-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ABf8G4EkoT7zv1svkv+cWndHcLJpTJCmeJpb5FzhS6vwNES7Tc5HjiScO4xeL8GV 4lu+sYiWoa0YdZF0CdaQcA== 0000950152-94-000341.txt : 20040504 0000950152-94-000341.hdr.sgml : 20040504 19940329172800 ACCESSION NUMBER: 0000950152-94-000341 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940329 DATE AS OF CHANGE: 19990831 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: 94518807 BUSINESS ADDRESS: STREET 1: 6300 WILSON MILLS RD CITY: MAYFIELD VILLAGE STATE: OH ZIP: 44143 BUSINESS PHONE: 4404615000 MAIL ADDRESS: STREET 1: 6300 WILSON MILLS RD CITY: MAYFIELD VILLAGE STATE: OH ZIP: 44143 10-K 1 FORM 10-K PROGRESSIVE 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, 1993 ---------------------------------------------------- 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 _____________________ Commission file number 1-9518 ------------------------------------------------------- THE PROGRESSIVE CORPORATION - - - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 34-0963169 - - - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 - - - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code)
(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 24, 1994: $2,067,055,541.87. The number of the registrant's Common Shares, $1.00 par value, outstanding as of February 24, 1994: 72,160,372 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1993 are incorporated by reference in Parts I, II and IV hereof. Portions of the registrant's Proxy Statement dated March 18, 1994, for the Annual Meeting of Shareholders to be held on April 22, 1994, are incorporated by reference in Part III hereof. 2 INTRODUCTION The Progressive Corporation and subsidiaries' (collectively, the "Company") 1993 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 18, 1994, for the Annual Meeting of Shareholders to be held on April 22, 1994 (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 52 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 they caused. Of the approximately 250 United States insurance company groups writing private passenger auto, the Company estimates that Progressive ranks ninth in size. Except as otherwise noted, all industry data and Progressive's market share or ranking in the industry were derived either directly from data published or reported by A.M. Best Company Inc. ("A.M. Best") or were estimated using A.M. Best data as the primary source. For 1993, 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 $115 billion, and Progressive's share of this market was approximately 1.5%. (b) Financial Information About Industry Segments Incorporated by reference from Note 11, SEGMENT INFORMATION, on page 46 of the Company's Annual Report. (c) Narrative Description of Business INSURANCE SEGMENT The Insurance Group underwrites a number of personal and commercial property-casualty insurance products. Net premiums written were $1,819.2 million in 1993, compared to $1,451.2 million and $1,324.6 million in 1992 and 1991, respectively. The underwriting profit (loss) was 10.7% in 1993, compared to 3.5% and (3.7)% in 1992 and 1991, 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 93% of the Company's 1993 total net written premiums. 1 3 The bulk of the Insurance Group's Core business consists of nonstandard insurance products for people cancelled and 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 1993 nonstandard automobile insurance market was about $18 billion, compared to $17 billion in 1992 and $16 billion in 1991. Approximately 125 independent specialty companies and more than 25 subsidiaries of large insurance companies wrote nonstandard auto premiums in 1993. In this market, the Insurance Group ranked fourth in 1992 in direct premiums written and near the top in underwriting performance. It is estimated that the 1993 ranking and underwriting performance will be consistent with 1992. The core business is continuing its experiment of writing standard and preferred automobile risks in several states. These experiments accounted for 4.5% of the Company's total private passenger auto premiums in 1993. 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 81% of the personal automobile insurance market. The Insurance Group's specialty personal lines products are dominated by motorcycle insurance. Other products offered include recreational vehicle, mobile home and boat insurance. The Insurance Group's competitors are specialty companies and standard 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 1993, over 80% 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 through its Miami and Tampa, Florida operations. It is anticipated that this activity may be expanded to other selected markets in Florida, Texas and Ohio. The Insurance Group's diversified businesses - the Financial Services, Risk Management Services and Motor Carrier divisions, as well as the run-off of the former Transportation division - accounted for 7% of total volume in 1993. These divisions, 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 2 4 such intermediaries and the Company and are tailored to the specific needs of the customer group and the nature of the related financial or purchase transactions. The diversified businesses also market their products directly to their customers through company-employed sales forces. The Financial Services division provides physical damage, property and flood 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 Financial Services' largest customer group for these services. This division 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. Risk Management Services' 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 insurer controlled by its bank customers. The program is sponsored by the American Bankers Association. This program represented less than 1% of total 1993 net premiums written. The Motor Carrier division provides insurance and related services, on a heavily reinsured basis, to a few excellent regional customers retained from the defunct Transportation business, as well as a growing number of intermediate-size trucking companies. The Motor Carrier division also manages involuntary Commercial Auto Insurance Plans. See SERVICE OPERATIONS on page 5 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 its 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 or the nature of the insurance-related services which may be provided 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, 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, from regulated insurers to 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 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, risk-based capital guidelines and further limitations on the ability of regulated insurers to pay dividends. 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, and the Clinton administration is in the process of considering changes to the nation's health care system. Changes in the health care system may have an effect on the medical coverage included in auto insurance policies. It is currently not possible to predict the outcome of any of these matters, or their potential impact on the Company. 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 expenses, are capitalized and amortized over the estimated period of the benefits, rather than expensed as incurred, as required by SAP. 3. Estimated salvage and net subrogation recoverables are reflected in the financial statements at the time the related loss reserves are established, rather than when actually recovered, as permitted by SAP. Salvage is the amount recovered when the property against which a claim is made is recovered and sold by the insurance company. Subrogation is the amount of claim cost recovered from the party at fault. 4. 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. 5. 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, as required by SAP. The differing treatment of income and expense items results in a corresponding difference in Federal income tax expense. SERVICE OPERATIONS The Motor Carrier division currently manages involuntary commercial auto insurance plans (CAIP) in 29 states. As a CAIP servicing carrier, the division processes about one third of the premiums in the involuntary commercial market, without assuming the indemnity risk. It competes with approximately 14 other providers nationwide. 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 $43.7 million in 1993, compared to $53.3 million and $54.0 million in 1992 and 1991, respectively. 5 7 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 $2,805.2 million at December 31, 1993, compared to $2,407.4 million at December 31, 1992. 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 $242.4 million in 1993, compared to $153.5 million in 1992 and $152.2 million in 1991. 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, 1993, was 6,101. 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. In order to assure safety of capital and conservatism of the balance sheet, total loss reserves are set at a level that is intended to provide confidence that they are adequate. The liabilities for losses and LAE are determined using actuarial and statistical procedures and represent undiscounted estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effect of future trends on claim settlement. These estimates are continually reviewed and adjusted as experience develops and new information becomes known. Such adjustments, if any, are reflected in the current results of operations. The accompanying tables present an analysis of property-casualty losses and LAE. The following table: (1) provides a reconciliation of beginning and ending estimated liability balances for 1993, 1992 and 1991, 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) 1993 1992 1991 ---------------------------------------------------- Balance, January 1 $ 956.4 $ 861.5 $ 791.6 Incurred losses and LAE: Current accident year 1,126.7 981.7 903.2 Prior accident years (98.5) (51.5) (42.8) ---------------------------------------------------- 1,028.2 930.2 860.4 ---------------------------------------------------- Paid losses and LAE: Current accident year 605.4 481.9 468.1 Prior accident years 366.8 353.4 322.4 ---------------------------------------------------- 972.2 835.3 790.5 ---------------------------------------------------- Balance, December 31 1,012.4 956.4 861.5 Add: Reinsurance recoverable on unpaid losses and LAE1 334.8 -- -- ---------------------------------------------------- Balance, December 31, GAAP 1,347.2 956.4 861.5 Adjust: Reinsurance recoverable on unpaid losses and LAE1 (334.8) -- -- Net salvage and subrogation 39.9 37.2 38.3 ---------------------------------------------------- Balance, December 31, SAP $1,052.3 $993.6 $899.8 ==================================================== - - - ---------------- 1 In 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.
The reconciliation above shows a $98.5 million redundancy, which emerged during 1993, in the 1993 liability and a $51.5 million redundancy in the 1992 liability, based on information known as of December 31, 1993 and December 31, 1992, respectively. Current reserves reflect conservatism of the liability established for potential adverse development. 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 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 LIABILITY FOR UNPAID - - - --------------------- LOSSES AND LAE $121.8 $146.5 $215.3 $323.8 $471.0 $651.0 $748.6 $791.6 $861.5 $956.4 $1,012.4 - - - -------------- PAID (CUMULATIVE) AS OF: - - - ----------------------- One year later 60.0 68.6 104.7 142.7 195.0 283.1 293.1 322.4 353.4 366.8 Two years later 85.9 101.4 151.9 204.4 294.9 393.7 446.8 490.8 518.8 -- Three years later 102.3 121.3 175.4 238.9 339.5 465.0 539.8 570.4 -- -- Four years later 111.6 128.8 187.2 255.7 369.9 514.0 588.2 -- -- -- Five years later 115.2 132.8 194.1 264.3 383.5 540.7 -- -- -- -- Six years later 116.5 135.8 197.7 268.7 389.1 -- -- -- -- -- Seven years later 117.6 136.8 200.7 270.1 -- -- -- -- -- -- Eight years later 118.3 138.9 201.3 -- -- -- -- -- -- -- Nine years later 119.1 139.1 -- -- -- -- -- -- -- -- Ten years later 119.3 -- -- -- -- -- -- -- -- -- LIABILITY RE-ESTIMATED - - - ----------------------- AS OF: - - - ----- One year later 124.5 146.9 218.7 300.6 446.6 610.3 684.5 748.8 810.0 857.9 Two years later 127.9 150.2 213.6 293.6 422.2 573.4 677.9 726.5 771.9 -- Three years later 128.6 144.0 205.3 282.8 402.4 581.3 668.6 712.7 -- -- Four years later 123.2 140.4 203.4 274.1 403.9 575.1 667.1 -- -- -- Five years later 120.2 139.0 200.9 275.6 399.6 578.4 -- -- -- -- Six years later 119.3 139.3 204.4 275.8 400.2 -- -- -- -- -- Seven years later 120.1 142.0 205.2 277.5 -- -- -- -- -- -- Eight years later 122.6 142.9 206.7 -- -- -- -- -- -- -- Nine years later 123.0 144.5 -- -- -- -- -- -- -- -- Ten years later 124.7 -- -- -- -- -- -- -- -- -- CUMULATIVE REDUNDANCY - - - --------------------- (DEFICIENCY) $ (2.9) $ 2.0 $ 8.6 $ 46.3 $ 70.8 $ 72.6 $ 81.5 $ 78.9 $ 89.6 $ 98.5 - - - ------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ PERCENTAGE1 (2.4) 1.4 4.0 14.3 15.0 11.2 10.9 10.0 10.4 10.3 - - - ----------------- 1 Cumulative redundancy/(deficiency) divided by liability for unpaid losses and LAE.
The above table presents the development of balance sheet liabilities for 1983 through 1992. 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, 1993, the companies had paid $139.1 million of the currently estimated $144.5 million of losses and LAE that had been incurred through the end of 1984; thus an estimated $5.4 million of losses incurred through 1984 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 1983 liability has developed a $2.9 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 1986, but incurred in 1983, will be included in the cumulative deficiency or redundancy amount for years 1983, 1984 and 1985. 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 54 of the Company's Annual Report. The data in the former table are based on Schedule P from the 1993, 1992, 1991 and 1990 Consolidated Annual Statement, 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 sold by the Company's life insurance subsidiary. Life insurance reserves are less than 1% of total reserves. Given the uncertainty inherent in establishing insurance loss reserves, its reserves have proven to be quite accurate. The Company's Consolidated Annual Statement Schedule P for 1993, 1992 and 1991 includes $14.5 million, $27.2 million, and $17.2 million, respectively, of paid LAE for non-indemnity business which is excluded for GAAP and, therefore, not included in the reconciliation shown on page 7. There are two significant differences between the development table on page 8 and The Company's Consolidated Annual Statement, Schedule P. Schedule P includes cumulative payments from a company purchased in September 1990 and an affiliate consolidated in March 1991, which are not included for GAAP reporting for periods prior to the dates of acquisition. Also, the development displayed in Schedule P, Part-2, excludes unallocated loss adjustment expenses which are included in the preceding development table. (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 (loss). 9 11 ITEM 2. PROPERTIES OWNED PROPERTIES The Company's central data processing facility occupies a modern, three-story brick building containing approximately 107,000 square feet of office space, on an approximately 40-acre parcel in Mayfield Village, Ohio, owned by a subsidiary. In spring 1992, construction began on the Company's new corporate office complex on this parcel, and in December 1993, the Company began occupying a portion of this complex. Construction is expected to be completed in 1994. The new facility will consist of approximately 520,000 square feet of space and will replace office space held under leases in a number of locations in the Cleveland, Ohio area. The cost of the project is currently estimated at $74.8 million and is being funded through operating cashflows. As of December 31, 1993, $50.5 million of the project's costs had been paid. 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 1994 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 681,000 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 225 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 SHAREHOLDERS 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. All stock prices and dividends per share have been adjusted to reflect the December 8, 1992 3-for-1 stock split.
Dividends Year Quarter High Low Per Share - - - ------------------------------------------------------------------------------------------ 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 ============================================================= 1992 1 $ 18 7/8 $ 14 3/4 $ .047 2 19 15 5/8 .047 3 22 18 7/8 .047 4 29 3/8 21 3/8 .050 ------------------------------------------------------------- $ 29 3/8 $ 14 3/4 $ .191 =============================================================
The closing price of the Company's Common Shares on February 24, 1994 was $34 5/8. (b) Holders There were 4,849 shareholders of record on February 24, 1994. (c) Dividends Statutory policyholders' surplus was $703.6 million and $658.3 million at December 31, 1993 and 1992, 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, 1993, $91.5 million of statutory policyholders' surplus represents net admitted assets of the insurance subsidiaries that are not transferable in the form of dividends, loans or advances to the parent. 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. Under current regulations, subsidiary dividends of $117.1 million in the aggregate may be paid in 1994 out of statutory policyholders' surplus, without such approval by regulatory authorities. The regulations may change during 1994, which could affect the dividends permitted to be paid by a regulated subsidiary without prior approval. 11 13 ITEM 6. SELECTED FINANCIAL DATA (millions - except per share amounts)
For the years ended December 31, 1993 1992 1991 1990 1989 Total revenues 1 $1,954.8 $1,738.9 $1,493.1 $1,376.2 $1,392.7 Net income 2 267.3 153.8 32.9 93.4 78.0 Per share: Net income 2,3 3.58 2.05 .41 1.19 .94 Dividends .200 .191 .172 .160 .147 Total assets 2,4 4,011.3 3,440.9 3,317.2 2,912.4 2,643.7 Funded debt outstanding 477.1 568.5 644.0 644.4 645.9 All per share amounts have been adjusted for the December 8, 1992 3-for-1 stock split. 1 Total 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. 2 Effective January 1, 1992, the Company adopted SFAS 109 and was able to demonstrate that the benefit of deferred tax assets was 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. 3 Presented on a fully diluted basis. 4 Pursuant 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 1993, the Company sold 4,950,000 Common Shares for net proceeds of $177.0 million, $150.0 million of its 7% Notes due 2013 and filed a shelf registration for $200.0 million of its debt securities (in January 1994, the Company sold $200.0 million of its 6.60% Notes due 2004 under the shelf registration statement). During 1993, the Company repurchased .4 million of its Serial Preferred Shares, Series A, at a cost of $9.8 million, repaid $170.0 million borrowed under its credit facilities and redeemed the entire $70.0 million of its 8 3/4% Debentures. During the three-year period ended December 31, 1993, the Company also sold 4,000,000 Serial Preferred Shares, Series A, for net proceeds of $96.4 million, of which .4 million were repurchased as discussed above, repurchased 4.0 million Common Shares (not adjusted for the December 1992 three-for-one stock split) at a total cost of $215.6 million, and decreased its aggregate borrowings $167.3 million. During the same period, The Progressive Corporation received $393.3 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) DIVIDENDS, on page 11. 12 14 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, 1993, operations generated a positive cash flow of $664.7 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. Total capital expenditures for the three years ended December 31, 1993, aggregated $122.6 million. In spring 1992, construction began on the Company's new corporate office complex in Mayfield Village, Ohio, and in December 1993, the Company began occupying a portion of this complex. Construction is expected to be completed in 1994. The new facility will consist of approximately 520,000 square feet of space and will replace office space held under leases in a number of locations in the Cleveland, Ohio area. The cost of the project is currently estimated at $74.8 million, and is being funded through operating cash flows. As of December 31, 1993, $50.5 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 the second quarter 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 RESULTS OF OPERATIONS Direct premiums written increased 20 percent to $1,966.4 million in 1993, compared to $1,636.8 million in 1992 and $1,536.8 million in 1991. These amounts include premiums written under state-mandated involuntary Commercial Auto Insurance Plans (CAIP), for which the Company retains no indemnity risk, of $98.0 million in 1993, $142.2 million in 1992 and $180.0 million in 1991. In 1993, the Company provided policy and claim processing services to 28 state CAIPs, compared to 26 in 1992 and 25 in 1991; the size of the CAIP market continues to decrease. Net premiums written increased 25 percent to $1,819.2 million, compared to $1,451.2 million in 1992 and $1,324.6 million in 1991. Premiums earned, which are a function of the amount of premiums written in the current and prior periods, increased 17 percent in 1993, compared to 11 percent in 1992 and 8 percent in 1991. In 1989, the Company established a reserve for potential premium rollbacks and refunds under provisions of California Proposition 103 and added to the reserve in subsequent years; the reserve reduced premiums written and earned $10.2 million and $49.7 million in 1992 and 1991, respectively. In 1992, the Company settled its financial responsibility under Proposition 103 and reduced its reserve as described above. In 1993, the Company's Core business' net premiums written grew 25 percent, driven by an increase in unit sales. The Company anticipates continued growth in its Core business in 1994; however, the Company prices business to achieve a four percent underwriting margin. As a result, in the short run, operating earnings may not increase in proportion to volume growth. 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 62 percent in 1993, compared to 65 percent in 1992 and 67 percent in 1991. The personnel reductions in late 1991 and early 1992, along with other cost-cutting measures and the favorable run-off of the Transportation business, reduced the Company's losses and loss adjustment expenses. Policy acquisition and other underwriting expenses as a percentage of premiums earned were 28 percent in 1993, compared to 31 percent in 1992 and 37 percent in 1991. The decrease reflects the cost-cutting measures discussed above, as well as process improvements, changed workflows and lower commission programs. Service revenues were $43.7 million in 1993, compared to $53.3 million in 1992 and $54.0 million in 1991; the decrease in revenues reflects the decrease in CAIP premiums written. Service businesses generated a pretax operating profit of $6.8 million in 1993, compared to a pretax loss of $4.3 million in 1992 and a pretax loss of $2.1 million in 1991. During 1992, loss adjustment expense reserves were increased $6.2 million. Recurring investment income (interest and dividends) decreased 3 percent to $134.5 million in 1993, 4 percent to $139.0 million in 1992 and 5 percent to $144.8 million in 1991, primarily due to lower prevailing interest rates. Net realized gains on security sales were $107.9 million in 1993, $14.5 million in 1992 and $7.4 million in 1991. 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 percent. Effective January 1, 1992, the Company adopted SFAS 109 and was able to demonstrate that the benefit of deferred tax assets was 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 write-down, as required under SFAS 96, was included in the Federal income tax provision. 14 16 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 ($2,135.1 million, or 76.6%, in 1993 and $1,779.4 million, or 74.6%, in 1992) of the portfolio at December 31, 1993 and 1992, was in short-term and intermediate- term, investment-grade fixed-income securities. A relatively small portion ($453.9 million, or 16.3% in 1993 and $398.6 million, or 16.7% in 1992) 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 ($77.6 million, or 2.8% in 1993 and $122.7 million, or 5.1% in 1992) and non-investment-grade fixed-income securities ($119.8 million, or 4.3% in 1993 and $85.4 million, or 3.6% in 1992). 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. The weighted average fully taxable equivalent yield of the portfolio was 8.7%, 8.6% and 9.4% as of December 31, 1993, 1992 and 1991, respectively. As of December 31, 1993, the Company elected to early adopt Statement of Financial Accounting Standards (SFAS) 115 "Accounting for Certain Investments in Debt and Equity Securities." For 1993, the adoption of SFAS 115 did not have any effect on the Company's results of operations or financial position. Fixed maturity securities which are held-to-maturity and short-term securities are reported at amortized cost; amortized cost of short-term securities approximates market. Available-for-sale securities are held for indefinite periods of time and include fixed maturities and equity securities. The available-for-sale securities are reported at market value with the changes in market value, net of deferred income taxes, reported directly in shareholders' equity as unrealized appreciation or depreciation. The quality distribution of the fixed-income portfolio is as follows:
Standard & Poor's Percentage at Percentage at Rating December 31, 1993 December 31, 1992 ------ ----------------- ----------------- AAA 61.8% 77.2% AA 23.6 10.1 A 8.4 6.3 BBB 0.6 0.6 Non Rated/Other 5.6 5.8 ----- ----- 100.0 % 100.0% ===== =====
As of December 31, 1993, the Company held $122.5 million of Collateralized Mortgage Obligations ("CMOs"), which represented 4.4% of the total investment portfolio. There are four types of securities held in the CMO Portfolio. As of December 31, 1993, sequential bonds represented 51.0% of the portfolio ($62.5 million) and had an average life of 1.5 years. Planned Amortization Class ("P.A.C.") bonds represented 25.9% of the portfolio ($31.7 million) and had an average life of 1.6 years. P.A.C. Principal Only and Interest Only bonds represented the remaining 23.1% of the portfolio ($28.3 million) and had an average life of 1.8 years. The portfolio contains no residual interests. CMOs held by the Company are highly liquid with readily available quotes and, at December 31, 1993, had an average life of 1.6 years. Eighty- nine percent of the CMOs held by the Company are rated AAA by Moody's or Standard & Poor's. As of December 31, 1993, the Company's total CMO portfolio had an unrealized loss of $3.7 million. The single largest unrealized loss in any CMO security was $1.3 million, or only 1.1% of such position. 15 17 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, 1993, the mark-to-market net gains in the Company's equity portfolio were $20.7 million ($13.5 million, net of taxes), as compared to $88.3 million ($58.3 million, net of taxes) in 1992. As of December 31, 1993 and 1992, the marketable equity portfolio of the Company was $453.9 million, or 16.3% and $398.6 million, or 16.7%, respectively, of the total investment portfolio. The 1993 marketable equity portfolio consisted of three principal components: (i) $73.0 million, or 16.1%, of standard adjustable rate preferreds (ARPS), (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 1992 marketable equity portfolio consisted of three principal components; (i) $138.9 million, or 34.8%, of standard adjustable rate preferred (ARPS), (ii) $64.1 million, or 16.1% of perpetual preferreds with mechanisms that may provide an opportunity to liquidate at par, and (iii) $195.6 million, or 49.1%, 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. ENVIRONMENTAL AND PRODUCT LIABILITY EXPOSURES Because the Company has been 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 and, in addition, has a supplemental reserve that is in an amount substantially in excess of the potential exposure for such claims. The Company does not believe that these claims will have a material impact on the Company's liquidity, results of operations or financial condition. However, the ultimate costs of the environmental and product liability claims are inherently difficult to project due to numerous uncertainties, including causation and policy coverage issues, the possible uncollectability of related reinsurance and third-party indemnity arrangements, unsettled and sometimes conflicting case law, difficulties in determining the scope of any contamination or injury and the nature and cost of the appropriate remedial action and the number and financial condition of responsible parties and their insurers, among other factors. Most of the Company's exposure for such claims results from Progressive's acquisition in 1985 of American Star Insurance Company, since renamed National Continental Insurance Company. When American Star was acquired, the seller agreed to administer all claims asserted under policies previously written by American Star and to pay all losses incurred under such policies, including those covered by reinsurance then in place on some of the policies. The seller encountered major financial difficulties as a result of losses in Hurricane Andrew and, despite having paid all losses and 16 18 adjusted all claims on the old business since 1985, has contested its obligation to administer these claims and to pay the losses not being paid by some of the reinsurers. The dispute has been submitted to arbitration and is scheduled to be heard by an arbitration panel during the second quarter. If it is determined that the seller is responsible for all of these losses, the amounts could be material to it. According to a recent study by independent actuaries for the seller, aggregate reserves on this business are about $19.2 million. Of that amount, about $6.3 million is being contested in the arbitration, $7.8 million is the admitted obligation of the seller and the balance is the responsibility of reinsurance sources that are paying their obligations. The Company will continue to monitor these exposures, adjust the related reserves appropriately as additional information becomes known and disclose any material developments. 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 1993 Annual Report, pages 33 through 46 and pages 50 through 55. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 1994 Annual Meeting of Shareholders of the Registrant, is incorporated herein by reference from the section entitled "Election of Directors" in the Proxy Statement, pages 1 through 3. 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.
Offices Held and Name Age Last Five Years Business Experience ---- --- ----------------------------------- Peter B. Lewis 60 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 40 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.
17 19 Allan W. Ditchfield 56 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) from July 1988 to March 1991. Daniel R. Lewis 47 President of the Central States Division since November 1989; President of the Consumer Finance Division prior to September 1989; Treasurer of the Registrant; Senior Vice President of Progressive Casualty prior to December 1993. Bruce W. Marlow 45 Chief Operating Officer of the Registrant; Executive Vice President of Progressive Casualty prior to December 1993. Michael C. Murr 42 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 56 Chief Legal Officer and Secretary of the Registrant since May 1989; Senior Vice President of Progressive Casualty from May 1989 to December 1993; Partner and Area Chair of National Business Practice, Baker & Hostetler, Cleveland, Ohio (attorneys) prior to May 1989. Tiona M. Thompson 43 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.
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 and New York Stock Exchange within specified time frames. The Company is required to report in this Form 10-K any failure on the part of any such individual to timely file any such report. The Form 5 filed for Daniel R. Lewis for 1992 inadvertently omitted to disclose two gifts totalling 100 of the Company's Common Shares received by his two minor children in January 1992. A supplemental filing was made with the Securities and Exchange Commission and the New York Stock Exchange promptly after this oversight was discovered. Norman S. Matthews' Form 5 for 1993, reporting charitable gifts totalling 250 Common Shares, was filed 29 days late. The total of all charitable gifts reported for David M. Schneider on his December 1993 Form 4 inadvertently omitted 4 Common Shares. An amended Form 4 was filed promptly after this omission was discovered. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the section of the Proxy Statement entitled "Executive Compensation," pages 7 through 15. 18 20 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 4 through 6. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the section of the Proxy Statement entitled "Election of Directors - Certain Related Transactions," page 3. 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, 1993, 1992 and 1991 Consolidated Balance Sheets - December 31, 1993 and 1992 Consolidated Statements of Changes in Shareholders' Equity - December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows - December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements Supplemental Information* *Not covered by Report of Independent Accountants. 19 21 (a)(2) Listing of Financial Statement Schedules The following financial statement schedules of the Registrant and its subsidiaries, Report of Independent Accountants and Consent of Independent Accountants are included in Item 14(d): Schedules Report of Independent Accountants Consent of Independent Accountants Schedule I - Summary of Investments - Other than Investments in Related Parties Schedule II - Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees other than Related Parties Schedule III - Condensed Financial Information of Registrant Schedule V - Supplementary Insurance Information Schedule VI - Reinsurance 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)(B) through (10)(K). (b) Reports on Form 8-K On November 12, 1993, the Company filed a Form 8-K to report the call for redemption on December 17, 1993, of the entire $70 million aggregate principal amount of its outstanding 8 3/4% Debentures due 2017. The redemption was made at 105.425% of the principal amount, plus accrued interest to the date fixed for redemption. These debentures were issued pursuant to an Indenture dated October 15, 1986 between the Company and Morgan Guaranty Trust Company of New York, as trustee. (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 23 through 36. 20 22 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 29, 1994 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 29, 1994 - - - --------------------------------- Officer of the Registrant and a Director Peter B. Lewis /s/ Charles B. Chokel Chief Financial Officer March 29, 1994 - - - --------------------------------- of the Registrant Charles B. Chokel /s/ Jeffrey W. Basch Chief Accounting Officer March 29, 1994 - - - --------------------------------- of the Registrant Jeffrey W. Basch Milton N. Allen* Director March 29, 1994 - - - --------------------------- Milton N. Allen B. Charles Ames* Director March 29, 1994 - - - -------------------------- B. Charles Ames Stephen R. Hardis* Director March 29, 1994 - - - --------------------------- Stephen R. Hardis Norman S. Matthews* Director March 29, 1994 - - - ------------------------ Norman S. Matthews Donald B. Shackelford* Director March 29, 1994 - - - ------------------------- Donald B. Shackelford
21 23 Paul B. Sigler* Director March 29, 1994 - - - ----------------------------- 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 29, 1994 ------------------------ David M. Schneider Attorney-in-fact
22 24 ANNUAL REPORT ON FORM 10-K ITEM 14(D) FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1993 THE PROGRESSIVE CORPORATION MAYFIELD VILLAGE, OHIO 23 25 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 1993 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 page 20 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 Cleveland, Ohio January 26, 1994 24 26 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. 33-64210) filed June 10, 1993, the Registration Statement of The Progressive Corporation 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, the Registration Statement on Form S-8 (File No. 33-23203) filed August 3, 1988 and the Registration Statement on Form S-8 (File No. 33-16509) filed August 14, 1987 of our report dated January 26, 1994, on our audits of the consolidated financial statements and financial statement schedules of The Progressive Corporation and subsidiaries as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND Cleveland, Ohio March 29, 1994 25 27 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES THE PROGRESSIVE CORPORATION AND SUBSIDIARIES (millions)
December 31, 1993 ----------------------------------------------------------- Amount At Which Shown In The Type of Investment Cost Market Value Balance Sheet ----------------------------------------------------------- Fixed Maturities: Held-to-maturity: State, municipalities and political subdivisions $ 309.1 $ 327.4 $ 309.1 ----------------------------------------------------------- Available-for-sale: United States Government and government agencies and authorities 20.5 20.8 20.8 States, municipalities and political subdivisions 819.8 835.7 835.7 Asset-backed securities 732.8 736.2 736.2 Foreign government obligations 31.8 33.8 33.8 Corporate and other debt securities 109.9 118.3 118.3 Redeemable preferred stock 47.1 47.8 47.8 ----------------------------------------------------------- 1,761.9 1,792.6 1,792.6 ----------------------------------------------------------- Total fixed maturities 2,071.0 2,120.0 2,101.7 ----------------------------------------------------------- Equity securities: Common Stocks 83.0 97.5 97.5 Preferred Stocks 350.2 356.4 356.4 ----------------------------------------------------------- Total equity securities 433.2 453.9 453.9 ----------------------------------------------------------- Short-term investments 230.8 231.3 230.8 ----------------------------------------------------------- Total investments $2,735.0 $2,805.2 $2,786.4 =========================================================== - - - ---------------- 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, 1993.
26 28 SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
Balance at Balance Beginning Amounts at End of Period Additions1 Collected of Period ------------------------------------------------------------------------- Year ended December 31, 1991: William Cadden $ 0 $ 188,452 $ 188,276 $ 176 Charles Chokel 0 245,327 245,327 0 Thomas Corlett 105,000 0 105,000 0 Allan Ditchfield 0 261,008 0 261,008 James Gordon 0 231,619 0 231,619 Geoffrey Halverson 0 133,951 131,026 2,925 Keith Phillips 0 158,098 158,098 0 Glenn Renwick 0 122,720 122,720 0 David Ryczko 0 112,559 0 112,559 ------------------------------------------------------------------------- $105,000 $1,453,734 $ 950,447 $ 608,287 ========================================================================= Year ended December 31, 1992: David Adams $ 0 $ 114,982 $ 0 $ 114,982 Alan Bauer 0 218,668 218,668 0 William Cadden 176 0 176 0 Allan Ditchfield 261,008 0 261,008 0 John Gibson 0 137,443 0 137,443 James Gordon 231,619 0 231,619 0 Geoffrey Halverson 2,925 0 2,925 0 Evan Kiesz 0 124,574 0 124,574 Chris Newman(2) 10,224 161,732 135,695 36,261 Glenn Renwick 0 312,989 312,989 0 David Ryczko 112,559 0 112,559 0 Tom Seedle(2) 55,995 96,610 152,605 0 ------------------------------------------------------------------------- $674,506 $1,166,998 $1,428,244 $ 413,260 ========================================================================= Year ended December 31, 1993: David Adams $114,982 $ 0 $ 114,982 $ 0 Travis Black (2) 12,351 96,451 108,802 0 John Gibson 137,443 0 137,443 0 Evan Kiesz 124,574 0 124,574 0 Chris Newman 36,261 0 36,261 0 ------------------------------------------------------------------------- $425,611 $ 96,451 $ 522,062 $ 0 ========================================================================= - - - -------------------- (1) Non-interest bearing; amounts represent an advance for relocation payable upon the earlier of termination of employment or sale of prior residence. (2) Balance at beginning of period was less than $100,000 and, therefore, not disclosed previously.
27 29 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME THE PROGRESSIVE CORPORATION (PARENT COMPANY) (millions)
Years Ended December 31, 1993 1992 1991 ------------------------------------------------- Revenues Dividends from subsidiaries* $131.3 $ 158.5 $129.2 Intercompany investment income* 6.8 3.7 17.7 ------------------------------------------------- 138.1 162.2 146.9 ------------------------------------------------- Expenses Interest expense 42.3 44.8 47.7 Other operating costs and expenses 3.2 2.4 2.2 Non-recurring items (1) 4.0 10.0 -- ------------------------------------------------- 49.5 57.2 49.9 ------------------------------------------------- Operating income and income before Federal income taxes and other items below 88.6 105.0 97.0 Federal income tax provision (benefit) (20.9) (18.2) 2.4 ------------------------------------------------- Income before equity in undistributed earnings of subsidiaries and cumulative effect of accounting change 109.5 123.2 94.6 Equity in undistributed net income of consolidated subsidiaries* 157.8 16.4 (61.7) ------------------------------------------------- Income before cumulative effect of accounting change 267.3 139.6 32.9 Cumulative effect of adopting SFAS 109 -- 14.2 -- ------------------------------------------------- Net income $267.3 $ 153.8 $ 32.9 ================================================= *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 on page 13 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, 1993 1992 ---------------------------------------- ASSETS Investment in non-consolidated affiliates $ .4 $ .4 Investment in subsidiaries* 972.0 887.7 Intercompany receivable* 484.6 301.0 Federal income taxes 54.8 57.7 Other assets 2.1 2.0 ---------------------------------------- TOTAL ASSETS $1,513.9 $ 1,248.8 ======================================== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 6.1 $ 11.5 Payable to subsidiaries* 34.4 41.6 Funded debt 475.5 566.7 ---------------------------------------- Total liabilities 516.0 619.8 ---------------------------------------- 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 3.6 and 4.0 shares) 87.9 96.4 Common Shares, $1.00 par value, authorized 200.0 shares, issued 82.2 and 77.1, including treasury shares of 10.1 and 10.0 72.1 67.1 Paid-in capital 357.6 180.7 Net unrealized appreciation of investment in equity securities of consolidated subsidiaries 33.5 77.5 Retained earnings 446.8 207.3 ---------------------------------------- Total shareholders' equity 997.9 629.0 ---------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,513.9 $ 1,248.8 ======================================== *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, 1993 1992 1991 ------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Income before cumulative effect of accounting change $267.3 $139.6 $ 32.9 Adjustments to reconcile income to net cash provided by (used in) operating activities: Equity in income of consolidated subsidiaries (289.1) (174.9) (67.5) Amortization .1 .1 .1 Changes in: Intercompany receivable or payable (7.2) 21.9 2.2 Accounts payable and accrued expenses (5.3) (12.3) 4.4 Federal income taxes 2.8 22.4 (17.5) Other, net 3.8 1.3 3.6 ------------------------------------------- Net cash used in operating activities (27.6) (1.9) (41.8) CASH FLOWS FROM INVESTING ACTIVITIES: Additional investments in equity securities of consolidated subsidiaries (4.7) (34.2) (19.6) Return of capital from consolidated subsidiary 32.9 -- -- Dividends received from consolidated subsidiaries 131.3 158.5 129.2 ------------------------------------------- Net cash provided by investing activities 159.5 124.3 109.6 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 1.8 4.2 -- Proceeds from issuance of stock 177.0 -- 96.4 Proceeds from funded debt 148.2 170.0 170.0 Payments on funded debt (240.0) (170.0) (170.0) Paid to subsidiaries (183.6) -- (40.0) Dividends paid to shareholders (23.1) (20.8) (17.0) Acquisition of treasury shares (12.2) (105.9) (107.3) ------------------------------------------- Net cash used in financing activities (131.9) (122.5) (67.9) ------------------------------------------- Decrease in cash -- (.1) (.1) Cash, beginning of year -- .1 .2 ------------------------------------------- Cash, end of year $ -- $ -- $ .1 =========================================== 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 1993 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 $91.0 million, $4.0 million and $30.4 million in 1993, 1992 and 1991, respectively. Total interest paid was $40.9 million for 1993, $44.3 million for 1992 and $47.0 million for 1991. 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) 1993 1992 ---------------------------- Revolving bank credit agreements $ -- $ 50.0 Credit facilities -- 120.0 7% Notes 148.2 -- 8 3/4% Debentures -- 69.7 8 3/4% Notes 28.8 28.6 10% Notes 149.3 149.3 10 1/8% Subordinated Notes 149.2 149.1 ---------------------------- $475.5 $566.7 ============================
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. See Note 12, SUBSEQUENT EVENTS, on page 46 of the Registrant's 1993 Annual Report. 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, 1993, the Registrant had no borrowings under this arrangement; at December 31, 1992, $50.0 million was outstanding. In May 1990, the Registrant also entered into a four-year credit facility with Morgan Guaranty Trust Company of New York under which the Registrant had the right to borrow up to $75.0 million. By selecting from available credit options, the Registrant could have elected to pay interest at rates related to the London interbank offered rate, the bank's CD rate, a base lending rate or a quoted rate. A commitment fee was payable on any unused portion of the committed facility at the rate of .15% per annum. At December 31, 1993 and 1992, the Registrant had no borrowings under this agreement. In February 1994, the Registrant terminated this credit facility. See Note 12, SUBSEQUENT EVENTS, on page 46 of the Registrant's 1993 Annual Report. 31 33 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) NOTES TO CONDENSED FINANCIAL STATEMENTS In October 1989, the Registrant entered into a five-year credit facility agreement with a group of banks under which the Registrant secured the right to borrow up to $235.0 million and request an additional $235.0 million. By selecting from available credit options, the Registrant could have elected to pay interest at rates related to the London interbank offered rate or the greater of the agent bank's base lending rate or a rate based on the Federal funds' rate. A commitment fee was payable on any unused portion of the committed facility at the rate of .125% per annum. The agreement provides for a utilization fee not to exceed .10% on the average amount of outstanding borrowings. At December 31, 1993, no borrowings were outstanding under this arrangement; at December 31, 1992, $120.0 million was outstanding. In February 1994, the Registrant terminated this agreement. See Note 12, SUBSEQUENT EVENTS, on page 46 of the Registrant's 1993 Annual Report. 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 $145.3 million at December 31, 1993. In February 1987, the Registrant sold $100.0 million, ($70.0 million after a 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 portfolio. A $4.0 million charge on debt extinguishment was recorded as a "non-recurring item." The fair value of this debt was $69.2 million at December 31, 1992. 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 $33.7 million and $31.8 million at December 31, 1993 and 1992, 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 $180.6 million and $181.2 million, respectively, at December 31, 1993, and $170.4 million and $169.1 million, respectively, at December 31, 1992. As of December 31, 1993, the Registrant is in compliance with its financial debt covenants. The most restrictive covenant, which appeared under the recently terminated credit facilities, provided that senior indebtedness could not exceed 200% of long-term capital. In January 1994, the Registrant sold $200.0 million of its 6.60% Notes due 2004. See Note 12, SUBSEQUENT EVENTS, on page 46 of this Registrant's 1993 Annual Report. Aggregate principal payments on funded debt outstanding at December 31, 1993 are $0 for 1994 through 1998 and $480.0 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 Payable to Subsidiaries in the accompanying Condensed Balance Sheets. 32 34 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) NOTES TO CONDENSED FINANCIAL STATEMENTS 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 was able to demonstrate that the benefit of deferred tax assets were 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. 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) 1993 1992 1991 ------------------------------------------------- Unrealized gains (losses): Available-for-sale: fixed maturities $ 1.6 $29.1 $ -- equity securities (67.6) 56.9 74.2 Deferred income taxes 22.0 (29.2) (25.2) ------------------------------------------------- $(44.0) $56.8 $49.0 =================================================
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 10, RELATED PARTIES, on pages 44 and 45 of the Registrant's 1993 Annual Report. 33 35 SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION THE PROGRESSIVE CORPORATION AND SUBSIDIARIES (millions)
Future policy Other benefits, policy Deferred losses, claims policy claims and and acquisition loss Unearned benefits Premium Investment Segment costs expenses(1) premiums(1) payable revenue Income(2) --------------------------------------------------------------------------------------- Year ended December 31, 1993: Insurance Lines $124.6 $1,348.6 $772.0 $ -- $1,668.7 $242.4 ======================================================================================= Year ended December 31, 1992: Insurance Lines $101.3 $1,274.2 $614.8 $ -- $1,426.1 $153.5 ======================================================================================= Year ended December 31, 1991: Insurance Lines $110.2 $1,077.1 $595.0 $ -- $1,286.9 $152.2 ======================================================================================= Benefits, Amortization claims, of deferred losses and policy Other Net settlement acquisition operating premiums Segment expenses costs expenses written --------------------------------------------------------------------------------------- Year ended December 31, 1993: Insurance Lines $1,028.0 $311.6 $151.3 $1,819.2 ======================================================================================= Year ended December 31, 1992: Insurance Lines $930.9 $304.1 $141.5 $1,451.2 ======================================================================================= Year ended December 31, 1991: Insurance Lines $858.0 $313.7 $162.1 $1,324.6 ======================================================================================= (1) Pursuant to SFAS 113, amounts for 1992 and 1991 were restated. (2) Excluding investment expenses of $10.2 million in 1993, $17.0 million in 1992, and $22.5 million in 1991.
34 36 SCHEDULE VI -- REINSURANCE THE PROGRESSIVE CORPORATION AND SUBSIDIARIES (millions)
Assumed Percentage YEAR ENDED Ceded to From of Amount Gross Other Other Assumed December 31, 1993 Amount Companies Companies Net Amount to Net - - - ----------------- ------------------------------------------------------------------------------------- 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 1,619.2 195.1 2.0 1,426.1 .1 Life -- -- -- -- -- ----------------------------------------------------------------- Total premiums earned $1,619.3 $195.2 $ 2.0 $1,426.1 ================================================================= December 31, 1991 - - - ----------------- Life Insurance in force $ 9.0 $ 4.5 $ -- $ 4.5 -- ===================================================================================== Premiums earned: Accident and health $ .3 $ .2 $ .1 $ .2 50.0 % Property and liability 1,485.5 199.1 .2 1,286.6 -- Life .2 .1 -- .1 -- ----------------------------------------------------------------- Total premiums earned $1,486.0 $199.4 $ .3 $1,286.9 =================================================================
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, 1993 $1,126.7 $(98.5) $972.2 =============== ================ ================ December 31, 1992 $981.7 $(51.5) $835.3 =============== ================ ================ December 31, 1991 $903.2 $(42.8) $790.5 =============== ================ ================ Pursuant to Rule 12-18 of Regulation S-X. See Schedule V, page 34, for the additional information required in Schedule X.
36 38 EXHIBIT INDEX
Exhibit No. If Incorporated by Reference, Under Reg. Form 10-K Documents with Which Exhibit S-K, Item 601 Exhibit No. Description of Exhibit was Previously Filed with SEC - - - --------------------------------------------------------------------------------------------------------------------------------- (3) 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) 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 Annual Report on Form 10-K Authority Industrial Development Revenue Bonds, Series (filed with SEC on March 30, 1989; 1982 (dated December 16, 1982); Loan and Debt Obligation see Exhibit 4(B) therein) Agreement; Indenture of Trust; Mortgage and Security Agreement; Unconditional Guaranty (4) 4(B) Indenture dated as of November 15, 1988 between Contained in Exhibit Binder Progressive and Rhode Island Hospital Trust National Bank, 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 Contained in Exhibit Binder aggregate principal amount of $150,000,000 under the Subordinated Indenture (4) 4(D) Indenture dated as of November 15, 1988 between Progressive Contained in Exhibit Binder and The First National Bank of Boston, as Trustee ("1988 Senior Indenture") (including Table of Contents and cross- reference sheet)
37 39 EXHIBIT INDEX
Exhibit No. If Incorporated by Reference, Under Reg. Form 10-K Documents with Which Exhibit S-K, Item 601 Exhibit No. Description of Exhibit was Previously Filed with SEC - - - --------------------------------------------------------------------------------------------------------------------------------- (4) 4(E) Form of 10% Notes due 2000 issued in the aggregate principal Contained in Exhibit Binder amount of $150,000,000 under the 1988 Senior Indenture (4) 4(F) Form of 8 3/4% Notes due 1999 issued in the aggregate principal Annual Report on Form 10-K amount of $30,000,000 under the 1988 Senior Indenture (Filed with SEC on March 30, 1990; see Exhibit 4(K) therein) (4) 4(G) $235,000,000 Facility Agreement dated October 6, 1989 Quarterly Report on Form 10-Q with Credit Suisse, et al; Credit Suisse as agent; terminated (Filed with SEC on November 13, February 10, 1994 1989; see Exhibit 4 therein) (4) 4(H) $75,000,000 Facility Agreement dated May 4, 1990 with Morgan Quarterly Report on Form 10-Q Guaranty Trust Company of New York; terminated February 1, 1994 (Filed with SEC on August 13, 1990; see Exhibit 4(A) therein) (4) 4(I) $20,000,000 Unsecured Line of Credit with National City Bank Contained in Exhibit Binder (dated May 23, 1990; renewed May 20, 1992, and amended February 1, 1994) (4) 4(J) Indenture dated as of September 15, 1993 between Progressive Quarterly Report on Form 10-Q and The First National Bank of Boston, as trustee ("1993 Senior (Filed with SEC on November 5, Indenture") (including Table of Contents and cross-reference 1993; see Exhibit 4(A) therein) sheet) (4) 4(K) Form of 7% Notes due 2013 issued in the aggregate principal Quarterly Report on Form 10-Q amount of $150,000,000 under the 1993 Senior Indenture (Filed with SEC on November 5, 1993; see Exhibit 4(B) therein) (4) 4(L) Form of 6.60% Notes due 2004 issued in the aggregate principal Contained in Exhibit Binder amount of $200,000,000 under the 1993 Senior Indenture.
38 40 EXHIBIT INDEX
Exhibit No. If Incorporated by Reference, Under Reg. Form 10-K Documents with Which Exhibit S-K, Item 601 Exhibit No. Description of Exhibit was Previously Filed with SEC - - - --------------------------------------------------------------------------------------------------------------------------------- (10)(ii) 10(A) Construction Contract dated March 2, 1993 between Annual Report on Form 10-K Progressive Casualty Insurance Company and The (Filed with SEC on March 30, Whiting-Turner Contracting Company 1993; see Exhibit 10(A) therein) (10)(iii) 10(B) The Progressive Corporation 1994 Gainsharing Plan Contained in Exhibit Binder (10)(iii) 10(C) The Progressive Corporation 1994 Executive Bonus Plan Contained in Exhibit Binder (10)(iii) 10(D) The Progressive Corporation Management Bonus Plan Quarterly Report on Form 10-Q (terminated December 31, 1993) (filed with SEC on November 12, 1992; see Exhibit 10(B) therein) (10)(iii) 10(E) The Progressive Corporation 1985 Restricted Stock Plan Quarterly Report on Form 10-Q (amended and restated on April 24, 1992); expired (Filed with SEC on August 14, December 31, 1993 1992; see Exhibit 10(C) therein) (10)(iii) 10(F) The Progressive Corporation Directors Deferral Quarterly Report on Form 10-Q Plan (Amendment and Restatement) (Filed with 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 and restated as of April 24, 1992, as further amended (Filed with SEC on March 30, on July 1, 1992 and February 5, 1993) 1993; see Exhibit 10(G) therein) (10)(iii) 10(H) Share Option Agreement dated March 17, 1989, between Annual Report on Form 10-K Progressive and David M. Schneider (Filed with SEC on March 30, 1990; see Exhibit 10(I) therein) (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, as of April 24, 1992 as further amended on 1992; see Exhibit 10(A) therein) July 1, 1992) (10)(iii) 10(J) Share Option Agreements dated August 3, 1988, January 1, Annual Report on Form 10-K 1989, May 22, 1989, and May 22, 1990 between Progressive (Filed with SEC on March 30, and Michael C. Murr 1993; see Exhibit 10(J) therein)
39 41 EXHIBIT INDEX
Exhibit No. If Incorporated by Reference, Under Reg. Form 10-K Documents with Which Exhibit S-K, Item 601 Exhibit No. Description of Exhibit was Previously Filed with SEC - - - --------------------------------------------------------------------------------------------------------------------------------- (10)(iii) 10(K) Agreement dated February 21, 1991 with Allan W. Ditchfield Annual Report on Form 10-K (Filed with SEC on March 30, 1992; see Exhibit 10(L) therein) (11) 11 Computation of Earnings Per Share Contained in Exhibit Binder (13) 13 The Progressive Corporation 1993 Annual Report Contained in Exhibit Binder (21) 21 Subsidiaries of The Progressive Corporation Contained in Exhibit Binder (23) 23 Consent of Independent Accountants Incorporated herein by reference to page 25 of this Annual Report on form 10-K (24) 24 Powers of Attorney Contained in Exhibit Binder (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.B 2 EXHIBIT 4.B 1 ========================================================================== THE PROGRESSIVE CORPORATION AND RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, Trustee ______________ INDENTURE ______________ Dated as of November 15, 1988 ========================================================================== 2 CROSS REFERENCE SHEET* ------- Between Provisions of Trust Indenture Act of 1939 and Indenture to be dated as of November 15, 1988 between THE PROGRESSIVE CORPORATION and RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, Trustee: Section of the Act Section of Indenture - - - ------------------- -------------------- 310(a)(1) and (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 310(a)(3) and (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 310(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 and 6.10(a), (b) and (d) 310(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13(a) and (c)(1) and (2) 311(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13(b) 311(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 and 4.2(a) 312(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a) and (b)(i) and (ii) 312(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(c) 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4(a)(i), (ii), (iii), (iv), (v) and (vi) 313(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 313(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 313(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 313(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 314(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(c)(1) and (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 314(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 314(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 315(a), (c) and (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 315(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11 315(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.12 316(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 316(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not required 316(a) (last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 316(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 317(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 317(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4(a) and (b) 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.7 * This Cross Reference Sheet is not part of the Indenture.
3 TABLE OF CONTENTS -----------------
PAGE ---- PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 RECITALS: Authorization of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Compliance with Legal Requirements 1 Purpose of and Consideration for Indenture . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE ONE DEFINITIONS SECTION 1.1. Certain Terms Defined . . . . . . . . . . . . . . . . . . . . . . . . 1 Authorized Newspaper . . . . . . . . . . . . . . . . . . . . . . . . 2 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . 2 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Corporate Trust Office . . . . . . . . . . . . . . . . . . . . . . . 2 Coupon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ECU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 European Communities . . . . . . . . . . . . . . . . . . . . . . . . 3 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Foreign Currency . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Holder, holder of Securities, Securityholder . . . . . . . . . . . . 3 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . 4 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . 4 Original issue date . . . . . . . . . . . . . . . . . . . . . . . . . 4 Original Issue Discount Security . . . . . . . . . . . . . . . . . . 4 Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Registered Security . . . . . . . . . . . . . . . . . . . . . . . . . 5 Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . . 5 Security or Securities . . . . . . . . . . . . . . . . . . . . . . . 6 Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 6 Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . . . . 6 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . . 6 Unregistered Security . . . . . . . . . . . . . . . . . . . . . . . . 6
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PAGE ---- U.S. Government Obligations . . . . . . . . . . . . . . . . . . . . . 6 vice president . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Yield to Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE TWO SECURITIES SECTION 2.1. Forms Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.2. Form of Trustee's Certificate of Authentication . . . . . . . . . . . 7 SECTION 2.3. Amount Unlimited; Issuable in Series . . . . . . . . . . . . . . . . 8 SECTION 2.4. Authentication and Delivery of Securities . . . . . . . . . . . . . . 10 SECTION 2.5. Execution of Securities . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.6. Certificate of Authentication . . . . . . . . . . . . . . . . . . . . 12 SECTION 2.7. Denomination and Date of Securities; Payments of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 2.8. Registration, Transfer and Exchange . . . . . . . . . . . . . . . . . 14 SECTION 2.9. Mutilated, Defaced, Destroyed Lost and Stolen Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 2.10. Cancellation of Securities; Destruction Thereof . . . . . . . . . . . 18 SECTION 2.11. Temporary Securities . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE THREE COVENANTS OF THE ISSUER SECTION 3.1. Payment of Principal and Interest . . . . . . . . . . . . . . . . . . 19 SECTION 3.2. Offices for Payments, etc . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 3.3. Appointment to Fill a vacancy in Office of Trustee . . . . . . . . . 21 SECTION 3.4. Paying Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 3.5. Written Statement to Trustee . . . . . . . . . . . . . . . . . . . . 22 SECTION 3.6. Luxembourg Publications . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE FOUR SECURITYHOLDERS' LISTS AND REPORTS BY THE ISSUER AND THE TRUSTEE SECTION 4.1. Issuer to Furnish Trustee Information as to Names and Addresses of Securityholders . . . . . . . . . . . . . . . . . . . 23 SECTION 4.2. Preservation and Disclosure of Securityholders' Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 4.3. Reports by the Issuer . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 4.4. Reports by the Trustee . . . . . . . . . . . . . . . . . . . . . . . 26
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PAGE ---- ARTICLE FIVE REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.1. Event of Default Defined; Acceleration of Maturity; Waiver of Default . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 5.2. Collection of Indebtedness by Trustee; Trustee May Prove Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 5.3. Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 5.4. Suits for Enforcement . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 5.5. Restoration of Rights on Abandonment of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 5.6. Limitations on Suits by Securityholders . . . . . . . . . . . . . . . 36 SECTION 5.7. Unconditional Right of Securityholders to Institute Certain Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 5.8. Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 5.9. Control by Securityholders . . . . . . . . . . . . . . . . . . . . . 37 SECTION 5.10. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 5.11. Trustee to Give Notice of Default, But May Withhold in Certain Circumstances . . . . . . . . . . . . . . . . . . . . . 39 SECTION 5.12. Right of Court to Require Filing of Undertaking to Pay Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE SIX CONCERNING THE TRUSTEE SECTION 6.1. Duties and Responsibilities of the Trustee; During Default; Prior to Default . . . . . . . . . . . . . . . . . . . . . 40 SECTION 6.2. Certain Rights of the Trustee . . . . . . . . . . . . . . . . . . . . 41 SECTION 6.3. Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof . . . . . . . . . . . 43 SECTION 6.4. Trustee and Agents May Hold Securities or Coupons; Collections, etc . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 6.5. Moneys Held by Trustee . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 6.6. Compensation and Indemnification of Trustee and Its Prior Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 6.7. Right of Trustee to Rely on Officers' Certificate, etc. . . . . . . . 44 SECTION 6.8. Qualification of Trustee; Conflicting Interests . . . . . . . . . . . 45 SECTION 6.9. Persons Eligible for Appointment as Trustee . . . . . . . . . . . . . 51
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PAGE ---- SECTION 6.10. Resignation and Removal; Appointment of Successor Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 6.11. Acceptance of Appointment by Successor Trustee . . . . . . . . . . . 53 SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business of Trustee . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 6.13. Preferential Collection of Claims Against the Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ARTICLE SEVEN CONCERNING THE SECURITYHOLDERS SECTION 7.1. Evidence of Action Taken by Securityholders . . . . . . . . . . . . . 60 SECTION 7.2. Proof of Execution of Instruments and of Holding of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 7.3. Holders to be Treated as Owners . . . . . . . . . . . . . . . . . . . 61 SECTION 7.4. Securities Owned by Issuer Deemed Not Outstanding . . . . . . . . . . 62 SECTION 7.5. Right of Revocation of Action Taken . . . . . . . . . . . . . . . . . 63 ARTICLE EIGHT SUPPLEMENTAL INDENTURES SECTION 8.1. Supplemental Indentures Without Consent of Security- holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 8.2. Supplemental Indentures With Consent of Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 8.3. Effect of Supplemental Indenture . . . . . . . . . . . . . . . . . . 66 SECTION 8.4. Documents to Be Given to Trustee . . . . . . . . . . . . . . . . . . 67 SECTION 8.5. Notation on Securities in Respect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 ARTICLE NINE CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 9.1. Issuer May Consolidate, etc., on Certain Terms . . . . . . . . . . . 67 SECTION 9.2. Successor Corporation Substituted . . . . . . . . . . . . . . . . . . 68 SECTION 9.3. Opinion of Counsel to Trustee . . . . . . . . . . . . . . . . . . . . 69
7 v
PAGE ---- ARTICLE TEN SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS SECTION 10.1. Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . 69 SECTION 10.2. Application by Trustee of Funds Deposited for Payment of Securities . 72 SECTION 10.3. Repayment of Moneys Held by Paying Agent . . . . . . . . . . . . . . 72 SECTION 10.4. Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two Years . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 10.5. Indemnity for U.S. Government Obligations . . . . . . . . . . . . . . 73 ARTICLE ELEVEN MISCELLANEOUS PROVISIONS SECTION 11.1. Incorporators, Shareholders, Officers and Directors of Issuer Exempt from Individual Liability . . . . . . . . . . . . . . 73 SECTION 11.2. Provisions of Indenture for the Sole Benefit of Parties and Securityholders . . . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 11.3. Successors and Assigns of Issuer Bound by Indenture . . . . . . . . . 74 SECTION 11.4. Notices and Demands on Issuer, Trustee and Securityholders . . . . . 74 SECTION 11.5. Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein . . . . . . . . . . . . . . . . . . . . . . . . . 75 SECTION 11.6. Payments Due on Saturdays, Sundays and Holidays . . . . . . . . . . 76 SECTION 11.7. Conflict of Any Provision of Indenture with Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 11.8. New York Law to Govern . . . . . . . . . . . . . . . . . . . . . . . 77 SECTION 11.9. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 SECTION 11.10. Effect of Headings . . . . . . . . . . . . . . . . . . . . . . . . . 77 SECTION 11.11. Securities in Foreign Currencies or in ECU . . . . . . . . . . . . . 77 ARTICLE TWELVE REDEMPTION OF SECURITIES AND SINKING FUNDS SECTION 12.1. Applicability of Article . . . . . . . . . . . . . . . . . . . . . . 77 SECTION 12.2. Notice of Redemption; Partial Redemptions . . . . . . . . . . . . . . 78 SECTION 12.3. Payment of Securities Called for Redemption . . . . . . . . . . . . . 79 SECTION 12.4. Exclusion of Certain Securities from Eligibility for Selection for Redemption . . . . . . . . . . . . . . . . . . . . . 80 SECTION 12.5. Mandatory and Optional Sinking Funds . . . . . . . . . . . . . . . . 81
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PAGE ---- ARTICLE THIRTEEN SUBORDINATION; SENIORITY SECTION 13.1. Securities Subordinated to Senior Indebtedness . . . . . . . . . . . 84 SECTION 13.2. Issuer Not to Make Payments with Respect to Securities in Certain Circumstances . . . . . . . . . . . . . . . . . . . . . 84 SECTION 13.3. Subrogation of Securities . . . . . . . . . . . . . . . . . . . . . . 87 SECTION 13.4. Authorization by Holders of Securities . . . . . . . . . . . . . . . 88 SECTION 13.5. Notices to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 88 SECTION 13.6. Trustee's Relation to Senior Indebtedness . . . . . . . . . . . . . . 89 SECTION 13.7. No Impairment of Subordination . . . . . . . . . . . . . . . . . . . 89 SECTION 13.8. Article 13 Not to Prevent Events of Default . . . . . . . . . . . . . 90 SECTION 13.9. Paying Agents other than the Trustee . . . . . . . . . . . . . . . . 90 SECTION 13.10. Securities Senior to Subordinated Indebtedness . . . . . . . . . . . 90 TESTIMONIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
9 THIS INDENTURE, dated as of November 15, 1988, between THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), and RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, a national banking association (the "Trustee"), WITNESSETH: WHEREAS, the Issuer has duly authorized the issue from time to time of its unsecured debentures, notes or other evidences of indebtedness to be issued in one or more series (the "Securities") up to such principal amount or amounts as may from time to time be authorized in accordance with the terms of this Indenture and to provide, among other things, for the authentication, delivery and administration thereof, the Issuer has duly authorized the execution and delivery of this Indenture; and WHEREAS, all things necessary to make this Indenture a valid indenture and agreement according to its terms have been done; Now, THEREFORE: In consideration of the premises and the purchases of the Securities by the holders thereof, the Issuer and the Trustee mutually covenant and agree for the equal and proportionate benefit of the respective holders from time to time of the Securities and of the Coupons, if any, appertaining thereto as follows: ARTICLE ONE DEFINITIONS SECTION 1.1 Certain Terms Defined. The following terms (except as otherwise expressly provided or unless the context otherwise clearly requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section. All other terms used in this Indenture that are defined in the Trust Indenture Act of 1939 or the definitions of which in the Securities Act of 1933 are referred to in the Trust Indenture Act of 1939, including terms defined therein by reference to the Securities Act of 1933 (except as herein otherwise expressly provided or unless the context otherwise clearly requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles, and the term "generally accepted accounting principles" means such accounting principles as 10 2 are generally accepted at the time of any computation. The words "herein", "hereto" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. The terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular. "Authorized Newspaper" means a newspaper (which, in the case of the United Kingdom, will, if practicable, be the Financial Times (London Edition) and, in the case of Luxembourg, will, if practicable, be the Luxemburger Wort) published in English or an official language of the country of publication customarily published at least once a day for at least five days in each calendar week and of general circulation in the United Kingdom or in Luxembourg, as applicable. If it shall be impractical in the opinion of the Trustee to make any publication of any notice required hereby in an Authorized Newspaper, any publication or other notice in lieu thereof which is made or given with the approval of the Trustee shall constitute a sufficient publication of such notice. "Board of Directors" means either the Board of Directors of the Issuer or any committee of such Board duly authorized to act hereunder. "Business Day" means, with respect to any Security, a day that in the city (or in any of the cities, if more than one) in which amounts are payable, as specified in the form of such Security, is not a day on which banking institutions are authorized by law or regulation to close or a day on which transactions in the currency in which the Securities are payable are not conducted. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or if at any time after the execution and delivery of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date. Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date as of which this Indenture is dated, located at 15 Westminster Street, Room 737W, Providence, Rhode Island 02903, Attn: Corporate Trust Administration. "Coupon" means any interest coupon appertaining to a Security. 11 3 "ECU" means the European Currency Unit as defined and revised from time to time by the council of European Communities. "European Communities" means the European Economic Community (the "EEC"), the European Coal and Steel Community and Euratom. "Event of Default" means any event or condition specified as such in Section 5.1. "Foreign Currency" means a currency issued by the government of a country other than the United States. "Holder," "Holder of Securities," "Securityholder" or other similar terms mean (a) in the case of any Registered Security, the Person in whose name such Security is registered in the security register kept by the Issuer for that purpose in accordance with the terms hereof, and (b) in the case of any Unregistered Security, the bearer of such Security, or any Coupon appertaining thereto, as the case may be. "Indebtedness" with respect to any Person means: (1) any debt (i) for borrowed money, or (ii) evidenced by a bond, note, debenture, or similar instrument (including purchase money obligations) given in connection with the acquisition of any business, property or assets, whether by purchase, merger, consolidation or otherwise, but shall not include any account payable or other obligation created or assumed by a Person in the ordinary course of business in connection with the obtaining of materials or services, or (iii) which is a direct or indirect obligation which arises as a result of banker's acceptances or drawings under bank letters of credit issued to secure obligations of such person, whether contingent or otherwise; (2) any debt of others described in the preceding clause (1) which such Person has guaranteed or for which it is otherwise liable; (3) the obligation of such Person as lessee under any lease of property which is reflected on such Person's balance sheet as a capitalized lease; and (4) any deferral, amendment, renewal, extension, supplement or refunding of any liability of the kind described in any of the preceding clauses (1), (2) and (3) provided, however, that, in computing the "Indebtedness" of any Person, there shall be excluded any particular 12 4 indebtedness if, upon or prior to the maturity thereof, there shall have been deposited with the depository in trust money (or evidences of indebtedness if permitted by the instrument creating such indebtedness) in the necessary amount to pay, redeem or satisfy such indebtedness as it becomes due, and the amount so deposited shall not be included in any computation of the assets of such Person. "Indenture" means this instrument as originally executed and delivered or, if amended or supplemented as herein provided, as so amended or supplemented or both, and shall include the forms and terms of particular series of Securities established as contemplated hereunder. "Interest" means, when used with respect to non-interest bearing Securities, interest payable after maturity. "lssuer" means (except as otherwise provided in Article Six) THE PROGRESSIVE CORPORATION, an Ohio corporation, and, subject to Article Nine, its successors and assigns. "Officers' Certificate" means a certificate signed by the chairman of the Board of Directors or the president or any vice president or by the treasurer and by the secretary or any assistant secretary of the Issuer and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 11.5. "Opinion of Counsel" means an opinion in writing signed by legal counsel who may be an employee of or counsel to the Issuer or other counsel who shall be satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 11.5, if and to the extent required hereby. "Original Issue Date" of any Security (or portion thereof) means the earlier of (a) the date of such Security or (b) the date of any Security (or portion thereof) for which such Security was issued (directly or indirectly) on registration of transfer, exchange or substitution. "Original Issue Discount Security" means any Security that provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof pursuant to Section 5.1. "Outstanding" (except as otherwise provided in Section 6.8), when used with reference to Securities, shall, subject to the provisions of Section 7.4, means, as of any particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except 13 5 (a) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Issuer) or shall have been set aside, segregated and held in trust by the Issuer for the holders of such Securities (if the Issuer shall act as its own paying agent), provided that if such Securities, or portions thereof, are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as herein provided, or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities in substitution for which other Securities shall have been authenticated and delivered, or which shall have been paid, pursuant to the terms of Section 2.9 (except with respect to any such Security as to which proof satisfactory to the Trustee is presented that such Security is held by a person in whose hands such Security is a legal, valid and binding obligation of the Issuer). In determining whether the holders of the requisite principal amount of Outstanding Securities of any or all series have given any request, demand, authorization, direction, notice, consent or waiver hereunder, the principal amount of all Original Issue Discount Security that shall be deemed to be Outstanding for such purposes shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the maturity thereof pursuant to Section 5.1. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "principal" whenever used with reference to the Securities or any Security or any portion thereof, shall be deemed to include "and premium, if any." "Registered Security" means any Security registered on the Security Register of the Issuer. "Responsible Officer" when used with respect to the Trustee means any officer or assistant officer assigned by the Trustee to administer its corporate trust matters. 14 6 "Security" or "Securities" (except as otherwise provided in Section 6.8) has the meaning stated in the first recital of this Indenture, or, as the case may be, Securities that have been authenticated and delivered under this Indenture. "Senior Indebtedness" means the principal and unpaid interest on Indebtedness of the Company outstanding at any time, other than (1) the Securities, (2) Indebtedness of the Issuer to a Subsidiary for money borrowed or advanced from any Subsidiary, except for such Indebtedness which the Subsidiary has borrowed from a third party other than a Subsidiary and advanced to the Company, (3) the Company's Floating Rate Convertible Subordinated Debentures due 2008 issued in the aggregate principal amount of $75,000,000 ("Floating Rate Convertible Subordinated Debentures"), and (4) any other Indebtedness which by its terms expressly provides that it is not superior in right of payment to the Securities. "Subordinated Indebtedness" means the principal and interest on any Indebtedness of the Company which by its terms is expressly subordinated in right of payment to the Securities (including without limitation the Floating Rate Convertible Subordinated Debentures). "Subsidiary" means a corporation the majority of whose voting stock is owned by the Company or a Subsidiary. Voting stock is capital stock having voting power under the ordinary circumstances to elect directors. "Trustee" means the Person identified as "Trustee" in the first paragraph hereof and, subject to the provisions of Article Six, shall also include any successor trustee. "Trust Indenture Act of 1939" (except as otherwise provided in Sections 8.1 and 8.2) means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was originally executed. "Unregistered Security" means any Security other than a Registered Security. "U.S. Government Obligations" means direct obligations of the United States of America, backed by its full faith and credit. "vice president" when used with respect to the Issuer, means any vice president, whether or not designated by a number or a word or words added before or after the title of "vice president". 15 7 "Yield to Maturity" means the yield to maturity on a series of securities, calculated at the time of issuance of such series, or, if applicable, at the most recent redetermination of interest on such series, and calculated in accordance with accepted financial practice. ARTICLE TWO SECURITIES SECTION 2.1 Forms Generally. The Securities of each series and the Coupons, if any, to be attached thereto shall be substantially in such form (not inconsistent with this Indenture) as shall be established by or pursuant to a resolution of the Board of Directors or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have imprinted or otherwise reproduced thereon such legend or legends, not inconsistent with the provisions of this Indenture, as may be required to comply with any law or with any rules or regulations pursuant thereto, or with any rules of any securities exchange or to conform to general usage, all as may be determined by the officers executing such Securities and Coupons, as evidenced by their execution of the Securities and Coupons. The definitive Securities and Coupons shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities and Coupons, as evidenced by their execution of such Securities and Coupons. SECTION 2.2 Form of Trustees Certificate of Authentication. The Trustee's certificate of authentication on all Securities shall be in substantially the following form: This is one of the Securities, of the series designated herein, referred to in the within-mentioned Indenture. TRUSTEE, as Trustee By ____________________________________________________ Authorized Signatory 16 8 SECTION 2.3 Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. There shall be established in or pursuant to a resolution of the Board of Directors and set forth in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, (1) the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities); (2) any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 2.8, 2.9, 2.11 or 12.3); (3) the date or dates on which the principal of the Securities of the series is payable or the method by which such date or dates shall be determined; (4) the rate or rates at which the Securities of the series shall bear interest, if any, or the method by which such rate shall be determined, the date or dates from which such interest shall accrue, the interest payment dates on which such interest shall be payable and the record dates for the determination of Holders to whom interest is payable; (5) the place or places where the principal and any interest on Securities of the series shall be payable; (6) the price or prices at which, the period or periods within which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Issuer, pursuant to any sinking fund or otherwise; (7) the obligation, if any, of the Issuer to redeem, purchase or repay Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the price or prices at which and the period or periods within which and the terms and conditions upon which Securities of the series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; 17 9 (8) if other than denominations of U.S. $1,000 and any integral multiple thereof, in the case of Registered Securities, or U.S. $1,000 in the case of Unregistered Securities, the denominations in which Securities of the series shall be issuable; (9) if other than the principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration of the maturity thereof pursuant to Section 5.1 or provable in bankruptcy pursuant to Section 5.2; (10) any authenticating or paying agents, transfer agents or registrars or any other agents with respect to the Securities of such series; (11) if other than such coin or currency of the United States of America as at the time of payment is legal tender for payment of public or private debts, the coin or currency or units based on or relating to currencies (including ECU) in which payment of the principal of and interest, if any, on the Securities of that series shall be payable; (12) if the principal of or interest, if any, on the Securities of that series are to be payable, at the election of the Issuer or a holder thereof, in a coin or currency or units based on or relating to currencies (including ECU) other than that in which the Securities are stated to be payable, the period or periods within which, and the terms and conditions upon which, such election may be made; (13) if the amount of payments of principal of or interest, if any, on the Securities of the series may be determined with reference to an index, formula or other method based on a coin or currency or units based on or relating to currencies (including ECU) other than that in which the Securities are stated to be payable, the manner in which such amounts shall be determined; (14) whether the Securities of the series will be issuable as Registered Securities or Unregistered Securities (with or without Coupons), or both, any restrictions applicable to the offer, sale or delivery of Unregistered Securities and, if other than as provided in Section 2.8, the terms upon which Unregistered Securities of any series may be exchanged for Registered Securities of such series and vice versa; 18 10 (15) whether and under what circumstances the Issuer will pay additional amounts on the Securities of the series held by a Person who is not a U.S. person in respect of any tax, assessment or governmental charge withheld or deducted and, if so, whether the Issuer will have the option to redeem such Securities rather than pay such additional amounts; (16) if the Securities of such series are to be issuable in definitive form (whether upon original issue or upon exchange of a temporary Security of such series) only upon receipt of certain certificates or other documents or satisfaction of other conditions not otherwise set forth herein, then the form and terms of such certificates, documents or conditions; (17) the degree to which such Securities shall be subordinated to any other securities of the Issuer; and (18) any other terms of the series, including provisions for payment by wire transfers, if any, or modifications of the definition of Business Day (which terms shall not adversely affect the interests of the Holders of the Securities). All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to such resolution of the Board of Directors or in any such indenture supplemental hereto. SECTION 2.4 Authentication and Delivery of Securities. At any time and from time to time after the execution and delivery of this Indenture, the Issuer may deliver Securities of any series (having attached thereto appropriate Coupons, if any), executed by the Issuer to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver such Securities and Coupons, if any, to or upon the written order of the Issuer, signed by both (a) the chairman of its Board of Directors, or any vice chairman of its Board of Directors, or its president or any vice president or its treasurer or any assistant treasurer and (b) by its secretary or any assistant secretary, without any further action by the Issuer. In authenticating such Securities and Coupons, if any, and accepting the additional responsibilities under this Indenture in relation to such Securities and Coupons, if any, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon: 19 11 (1) a copy of any resolution or resolutions of the Board of Directors by or pursuant to which the form and term of such series were established in each case certified by the Secretary or an Assistant Secretary of the Issuer; (2) an executed supplemental indenture, if any; (3) an Officers' Certificate setting forth the form and terms of the Securities and Coupons, if any, as required pursuant to Section 2.3, and prepared in accordance with Section 11.5; (4) an Opinion of Counsel, prepared in accordance with Section 11.5, which shall state (a) that the form or forms and terms of such Securities and Coupons, if any, have been established by or pursuant to a resolution of the Board of Directors or by a supplemental indenture as permitted by Section 2.1 and 2.3 in conformity with the provisions of this Indenture; (b) that such Securities and Coupons, if any, when authenticated and delivered by the Trustee and issued by the issuer in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and binding obligations of the Issuer; (c) that all laws and requirements in respect of the execution and delivery by the Issuer of the Securities and Coupons, if any, have been complied with; and (d) such other matters as the Trustee may reasonably request. The Trustee shall have the right to decline to authenticate and deliver any Securities and Coupons, if any, under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken by the Issuer or if the Trustee in good faith by its board of directors or board of trustees, executive committee, or a trust committee of directors, trustees or Responsible Officers shall determine that such action would expose the Trustee to personal liability to existing Holders. SECTION 2.5 Execution of Securities. The Securities and, if applicable, each Coupon appertaining thereto, shall be signed on behalf of the Issuer by both (a) the chairman of its Board of Directors or any vice chairman of its Board of Directors or its president or any vice president or its treasurer or any assistant treasurer and (b) by its secretary or any 20 12 assistant secretary, under its corporate seal which may, but need not, be attested. Such signatures may be the manual or facsimile signatures of the present or any future such officers. The seal of the Issuer may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Securities. Typographical and other minor errors or defects in any such reproduction of the seal or any such signature shall not affect the validity or enforceability of any Security or Coupon that has been duly authenticated and delivered by the Trustee. In case any officer of the Issuer who shall have signed any of the Securities or Coupons shall cease to be such officer before the Security or Coupon so signed (or the Security to which the Coupon so signed appertains) shall be authenticated and delivered by the Trustee or disposed of by the Issuer, such Security or Coupon nevertheless may be authenticated and delivered or disposed of as though the person who signed such Security or Coupon had not ceased to be such officer of the Issuer; and any Security or Coupon may be signed on behalf of the Issuer by such persons as, at the actual date of the execution of such Security or Coupon, shall be the proper officers of the Issuer, although at the date of the execution and delivery of this Indenture any such person was not such an officer. SECTION 2.6 Certificate of Authentication. Only such Securities as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed by the Trustee by the manual signature of one of its authorized signatories, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee upon any Security executed by the Issuer shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. No Coupon shall be entitled to the benefits of this Indenture or shall be valid or obligatory for any purpose until such certificate by the Trustee shall have become duly executed on the Security to which such Coupon appertains. SECTION 2.7 Denomination and Date of Securities; Payments of Interest. The Securities shall be issuable as Registered Securities or Unregistered Securities in such denominations as shall be specified as contemplated by Section 2.3. In the absence of any such specification with respect to the Registered Securities of any series, the Registered Securities of such series shall be issuable in denominations of U.S. $1,000 and any integral multiple thereof. In the absence of any such specification 21 13 with respect to the Unregistered Securities, Unregistered Securities shall be issued in the denomination of U.S. $1,000. The Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plan as the officers of the Issuer executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. Each Registered Security shall be dated the date of its authentication. Each Unregistered Security shall be dated as provided in the resolution or resolutions of the Board of Directors of the Issuer or the supplemental indenture referred to in Section 2.3. The Securities of each series shall bear interest, if any, from the date, and such interest shall be payable on the dates, established as contemplated by Section 2.3. The person in whose name any Registered Security of any series is registered at the close of business on any record date applicable to a particular series with respect to any interest payment date for such series shall be entitled to receive the interest, if any, payable on such interest payment date notwithstanding any transfer or exchange of such Registered Security subsequent to the record date and prior to such interest payment date, except if and to the extent the Issuer shall default in the payment of the interest due on such interest payment date for such series, in which case such defaulted interest shall be paid to the persons in whose names Outstanding Registered Securities for such series are registered at the close of business on a subsequent record date (which shall be not less than five Business Days prior to the date of payment of such defaulted interest) established by notice given by mail by or on behalf of the Issuer to the holders of Registered Securities not less than 15 days preceding such subsequent record date. The term "record date" as used with respect to any interest payment date (except a date for payment of defaulted interest) shall mean the date specified as such in the terms of the Registered Securities of any particular series, or, if no such date is so specified, if such interest payment date is the first day of a calendar month, the fifteenth day of the next preceding calendar month or, if such interest payment date is the fifteenth day of a calendar month, the first day of such calendar month, whether or not such record date is a Business Day. Any defaulted interest payable in respect of any Unregistered Security shall be payable pursuant to such procedures as are satisfactory to the Trustee and in such manner so that there is no discrimination as between the holders of Registered Securities and Unregistered Securities 22 14 of the same series and notice of the payment date therefore shall be given by the Trustee in the name and at the expense of the Company by publication at least once in an Authorized Newspaper. In case an Unregistered Security is surrendered in exchange for a Registered Security after the close of business on any record date for the payment of defaulted interest and before the opening of business on the proposed date of payment of such defaulted interest, the Coupon appertaining to such surrendered Unregistered Security and due for payment on such proposed date of payment will not be surrendered with such surrendered Unregistered Security and interest payable on such proposed date of payment will be made only to the holder of such Coupon on such proposed date. SECTION 2.8. Registration, Transfer and Exchange. The Issuer will keep or cause to be kept at each office or agency to be maintained for the purpose as provided in Section 3.2 a register or registers for each series of Registered Securities issued hereunder (collectively, the "Security Register") in which, subject to such reasonable regulations as it may prescribe, it will register, and will register the transfer of, or cause the registration of transfer of, Registered Securities as in this Article provided. Such register shall be in written form in the English language or in any other form capable of being converted into such form within a reasonable time. At all reasonable times such register or registers shall be open for inspection by the Trustee. Upon due presentation for registration of transfer of any Registered Security of any series at any such office or agency to be maintained for the purpose as provided in Section 3.2, the Issuer shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Registered Security or Registered Securities of the same series in authorized denominations for a like aggregate principal amount. Unregistered Securities (except for any temporary Unregistered Securities) and Coupons (except for Coupons attached to any temporary Unregistered Securities) shall be transferable by delivery. Any Registered Security or Registered Securities of any series may be exchanged for a Registered Security or Registered Securities of the same series in other authorized denominations, in an equal aggregate principal amount. Registered Securities of any series to be exchanged shall be surrendered at any office or agency to be maintained by the Issuer 23 15 for the purpose as provided in Section 3.2, and the Issuer shall execute and the Trustee shall authenticate and deliver in exchange therefore the Registered Security or Registered Securities of the same series which the Securityholder making the exchange shall be entitled to receive, bearing numbers not contemporaneously outstanding. If the Securities of any series are issued in both registered and unregistered form, except as otherwise specified pursuant to Section 2.3, at the option of the Holder thereof, Unregistered Securities of any series may be exchanged for Registered Securities of such series, maturity date, and interest rate of any authorized denominations and of a like aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. At the option of the Holder thereof, if Unregistered Securities of any series, maturity date, interest rate and original issue date are issued in more than one authorized denomination, except as otherwise specified pursuant to Section 2.3, such Unregistered Securities may be exchanged for Unregistered Securities of such series, maturity date, interest rate and original issue date of other authorized denominations and of a like aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2 or as specified pursuant to Section 2.3, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. Unless otherwise specified pursuant to Section 2.3, Registered Securities of any series may not be exchanged for Unregistered Securities of such series. Whenever any Securities, and the Coupons appertaining thereto, if any, are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and deliver, the Securities, and the Coupons appertaining thereto, if any, which the Holder making the exchange is entitled to receive. Notwithstanding the foregoing, if an Unregistered Security of any series is surrendered at any such office or agency in exchange for a Registered Security of the same series after the close of business at such office or agency on any record date and before the opening of business at such office or agency on the applicable interest payment date, such Unregis- 24 16 tered Security shall be surrendered without the Coupon, if any, relating to such interest payment date. All Securities and Coupons surrendered upon any exchange or transfer provided for in this Indenture shall be promptly cancelled and disposed of by the Trustee and the Trustee will deliver a certificate of disposition thereof to the Issuer. All Registered Securities presented for registration of transfer, exchange, redemption or payment shall (if so required by the Issuer or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuer and the Trustee duly executed by, the holder or his attorney duly authorized in writing. The Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchange or registration of transfer of Securities and shall not be required to exchange or register a transfer of any Securities until such payment is made. No service charge shall be made for any such transaction. The Issuer shall not be required to exchange or register a transfer of (a) any Securities of any series for a period of 15 days next preceding the first mailing of notice of redemption of Securities of such series to be redeemed, or (b) any Securities selected, called or being called for redemption except, in the case of any Security where public notice has been given that such Security is to be redeemed in part, the portion thereof not so to be redeemed and except that an Unregistered Security may be exchanged for a Registered Security of the same series being called for redemption. All Securities issued upon any transfer or exchange of Securities shall be valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange. Notwithstanding anything herein or in the terms of any series of Securities to the contrary, neither the Issuer nor the Trustee (which shall rely on an Officers' Certificate and an Opinion of Counsel) shall be required to exchange any Unregistered Security for a Registered Security if such exchange would result in adverse Federal income tax consequences to the Issuer (including, without limitation the inability of the Issuer to deduct from its income, as computed for Federal income tax purposes, the interest payable on the Unregistered Securities) under then applicable United States Federal income tax laws. 25 17 SECTION 2.9 Mutilated, Defaced, Destroyed, Lost and Stolen Securities. In case any temporary or definitive Security or any Coupon appertaining to any Security shall become mutilated, defaced or be destroyed, lost or stolen, the Issuer in its discretion may execute, and upon the written request of any officer of the Issuer, the Trustee shall authenticate and deliver, a new Security of the same series, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated or defaced Security, or in lieu of and substitution for the Security so destroyed, lost or stolen with Coupons corresponding to the Coupons appertaining to the Security so mutilated, defaced, destroyed, lost or stolen, or in exchange or substitution for the Security to which such mutilated, defaced, destroyed, lost or stolen Coupons appertained, with Coupons appertaining thereto corresponding to the Coupons so mutilated, defaced, destroyed, lost or stolen. In every case the applicant for a substitute Security or Coupon shall furnish to the Issuer and to the Trustee and any agent of the Issuer or the Trustee such security or indemnity as may be required by them to indemnify and defend and to save each of them harmless and, in every case of destruction, loss or theft, evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof. Upon the issuance of any substitute Security or Coupon, the Issuer may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. In case any Security or Coupon which has matured or is about to mature or has been called for redemption in full shall become mutilated or defaced or be destroyed, lost or stolen, the Issuer may, at its sole discretion, instead of issuing a substitute Security or Coupon, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated or defaced Security or Coupon), if the applicant for such payment shall furnish to the Issuer and to the Trustee and any agent of the issuer or the Trustee such security or indemnity as any of them may require to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Issuer and the Trustee and any agent of the Issuer or the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security or Coupon and of the ownership thereof. Every substitute Security or Coupon of any series issued pursuant to the provisions of this Section by virtue of the fact that any such 26 18 Security or Coupon is destroyed, lost or stolen shall constitute an additional contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Security or Coupon shall be at any time enforceable by anyone and shall be entitled to all the benefits of (but shall be subject to all the limitations of rights set forth in) this Indenture equally and proportionately with any and all other Securities or Coupons of such series duly authenticated and delivered hereunder. All Securities or Coupons shall be held and owned upon the express condition that, to the extent permitted by law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, defaced or destroyed, lost or stolen Securities or Coupons and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.10 Cancellation of Securities; Destruction Thereof. All Securities and Coupons surrendered for payment, redemption, registration of transfer or exchange, or for credit against any payment in respect of a sinking or analogous fund, if surrendered to the Issuer or any agent of the Issuer or the Trustee, shall be delivered to the Trustee for cancellation or, if surrendered to the Trustee, shall be cancelled by it; and no Securities or Coupons shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall destroy cancelled Securities and Coupons held by it and deliver a certificate of destruction to the Issuer. If the Issuer shall acquire any of the Securities or Coupons, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities or Coupons unless and until the same are delivered to the Trustee for cancellation. SECTION 2.11 Temporary Securities. Pending the preparation of definitive Securities for any series, the Issuer may execute and the Trustee shall authenticate and deliver temporary Securities for such series (printed, lithographed, typewritten or otherwise reproduced, in each case in form satisfactory to the Trustee). Temporary Securities of any series shall be issuable as Registered Securities without Coupons, or as Unregistered Securities with or without Coupons attached thereto, of any authorized denomination, and substantially in the form of the definitive Securities of such series but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be 27 19 determined by the Issuer with the concurrence of the Trustee. Temporary Securities may contain such reference to any provisions of this Indenture as may be appropriate. Every temporary Security shall be executed by the Issuer and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definitive Securities. Without unreasonable delay the Issuer shall execute and shall furnish definitive Securities of such series and thereupon temporary Securities of such series may be surrendered in exchange therefore without charge at each office or agency to be maintained by the Issuer for that purpose pursuant to Section 3.2, and in the case of Unregistered Securities, together with any unmatured Coupons and any matured Coupons in default appertaining thereto, at any agency maintained by the Issuer for such purpose as specified pursuant to Section 2.3, and the Trustee shall authenticate and deliver in exchange for such temporary Securities of such series a like aggregate principal amount of definitive Securities of the same series of authorized denominations. Until so exchanged, the temporary Securities and any unmatured Coupons appertaining thereto of any series shall be entitled to the same benefits under this Indenture as definitive Securities and any unmatured Coupons appertaining thereto of such series. The provisions of this Section are subject to any restrictions or limitations on the issue and delivery of temporary Unregistered Securities of any series that may be established pursuant to Section 2.3 (including any provision that Unregistered Securities of such series initially be issued in the form of a single global Unregistered Security to be delivered to a depositary or agency of the Issuer located outside the United States and the procedures pursuant to which definitive Unregistered Securities of such series would be issued in exchange for such temporary global Unregistered Security). ARTICLE THREE COVENANTS OR THE ISSUER SECTION 3.1 Payment of Principal and Interest. The Issuer covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay or cause to be paid the principal of, and interest on, each of the Securities of such series at the place or places, at the respective times and in the manner provided in such Securities. Except as specified in Section 2.3, the interest on Securities with Coupons attached (together with any additional amounts payable pursuant to the terms of such Securities) shall be payable only upon presentation and 28 20 surrender of the several Coupons for such interest installments as are evidenced thereby as they severally mature. Except as specified in Section 2.3, the interest on any temporary Unregistered Securities (together with any additional amounts payable pursuant to the terms of such Securities) shall be paid, as to the installments of interest evidenced by Coupons attached thereto, if any, only upon presentation and surrender thereof, and, as to the other installments of interest, if any, only upon presentation of such Securities for notation thereon of the payment of such interest. Each installment of interest on the Registered Securities of any series may be paid by mailing checks for such interest payable to or upon the written order of the holders of Registered Securities entitled thereto as they shall appear on the registry books of the Issuer. SECTION 3.2 Offices for Payments, etc. So long as any of the Securities remain outstanding, the Issuer will maintain the following for each series: an office or agency (a) where the Registered Securities may be presented for payment, (b) where the Registered Securities may be presented for registration of transfer and for exchange as in this Indenture provided and (c) where notices and demands to or upon the Issuer in respect of the Registered Securities or of this Indenture may be served. The Issuer will maintain one or more agencies in a city or cities located outside the United States (including any city in which such an agency is required to be maintained under the rules of any stock exchange on which the Securities of such series are listed) where the Unregistered Securities, if any, of each series and Coupons, if any, appertaining thereto may be presented for payment. No payment on any Unregistered Security or Coupon will be made upon presentation of such Unregistered Security or Coupon at an agency of the Issuer within the United States nor will any payment be made by transfer to an account in, or by mail to an address in, the United States unless pursuant to applicable United States laws and regulations then in effect such payment can be made without adverse tax consequences to the Issuer. Notwithstanding the foregoing, payments in U.S. dollars on Unregistered Securities of any series and Coupons appertaining thereto which are denominated in U.S. dollars may be made at an agency of the Issuer maintained in the Borough of Manhattan, The City of New York if such payment in U.S. dollars at each agency maintained by the Issuer outside the United States for payment on such Unregistered Securities is illegal or effectively precluded by exchange controls or other similar restrictions. 29 21 The Issuer will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. With respect to each series of Securities and Coupons whose terms are established pursuant to Section 2.3, the Issuer hereby designates the Corporate Trust Office as the initial office to be maintained by it for each such purpose. In case the Issuer shall fail to so designate or maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Corporate Trust Office. SECTION 3.3 Appointment to Fill a Vacancy in Office of Trustee. The Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee with respect to each series of Securities hereunder. SECTION 3.4 Paying Agents. Whenever the Issuer shall appoint a paying agent other than the Trustee with respect to the Securities of any series, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section, (a) that it will hold all sums received by it as such agent for the payment of the principal of or interest on the Securities of such series (whether such sums have been paid to it by the Issuer or by any other obligor on the Securities of such series) in trust for the benefit of the holders of the Securities of such series or the Coupons appertaining thereto or of the Trustee, and (b) that it will give the Trustee notice of any failure by the Issuer (or by any other obligor on the Securities of such series) to make any payment of the principal of or interest on the Securities of such series when the same shall be due and payable. The Issuer will, on or prior to each due date of the principal of or interest on the Securities of such series, deposit with the paying agent a sum sufficient to pay such principal or interest so becoming due, and (unless such paying agent is the Trustee) the Issuer will promptly notify the Trustee of any failure to take such action. If the Issuer shall act as its own paying agent with respect to the Securities or the Coupons appertaining thereto of any series, it will, on 30 22 or before each due date of the principal of or interest on the Securities or the Coupons appertaining thereto of such series, set aside, segregate and hold in trust for the benefit of the holders of the Securities or the Coupons appertaining thereto of such series a sum sufficient to pay such principal or interest so becoming due. The Issuer will promptly notify the Trustee of any failure to take such action. Anything in this Section to the contrary notwithstanding, the Issuer may at any time, for the purpose of obtaining a satisfaction and discharge with respect to one or more or all series of Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust for any such series by the Issuer or any paying agent hereunder, as required by this Section, such sums to be held by the Trustee upon the trusts herein contained. Anything in this Section to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section is subject to the provisions of Sections 10.3 and 10.4. SECTION 3.5 Written Statement to Trustee. The Issuer will deliver to the Trustee on or before April 30 in each year (beginning with April 30, 1989) a written statement, signed by two of its officers (which need not comply with Section 11.5), stating that in the course of the performance of their duties as officers of the Issuer they would normally have knowledge of any default by the Issuer in the performance or fulfillment of any covenant, agreement or condition contained in this Indenture, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. SECTION 3.6 Luxembourg Publications. In the event of the publication of any notice pursuant to Section 5.11, 6.10(a), 6.11, 8.2, 10.4 or 12.2, the party making such publication in London shall also, to the extent that notice is required to be given to Holders of Securities of any series by applicable Luxembourg law or stock exchange regulation, as evidenced by an Officers' Certificate delivered to such party, make a similar publication in Luxembourg. 31 23 ARTICLE FOUR SECURITYHOLDERS' LISTS AND REPORTS BY THE ISSUER AND THE TRUSTEE SECTION 4.1 Issuer to Furnish Trustee Information as to Names and Addresses of Securityholders. The Issuer covenants and agrees that it will furnish or cause to be furnished to the Trustee a list in such form as the Trustee may reasonably require of the names and addresses of the holders of the Securities of each series: (a) semiannually and not more that 15 days after each record date for the payment of interest on such Securities, as hereinabove specified, as of such record date and on dates to be determined pursuant to Section 2.3 for not-interest bearing securities in each year, and (b) at such other times as the Trustee may request in writing, within 30 days after receipt by the Issuer of any such request as of a date not more than 15 days prior to the time such information is furnished, provided that if and so long as the Trustee shall be the Security registrar for such series and all of the Securities of such series are Registered Securities, such list shall not be required to be furnished. The Trustee shall, at the request of the Issuer, provide such list to the Issuer for so long as the Trustee shall be the Security registrar. SECTION 4.2 Preservation and Disclosure of Securityholders' Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of each series of Securities (i) contained in the most recent list furnished to it as provided in Section 4.1, (ii) received by it in the capacity of Security registrar for such series, if so acting and (iii) filed with it within the preceding two years pursuant to Section 4.4(c)(ii). The Trustee may destroy any list furnished to it as provided in Section 4.1 upon receipt of a new list so furnished. (b) In case three or more holders of Securities (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Securities of a particular series (in which case the applicants must all hold Securities of such series) or with Holders of all 32 24 Securities with respect to their rights under this Indenture or under such Securities and such application is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business Days after the receipt of such application, at its election, either (i) afford to such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section, or (ii) inform such applicants as to the approximate number of holders of Securities of such series or all Securities, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee, in accordance with the provisions of subsection (a) of this Section, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford to such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder of such series or all Securities, as the case may be, whose name and address appears in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Commission together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Securities of such series or all Securities, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met, and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall 33 25 be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Securities and Coupons, by receiving and holding the same, agrees with the Issuer and the Trustee that neither the Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Securities in accordance with the provisions of subsection (b) of this Section, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under such subsection (b). SECTION 4.3 Reports by the Issuer. The Issuer covenants: (a) to file with the Trustee, within 15 days after the Issuer is required to file the same with the Commission, copies of the annual reports and of the information, documents, any other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Issuer may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, if the Issuer is not required to file information, documents, or reports pursuant to either of such Sections, then to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents, and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934, or in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (b) to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents, and reports with respect to compliance by the Issuer with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations; and (c) to transmit by mail to the holders of Securities. within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Issuer pursuant to subsections (a) and (b) of this Section as may be required 34 26 to be transmitted to such Holders by rules and regulations prescribed from time to time by the Commission. SECTION 4.4 Reports by the Trustee. (a) On or before July 15 in each year following the date hereof, so long as any Securities are Outstanding hereunder, the Trustee shall transmit by mail as provided below to the Securityholders of each series, as hereinafter in this Section provided, a brief report dated as of the preceding May 15 with respect to: (i) its eligibility under Section 6.9 and its qualification under Section 6.8, or in lieu thereof, if to the best of its knowledge it has continued to be eligible and qualified under such Sections, a written statement to such effect; (ii) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities of any series, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to report such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount of the securities of any series Outstanding on the date of such report; (iii) the amount, interest rate, and maturity date of all other indebtedness owing by the Issuer (or by any other obligor on the Securities) to the Trustee in its individual capacity on the date of such report, with a brief description of any property held as collateral security therefore, except any indebtedness based upon a creditor relationship arising in any manner described in Section 6.13(b)(2), (3), (4) or (6); (iv) the property and funds, if any, physically in the possession of the Trustee (as such) on the date of such report; (v) any additional issue of Securities which the Trustee has not previously reported; and (vi) any action taken by the Trustee in the performance of its duties under this Indenture which it has not previously reported and which in its opinion materially affects the Securities, except action in respect of a default, notice of which has been or is to be withheld by it in accordance with the provisions of Section 5.11. 35 27 (b) The Trustee shall transmit to the Securityholders of each series, as provided in subsection (c) of this Section, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee, as such, since the date of the last report transmitted pursuant to the provisions of subsection (a) of this Section (or if no such report has yet been so transmitted, since the date of this Indenture) for the reimbursement of which it claims or may claim a lien or charge prior to that of the Securities of such series on property or funds held or collected by it as Trustee and which it has not previously reported pursuant to this subsection (b), except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of Securities of such series outstanding at such time, such report to be transmitted within 90 days after such time. (c) Reports pursuant to this Section shall be transmitted by mail: (i) to all registered Holders of Securities, as the names and addresses of such Holders appear upon the registry books of the Issuer; (ii) to such other Holders of Securities as have, within two years preceding such transmission, filed their names and addresses with the Trustee for that purpose; and (iii) except in the case of reports pursuant to subsection (b), to each Holder of a Security whose name and address are preserved at the time by the Trustee as provided in Section 4.2(a). (d) A copy of each such report shall, at the time of such transmission to Securityholders, be furnished to the Issuer and be filed by the Trustee with each stock exchange upon which the Securities of any applicable series are listed and also with the Commission. The Issuer agrees to notify the Trustee with respect to any series when and as the Securities of such series become admitted to trading on any national securities exchange. 36 28 ARTICLE FIVE REMEDIES OR THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.1 Event of Default Defined; Acceleration of Maturity; Waiver of Default. "Event of Default with respect to Securities of any series wherever used herein, means each one of the following events which shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any installment of interest upon any of the Securities of such series as and when the same shall become due and payable, and continuance of such default for a period of 30 days; or (b) default in the payment of all or any part of the principal on any of the Securities of such series as and when the same shall become due and payable either at maturity, upon redemption, by declaration or otherwise; or (c) default in the payment of any sinking fund installment as and when the same shall become due and payable by the terms of the Securities of such series; or (d) default in the performance, or breach, of any covenant or warranty of the Issuer in respect of the Securities of such series (other than a covenant or warranty in respect of the Securities of such series a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Issuer by the Trustee or to the Issuer and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of all series affected thereby, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Issuer in all involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the 37 29 Issuer or for any substantial part of its property or ordering the winding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (f) the Issuer shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Issuer or for any substantial part of its property, or make any general assignment for the benefit of creditors; or (g) any other Event of Default provided in the supplemental indenture or resolution of the Board of Directors under which such series of Securities is issued or in the form of Security for such series. If an Event of Default described in clauses (a), (b), (c) or (d) above (if the Event of Default under clause (d) is with respect to less than all series of Securities then Outstanding) occurs and is continuing, then, and in each and every such case, unless the principal of all of the Securities of such series shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Securities of such series then Outstanding hereunder (each such series voting as a separate class) by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if the Securities of such series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) of all Securities of such series and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. If an Event of Default described in clause (d) (if the Event of Default under clause (d) is with respect to all series of Securities then Outstanding), (e) or (f) occurs and is continuing, then and in each and every such case, unless the principal of all the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in 38 30 aggregate principal amount of all the Securities then Outstanding hereunder (treated as one class), by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if any Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of all the Securities then Outstanding and interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal (or, if the Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of the Securities of any series (or of all the Securities, as the case may be) shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Issuer shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities of such series (or of all the Securities, as the case may be) and the principal of any and all Securities of such series (or of all the Securities, as the case may be) which shall have become due otherwise than by acceleration (with interest upon such principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series (or at the respective rates of interest or Yields to Maturity of all the Securities, as the case may be, to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee, its agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6, and if any and all Events of Default under the Indenture, other than the non-payment of the principal of Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein---then and in every such case the holders of a majority in aggregate principal amount of all the Securities of such series, each series voting as a separate class (or of all the Securities, as the case may be, voting as a single class) then outstanding, by written notice to the Issuer and to the Trustee, may waive all defaults with respect to such series (or with respect to all the 39 31 Securities, as the case may be) and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. For all purposes under this Indenture, if a portion of the principal of any Original Issue Discount Securities shall have been accelerated and declared due and payable pursuant to the provisions hereof, then, from and after such declaration, unless such declaration has been rescinded and annulled, the principal amount of such Original Issue Discount Securities shall be deemed, for all purposes hereunder, to be such portion of the principal thereof as shall be due and payable as a result of such acceleration, and payment of such portion of the principal thereof as shall be due and payable as a result of such acceleration, together with interest, if any, thereon and all other amounts owing thereunder, shall constitute payment in full of such Original Issue Discount Securities. SECTION 5.2 Collection of Indebtedness by Trustee; Trustee May Prove Debt. The Issuer covenants that (a) in case default shall be made in the payment of any installment of interest on any of the Securities of any series when such interest shall have become due and payable, and such default shall have continued for a period of 30 days or (b) in case default shall be made in the payment of all or any part of the principal of any of the Securities of any series when the same shall have become due and payable, whether upon maturity of the Securities of such series or upon any redemption or by declaration or otherwise--then upon demand of the Trustee, the Issuer will pay to the Trustee for the benefit of the Holders of the Securities of such series the whole amount that then shall have become due and payable on all Securities of such series, and Coupons appertaining thereto, for principal or interest, as the case may be (with interest to the date of such payment upon the overdue principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series); and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and any expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of its negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6. 40 32 Until such demand is made by the Trustee, the Issuer may pay the principal of and interest on the Securities of any series to the holders, whether or not the principal of and interest on the Securities of such series be overdue. In case the Issuer shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree, and may enforce any such judgment or final decree against the Issuer or other obligor upon such Securities and collect in the manner provided by law out of the property of the Issuer or other obligor upon such Securities, wherever situated, the moneys adjudged or decreed to be payable. In case there shall be pending proceedings relative to the Issuer or any other obligor upon the Securities under Title 11 of the United States Code or any other applicable Federal or state bankruptcy, insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Issuer or its property or such other obligor, or in case of any other comparable judicial proceedings relative to the Issuer or other obligor upon the Securities of any series, or Coupons appertaining thereto, or to the creditors or property of the Issuer or such other obligor, the Trustee, irrespective of whether the principal of any Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section, shall be entitled and empowered, by intervention in such proceedings or otherwise: (a) to file and prove a claim or claims for the whole amount of principal and interest (or, if the Securities of any series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) owing and unpaid in respect of the Securities of any series, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and 41 33 each predecessor Trustee, except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6) and of the Securityholders allowed in any judicial proceedings relative to the Issuer or other obligor upon the Securities of any series, or to the creditors or property of the Issuer or such other obligor, (b) unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Securities of any series in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and (c) to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute all amounts received with respect to the claims of the Securityholders and of the Trustee on their behalf; and any trustee, receiver, or liquidator, custodian or other similar official is hereby authorized by each of the Securityholders to make payments to the Trustee, and, in the event that the Trustee shall consent to the making of payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Securityholder any plan or reorganization, arrangement, adjustment or composition affecting the Securities or Coupons appertaining thereto of any series or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar person. All rights of action and of asserting claims under this Indenture, or under any of the Securities, or Coupons appertaining thereto may be enforced by the Trustee without the possession of any of the Securities, or Coupons appertaining thereto, or the production thereof on any trial or other proceedings relative thereto, and any such action or proceedings 42 34 instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements, compensation and all other amounts due pursuant to Section 6.6 to the Trustee, each predecessor Trustee and their respective agents and attorneys, shall be for the ratable benefit of the holders of the Securities, or Coupons appertaining thereto, in respect of which such action was taken. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Securities in respect to which such action was taken, and it shall not be necessary to make any holders of such Securities parties to any such proceedings. SECTION 5.3 Application of Proceeds. Any moneys collected by the Trustee pursuant to this Article in respect of any series shall be applied in the following order at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of principal or interest, upon presentation of the several Securities, and Coupons appertaining thereto, in respect of which monies have been collected and stamping (or otherwise noting) thereon the payment, or issuing Securities of such series in reduced principal amounts in exchange for the presented Securities of like series if only partially paid, or upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses applicable to such series in respect of which monies have been collected, including reasonable compensation to the Trustee and each predecessor Trustee and their respective agents and attorneys and of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6; SECOND: To the Holders of Senior Indebtedness to the extent required by Article 13; THIRD: In case the principal of the Securities of such series in respect of which moneys have been collected shall not have become and be then due and payable, to the payment of interest on the Securities of such series in default in the order of the maturity of the installments of such interest, with interest (to the extent that such 43 35 interest has been collected by the Trustee) upon the overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in such Securities, such payments to be made ratably to the persons entitled thereto, without discrimination or preference; FOURTH: In case the principal of the Securities of such series in respect of which moneys have been collected shall have become and shall be then due and payable, to the payment of the whole amount then owing and unpaid upon all the Securities of such series for principal and interest, with interest upon the overdue principal, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series; and in case such moneys shall be insufficient to pay in full the whole amount so due and unpaid upon the Securities of such series, then to the payment of such principal and interest or yield to maturity, without preference or priority of principal over interest or yield to maturity, or of interest or yield to maturity over principal, or of any installment of interest over any other installment of interest, or of any Security of such series over any other Security of such series, ratably to the aggregate of such principal and accrued and unpaid interest or yield to maturity; and FIFTH: To the payment of the remainder, if any, to the Issuer or any other person lawfully entitled thereto. SECTION 5.4 Suits for Enforcement. In case an Event of Default has occurred, has not been waived and is continuing, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.5 Restoration of Rights on Abandonment of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued 44 36 or abandoned for any reason, or shall have been determined adversely to the Trustee, then and in every such case the Issuer and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Issuer, the Trustee and the Securityholders shall continue as though no such proceedings had been taken. SECTION 5.6 Limitations on Suits by Securityholders. No holder of any Security of any series or of any Coupon appertaining thereto shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture, or for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Securities of such series then outstanding shall have made written request upon the Trustee to institute such action or proceedings in its own name as trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 5.9; it being understood and intended, and being expressly covenanted by the taker and Holder of every Security or Coupon with every other taker and Holder and the Trustee, that no one or more Holders of Securities of any series or of any Coupon appertaining thereto shall have any right in any manner whatever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other such Holder of Securities or Coupons, or to obtain or seek to obtain priority over or preference to any other such Holder or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders of Securities of the applicable series or of any Coupon appertaining thereto. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. 45 37 SECTION 5.7 Unconditional Rights of Securityholders to Institute Certain Suits. Notwithstanding any other provision in this Indenture and any provision of any Security, the right of any holder of any Security or Coupon to receive payment of the principal of an interest on such Security or Coupon on or after the respective due dates expressed in such Security or Coupon, or in any Coupon appertaining thereto, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 5.8 Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default. Except as provided in Section 2.9, no right or remedy herein conferred upon or reserved to the Trustee or to the Securityholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. No delay or omission of the Trustee or of any Securityholder to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; and, subject to Section 5.6, every power and remedy given by this Indenture or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 5.9 Control by Securityholders. The Holders of a majority in aggregate principal amount of the Securities of each series affected (with each series voting as a separate class) at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to the Securities of such series by this Indenture; provided that such direction shall not be otherwise than in accordance with law and the provisions of this Indenture and provided further that (subject to the provisions of Section 6.1) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel shall determine that the action or proceeding so directed may not lawfully be 46 38 taken or if the Trustee in good faith by its board of directors, the executive committee, or a trust committee of directors or Responsible Officers of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability or if the Trustee in good faith shall so determine that the actions or forebearances specified in or pursuant to such direction would be unduly prejudicial to the interests of Holders of the Securities of all series so affected not joining in the giving of said direction, it being understood that (subject to Section 6.1) the Trustee shall have no duty to ascertain whether or not such actions or forebearances are unduly prejudicial to such Holders. Nothing in this Indenture shall impair the right of the Trustee in its discretion to take any action deemed proper by the Trustee and which is not inconsistent with such direction or directions by Securityholders. SECTION 5.10 Waiver of Past Defaults. Prior to the declaration of the acceleration of the maturity of the Securities of any series as provided in Section 5.1, the Holders of a majority in aggregate principal amount of the Securities of such series at the time Outstanding may on behalf of the Holders of all the Securities of such series waive any past default or Event of Default described in clause (d) of Section 5.1 (or, in the case of an event specified in clause (d) of Section 5.1 which relates to less than all series of Securities then Outstanding, the Holders of a majority in aggregate principal amount of the Securities then Outstanding affected thereby (each series voting as a separate class)) may waive any such default or Event of Default, or, in the case of an event specified in clause (d) (if the Event of Default under clause (d) relates to all series of Securities then Outstanding), (e) or (f) of Section 5.1 the Holders of Securities of a majority in principal amount of all the Securities then Outstanding (voting as one class) may waive any such default or Event of Default), and its consequences except a default in respect of a covenant or provision hereof which cannot be modified or amended without the consent of the Holder of each Security affected. In the case of any such waiver, the Issuer, the Trustee and the Holders of the Securities of such series shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Upon any such waiver, such default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of 47 39 Default arising therefrom shall be deemed to have been cured, and not to have occurred for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 5.11 Trustee to Give Notice of Default, But May Withhold in Certain Circumstances. The Trustee shall, within 90 days after the occurrence of a default with respect to the Securities of any series known to a Responsible Officer of the Trustee, provide notice to the Holders of Securities of such series and Coupons appertaining thereto, if any, (i) if any Unregistered Securities of that series are then Outstanding, to the Holders thereof, by publication at least once in an Authorized Newspaper in London (and, if required by Section 3.6, at least once in an Authorized Newspaper in Luxembourg), (ii) if any Unregistered Securities of that series are then Outstanding, to all Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing such notice to such Holders at such addresses and (iii) to all Holders of then Outstanding Registered Securities of that series, by mailing such notice to such Holders at their addresses as they shall appear in the registry books, unless such defaults shall have been cured before the giving of such notice (the term "default" or "defaults" for the purposes of this Section being hereby defined to mean any event or condition which is, or with notice or lapse of time or both would become, an Event of Default); provided that, except in the case of default in the payment of the principal of or interest on any of the Securities of such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors or trustees and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders of such series. SECTION 5.12 Right of Court to Require Filing of Undertaking to Pay Costs. All parties to this Indenture agree, and each Holder of any Security or Coupon by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any 48 40 party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder or group of Securityholders of any series holding in the aggregate more than 10% in aggregate principal amount of the Securities of such series, or, in the case of any suit relating to or arising under clause (d) of Section 5.1 (if the suit relates to Securities of more than one but less than all series), 10% in aggregate principal amount of Securities Outstanding affected thereby, or in the case of any suit relating to or arising under clause (d) (if the suit under clause (d) relates to all the Securities then Outstanding), (e) or (f) of Section 5.1, 10% in aggregate principal amount of all Securities Outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of or interest on any Security or Coupon on or after the due date expressed in such Security or Coupon. ARTICLE SIX CONCERNING THE TRUSTEE SECTION 6.1 Duties and Responsibilities of the Trustee; During Default; Prior to Default. With respect to the Holders of any series of Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Securities of a particular series and after the curing or waiving of all Events of Default which may have occurred with respect to such series, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Securities of a series has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that (a) prior to the occurrence of an Event of Default with respect to the Securities of any series and after the curing or waiving of all such Events of Default with respect to such series which may have occurred: (i) the duties and obligations of the Trustee with respect to the Securities of any series shall be determined solely by the 49 41 express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such statements, certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders pursuant to Section 5.9 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there shall be reasonable ground for believing that the repayment of such funds or adequate indemnity against such liability is not reasonably assured to it. SECTION 6.2 Certain Rights of the Trustee. Subject to Section 6.1: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, Officers' Certificate or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, note, coupon, security or 50 42 other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Issuer mentioned herein shall be sufficiently evidenced by an Officers' Certificate or order of the Issuer (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the secretary or an assistant secretary of the Issuer; (c) the Trustee may consult with counsel and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the trusts, rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; (f) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, appraisal, bond, debenture, note, coupon, security, or other paper or document unless requested in writing so to do by the holders of not less than a majority in aggregate principal amount of the Securities of all series affected then outstanding; provided that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a 51 43 condition to proceeding; the reasonable expenses of every such investigation shall be paid by the Issuer or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Issuer upon demand; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys not regularly in its employ and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder; and (h) the Trustee shall not be deemed to have knowledge or notice of any default or Event of Default unless a Responsible Officer has actual knowledge thereof or unless the holders of not less than 25% of the aggregate principal amount of the then outstanding Securities of any affected series have notified the Trustee thereof. SECTION 6.3 Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Issuer, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Securities or Coupons. The Trustee shall not be accountable for the use or application by the Issuer of any of the Securities or of the proceeds thereof. SECTION 6.4 Trustee and Agents May Hold Securities or Coupons; Collections, etc. The Trustee or any agent of the Issuer or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities or Coupons with the same rights it would have if it were not the Trustee or such agent and, subject to Sections 6.8 and 6.13, if operative, may otherwise deal with the Issuer and receive, collect, hold and retain collections from the Issuer with the same rights it would have if it were not the Trustee or such agent. SECTION 6.5 Moneys Held by Trustee. Subject to the provisions of Section 10.4 hereof, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except 52 44 to the extent required by mandatory provisions of law. Neither the Trustee nor any agent of the Issuer or the Trustee shall be under any liability for interest on any moneys received by it hereunder. SECTION 6.6 Compensation and Indemnification of Trustee and Its Prior Claim. The Issuer covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) and the Issuer covenants and agrees to pay or reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of it in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Issuer also covenants to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including the costs and expenses of defending itself against or investigating any claim of liability in the premises. The obligations of the Issuer under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. Such additional indebtedness shall be a senior claim to that of the Securities and Coupons upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Securities or Coupons, and the Securities and Coupons are hereby subordinated to such senior claim, but such senior claim shall not be subordinate to any Senior Indebtedness. SECTION 6.7 Right of Trustee to Rely on Officers' Certificate, etc. Subject to Sections 6.1 and 6.2, whenever in the administration of the trusts of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may in the absence of negligence or bad faith on the part of the Trustee, be deemed 53 45 to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.8 Qualification of Trustee; Conflicting Interests. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section, it shall, within 90 days after ascertaining that it has such conflicting interest, either eliminate such conflicting interest or resign in the manner and with the effect specified in this Indenture. (b) In the event that the Trustee shall fail to comply with the provisions of subsection (a) of this Section, the Trustee shall, within 10 days after the expiration of such 90 day period, provide notice of such failure to the Securityholders in the manner and to the extent required by Section 4.4(c). (c) For the purposes of this Section, the Trustee shall be deemed to have a conflicting interest with respect to Securities of any series if (i) the Trustee is trustee under this Indenture with respect to the Outstanding Securities of any other series or is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Issuer are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Securities issued under this Indenture and this Indenture with respect to the Securities of any other series and there shall also be so excluded any other indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Issuer are outstanding if (i) this Indenture is and, if applicable, this Indenture and any series issued pursuant to this Indenture and such other indenture or indentures are wholly unsecured, and such other indenture or indentures are hereafter qualified under the Trust Indenture Act of 1939, unless the Commission shall have found and declared by order pursuant to Section 305(b) or Section 307(c) of such Trust Indenture Act of 1939 that differences exist between the provisions of this Indenture with respect to Securities of such series and one or more other series, or the provisions of this Indenture and the provisions of such other indenture or indentures which are so likely to involve a material conflict of interest as to make it necessary 54 46 in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to Securities of such series and such other series, or under this Indenture or such other indenture or indentures, or (ii) the Issuer shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that trusteeship under this Indenture with respect to Securities of such series and such other series, or under this Indenture and such other indenture or indentures is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to Securities of such series and such other series, or under this Indenture and such other indentures; (ii) the Trustee or any of its directors or executive officers is an obligor upon the Securities of any series issued under this Indenture or an underwriter for the Issuer; (iii) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with the Issuer or an underwriter for the Issuer; (iv) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee, or representative of the Issuer, or of an underwriter (other than the Trustee itself) for the Issuer who is currently engaged in the business of underwriting, except that (x) one individual may be a director or an executive officer, or both, of the Trustee and a director or an executive officer, or both, of the Issuer, but may not be at the same time an executive officer of both the Trustee and the Issuer; (y) if and so long as the number of directors of the Trustee in office is more than nine, one additional individual may be a director or an executive officer, or both, of the Trustee and a director of the Issuer; and (z) the Trustee may be designated by the Issuer or by any underwriter for the Issuer to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent, or depositary, or in any other similar capacity, or, subject to the provisions of subsection (c)(i) of this Section, to act as trustee, whether under an indenture or otherwise; (v) 10% or more of the voting securities of the Trustee is beneficially owned either by the Issuer or by any director, partner or executive officer thereof, or 20% or more of such voting securities 55 47 is beneficially owned, collectively, by any two or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Issuer or by any director, partner, or executive officer thereof, or is beneficially owned, collectively, by any two or more such persons; (vi) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, (x) 5% or more of the voting securities or 10% or more of any other class of security of the Issuer, not including the Securities issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (y) 10% or more of any class of security of an underwriter for the Issuer; (vii) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 5% or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Issuer; (viii) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of the Issuer; or (ix) the Trustee owns on May 15 in any calendar year, in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of security, of any person the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under Section 6.8(c)(vi), (vii) or (viii). As to any such securities of which the Trustee acquired ownership through becoming executor, administrator, or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of two years from the date of such acquisition, to the extent that such securities included in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after May 15 in each calendar year the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such May 15. If the Issuer 56 48 fails to make payment in full of principal of or interest on any of the Securities when and as the same becomes due and payable, and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph, all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of subsections (c)(vi), (vii) and (viii) of this Section. The specification of percentages in subsections (c)(v) to (ix) inclusive of this Section shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of subsections (c)(iii) or (vii) of this Section. For the purposes of subsections (c)(vi), (vii), (viii) and (ix), of this Section, only, (i) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies, or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (ii) an obligation shall be deemed to be in default when a default in payment of principal shall have continued for 30 days or more and shall not have been cured; and (iii) the Trustee shall not be deemed to be the owner or holder of (x) any security which it holds as collateral security, as trustee or otherwise, for an obligation which is not in default as defined in clause (ii) above, or (y) any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (z) any security which it holds as agent for collection, or as custodian, escrow agent, or depositary, or in any similar representative capacity. Except as provided above, the word "security" or "securities" as used in this Section shall mean any note, stock, treasury stock, bond, 57 49 debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. (d) For purposes of this Section: (i) the term "underwriter" when used with reference to the issuer shall mean every person who, within three years prior to the time as of which the determination is made, has purchased from the Issuer with a view to, or has offered or sold for the Issuer in connection with, the distribution of any security of the Issuer outstanding at such time, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission; (ii) the term "director" shall mean any director of a corporation or any individual performing similar functions with respect to any organization whether incorporated or unincorporated; (iii) the term "person" shall mean an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization, or a government or political subdivision thereof; as used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security; (iv) the term "voting security" shall mean any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person; 58 50 (v) the term "Issuer" shall mean any obligor upon the Securities; and (vi) the term "executive officer" shall mean the president, every vice president, every trust officer, the cashier, the secretary, and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors. (e) The percentages of voting securities and other securities specified in this Section shall be calculated in accordance with the following provisions: (i) a specified percentage of the voting securities of the Trustee, the Issuer or any other person referred to in this Section (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person; (ii) a specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding; (iii) the term "amount", when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares, and the number of units if relating to any other kind of security; (iv) the term "outstanding" means issued and not held by or for the account of the issuer; the following securities shall not be deemed outstanding within the meaning of this definition: (A) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (B) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; 59 51 (C) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; and (D) securities held in escrow if placed in escrow by the issuer thereof; provided, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof; and (v) a security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; provided, that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes and provided, further, that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. SECTION 6.9 Persons Eligible for Appointment as Trustee. The Trustee for each series of Securities hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or of any State or the District of Columbia having a combined capital and surplus of at least $50,000,000, and which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by Federal, State or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. 60 52 SECTION 6.10 Resignation and Removal; Appointment of Successor Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign with respect to one or more or all series of Securities by giving written notice of resignation to the Issuer. Upon receiving such notice of resignation, the Issuer shall promptly appoint a successor trustee or trustees with respect to the applicable series by written instrument in duplicate, executed by authority of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee or trustees. If no successor trustee shall have been so appointed with respect to any series and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide Holder of a Security or Securities of the applicable series for at least six months may, subject to the provisions of Section 5.12, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (i) the Trustee shall fail to comply with the provisions of Section 6.8 with respect to any series of Securities after written request therefor by the Issuer or by any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months; or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.9 and shall fail to resign after written request therefor by the Issuer or by any Securityholder; or (iii) the Trustee shall become incapable of acting with respect to any series of Securities, or shall be adjudged a bankrupt or insolvent, or a receiver or liquidator of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property of affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Issuer may remove the Trustee with respect to the applicable series of Securities and appoint a successor trustee for such series by written instrument, in duplicate, executed by order of the Board of Directors of the Issuer, one copy of which instrument shall be 61 53 delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 5.12, any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months may on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee with respect to such series. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The Holders of a majority in aggregate principal amount of the Securities of each series at the time Outstanding may at any time remove the Trustee with respect to securities of such series and appoint a successor trustee with respect to the Securities of such series by delivering to the Trustee so removed, to the successor trustee so appointed and to the Issuer the evidence provided for in Section 7.1 of the action in that regard taken by the Securityholders. (d) any resignation or removal of the Trustee with respect to any series and any appointment of a successor trustee with respect to such series pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11. SECTION 6.11 Acceptance of Appointment by Successor Trustee. Any successor trustee appointed as provided in Section 6.10 shall execute and deliver to the Issuer and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee with respect to all or any applicable series shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, duties and obligations with respect to such series of its predecessor hereunder, with like effect as if originally named as trustee for such series hereunder; but, nevertheless, on the written request of the Issuer or of the successor trustee, upon payment of its charges then unpaid, the trustee ceasing to act shall, subject to Section 10.4, pay over to the successor trustee all moneys at the time held by it hereunder and shall execute and deliver an instrument transferring to such successor trustee all such rights, powers, duties and obligations. Upon request of any such successor trustee, the Issuer shall execute any and all instruments in writing for more fully and certainly vesting in and 62 54 confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.6. If a successor trustee is appointed with respect to the Securities of one or more (but not all) series, the Issuer, the predecessor Trustee and each successor trustee with respect to the Securities of any applicable series shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the predecessor Trustee with respect to the Securities of any series as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such trustees or co-trustees of the same trust and that each such trustee shall be trustee of a trust or trusts under separate indentures. No successor trustee with respect to any series of Securities shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 6.8 and eligible under the provisions of Section 6.9. Upon acceptance of appointment by any successor trustee as provided in this Section 6.11, the Issuer shall mail notice thereof (a) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof, by publication of such notice at least once in an Authorized Newspaper in London (and, if required by Section 3.6. at least once in an Authorized Newspaper in Luxembourg), (b) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing such notice to such holders at such addresses as were so furnished to the Trustee (and the Trustee shall make such information available to the Issuer for such purpose) and (c) to the Holders of Registered Securities of each series affected, by first-class mail to such Holders of Securities of any series for which such successor trustee is acting as trustee at their last addresses as they shall appear in the Security register. If the Issuer fails to mail such notice within ten days after acceptance of appointment by the successor trustee, 63 55 the successor trustee shall cause such notice to be mailed at the expense of the Issuer. SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business of Trustee. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party or any corporation succeeding to the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided, that such corporation shall be qualified under the provisions of Section 6.8 and eligible under the provisions of Section 6.9 without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities of any series shall have been authenticated but not delivered any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities of any series shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities of such series or in this Indenture provided that the certificate of the Trustee shall have; provided, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities of any series in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13 Preferential Collection of Claims Against the Issuer. (a) Subject to the provisions of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Issuer within four months prior to a default, as defined in subsection (c) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the Holders of the Securities and the Holders of other indenture securities (as defined in this Section): (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or 64 56 interest, effected after the beginning of such four months period and valid as against the Issuer and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in subsection (a)(2) of this Section, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Issuer upon the date of such default; and (2) all property received by the Trustee in respect of any claim as such creditor, either as security therefore, or in satisfaction or composition thereof, or otherwise, after the beginning of such four months' period or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the Issuer and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee: (A) to retain for its own account (i) payments made on account of any such claim by any person (other than the Issuer) who is liable thereon, (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third person, and (iii) distributions made in cash, securities or other property in respect of claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable state law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such four months' period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such four months' period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default as defined in subsection (c) of this Section would occur within four months; or (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in such paragraph (B) or (C) as the case may be, to the extent of the fair value of such property. 65 57 For the purpose of paragraphs (B), (C) and (D), property substituted after the beginning of such four months' period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released and to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of Trustee as such creditor, such claim shall have the same status as such pre- existing claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned between the Trustee, the Securityholders and the holders of other indenture securities in such manner that the Trustee, such Securityholders and the holders of other indenture securities realize, as a result of payment from such special account and payments of dividends on claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Issuer of the funds and property in such special account and before crediting to the respective claims of the Trustee, such Securityholders and the holders of other indenture securities dividends on claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, whether such distribution is made in cash, securities or other property, but shall not include and such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceeding for reorganization is pending shall have jurisdiction (i) to apportion between the Trustee, such Securityholders and the holders of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such special account and the proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the 66 58 provisions of this paragraph, due consideration in determining the fairness of the distributions to be made to the Trustee, such Securityholders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any Trustee who has resigned or been removed after the beginning of such four months' period shall be subject to the provisions of this subsection (a) as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such four months' period, it shall be subject to the provisions of this subsection (a) if and only if the following conditions exist: (i) the receipt of property or reduction of claim which would have given rise to the obligation to account, if such Trustee had continued as trustee, occurred after the beginning of such four months' period; and (ii) such receipt of property or reduction of claim occurred within four months after such resignation or removal. (b) There shall be excluded from the operation of this Section a creditor relationship arising from (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee; (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction or by this Indenture for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advance and of the circumstances surrounding the making thereof is given to the Securityholders at the time and in the manner provided in this Indenture; (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity; 67 59 (4) an indebtedness created as a result of services rendered or premises rented or an indebtedness created as a result of goods or securities sold in a cash transaction as defined in subsection (c)(3) below: (5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Issuer, or (6) the acquisition, ownership, acceptance or negotiation of any draft, bills of exchange, acceptance or obligations which fall within the classification of self-liquidating paper as defined in subsection (c)(4) of this Section. (c) As used in this Section: (1) the term "default" shall mean any failure to make payment in full of the principal of or interest upon any of the Securities or upon the other indenture securities when and as such principal or interest becomes due and payable; (2) the term "other indenture securities" shall mean securities upon which the Issuer is an obligor (as defined in the Trust Indenture Act of 1939) outstanding under any other indenture (i) under which the Trustee is also trustee, (ii) which contains provisions substantially similar to the provisions of subsection (a) of this Section, and (iii) under which a default exists at the time of the apportionment of the funds and property held in said special account; (3) the term "cash transaction" shall mean any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand; (4) the term "self-liquidating paper" shall mean any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Issuer for the purpose of financing the purchase, processing, manufacture, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the secu- 68 60 rity, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Issuer arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation; and (5) the term "Issuer" shall mean any obligor upon the Securities. ARTICLE SEVEN CONCERNING THE SECURITYHOLDERS SECTION 7.1 Evidence of Action Taken by Securityholders. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by a specified percentage in principal amount of the Securityholders of any or all series may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such specified percentage of Securityholders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee. Proof of execution of any instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Sections 6.1 and 6.2) conclusive in favor of the Trustee and the Issuer, if made in the manner provided in this Article. SECTION 7.2 Proof of Execution of Instruments and of Holding of Securities. Subject to Sections 6.1 and 6.2, the execution of any instrument by a Securityholder or his agent or proxy may be proved in the following manner: The fact and date of the execution by any Holder of any instrument may be proved by the certificate of any notary public or other officer of any jurisdiction authorized to take acknowledgments of deeds or administer oaths that the person executing such instruments acknowledged to him the execution thereof, or by an affidavit of a witness to such execution sworn to before any such notary or other such officer. Where such execution is by or on behalf of any legal entity other than an individual, such certificate or affidavit shall also constitute sufficient proof of the authority of the person executing the same. The fact of the holding by any Holder 69 61 of an Unregistered Security of any series, and the identifying number of such Security and the date of his holding the same, may be proved by the production of such Security or by a certificate executed by any trust company, bank, banker or recognized securities dealer wherever situated satisfactory to the Trustee, if such certificate shall be deemed by the Trustee to be satisfactory. Each such certificate shall be dated and shall state that on the date thereof a Security of such series bearing a specified identifying number was deposited with or exhibited to such trust company, bank, banker or recognized securities dealer by the person named in such certificate. Any such certificate may be issued in respect of one or more Unregistered Securities of one or more series specified therein. The holding by the person named in any such certificate of any Unregistered Securities of any series specified therein shall be presumed to continue for a period of one year from the date of such certificate unless at the time of any determination of such holding (1) another certificate bearing a later date issued in respect of the same Securities shall be produced, or (2) the Security of such series specified in such certificate shall be produced by some other person, or (3) the Security of such series specified in such certificate shall have ceased to be Outstanding. Subject to Sections 6.1 and 6.2, the fact and date of the execution of any such instrument and the amount and numbers of Securities of any series held by the person so executing such instrument and the amount and numbers of any Security or Securities for such series may also be proven in accordance with such reasonable rules and regulations as may be prescribed by the Trustee for such series or in any other manner which the Trustee for such series may deem sufficient. SECTION 7.3 Holders to be Treated as Owners. The Issuer, the Trustee and any agent of the Issuer or the Trustee may deem and treat the person in whose name any Security shall be registered upon the Security register for such series as the absolute owner of such Security (whether or not such Security shall be overdue and not withstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of and, subject to the provisions of this Indenture, interest on such Security and for all other purposes; and neither the Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. The 70 62 Issuer, the Trustee and any agent of the lssuer or the Trustee may treat the Holder of any Unregistered Security and the Holder of any Coupon as the absolute owner of such Unregistered Security or Coupon (whether or not such Unregistered Security or Coupon shall be overdue) for the purpose of receiving payment thereof or on account thereof and for all other purposes and neither the Issuer, the Trustee, nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. All such payments so made to any such person, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Security or Coupon. SECTION 7.4 Securities Owned by Issuer Deemed Not Outstanding. In determining whether the Holders of the requisite aggregate principal amount of Outstanding Securities of any or all series have concurred in any direction, consent or waiver under this Indenture. Securities which are owned by the Issuer or any other obligor on the Securities with respect to which such determination is being made or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities with respect to which such determination is being made shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver only Securities which the Trustee knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Issuer or any other obligor upon the Securities or any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities. In case of a dispute as to such right, the advice of counsel shall be full protection in respect of any decision made by the Trustee in accordance with such advice. Upon request of the Trustee, the Issuer shall furnish to the Trustee promptly a written statement by two of its officers (which need not comply with Section 11.5) listing and identifying all Securities, if any, known by the Issuer to be owned or held by or for the account of any of the above-described persons; and, subject to Sections 6.1 and 6.2, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the fact therein set 71 63 forth and of the fact that all Securities not listed therein are Outstanding for the purpose of any such determination. SECTION 7.5 Right of Revocation of Action Taken. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.1, of the taking of any action by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action, any Holder of a Security the serial number of which is shown by the evidence to be included among the serial number of the Securities the Holders of which have consented to such action may, by filing written notice at the Corporate Trust Office and upon proof of holding as provided in this Article, revoke such action so far as concerns such Security. Except as aforesaid any such action taken by the Holder of any Security shall be conclusive and binding upon such Holder and upon all future Holders and owners of such Security and of any Securities issued in exchange or substitution therefore, irrespective of whether or not any notation in regard thereto is made upon any such Security. Any action taken by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action shall be conclusively binding upon the Issuer, the Trustee and the Holders of all the Securities affected by such action. ARTICLE EIGHT SUPPLEMENTAL INDENTURES SECTION 8.1 Supplemental Indentures Without Consent of Securityholders. The Issuer, when authorized by a resolution of its Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act of 1939 as in force at the date of the execution thereof) for one or more of the following purposes: (a) to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Securities of one or more series any property or assets: (b) to evidence the succession of another corporation to the Issuer, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Issuer pursuant to Article Nine; 72 64 (c) to add to the covenants of the Issuer such further covenants, restrictions, conditions or provisions as its Board of Directors and the Trustee shall consider to be for the protection of the Holders of Securities or Coupons, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, that in respect of any such additional covenant, restriction, condition or provision such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such an Event of Default or may limit the remedies available to the Trustee upon such an Event of Default or may limit the right of the Holders of a majority in aggregate principal amount of the Outstanding Securities of such series to waive such an Event of Default; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture; or to make such other provisions in regard to matters or questions arising under this Indenture or under any supplemental indenture as the Board of Directors may deem necessary or desirable and which shall not adversely affect the interests of the Holders of the Securities; (e) to provide for the issuance under this Indenture of Securities in coupon form (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with Securities issued hereunder in fully registered form, and to make all appropriate changes for such purpose; and (f) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities of one or more series, or of the Coupons appertaining to such Securities, and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Section 6.11. The Trustee is hereby authorized to join with the Issuer in the execution of any such supplemental indenture, to make any further 73 65 appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer, assignment, mortgage or pledge of any property thereunder, but the Trustee shall not be obligated to enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed without the consent of the Holders of any of the Securities at the time Outstanding, notwithstanding any of the provisions of Section 8.2. SECTION 8.2 Supplemental Indentures With Consent of Securityholders. With the consent (evidenced as provided in Article Seven of the Holders not less than 66 2/3% in aggregate principal amount of the Securities at the time Outstanding of all series affected by such supplemental indenture (voting as one class), the Issuer, when authorized by a resolution of its Board of Directors, and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act of 1939 as in force at the date of execution thereof) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Securities of each such series or the coupons appertaining to such Securities; provided, that no such supplemental indenture shall (a) extend the final maturity of any Security, or reduce the principal amount thereof or the method in which amounts of payments of principal or interest thereon are determined, or reduce the rate or extend the time of payment of interest thereon, or change the coin or currency or units based on or related to currencies (including ECU) of payment thereof, or reduce any amount payable on redemption thereof or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof pursuant to Section 5.1 or the amount thereof provable in bankruptcy pursuant to Section 5.2, or impair or affect the right of any Securityholder to institute suit for the payment thereof or, if the Securities provide therefore, any right of repayment at the option of the Securityholder or make any change in Article Thirteen hereof that adversely affects the rights of any Holder, in each case, without the consent of the Holder of each Security so affected, or (b) reduce the aforesaid percentage of Securities of any series, the consent of the Holders of which is required for any such supplemental indenture, without the consent of the Holder of each Security so affected. 74 66 Upon the request of the Issuer, accompanied by a copy of a resolution of the Board of Directors certified by the secretary or an assistant secretary of the Issuer authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid and other documents, if any, required by Section 7.1, the Trustee shall join with the Issuer in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Issuer and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Issuer shall mail a notice thereof (i) by first class mail to the Holders of then Outstanding Registered Securities of each series affected thereby at their addresses as they shall appear on the registry books of the Issuer, (ii) if any Unregistered Securities of a series affected thereby are then Outstanding, to the Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing a notice thereof by first class mail to such Holders at such addresses as were so furnished to the Trustee and (iii) if any Unregistered Securities of a series affected thereby are then Outstanding, to all holders thereof by publication of a notice thereof at least once in an Authorized Newspaper in London (and, if required by Section 3.6, at least once in an authorized Newspaper in Luxembourg), and in each case such notice shall set forth in general terms the substance of such supplemental indenture. Any failure of the Issuer to mail such notice, or any defect therein, shall not however, in any way impair or affect the validity of any such supplemental indenture. SECTION 8.3 Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, 75 67 the Issuer and the Holders of Securities of each series affected thereby shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture of any and all purposes. SECTION 8.4 Documents to Be Given to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Officers' Certificate and an Opinion Of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article Eight complies with the applicable provisions of this Indenture. SECTION 8.5 Notation on Securities in Respect of Supplemental Indentures. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article may bear a notation in form approved by the Trustee for such series as to any matter provided for by such supplemental indenture or as to any action taken at any such meeting. If the Issuer or the Trustee shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Issuer, authenticated by the Trustee and delivered in exchange for the Securities of such series then Outstanding. ARTICLE NINE CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 9.1 Issuer May Consolidate, etc., on Certain Terms. The issuer covenants that it will not merge or consolidate with any other corporation or sell or convey all or substantially all of its assets to any Person, unless (i) either the Issuer shall be the continuing corporation, or the successor corporation or the Person which acquires by sale or conveyance substantially all the assets of the Issuer (if other than the Issuer) shall be a corporation organized under the laws of the United States of America or any State thereof and shall expressly assume the due and punctual payment of the principal of and interest on all the Securities and Coupons, according to their tenor, and the due and 76 68 punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Issuer by supplemental indenture satisfactory to the Trustee, executed and delivered to the Trustee by such corporation, and (ii) the Issuer or such successor corporation, as the case may be, shall not, immediately after such merger or consolidation, or such sale or conveyance, be in default in the performance of any such covenant or condition. SECTION 9.2 Successor Corporation Substituted. In case of any such consolidation, merger, sale or conveyance and following such an assumption by the successor corporation, such successor corporation shall succeed to and be substituted for the Issuer, with the same effect as if it had been named herein. Such successor corporation may cause to be signed, and may issue either in its own name or in the name of the Issuer prior to such succession any or all of the Securities issuable hereunder, together with any Coupons appertaining thereto, which theretofore shall not have been signed by the Issuer and delivered to the Trustee; and, upon the order of such successor corporation instead of the Issuer and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee authenticate and shall deliver any Securities, together with any Coupons appertaining thereto, which previously shall have been signed and delivered by the officers of the Issuer to the Trustee for authentication, and any Securities, together with any Coupons appertaining thereto, which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All of the Securities, together with any Coupons appertaining thereto, so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities, together with any Coupons appertaining thereto, theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities and Coupons had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale, lease or conveyance such changes in phraseology and form (but not in substance) may be made in the Securities and Coupons thereafter to be issued as may be appropriate. In the event of any such sale or conveyance (other than a conveyance by way of lease) the Issuer or any successor corporation which shall theretofore have become such in the manner described in this Article shall be discharged from all obligations and covenants under this Indenture and the Securities and may be liquidated and dissolved. 77 69 SECTION 9.3 Opinion of Counsel to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Opinion of Counsel, prepared in accordance with Section 11.5, as conclusive evidence that any such consolidation, merger, sale, lease or conveyance and any such assumption, and any such liquidation or dissolution, complies with the applicable provisions of this Indenture. ARTICLE TEN SATISFACTION AND DISCHARGE OF INDENTURE: UNCLAIMED MONEYS SECTION 10.1 Satisfaction and Discharge of Indenture. (A) If at any time (a) the Issuer shall have paid or caused to be paid the principal of and interest on all the Securities of any series Outstanding hereunder and all unmatured Coupons appertaining thereto (other than Securities or Coupons which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.9) as and when the same shall have become due and payable, or (b) the Issuer shall have delivered to the Trustee for cancellation all Securities of any series theretofore authenticated and all unmatured Coupons appertaining thereto (other than any Securities or Coupons of such series which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.9) or (c) (i) all the Securities of such series not theretofore delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and (ii) the Issuer shall have irrevocably deposited or caused to be deposited with the Trustee as trust funds the entire amount in cash (other than moneys repaid by the Trustee or any paying agent to the Issuer in accordance with Section 10.4) or U.S. Government Obligations, maturing as to principal and interest in such amounts and at such times as will insure the availability of cash (without consideration of any reinvestment of such principal or interest), or a combination of U.S. Government Obligations and cash sufficient to pay at maturity or upon redemption all Securities of such series and all unmatured Coupons appertaining thereto (other than any Securities or Coupons of such series which shall have been destroyed, lost or stolen and which shall have been 78 70 replaced or paid as provided in Section 2.9) not theretofore delivered to the Trustee for cancellation, including principal and interest due or to become due to such date of maturity as the case may be, and if, in any such case, the Issuer shall also pay or cause to be paid all other sums payable hereunder by the Issuer with respect to Securities of such series and Coupons appertaining thereto, then this Indenture shall cease to be of further effect with respect to Securities of such series and Coupons appertaining thereto (except as to (i) rights of registration of transfer and exchange, and the Issuer's right of optional redemption, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of holders of Securities and Coupons appertaining thereto to receive payments of principal thereof and interest thereon upon the original stated due dates therefore (but not upon acceleration) and remaining rights of the holders to receive mandatory sinking fund payments, if any, (iv) the rights, obligations, duties and immunities of the Trustee hereunder, including those under Section 6.6. (v) the rights of the Securityholders of such series as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them, and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, on demand of the Issuer accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Issuer, shall execute proper instruments acknowledging such satisfaction of and discharging this Indenture with respect to such series; provided, that the rights of Holders of the Securities and Coupons to receive amounts in respect of principal of and interest on the Securities and Coupons held by them shall not be delayed longer than required by then-applicable mandatory rules or policies of any securities exchange upon which the Securities are listed. The Issuer agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Securities and Coupons of such series. (B) The following provisions shall apply to the Securities of each series unless specifically otherwise provided in a Board Resolution, Officers' Certificate or indenture supplemental hereto provided pursuant to Section 2.3. In addition to discharge of the Indenture pursuant to the next preceding paragraph, the Issuer shall be deemed to have paid and discharged the entire indebtedness on all the Securities of a series and Coupons appertaining thereto on the 121st day after the date of the 79 71 deposit referred to in subparagraph (a) below, and the provisions of this Indenture with respect to the Securities of such series and Coupons appertaining thereto shall no longer be in effect (except as to (i) rights of registration of transfer and exchange of Securities of such series, and of Coupons appertaining thereto, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of holders of Securities and Coupons appertaining thereto to receive, from the trust fund described in subparagraph (a) below, payments of principal thereof and interest thereon, upon the original stated due dates therefore (but not upon acceleration) and remaining rights of the holders to receive sinking fund payments if any, (iv) the rights, obligations, duties and immunities of the Trustee hereunder, including those under section 6.6, (v) the rights of the holders of Securities of such series and Coupons appertaining thereto as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, at the expense of the Issuer, shall at the Issuer's request execute proper instruments acknowledging the same, if (a) with reference to this provision the Issuer has irrevocably deposited or caused to be irrevocably deposited with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Securities of such series and Coupons appertaining thereto (i) cash, or (ii) U.S. Government Obligations, maturing as to principal and interest at such times and in such amounts as will insure the availability of cash or (iii) a combination thereof, in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay (A) the Principal and interest on all Securities of such series and Coupons appertaining thereto on the date that such principal or interest is due and payable and (B) any mandatory sinking fund payments on the day on which such payments are due and payable in accordance with the terms of the Indenture and the Securities of such series; (b) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Issuer is a party or by which it is bound; (c) the Issuer has delivered to the Trustee an opinion of independent legal counsel satisfactory to the Trustee to the effect 80 72 that Holders of the Securities of such series and Coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred; and (d) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the defeasance contemplated by this provision have been complied with, and the Opinion of Counsel shall also state that such deposit does not violate applicable law. SECTION 10.2 Application by Trustee of Funds Deposited for Payment of Securities. Subject to Section 10.4, all moneys deposited with the Trustee pursuant to Section 10.1 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Issuer acting as its own paying agent), to the Holders of the particular Securities of such series and of Coupons appertaining thereto for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest; but such money need not be segregated from other funds except to the extent required by law. Money or U.S. Government Obligations so held in trust are not subject to the provisions of Article 13. SECTION 10.3 Repayment of Moneys Held by Paying Agent. In connection with the satisfaction and discharge of this Indenture with respect to Securities of any series, all moneys then held by any paying agent under the provisions of this Indenture with respect to such series of Securities shall, upon demand of the Issuer, be repaid to it or paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 10.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two Years. Any moneys deposited with or paid to the Trustee or any paying agent for the payment of the principal of or interest on any Security of any series and not applied but remaining unclaimed for two years after the date upon which such principal or interest shall have become due and payable, shall, upon the written request of the Issuer and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Issuer by the Trustee for such series or such paying agent, and the Holder of the Security of such series shall, unless 81 73 otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Issuer for any payment which such Holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such moneys shall thereupon cease; provided the Trustee or such paying agent, before being required to make any such repayment with respect to moneys deposited with it for any payment (a) in respect of Registered Securities of any series, may at the expense of the Issuer, mail by first class mail to Holders of such Securities at their addresses as they shall appear on the Security register, and (b) in respect of Unregistered Securities of any series, may at the expense of the Issuer cause to be published once, in an Authorized Newspaper in London (and if required by Section 3.8, once in an Authorized Newspaper in Luxembourg), notice, that such moneys remain and that, after a date specified therein, which shall not be less than thirty days from the date of such mailing or publication, any unclaimed balance of such money then remaining will be repaid to the Issuer. SECTION 10.5 Indemnity for U.S. Government Obligations. The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 10.1 or the principal or interest received in respect of such obligations. ARTICLE ELEVEN MISCELLANEOUS PROVISIONS SECTION 11.1 Incorporators, Shareholders, Officers and Directors of Issuer Exempt from Individual Liability. No recourse under or upon any obligation, covenant or agreement contained in this Indenture, or in any Security or Coupon appertaining thereto, or because of any indebtedness evidenced thereby, shall be had against any incorporator, as such or against any past, present or future shareholder, officer or director, as such, of the Issuer or of any successor, either directly or through the Issuer or any successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities and any Coupons appertaining thereto by the holders thereof and as part of the consideration for the issue of the Securities and any Coupons appertaining thereto. 82 74 SECTION 11.2 Provisions of Indenture for the Sole Benefit of Parties and Securityholders. Nothing in this Indenture or in the Securities and any Coupons appertaining thereto, expressed or implied, shall give or be construed to give to any person, firm or corporation, other than the parties hereto and their successors and the Holders of the Securities or Coupons, any legal or equitable right, remedy or claim under this Indenture or under any covenant or provision herein contained, all such covenants and provisions being for the sole benefit of the parties hereto and their successors and of the Holders of the Securities. SECTION 11.3 Successors and Assigns of lssuer Bound by Indenture. All the covenants, stipulations, promises and agreements in this Indenture contained by or in behalf of the Issuer shall bind its successors and assigns, whether so expressed or not. SECTION 11.4 Notices and Demands on Issuer, Trustee and Securityholders. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities or Coupons to or on the Issuer may be given or served by being deposited postage prepaid, first-class mail (except as otherwise specifically provided herein) addressed (until another address of the Issuer is filed by the Issuer with the Trustee) to The Progressive Corporation, 6000 Parkland Boulevard, Mayfield Heights, Ohio 44124, Attn: Treasurer. Any notice, direction, request or demand by the Issuer or any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made at the Corporate Trust Office. Where this Indenture provides for notice to Holders, such notice shall be sufficiently given (unless otherwise herein expressly provided) (i) in the case of Holders of Registered Securities and Holders of Unregistered Securities who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), if in writing and mailed, first-class postage prepaid, to each holder entitled thereto, at his last address as it appears in the registry books; and (ii) in the case of holders of Unregistered Securities who have not filed their names and addresses with the Trustee, by publication in accordance with the requirements of the provision hereof requiring such notice. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given when mailed, whether or not the Holder receives the notice. In any case 83 75 where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of or irregularities in regular mail service, it shall be impracticable to mail notice to the Issuer and Securityholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. SECTION 11.5 Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein. Upon any application or demand by the Issuer to the Trustee to take any action under any of the provisions of this Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition, (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based, (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. 84 76 Any certificate, statement or opinion of an officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of counsel may be based, insofar as it relates to factual matters, information with respect to which is in the possession of the Issuer, upon the certificate, statement or opinion of or representations by an officer or officers of the Issuer, unless such counsel knows that the certificate, statement or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of an officer of the Issuer or of counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants in the employ of the Issuer, unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate or opinion of any independent firm of public accountants filed with the Trustee shall contain a statement that such firm is independent. SECTION 11.6 Payments Due on Saturdays, Sundays and Holidays. If the date of maturity of interest on or principal of the Securities of any series or any Coupons appertaining thereto or the date fixed for redemption or repayment of any such Security or Coupon shall not be a Business Day, then payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. SECTION 11.7 Conflict of Any Provision of Indenture with Trust Indenture Act of 1939. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in 85 77 this Indenture which is required to be included herein by any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, such required provision shall control. SECTION 11.8 New York Law to Govern. This Indenture and each Security and Coupon shall be deemed to be a contract under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of such State, except as may otherwise be required by mandatory provisions of law. SECTION 11.9 Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. SECTION 11.10 Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 11.11 Securities in Foreign Currencies or in ECU. Whenever this Indenture provides for any action by, or the determination of any of the rights of, or any distribution to, Holders of Securities denominated in United States dollars and in any other currency or currency unit (including ECU), in the absence of any provision to the contrary in the form of Security of any particular series, any amount in respect of any Security denominated in a currency or currency unit (including ECU) other than United States dollars shall be treated for any such action or distribution as that amount of United States dollars that could be obtained for such amount on such reasonable basis of exchange and as of such date as the Issuer may specify in a written notice to the Trustee or in the absence of such written notice, as the Trustee shall so determine. ARTICLE TWELVE REDEMPTION OF SECURITIES AND SINKING FUNDS SECTION 12.1 Applicability of Article. The provisions of this Article shall be applicable to the Securities of any series which are redeemable before their maturity or to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 2.3 for Securities of such series. 86 78 SECTION 12.2 Notice of Redemption; Partial Redemptions. Notice of redemption to the Holders of Registered Securities of any series to be redeemed as a whole or in part at the option of the Issuer shall be given by mailing notice of such redemption by first class mail, postage prepaid, at least 30 days and not more than 60 days prior to the date fixed for redemption to such Holders of Securities of such series at their last addresses as they shall appear upon the registry books. Notice of redemption to the Holders of Unregistered Securities to be redeemed as a whole or in part, who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), shall be given by mailing notice of such redemption, by first class mail, postage prepaid, at least thirty and not more than sixty days prior to the date fixed for redemption, to such Holders at such addresses as were so furnished to the Trustee (and in the case of any such notice given by the Issuer, the Trustee shall make such information available to the Issuer for such purpose). Notice of redemption to all other holders of Unregistered Securities shall be published in an Authorized Newspaper in London (and, if required by Section 3.6, in an Authorized Newspaper in Luxembourg), in each case, once in each of two successive calendar weeks, the first publication to be not less than thirty nor more than sixty days prior to the date fixed for redemption. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives the notice. Failure to give notice by mail, or any defect in the notice to the Holder of any Security of a series designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security of such series. The notice of redemption to each such Holder shall specify the principal amount of each Security of such series held by such Holder to be redeemed, the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of such Securities, and, in the case of Securities with Coupons attached thereto, of all Coupons appertaining thereto maturing after the date fixed for redemption, that such redemption is pursuant to the mandatory or optional sinking fund, or both, if such be the case, that interest accrued to the date fixed for redemption will be paid as specified in such notice and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. In case any Security of a series is to be redeemed in part only the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of 87 79 such Security, a new Security or Securities of such series in principal amount equal to the unredeemed portion thereof will be issued. The notice of redemption of Securities of any series to be redeemed at the option of the Issuer shall be given by the Issuer or, at the Issuer's request, by the Trustee in the name and at the expense of the Issuer. On the redemption date specified in the notice of redemption given as provided in this Section, the Issuer will deposit with the Trustee or with one or more paying agents (or, if the Issuer is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 3.4) an amount of money sufficient to redeem on the redemption date all the Securities of such series so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. If any or all of the outstanding Securities of a series are to be redeemed, the Issuer will deliver to the Trustee at least 70 days prior to the date fixed for redemption an Officers' Certificate stating the date of redemption and the aggregate principal amount of Securities to be redeemed. If less than all the Securities of a series are to be redeemed, the Trustee shall select, in such manner as it shall deem appropriate and fair, Securities of such series to be redeemed in whole or in part. Securities may be redeemed in part in multiples equal to the minimum authorized denomination for Securities of such series or any integral multiple thereof. The Trustee shall promptly notify the Issuer in writing of the Securities of such series selected for redemption and, in the case of any Securities of such series selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities of any series shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. SECTION 12.3 Payment of Securities Called for Redemption. If notice of redemption has been given as above provided, the Securities or portions of Securities specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Issuer shall default in the payment of such Securities at the redemption price, together with interest accrued to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue and the 88 80 unmatured Coupons, if any, appertaining thereto shall be void and, except as provided in Sections 6.5 and 10.4, such Securities shall cease from and after the date fixed for redemption to be entitled to any benefit or security under this Indenture, and the Holders thereof shall have no right in respect of such Securities except the right to receive the redemption price thereof and unpaid interest to the date fixed for redemption. On presentation and surrender of such Securities, together with all Coupons appertaining thereto maturing after the date fixed for redemption, at a place of payment specified in said notice, said Securities and Coupons or the specified portions thereof shall be paid and redeemed by the Issuer at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption; provided that any semiannual payment of interest becoming due on the date fixed for redemption shall be payable in the case of Securities with Coupons attached thereto, to the bearers of the Coupons for such interest upon surrender thereof, and in the case of Registered Securities, to the Holders of such Securities registered as such on the relevant record date subject to the terms and provisions of Section 2.4 hereof. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate of interest or Yield to Maturity (in the case of an Original Issue Discount Security) borne by the Security. If any Security with Coupons attached thereto is surrendered for redemption and is not accompanied by all such Coupons maturing after the date fixed for redemption, the surrender of such missing Coupon or Coupons may be waived by the Issuer and the Trustee, if there be furnished to each of them such security or indemnity as they may require to save each of them harmless. Upon presentation of any Security redeemed in part only, the Issuer shall execute and the Trustee shall authenticate and deliver to or on the order of the Holder thereof, at the expense of the Issuer, a new Security or Securities of such series, together with all Coupons, if any, appertaining thereto, of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented. SECTION 12.4 Exclusion of Certain Securities from Eligibility for Selection for Redemption. Securities shall be excluded from eligibility for selection for redemption if they are identified by registra- 89 81 tion and certificate number in a written statement signed by an authorized officer of the Issuer and delivered to the Trustee at least 40 days prior to the last date on which notice of redemption may be given as being owned of record and beneficially by, and not pledged or hypothecated by either (a) the Issuer or (b) an entity specifically identified in such written statement directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer. SECTION 12.5 Mandatory and Optional Sinking Funds. The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a "mandatory sinking fund payment", and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an "optional sinking fund payment". The date on which a sinking fund payment is to be made is herein referred to as the "sinking fund payment date". In lieu of making all or any part of any mandatory sinking fund payment with respect to any series of Securities in cash, the Issuer may at its option (a) deliver to the Trustee Securities of such series theretofore purchased or otherwise acquired (except upon redemption pursuant to the mandatory sinking fund) by the Issuer or receive credit for Securities of such series (not previously so credited) theretofore purchased or otherwise acquired (except as aforesaid) by the Issuer and delivered to the Trustee for cancellation pursuant to Section 2.7, (b) receive credit for optional sinking fund payments (not previously so credited) made pursuant to this Section, or (c) receive credit for Securities of such series (not previously so credited) redeemed by the Issuer through any optional redemption provision contained in the terms of such series. Securities so delivered or credited shall be received or credited by the Trustee at the sinking fund redemption price specified in such Securities. On or before the sixtieth day next preceding each sinking fund payment date for any series, the Issuer will deliver to the Trustee a written statement (which need not contain the statements required by Section 11.5) signed by an authorized officer of the Issuer (a) specifying the portion of the mandatory sinking fund payment to be satisfied by payment of cash and the portion to be satisfied by credit of Securities of such series, (b) stating that none of the Securities of such series has theretofore been so credited, (c) stating that no defaults in the payment of interest or Events of Default with respect to such series have occurred 90 82 (which have not been waived or cured) and are continuing and (d) stating whether or not the Issuer intends to exercise its right to make an optional sinking fund payment with respect to such series and, if so, specifying the amount of such optional sinking fund payment which the Issuer intends to pay on or before the next succeeding sinking fund payment date. Any Securities of such series to be credited and required to be delivered to the Trustee in order for the Issuer to be entitled to credit therefore as aforesaid which have not theretofore been delivered to the Trustee shall be delivered for cancellation pursuant to Section 2.10 to the Trustee with such written statement (or reasonably promptly thereafter if acceptable to the Trustee). Such written statement shall be irrevocable and upon its receipt by the Trustee the Issuer shall become unconditionally obligated to make all the cash payments or payments therein referred to, if any, on or before the next succeeding sinking fund payment date. Failure of the Issuer, on or before any such sixtieth day, to deliver such written statement and Securities specified in this paragraph, if any, shall not constitute a default but shall constitute, on and as of such date, the irrevocable election of the Issuer (i) that the mandatory sinking fund payment for such series due on the next succeeding sinking fund payment date shall be paid entirely in cash without the option to deliver or credit Securities of such series in respect thereof and (ii) that the Issuer will make no optional sinking fund payment with respect to such series as provided in this Section. If the sinking fund payment or payments (mandatory or optional or both) to be made in cash on the next succeeding sinking fund payment date plus any unused balance of any preceding sinking fund payments made in cash shall exceed $50,000 (or a lesser sum if the Issuer shall so request) with respect to the Securities of any particular series, such cash shall be applied on the next succeeding sinking fund payment date to the redemption of Securities of such series at the sinking fund redemption price together with accrued interest to the date fixed for redemption. If such amount shall be $50,000 or less and the Issuer makes no such request, then it shall be carried over until a sum in excess of $50,000 is available. The Trustee shall select, in the manner provided in Section 12.2, for redemption on such sinking fund payment date a sufficient principal amount of Securities of such series to absorb said cash, as nearly as may be, and shall (if requested in writing by the Issuer) inform the Issuer of the serial numbers of the Securities of such series (or potions thereof) so selected. Securities of any series which are (a) owned by the Issuer 91 83 or an entity known by the Trustee to be directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer, as shown by the Security register, and not know to the Trustee to have been pledged or hypothecated by the Issuer or any such entity or (b) identified in an Officers' Certificate at least 60 days prior to the sinking fund payment date as being beneficially owned by, and not pledged or hypothecated by, the Issuer or an entity directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer shall be excluded from Securities of such series eligible for selection for redemption. The Trustee, in the name and at the expense of the Issuer (or the Issuer, if it shall so request the Trustee in writing) shall cause notice of redemption of the Securities of such series to be given in substantially the manner provided in Section 12.2 (and with the effect provided in Section 12.3) for the redemption of Securities of such series in part at the option of the Issuer. The amount of any sinking fund payments not so applied or allocated to the redemption of Securities of such series shall be added to the next cash sinking fund payment for such series and, together with such payment, shall be applied in accordance with the provisions of this Section. Any and all sinking fund moneys held on the stated maturity date of the Securities of any particular series (or earlier, if such maturity is accelerated), which are not held for the payment or redemption of particular Securities of such series shall be applied, together with other moneys, if necessary, sufficient for the purpose, to the payment of the principal of, and interest on, the Securities of such series at maturity. On each sinking fund payment date, the Issuer shall pay to the Trustee in cash or shall otherwise provide for the payment of all interest accrued to the date fixed for redemption on Securities to be redeemed on the next following sinking fund payment date. The Trustee shall not redeem or cause to be redeemed any Securities of a series with sinking fund moneys or provide any notice of redemption of Securities for such series by operation of the sinking fund during the continuance of a default in payment of interest on such Securities or of any Event of Default except that, where the mailing or publication of notice of redemption of any Securities shall theretofore have been made, the Trustee shall redeem or cause to be redeemed such Securities, provided that it shall have received from the Issuer a sum sufficient for such redemption. Except as aforesaid, any moneys in the sinking fund for such series at the time when any such default or Event of Default 92 84 shall occur, and any moneys thereafter paid into the sinking fund, shall, during the continuance of such default or Event of Default, be deemed to have been collected under Article Five and held for the payment of all such Securities. In case such Event of Default shall have been waived as provided in Section 5.10 or the default cured on or before the sixtieth day preceding the sinking fund payment date in any year, such moneys shall thereafter be applied on the next succeeding sinking fund payment date in accordance with this Section to the redemption of such Securities. ARTICLE THIRTEEN SUBORDINATION; SENIORITY SECTION 13.1 Securities Subordinated to Senior Indebtedness. The Issuer agrees, and each Holder of the Securities by his acceptance thereof likewise agrees, that the payment of the principal of and interest on Securities of any series issued under this Indenture shall be subordinated and junior in right of payment, to the extent and in the manner provided in this Article 13 to the prior payment in full of all Senior Indebtedness whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed. The Senior Indebtedness of the Issuer shall continue to be Senior Indebtedness and entitled to the benefits of these subordination provisions irrespective of any amendment, modification or waiver of any term of any instrument relating to the Senior Indebtedness or the extension or renewal of the Senior Indebtedness. All the provisions of this Indenture and the Securities shall be subject to the provisions of this Article 13 so far as they may be applicable thereto, except that nothing in this Article 13 shall apply to claims for, or payments to, the Trustee under or pursuant to Section 6.6. SECTION 13.2 Issuer Not to Make Payments with Respect to Securities in Certain Circumstances. No payment shall be made by the Issuer on account of principal of or interest on Securities of any series or on account of the purchase or other acquisition of Securities of any series, if there shall have occurred and be continuing a default with respect to any Senior Indebtedness permitting the acceleration thereof or with respect to the payment of any Senior Indebtedness and (a) such default is the subject of a judicial proceeding or (b) notice of such default 93 85 in writing or by telegram has been given to the Issuer by any holder or holders of any Senior Indebtedness (provided, however, that in the case of Senior Indebtedness issued pursuant to an indenture such notice may be validly given only by the trustee under such indenture), unless and until such default or event of default shall have been cured or waived or shall have ceased to exist. Upon any acceleration of the principal of Securities of any series or any payment by the Issuer, or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or liquidation or reorganization of the Issuer, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in money or money's worth, or payment thereof provided for, before any payment is made on account of the principal of or interest on Securities of any series; and (subject to the power of a court of competent jurisdiction to make other equitable provision, which shall have been determined by such court to give effect to the rights conferred in this Article upon the Senior Indebtedness and the holders thereof with respect to Securities of any series or the Holders thereof or the Trustee, by a lawful plan of reorganization or readjustment under applicable law) upon any such dissolution or winding up or liquidation or reorganization, any payment by the Issuer, or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, to which the Holders of the Securities of any series or the Trustee would be entitled except for the provisions of this Article, shall be paid by the Issuer or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution directly to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any payment or distribution is made to the Holders of the Securities of any series or to the Trustee. In the event that, notwithstanding the foregoing, any payment by or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be 94 86 received by the Trustee or the Holders of the Securities of any series before all Senior Indebtedness is paid in full in money or money's worth, or provision is made for such payment, and if such fact shall then have been or thereafter be made known to the Trustee or, as the case may be, such Holder, then and in such event such payment or distribution shall be paid over or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, and, until so delivered, the same shall be held in trust by any Holder of a Security as the property of the holders of Senior Indebtedness. The consolidation of the Issuer with, or the merger of the Issuer into, another corporation or the liquidation or dissolution of the Issuer following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided in Article Nine shall not be deemed a dissolution, winding up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article Nine. Nothing in this Section shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6. The holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holders of the Securities of any series, without incurring responsibility to the Holders of the Securities of any series and without impairing or releasing the obligations of the Holders of the Securities of any series to the holders of Senior Indebtedness: (i) change the manner, place or terms of payment or change or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Issuer and any other Person. 95 87 SECTION 13.3 Subrogation of Securities. Subject to the payment in full of all amounts then due (whether by acceleration of the maturity thereof or otherwise) on account of the principal and interest on all Senior Indebtedness at the time outstanding, the Holders of the Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Issuer applicable to the Senior Indebtedness until the principal and interest on the Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property or securities to which the Holders of the Securities of any series or the Trustee would be entitled except for the provisions of this Article shall, as between the Issuer, its creditors other than holders of Senior Indebtedness, and the Holders of the Securities of any series, be deemed to be a payment by the Issuer to or on account of the Senior Indebtedness. It is understood that the provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities, on the one hand, and the holders of Senior Indebtedness, on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Securities of any series is intended to or shall impair, as among the Issuer, its creditors other than the holders of Senior Indebtedness, and the Holders of the Securities, the obligation of the Issuer, which is absolute and unconditional, to pay to the Holders of the Securities the principal of and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders of the Securities of any series and creditors of the Issuer other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness in respect of cash, property or securities of the Issuer received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Issuer referred to in this Article, the Trustee, subject to the provisions of Section 6.1, and the Holders of the Securities shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such 96 88 dissolution, winding up, liquidation or reorganization proceedings are pending, or certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of the Securities, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Issuer, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. SECTION 13.4 Authorization by Holders of Securities. Each Holder of a Security of any series by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate, as between the Holder of the Security and the holders of Senior Indebtedness, the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes. SECTION 13.5 Notices to Trustee. The Issuer shall give prompt written notice to the Trustee of any fact known to the Issuer which would prohibit the making of any payment of moneys to or by the Trustee in respect of the Securities of any series pursuant to the provisions of this Article. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment of moneys to or by the Trustee in respect of the Securities of any series pursuant to the provisions of this Article, unless and until the Trustee shall have received at its Corporate Trust Office written notice thereof from the Issuer or a holder or holders of Senior Indebtedness or from any trustee therefore; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 6.1, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received at least three Business Days prior to the date upon which by the terms hereof any such moneys may become payable for any purpose (including, without limitation, the payment of the principal or interest on any Security of any series) with respect to such moneys the notice provided for in this Section, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received and shall 97 89 not be affected by any notice to the contrary which may be received by it within three Business Days prior to such date. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness or a trustee on behalf of any such holder. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 13.6 Trustee's Relation to Senior Indebtedness. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in Section 6.13 or elsewhere in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe any such of its covenants and obligations as are specifically set forth in this Article, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not owe any fiduciary duty to the holders of Senior Indebtedness but shall have only such obligations to such holders as are expressly set forth in this Article. SECTION 13.7 No Impairment of Subordination. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Issuer or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Issuer with the terms, provisions and 98 90 covenants of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. SECTION 13.8 Article 13 Not To Prevent Events of Default. The failure to make a payment on account of principal or interest on the Securities by reason of any provision in this Article 13 shall not be construed as preventing the occurrence of an Event of Default under Section 5.1. SECTION 13.9 Paying Agents other than the Trustee. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Issuer and be then acting hereunder, the term "Trustee" as used in this Article 13 shall in such case (unless the context shall otherwise require) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article 13 in addition to or in place of the Trustee; provided, however, that Sections 13.5 and 13.6 hereof shall not apply to the Issuer or any Subsidiary if it acts as Paying Agent. SECTION 13.10 Securities Senior to Subordinated Indebtedness. The indebtedness represented by the Securities will be senior and prior in right of payment to the principal and interest on all Subordinated Indebtedness, to the extent and in the manner provided in such Subordinated Indebtedness. 99 91 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of November 15, 1988. THE PROGRESSIVE CORPORATION [CORPORATE SEAL] By ----------------------------------------- Treasurer Attest: By -------------------------------------- RHODE ISLAND HOSPITAL TRUST NATIONAL BANK [CORPORATE SEAL] By ----------------------------------------- Attest: By --------------------------------------
100 92 STATE OF NEW YORK COUNTY OF NEW YORK ss.: On this ____ day of ______ before me personally came Howard M. Zelikow, to me personally known, who, being by me duly sworn, did depose and say that he resides at Cleveland, Ohio ; that he is an officer of THE PROGRESSIVE CORPORATION, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. ----------------------------------------- Notary Public [NOTARIAL SEAL]
STATE OF NEW YORK COUNTY OF NEW YORK ss.: On this day of , before me personally came , to me personally known, who, being by me duly sworn, did depose and say that he resides at New York, New York; that he is an of RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. ----------------------------------------- Notary Public [NOTARIAL SEAL]
EX-4.C 3 EXHIBIT 4.C 1 [FORM OF FACE OF REGISTERED DEBT SECURITY] NO. R $____________ CUSIP 743315 AD 5 SEE REVERSE FOR CERTAIN DEFINITIONS THE PROGRESSIVE CORPORATION 10-1/8% SUBORDINATED NOTE DUE DECEMBER 15, 2000 THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), for value received, hereby promises to pay to ___________________________________ or registered assigns, at the office or agency of the Issuer at the office of the Trustee in Providence, Rhode Island, the principal sum of __________________ Dollars on December 15, 2000, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest semiannually on June 15 and December 15 of each year, commencing June 15, 1989, on said principal sum at said office or agency, in like coin or currency, at the rate per annum specified in the title of this Note, from the June 15 or the December 15, as the case may be, next preceding the date of this Note to which interest has been paid, unless the date hereof is a date to which interest has been paid, in which case from the date of this Note, or unless no interest has been paid on these Notes, in which case from December 15, 1988, until payment of said principal sum has been made or duly provided for; PROVIDED, that payment of interest may be made at the option of the Issuer by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. Notwithstanding the foregoing, if the date hereof is after the first day of June or December, as the case may be, and before the following June 15 or December 15, this Note shall bear interest from such June 15 or December 15; PROVIDED, that if the Issuer shall default in the payment of interest due on such June 15 or December 15, then this Note shall bear interest from the next preceding June 15 or December 15 to which interest has been paid or, if no interest has been paid on these Notes, from December 15, 1988. The interest so payable on any June 15 or December 15 will, subject to certain exceptions provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note is registered at the close of business on the June 1 or December 1, as the case may be, next preceding such June 15 or December 15. Reference is made to the further provisions of this Note set forth on the reverse hereof. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. 2 This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. IN WITNESS WHEREOF, The Progressive Corporation has caused this instrument to be signed by facsimile by its duly authorized officers and has caused a facsimile of its corporate seal to be affixed hereunto or imprinted hereon. Dated: THE PROGRESSIVE CORPORATION Attest: By /s/ Peter B. Lewis -------------------------------- President and Chief Executive /s/ David M. Schneider Officer ---------------------- Secretary [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Securities, of the series designated herein, referred to in the within-mentioned Indenture. Rhode Island Hospital Trust National Bank, as Trustee By................................. Authorized Signatory [FORM OF REVERSE OF DEBT SECURITY] THE PROGRESSIVE CORPORATION 10-1/8% SUBORDINATED NOTE DUE DECEMBER 15, 2000 -2- 3 This Note is one of a duly authorized issue of debentures, notes, bonds or other evidences of indebtedness of the Issuer (hereinafter called the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an indenture dated as of November 15, 1988 (herein called the "Indenture"), duly executed and delivered by the Issuer to Rhode Island Hospital Trust National Bank, as Trustee (herein called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuer and the holders of the Securities. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption provisions (if any), may be subject to different sinking, purchase or analogous funds (if any) and may otherwise vary as in the Indenture provided. This Note is one of a series designated as the 10-1/8% Subordinated Note Due December 15, 2000 of the Issuer, limited in aggregate principal amount to $150,000,000. In case an Event of Default with respect to the 10-1/8% Subordinated Notes Due December 15, 2000, as defined in the Indenture, shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. This Note is subordinated to all existing and future Senior Indebtedness (as defined in the Indenture) of the Issuer. To the extent and in the manner provided in the Indenture, Senior Indebtedness must be paid before any payment may be made to any Holders of Securities of any series. Any Securityholder by accepting this Note agrees to the subordination and authorizes the Trustee to give it effect. In addition to all other rights of Senior Indebtedness described in the Indenture, the Senior Indebtedness shall continue to be Senior Indebtedness and entitled to the benefits of the subordination provisions irrespective of any amendment, modification or waiver of any term of any instrument relating to the Senior Indebtedness or extension or renewal of the Senior Indebtedness. The Indenture contains provisions permitting the Issuer and the Trustee, with the consent of the Holders of not less than 66-2/3% in aggregate principal amount of the Securities at the time Outstanding (as defined in the Indenture) of all series to be affected (voting as one class), evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the Holders of the Securities of each such series; PROVIDED HOWEVER, that no such supplemental indenture shall (i) extend the final maturity of any Security, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of any interest thereon, or impair or affect the rights of any Holder to institute suit for the payment thereof, or make any change in the subordination provisions that adversely affects the rights of any Holder, in each case, without the consent of the Holder of each Security so affected or (ii) reduce the aforesaid percentage of Securities, the Holders of which are required to consent to any such supplemental indenture, without the consent of the Holder of each Security affected. It is also provided in the Indenture -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 the case of certain defaults or Events of Default, all or certain series of the Securities) may on behalf of the Holders of all the Securities of such series (or all or certain series of the Securities, as the case may be) waive any such past default or Event of Default and its consequences. The preceding sentence shall not, however, apply to a default in the payment of the principal of or premium, if any, or interest on any of the Securities. Any such consent or waiver by the Holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Note and any Note which may be issued in exchange or substitution herefor, irrespective of whether or not any notation thereof is made upon this Note or such other Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Note in the manner, at the respective times, at the rate and in the coin or currency herein prescribed. The Notes are issuable in registered form without coupons in denominations of $1,000 and any integral multiples of $1,000 at the office or agency of the Issuer at the office of the Trustee in Providence, Rhode Island, and in the manner and subject to the limitations provided in the Indenture, but without the payment of any service charge, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. The Notes are not subject to redemption at the option of the Issuer or through the operation of a sinking fund. Upon due presentment for registration of transfer of this Note at the office or agency of the Issuer or at the office of the Trustee in Providence, Rhode Island, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. The Issuer, the Trustee and any authorized agent of the Issuer or the Trustee may deem and treat the registered Holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon), for the purpose of receiving payment of, or on account of, the principal hereof and, subject to the provisions on the face hereof, interest hereon, and for -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 any notice to the contrary. No recourse under or upon any obligation, covenant or agreement of the Issuer in the Indenture or any indenture supplemental thereto or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, shareholder, officer or director, as such, of the Issuer or of any successor corporation, either directly or through the Issuer or any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance hereof and as part of the consideration for the issue hereof. Terms used herein which are defined in the Indenture shall have the respective meanings assigned thereto in the Indenture. -5- EX-4.D 4 EXHIBIT 4.D 1 ========================================================================== THE PROGRESSIVE CORPORATION AND THE FIRST NATIONAL BANK OF BOSTON, Trustee ______________ INDENTURE ______________ Dated as of November 15, 1988 ========================================================================== 2 CROSS REFERENCE SHEET* Between Provisions of Trust Indenture Act of 1939 and Indenture to be dated as of November 15, 1988 between THE PROGRESSIVE CORPORATION and THE FIRST NATIONAL BANK OF BOSTON, Trustee:
Section of the Act Section of Indenture - - - ------------------ -------------------- 310(a)(1) and (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 310(a)(3) and (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 310(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 and 6.10(a), (b) and (d) 310(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13(a) and (c)(1) and (2) 311(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13(b) 311(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 and 4.2(a) 312(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a) and (b)(i) and (ii) 312(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(c) 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4(a)(i), (ii), (iii), (iv), (v) and (vi) 313(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 313(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 313(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 313(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 314(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(c)(1) and (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 314(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 314(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 315(a), (c) and (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 315(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11 315(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.12 316(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 316(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Required 316(a) (last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 316(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 317(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 317(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4(a) and (b) 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.7
* This Cross Reference Sheet is not part of the Indenture. 3 TABLE OF CONTENTS
PAGE ---- PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 RECITALS: Authorization of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Compliance with Legal Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Purpose of and Consideration for Indenture . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE ONE DEFINITIONS SECTION 1.1. Certain Terms Defined . . . . . . . . . . . . . . . . . . . . . . . . . 1 Authorized Newspaper . . . . . . . . . . . . . . . . . . . . . . . . . 2 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Corporate Trust Office . . . . . . . . . . . . . . . . . . . . . . . . 2 Coupon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ECU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 European Communities . . . . . . . . . . . . . . . . . . . . . . . . . 3 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Foreign Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Holder, holder of Securities, Securityholder . . . . . . . . . . . . . 3 Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . 3 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Original Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Original Issue Discount Securities . . . . . . . . . . . . . . . . . . 4 Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Registered Security . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Security or Securities . . . . . . . . . . . . . . . . . . . . . . . . 5 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . . . 5 Unregistered Security . . . . . . . . . . . . . . . . . . . . . . . . . 5
4 ii
PAGE ---- U.S. Government Obligations . . . . . . . . . . . . . . . . . . . . . . 5 Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Yield to Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE TWO SECURITIES SECTION 2.1. Forms Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2.2. Form of Trustee's Certificate of Authentication . . . . . . . . . . . . 6 SECTION 2.3. Amount Unlimited; Issuable in Series . . . . . . . . . . . . . . . . . 7 SECTION 2.4. Authentication and Delivery of Securities . . . . . . . . . . . . . . . 9 SECTION 2.5. Execution of Securities . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 2.6. Certificate of Authentication . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.7. Denomination and Date of Securities; Payments of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.8. Registration, Transfer and Exchange . . . . . . . . . . . . . . . . . 13 SECTION 2.9. Mutilated, Defaced, Destroyed, Lost and Stolen Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 2.10. Cancellation of Securities; Destruction Thereof . . . . . . . . . . . 17 SECTION 2.11. Temporary Securities . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE THREE COVENANTS OF THE ISSUER SECTION 3.1. Payment of Principal and Interest . . . . . . . . . . . . . . . . . . 18 SECTION 3.2. Offices for Payments, etc. . . . . . . . . . . . . . . . . . . . . . 19 SECTION 3.3. Appointment to Fill a Vacancy in the Office of Trustee . . . . . . . 20 SECTION 3.4. Paying Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 3.5. Written Statement to Trustee . . . . . . . . . . . . . . . . . . . . 21 SECTION 3.6. Luxembourg Publications . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE FOUR SECURITYHOLDERS' LISTS AND REPORTS BY THE ISSUER AND THE TRUSTEE SECTION 4.1. Issuer to Furnish Trustee Information as to Names and Addresses of Securityholders . . . . . . . . . . . . . . . . . . . 22 SECTION 4.2. Preservation and Disclosure of Securityholders' Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 4.3. Reports by the Issuer . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 4.4. Reports by the Trustee . . . . . . . . . . . . . . . . . . . . . . . 25
iii 5 iii ARTICLE FIVE REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT
PAGE ---- SECTION 5.1. Event of Default Defined; Acceleration of Maturity; Waiver of Default . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 5.2. Collection of Indebtedness by Trustee; Trustee May Prove Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 5.3. Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 5.4. Suits for Enforcement . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 5.5. Restoration of Rights on Abandonment of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 5.6. Limitations on Suits by Securityholders . . . . . . . . . . . . . . . 35 SECTION 5.7. Unconditional Right of Securityholders to Institute Certain Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 5.8. Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 5.9. Control by Securityholders . . . . . . . . . . . . . . . . . . . . . 36 SECTION 5.10. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 5.11. Trustee to Give Notice of Default, But May Withhold in Certain Circumstances . . . . . . . . . . . . . . . . . . . . . 38 SECTION 5.12. Right of Court to Require Filing of Undertaking to Pay Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE SIX CONCERNING THE TRUSTEE SECTION 6.1. Duties and Responsibilities of the Trustee; During Default; Prior to Default . . . . . . . . . . . . . . . . . . . . . 39 SECTION 6.2. Certain Rights of the Trustee . . . . . . . . . . . . . . . . . . . . 40 SECTION 6.3. Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof . . . . . . . . . . . 42 SECTION 6.4. Trustee and Agents May Hold Securities or Coupons; Collections, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 6.5. Moneys Held by Trustee . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 6.6. Compensation and Indemnification of Trustee and Its Prior Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 6.7. Right of Trustee to Rely on Officers' Certificate, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 6.8. Qualification of Trustee; Conflicting Interests . . . . . . . . . . . 44 SECTION 6.9. Persons Eligible for Appointment as Trustee . . . . . . . . . . . . . 50
6 iv
PAGE ---- SECTION 6.10. Resignation and Removal; Appointment of Successor Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 6.11. Acceptance of Appointment by Successor Trustee . . . . . . . . . . 52 SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business of Trustee . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 6.13. Preferential Collection of Claims Against the Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
ARTICLE SEVEN CONCERNING THE SECURITYHOLDERS SECTION 7.1. Evidence of Action Taken by Securityholders . . . . . . . . . . . . 59 SECTION 7.2. Proof of Execution of Instruments and of Holding of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 7.3. Holders to be Treated as Owners . . . . . . . . . . . . . . . . . . 60 SECTION 7.4. Securities Owned by Issuer Deemed Not Outstanding . . . . . . . . . 61 SECTION 7.5. Right of Revocation of Action Taken . . . . . . . . . . . . . . . . 62
ARTICLE EIGHT SUPPLEMENTAL INDENTURES SECTION 8.1. Supplemental Indentures Without Consent of Security- holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 8.2. Supplemental Indentures With Consent of Securityholders . . . . . . 64 SECTION 8.3. Effect of Supplemental Indenture . . . . . . . . . . . . . . . . . 65 SECTION 8.4. Documents to Be Given to Trustee . . . . . . . . . . . . . . . . . 66 SECTION 8.5. Notation on Securities in Respect of Supplemental Indentures . . . . 66
ARTICLE NINE CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 9.1. Issuer May Consolidate, etc., on Certain Terms . . . . . . . . . . 66 SECTION 9.2. Successor Corporation Substituted . . . . . . . . . . . . . . . . . 67 SECTION 9.3. Opinion of Counsel to Trustee . . . . . . . . . . . . . . . . . . . 68
7 v ARTICLE TEN SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS
PAGE ---- SECTION 10.1. Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . 68 SECTION 10.2. Application by Trustee of Funds Deposited for Payment of Securities 71 SECTION 10.3. Repayment of Moneys Held by Paying Agent . . . . . . . . . . . . . 71 SECTION 10.4. Return of Moneys Held By Trustee and Paying Agent Unclaimed for Two Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 10.5. Indemnity for U.S. Government Obligations . . . . . . . . . . . . . 72
ARTICLE ELEVEN MISCELLANEOUS PROVISIONS SECTION 11.1. Incorporators, Shareholders, Officers and Directors of Issuer Exempt from Individual Liability . . . . . . . . . . . . . 72 SECTION 11.2. Provisions of Indenture for the Sole Benefit of Parties and Securityholders . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 11.3. Successors and Assigns of Issuer Bound by Indenture . . . . . . . . 73 SECTION 11.4. Notices and Demands on Issuer, Trustee and Securityholders . . . . 73 SECTION 11.5. Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein . . . . . . . . . . . . . . . . . . . . . 74 SECTION 11.6. Payments Due on Saturdays, Sundays and Holidays . . . . . . . . . . 75 SECTION 11.7. Conflict of Any Provision of Indenture with Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . . . 75 SECTION 11.8. New York Law to Govern . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 11.9. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 11.10. Effect of Headings . . . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 11.11. Securities in Foreign Currencies or in ECU . . . . . . . . . . . . 76
ARTICLE TWELVE REDEMPTION OF SECURITIES AND SINKING FUNDS SECTION 12.1. Applicability of Article . . . . . . . . . . . . . . . . . . . . . 76 SECTION 12.2. Notice of Redemption; Partial Redemptions . . . . . . . . . . . . . 77 SECTION 12.3. Payment of Securities Called for Redemption . . . . . . . . . . . . 78 SECTION 12.4. Exclusion of Certain Securities from Eligibility for Selection for Redemption . . . . . . . . . . . . . . . . . . . . 79 SECTION 12.5. Mandatory and Optional Sinking Funds . . . . . . . . . . . . . . . 80
8 vi TESTIMONIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
9 THIS INDENTURE, dated as of November 15, 1988, between THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), and THE FIRST NATIONAL BANK OF BOSTON, a national banking association (the "Trustee"), WITNESSETH: WHEREAS, the Issuer has duly authorized the issue from time to time of its unsecured debentures, notes or other evidences of indebtedness to be issued in one or more series (the "Securities") up to such principal amount or amounts as may from time to time be authorized in accordance with the terms of this Indenture and to provide, among other things, for the authentication, delivery and administration thereof, the Issuer has duly authorized the execution and delivery of this Indenture; and WHEREAS, all things necessary to make this Indenture a valid indenture and agreement according to its terms have been done; NOW, THEREFORE: In consideration of the premises and the purchases of the Securities by the holders thereof, the Issuer and the Trustee mutually covenant and agree for the equal and proportionate benefit of the respective holders from time to time of the Securities and of the Coupons, if any, appertaining thereto as follows: ARTICLE ONE DEFINITIONS SECTION 1.1 Certain Terms Defined. The following terms (except as otherwise expressly provided or unless the content otherwise clearly requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section. All other terms used in this Indenture that are defined in the Trust Indenture Act of 1939 or the definitions of which in the Securities Act of 1933 are referred to in the Trust Indenture Act of 1939, including terms defined therein by reference to the Securities Act of 1933 (except as herein otherwise expressly provided or unless the content otherwise clearly requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles, and the term "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means such accounting principles as 10 2 are generally accepted at the time of any computation. The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. The terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular. "Authorized Newspaper" means a newspaper (which, in the case of the United Kingdom, will, if practicable, be the Financial Times (London Edition) and, in the case of Luxembourg, will, if practicable, be the Luxemburger Wort) published in English or an official language of the country of publication customarily published at least once a day for at least five days in each calendar week and of general circulation in the United Kingdom or in Luxembourg, as applicable. If it shall be impractical in the opinion of the Trustee to make any publication of any notice required hereby in an Authorized Newspaper, any publication or other notice in lieu thereof which is made or given with the approval of the Trustee shall constitute a sufficient publication of such notice. "Board of Directors" means either the Board of Directors of the Issuer or any committee of such Board duly authorized to act hereunder. "Business Day" means, with respect to any Security, a day that in the city (or in any of the cities, if more than one) in which amounts are payable, as specified in the form of such Security, is not a day on which banking institutions are authorized by law or regulation to close or a day on which transactions in the currency in which the Securities are payable are not conducted. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or if at any time after the execution and delivery of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date. "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date as of which this Indenture is dated, located at 100 Federal Street, Boston, Massachusetts 02110, Attn: Corporate Trust Administration. "Coupon" means any interest coupon appertaining to a Security. 11 3 "ECU" means the European Currency Unit as defined and revised from time to time by the council of European Communities. "European Communities" means the European Economic Community (the "EEC"), the European Coal and Steel Community and Euratom. "Event of Default" means any event or condition specified as such in Section 5.1. "Foreign Currency" means a currency issued by the government of a country other than the United States. "Holder," "holder of Securities," "Securityholder" or other similar terms mean (a) in the case of any Registered Security, the Person in whose name such Security is registered in the security register kept by the Issuer for that purpose in accordance with the terms hereof, and (b) in the case of any Unregistered Security, the bearer of such Security, or any Coupon appertaining thereto, as the case may be. "Indenture" means this instrument as originally executed and delivered or, if amended or supplemented as herein provided, as so amended or supplemented or both, and shall include the forms and terms of particular series of Securities established as contemplated hereunder. "Interest" means, when used with respect to non-interest bearing Securities, interest payable after maturity. "Issuer" means (except as otherwise provided in Article Six) THE PROGRESSIVE CORPORATION, an Ohio corporation, and, subject to Article Nine, its successors and assigns. "Officers' Certificate" means a certificate signed by the chairman of the Board of Directors or the president or any vice president or by the treasurer and by the secretary or any assistant secretary of the Issuer and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 11.5. "Opinion of Counsel" means an opinion in writing signed by legal counsel who may be an employee of or counsel to the Issuer or other counsel who shall be satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 11.5, if and to the extent required hereby. 12 4 "Original issue date" of any Security (or portion thereof) means the earlier of (a) the date of such Security or (b) the date of any Security (or portion thereof) for which such Security was issued (directly or indirectly) on registration of transfer, exchange or substitution. "Original Issue Discount Security" means any Security that provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof pursuant to Section 5.1. "Outstanding" (except as otherwise provided in Section 6.8), when used with reference to Securities, subject to the provisions of Section 7.4, means, as of any particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except (a) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Issuer) or shall have been set aside, segregated and held in trust by the Issuer for the holders of such Securities (if the Issuer shall act as its own paying agent), provided that if such Securities, or portions thereof, are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as herein provided or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities in substitution for which other Securities shall have been authenticated and delivered, or which shall have been paid, pursuant to the terms of Section 2.9 (except with respect to any such Security as to which proof satisfactory to the Trustee is presented that such Security is held by a person in whose hands such Security is a legal, valid and binding obligation of the Issuer). In determining whether the holders of the requisite principal amount of Outstanding Securities of any or all series have given any request, demand, authorization, direction, notice, consent or waiver hereunder, the principal amount of an Original Issue Discount Security that shall be deemed to be Outstanding for such purposes shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the maturity thereof pursuant to Section 5.1. 13 5 "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Principal" whenever used with reference to the Securities or any Security or any portion thereof, shall be deemed to include "and premium, if any." "Registered Security" means any Security registered on the Security Register of the Issuer. "Responsible Officer" when used with respect to the Trustee means any officer or assistant officer assigned by the Trustee to administer its corporate trust matters. "Security" or "Securities" (except as otherwise provided in Section 6.8) has the meaning stated in the first recital of this Indenture, or, as the case may be, Securities that have been authenticated and delivered under this Indenture. "Trustee" means the Person identified as "Trustee" in the first paragraph hereof and, subject to the provisions of Article Six, shall also include any successor trustee. "Trust Indenture Act of 1939" (except as otherwise provided in Sections 8.1 and 8.2) means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was originally executed. "Unregistered Security" means any Security other than a Registered Security. "U.S. Government Obligations" means direct obligations of the United States of America, backed by its full faith and credit. "Vice President," when used with respect to the Issuer, means any vice president, whether or not designated by a number or a word or words added before or after the title of "vice president". "Yield to Maturity" means the yield to maturity on a series of securities, calculated at the time of issuance of such series, or, if applicable, at the most recent redetermination of interest on such series, and calculated in accordance with accepted financial practice. 14 6 ARTICLE TWO SECURITIES SECTION 2.1 Forms Generally. The Securities of each series and the Coupons, if any, to be attached thereto shall be substantially in such form (not inconsistent with this Indenture) as shall be established by or pursuant to a resolution of the Board of Directors or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have imprinted or otherwise reproduced thereon such legend or legends, not inconsistent with the provisions of this Indenture, as may be required to comply with any law or with any rules or regulations pursuant thereto, or with any rules of any securities exchange or to conform to general usage, all as may be determined by the officers executing such Securities and Coupons, as evidenced by their execution of the Securities and Coupons. The definitive Securities and Coupons shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities and Coupons, as evidenced by their execution of such Securities and Coupons. SECTION 2.2 Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication on all Securities shall be in substantially the following form: This is one of the Securities, of the series designated herein, referred to in the within-mentioned Indenture. TRUSTEE, as Trustee By ____________________________________ Authorized Signatory 15 7 SECTION 2.3 Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. There shall be established in or pursuant to a resolution of the Board of Directors and set forth in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, (1) the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities); (2) any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 2.8, 2.9, 2.11 or 12.3); (3) the date or dates on which the principal of the Securities of the series is payable or the method by which such date or dates shall be determined; (4) the rate or rates at which the Securities of the series shall bear interest, if any, or the method by which such rate shall be determined, the date or dates from which such interest shall accrue, the interest payment dates on which such interest shall be payable and the record dates for the determination of Holders to whom interest is payable; (5) the place or places where the principal and any interest on Securities of the series shall be payable; (6) the price or prices at which, the period or periods within which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Issuer, pursuant to any sinking fund or otherwise; (7) the obligation, if any, of the Issuer to redeem, purchase or repay Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the price or prices at which and the period or periods within which and the terms and conditions upon which Securities of the series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; 16 8 (8) if other than denominations of U.S. $1,000 and any integral multiple thereof, in the case of Registered Securities, or U.S. $1,000 in the case of Unregistered Securities, the denominations in which Securities of the series shall be issuable; (9) if other than the principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration of the maturity thereof pursuant to Section 5.1 or provable in bankruptcy pursuant to Section 5.2; (10) any authenticating or paying agents, transfer agents or registrars or any other agents with respect to the Securities of such series; (11) if other than such coin or currency of the United States of America as at the time of payment is legal tender for payment of public or private debts, the coin or currency or units based on or relating to currencies (including ECU) in which payment of the principal of and interest, if any, on the Securities of that series shall be payable; (12) if the principal of or interest, if any, on the Securities of that series are to be payable, at the election of the Issuer or a holder thereof, in a coin or currency or units based on or relating to currencies (including ECU) other than that in which the Securities are stated to be payable, the period or periods within which, and the terms and conditions upon which, such election may be made; (13) if the amount of payments of principal of or interest, if any, on the Securities of the series may be determined with reference to an index, formula or other method based on a coin or currency or units based on or relating to currencies (including ECU) other than that in which the Securities are stated to be payable, the manner in which such amounts shall be determined; (14) whether the Securities of the series will be issuable as Registered Securities or Unregistered Securities (with or without Coupons), or both, any restrictions applicable to the offer, sale or delivery of Unregistered Securities and, if other than as provided in Section 2.8, the terms upon which Unregistered Securities and, of any series may be exchanged for Registered Securities of such series and vice versa; 17 9 (15) whether and under what circumstances the Issuer will pay additional amounts on the Securities of the series held by a Person who is not a U.S. person in respect of any tax, assessment or governmental charge withheld or deducted and, if so, whether the Issuer will have the option to redeem such Securities rather than pay such additional amounts; (16) if the Securities of such series are to be issuable in definitive form (whether upon original issue or upon exchange of a temporary Security of such series) only upon receipt of certain certificates or other documents or satisfaction of other conditions not otherwise set forth herein, then the form and terms of such certificates, documents or conditions; and (17) any other terms of the series, including provisions for payment by wire transfers, if any, or modifications of the definition of Business Day (which terms shall not adversely affect the interests of the Holders of the Securities). All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to such resolution of the Board of Directors or in any such indenture supplemental hereto. SECTION 2.4 Authentication and Delivery of Securities. At any time and from time to time after the execution and delivery of this Indenture, the Issuer may deliver Securities of any series (having attached thereto appropriate Coupons, if any), executed by the Issuer to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver such Securities and Coupons, if any, to or upon the written order of the Issuer, signed by both (a) the chairman of its Board of Directors, or any vice chairman of its Board of Directors, or its president or any vice president or its treasurer or any assistant treasurer and (b) by its secretary or any assistant secretary, without any further action by the Issuer. In authenticating such Securities and Coupons, if any, and accepting the additional responsibilities under this Indenture in relation to such Securities and Coupons, if any, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon: (1) a copy of any resolution or resolutions of the Board of Directors by or pursuant to which the form and term of such series 18 10 were established in each case certified by the secretary or an assistant secretary of the Issuer; (2) an executed supplemental indenture, if any; (3) an Officers' Certificate setting forth the form and terms of the Securities and Coupons, if any, as required pursuant to Section 2.3, and prepared in accordance with Section 11.5; (4) an Opinion of Counsel, prepared in accordance with Section 11.5, which shall state (a) that the form or forms and terms of such Securities and Coupons, if any, have been established by or pursuant to a resolution of the Board of Directors or by a supplemental indenture as permitted by Section 2.1 and 2.3 in conformity with the provisions of this Indenture; (b) that such Securities and Coupons, if any, when authenticated and delivered by the Trustee and issued by the issuer in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and binding obligations of the Issuer; (c) that all laws and requirements in respect of the execution and delivery by the Issuer of the Securities and Coupons, if any, have been complied with; and (d) such other matters as the Trustee may reasonably request. The Trustee shall have the right to decline to authenticate and deliver any Securities and Coupons, if any, under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken by the Issuer or if the Trustee in good faith by its board of directors or board of trustees, executive committee, or a trust committee of directors, trustees or Responsible Officers shall determine that such action would expose the Trustee to personal liability to existing Holders. SECTION 2.5 Execution of Securities. The Securities and, if applicable, each Coupon appertaining thereto, shall be signed on behalf of the Issuer by both (a) the chairman of its Board of Directors or any vice chairman of its Board of Directors or its president or any vice president or its treasurer or any assistant treasurer and (b) by its secretary or any assistant secretary, under its corporate seal which may, but need not, be 19 11 attested. Such signatures may be the manual or facsimile signatures of the present or any future such officers. The seal of the Issuer may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Securities. Typographical and other minor errors or defects in any such reproduction of the seal or any such signature shall not affect the validity or enforceability of any Security or Coupon that has been duly authenticated and delivered by the Trustee. In case any officer of the Issuer who shall have signed any of the Securities or Coupons shall cease to be such officer before the Security or Coupon so signed (or the Security to which the Coupon so signed appertains) shall be authenticated and delivered by the Trustee or disposed of by the Issuer, such Security or Coupon nevertheless may be authenticated and delivered or disposed of as though the person who signed such Security or Coupon had not ceased to be such officer of the Issuer; and any Security or Coupon may be signed on behalf of the Issuer by such persons as, at the actual date of the execution of such Security or Coupon, shall be the proper officers of the Issuer, although at the date of the execution and delivery of this Indenture any such person was not such an officer. SECTION 2.6 Certificate of Authentication. Only such Securities as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed by the Trustee by the manual signature of one of its authorized signatories, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee upon any Security executed by the Issuer shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. No Coupon shall be entitled to the benefits of this Indenture or shall be valid or obligatory for any purpose until such certificate by the Trustee shall have become duly executed on the Security to which such Coupon appertains. SECTION 2.7 Denomination and Date of Securities; Payments of Interest. The Securities shall be issuable as Registered Securities or Unregistered Securities in such denominations as shall be specified as contemplated by Section 2.3. In the absence of any such specification with respect to the Registered Securities of any series, the Registered Securities of such series shall be issuable in denominations of U.S. $1,000 and any integral multiple thereof. In the absence of any such specification 20 12 with respect to the Unregistered Securities, Unregistered Securities shall be issued in the denomination of U.S. $1,000. The Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plan as the officers of the Issuer executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. Each Registered Security shall be dated the date of its authentication. Each Unregistered Security shall be dated as provided in the resolution or resolutions of the Board of Directors of the Issuer or the supplemental indenture referred to in Section 2.3. The Securities of each series shall bear interest, if any, from the date, and such interest shall be payable on the dates, established as contemplated by Section 2.3. The person in whose name any Registered Security of any series is registered at the close of business on any record date applicable to a particular series with respect to any interest payment date for such series shall be entitled to receive the interest, if any, payable on such interest payment date notwithstanding any transfer or exchange of such Registered Security subsequent to the record date and prior to such interest payment date, except if and to the extent the Issuer shall default in the payment of the interest due on such interest payment date for such series, in which case such defaulted interest shall be paid to the persons in whose names Outstanding Registered Securities for such series are registered at the close of business on a subsequent record date (which shall be not less than five Business Days prior to the date of payment of such defaulted interest) established by notice given by mail by or on behalf of the Issuer to the holders of Registered Securities not less than 15 days preceding such subsequent record date. The term "record date" as used with respect to any interest payment date (except a date for payment of defaulted interest) shall mean the date specified as such in the terms of the Registered Securities of any particular series, or, if no such date is so specified, if such interest payment date is the first day of a calendar month, the fifteenth day of the next preceding calendar month or, if such interest payment date is the fifteenth day of a calendar month, the first day of such calendar month, whether or not such record date is a Business Day. Any defaulted interest payable in respect of any Unregistered Security shall be payable pursuant to such procedures as are satisfactory to the Trustee and in such manner so that there is no discrimination as between the holders of Registered Securities and Unregistered Securities 21 13 of the same series and notice of the payment date therefor shall be given by the Trustee in the name and at the expense of the Company by publication at least once in an Authorized Newspaper. In case an Unregistered Security is surrendered in exchange for a Registered Security after the close of business on any record date for the payment of defaulted interest and before the opening of business on the proposed date of payment of such defaulted interest, the Coupon appertaining to such surrendered Unregistered Security and due for payment on such proposed date of payment will not be surrendered with such surrendered Unregistered Security and interest payable on such proposed date of payment will be made only to the holder of such Coupon on such proposed date. SECTION 2.8. Registration, Transfer and Exchange. The Issuer will keep or cause to be kept at each office or agency to be maintained for the purpose as provided in Section 3.2 a register or registers for each series of Registered Securities issued hereunder (collectively, the "Security Register") in which, subject to such reasonable regulations as it may prescribe, it will register, and will register the transfer of, or cause the registration of transfer of, Registered Securities as in this Article provided. Such register shall be in written form in the English language or in any other form capable of being converted into such form within a reasonable time. At all reasonable times such register or registers shall be open for inspection by the Trustee. Upon due presentation for registration of transfer of any Registered Security of any series at any such office or agency to be maintained for the purpose as provided in Section 3.2, the Issuer shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Registered Security or Registered Securities of the same series in authorized denominations for a like aggregate principal amount. Unregistered Securities (except for any temporary Unregistered Securities) and Coupons (except for Coupons attached to any temporary Unregistered Securities) shall be transferable by delivery. Any Registered Security or Registered Securities of any series may be exchanged for a Registered Security or Registered Securities of the same series in other authorized denominations, in all equal aggregate principal amount. Registered Securities of any series to be exchanged shall be surrendered at any office or agency to be maintained by the Issuer 22 14 for the purpose as provided in Section 3.2, and the Issuer shall execute and the Trustee shall authenticate and deliver in exchange therefor the Registered Security or Registered Securities of the same series which the Securityholder making the exchange shall be entitled to receive, bearing numbers not contemporaneously outstanding. If the Securities of any series are issued in both registered and unregistered form, except as otherwise specified pursuant to Section 2.3, at the option of the Holder thereof, Unregistered Securities of any series may be exchanged for Registered Securities of such series, maturity date, and interest rate of any authorized denominations and of a like aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. At the Option of the Holder thereof, if Unregistered Securities of any series, maturity date, interest rate and original issue date are issued in more than one authorized denomination, except as otherwise specified pursuant to Section 2.3, such Unregistered Securities may be exchanged for Unregistered Securities of such series, maturity date, interest rate and original issue date of other authorized denominations and of a like aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2 or as specified pursuant to Section 2.3, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. Unless otherwise specified pursuant to Section 2.3, Registered Securities of any series may not be exchanged for Unregistered Securities of such series. Whenever any Securities, and the Coupons appertaining thereto, if any, are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and deliver, the Securities, and the Coupons appertaining thereto, if any, which the Holder making the exchange is entitled to receive. Notwithstanding the foregoing, if an Unregistered Security of any series is surrendered at any such office or agency in exchange for a Registered Security of the same series after the close of business at such office or agency on any record date and before the opening of business at such office or agency on the applicable interest payment date, such Unregis- 23 15 tered Security shall be surrendered without the Coupon, if any, relating to such interest payment date. All Securities and Coupons surrendered upon any exchange or transfer provided for in this Indenture shall be promptly cancelled and disposed of by the Trustee and the Trustee will deliver a certificate of disposition thereof to the Issuer. All Registered Securities presented for registration of transfer, exchange, redemption or payment shall (if so required by the Issuer or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuer and the Trustee duly executed by, the holder or his attorney duly authorized in writing. The Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchange or registration of transfer of Securities and shall not be required to exchange or register a transfer of any Securities until such payment is made. No service charge shall be made for any such transaction. The Issuer shall not be required to exchange or register a transfer of (a) any Securities of any series for a period of 15 days next preceding the first mailing of notice of redemption of Securities of such series to be redeemed, or (b) any Securities selected, called or being called for redemption except, in the case of any Security where public notice has been given that such Security is to be redeemed in part, the portion thereof not so to be redeemed and except that all Unregistered Security may be exchanged for a Registered Security of the same series being called for redemption. All Securities issued upon any transfer or exchange of Securities shall be valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange. Notwithstanding anything herein or in the terms of any series of Securities to the contrary, neither the Issuer nor the Trustee (which shall rely on an Officers' Certificate and an Opinion of Counsel) shall be required to exchange any Unregistered Security for a Registered Security if such exchange would result in adverse Federal income tax consequences to the Issuer (including, without limitation the inability of the Issuer to deduct from its income, as computed for Federal income tax purposes, the interest payable on the Unregistered Securities) under then applicable United States Federal income tax laws. 24 16 SECTION 2.9 Mutilated, Defaced, Destroyed, Lost and Stolen Securities. In case any temporary or definitive Security or any Coupon appertaining to any Security shall become mutilated, defaced or be destroyed, lost or stolen, the Issuer in its discretion may execute, and upon the written request of any officer of the Issuer, the Trustee shall authenticate and deliver, a new Security of the same series, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated or defaced Security, or in lieu of and substitution for the Security so destroyed, lost or stolen with Coupons corresponding to the Coupons appertaining to the Security so mutilated, defaced, destroyed, lost or stolen, or in exchange or substitution for the Security to which such mutilated, defaced, destroyed, lost or stolen Coupons appertained, with Coupons appertaining thereto corresponding to the Coupons so mutilated, defaced, destroyed, lost or stolen. In every case the applicant for a substitute Security or Coupon shall furnish to the Issuer and to the Trustee and any agent of the Issuer or the Trustee such security or indemnity as may be required by them to indemnify and defend and to save each of them harmless and, in every case of destruction, loss or theft, evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof. Upon the issuance of any substitute Security or Coupon, the Issuer may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. In case any Security or Coupon which has matured or is about to mature or has been called for redemption in full shall become mutilated or defaced or be destroyed, lost or stolen, the Issuer may, at its sole discretion, instead of issuing a substitute Security or Coupon, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated or defaced Security or Coupon), if the applicant for such payment shall furnish to the Issuer and to the Trustee and any agent of the issuer or the Trustee such security or indemnity as any of them may require to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Issuer and the Trustee and any agent of the Issuer or the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security or Coupon and of the ownership thereof. Every substitute Security or Coupon of any series issued pursuant to the provisions of this Section by virtue of the fact that any such 25 17 Security or Coupon is destroyed, lost or stolen shall constitute an additional contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Security or Coupon shall be at any time enforceable by anyone and shall be entitled to all the benefits of (but shall be subject to all the limitations of rights set forth in) this Indenture equally and proportionately with any and all other Securities or Coupons of such series duly authenticated and delivered hereunder. All Securities or Coupons shall be held and owned upon the express condition that, to the extent permitted by law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, defaced or destroyed, lost or stolen Securities or Coupons and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.10 Cancellation of Securities; Destruction Thereof. All Securities and Coupons surrendered for payment, redemption, registration of transfer or exchange, or for credit against any payment in respect of a sinking or analogous fund, if surrendered to the Issuer or any agent of the Issuer or the Trustee, shall be delivered to the Trustee for cancellation or, if surrendered to the Trustee, shall be cancelled by it; and no Securities or Coupons shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall destroy cancelled Securities and Coupons held by it and deliver a certificate of destruction to the Issuer. If the Issuer shall acquire any of the Securities or Coupons, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities or Coupons unless and until the same are delivered to the Trustee for cancellation. SECTION 2.11 Temporary Securities. Pending the preparation of definitive Securities for any series, the Issuer may execute and the Trustee shall authenticate and deliver temporary Securities for such series (printed, lithographed, typewritten or otherwise reproduced, in each case in form satisfactory to the Trustee). Temporary Securities of any series shall be issuable as Registered Securities without Coupons, or as Unregistered Securities with or without Coupons attached thereto, of any authorized denomination, and substantially in the form of the definitive Securities of such series but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be 26 18 determined by the Issuer with the concurrence of the Trustee. Temporary Securities may contain such reference to any provisions of this Indenture as may be appropriate. Every temporary Security shall be executed by the Issuer and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definitive Securities. Without unreasonable delay the Issuer shall execute and shall furnish definitive Securities of such series and thereupon temporary Securities of such series may be surrendered in exchange therefor without charge at each office or agency to be maintained by the Issuer for that purpose pursuant to Section 3.2, and in the case of Unregistered Securities, together with any unmatured Coupons and any matured Coupons in default appertaining thereto, at any agency maintained by the Issuer for such purpose as specified pursuant to Section 2.3, and the Trustee shall authenticate and deliver in exchange for such temporary Securities of such series a like aggregate principal amount of definitive Securities of the same series of authorized denominations. Until so exchanged, the temporary Securities and any unmatured Coupons appertaining thereto of any series shall be entitled to the same benefits under this Indenture as definitive Securities and any unmatured Coupons appertaining thereto of such series. The provisions of this Section are subject to any restrictions or limitations on the issue and delivery of temporary Unregistered Securities of any series that may be established pursuant to Section 2.3 (including any provision that Unregistered Securities of such series initially be issued in the form of a single global Unregistered Security to be delivered to a depositary or agency of the Issuer located outside the United States and the procedures pursuant to which definitive Unregistered Securities of such series would be issued in exchange for such temporary global Unregistered Security). ARTICLE THREE COVENANTS OF THE ISSUER SECTION 3.1 Payment of Principal and Interest. The Issuer covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay or cause to be paid the principal of, and interest on, each of the Securities of such series at the place or places, at the respective times and in the manner provided in such Securities. Except as specified in Section 2.3, the interest on Securities with Coupons attached (together with any additional amounts payable pursuant to the terms of such Securities) shall be payable only upon presentation and 27 19 surrender of the several Coupons for such interest installments as are evidenced thereby as they severally mature. Except as specified in Section 2.3, the interest on any temporary Unregistered Securities (together with any additional amounts payable pursuant to the terms of such Securities) shall be paid, as to the installments of interest evidenced by Coupons attached thereto, if any, only upon presentation and surrender thereof and, as to the other installments of interest, if any, only upon presentation of such Securities for notation thereon of the payment of such interest. Each installment of interest on the Registered Securities of any series may be paid by mailing checks for such interest payable to or upon the written order of the holders of Registered Securities entitled thereto as they shall appear on the registry books of the Issuer. SECTION 3.2 Offices for Payments, etc. So long as any of the Securities remain outstanding, the Issuer will maintain the following for each series: an office or agency (a) where the Registered Securities may be presented for payment, (b) where the Registered Securities may be presented for registration of transfer and for exchange as in this Indenture provided and (c) where notices and demands to or upon the Issuer in respect of the Registered Securities or of this Indenture may be served. The Issuer will maintain one or more agencies in a city or cities located outside the United States (including any city in which such an agency is required to be maintained under the rules of any stock exchange on which the Securities of such series are listed) where the Unregistered Securities, if any, of each series and Coupons, if any, appertaining thereto may be presented for payment. No payment on any Unregistered Security or Coupon will be made upon presentation of such Unregistered Security or Coupon at an agency of the Issuer within the United States nor will any payment be made by transfer to an account in, or by mail to an address in, the United States unless pursuant to applicable United States laws and regulations then in effect such payment can be made without adverse tax consequences to the Issuer. Notwithstanding the foregoing, payments in U.S. dollars on Unregistered Securities of any series and Coupons appertaining thereto which are denominated in U.S. dollars may be made at an agency of the Issuer maintained in the Borough of Manhattan, The City of New York if such payment in U.S. dollars at each agency maintained by the Issuer outside the United States for payment on such Unregistered Securities is illegal or effectively precluded by exchange controls or other similar restrictions. 28 20 The Issuer will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. With respect to each series of Securities and Coupons whose terms are established pursuant to Section 2.3, the Issuer hereby designates the Corporate Trust Office as the initial office to be maintained by it for each such purpose. In case the Issuer shall fail to so designate or maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Corporate Trust Office. SECTION 3.3 Appointment to Fill a Vacancy in Office of Trustee. The Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee with respect to each series of Securities hereunder. SECTION 3.4 Paying Agents. Whenever the Issuer shall appoint a paying agent other than the Trustee with respect to the Securities of any series, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section, (a) that it will hold all sums received by it as such agent for the payment of the principal of or interest on the Securities of such series (whether such sums have been paid to it by the Issuer or by any other obligor on the Securities of such series) in trust for the benefit of the holders of the Securities of such series or the Coupons appertaining thereto or of the Trustee, and (b) that it will give the Trustee notice of any failure by the Issuer (or by any other obligor on the Securities of such series) to make any payment of the principal of or interest on the Securities of such series when the same shall be due and payable. The Issuer will, on or prior to each due date of the principal of or interest on the Securities of such series, deposit with the paying agent a sum sufficient to pay such principal or interest so becoming due, and (unless such paying agent is the Trustee) the Issuer will promptly notify the Trustee of any failure to take such action. If the Issuer shall act as its own paying agent with respect to the Securities or the Coupons appertaining thereto of any series, it will, on 29 21 or before each due date of the principal of or interest on the Securities or the Coupons appertaining thereto of such series, set aside, segregate and hold in trust for the benefit of the holders of the Securities or the Coupons appertaining thereto of such series a sum sufficient to pay such principal or interest so becoming due. The Issuer will promptly notify the Trustee of any failure to take such action. Anything in this Section to the contrary notwithstanding, the Issuer may at any time, for the purpose of obtaining a satisfaction and discharge with respect to one or more or all series of Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust for any such series by the Issuer or any paying agent hereunder, as required by this Section, such sums to be held by the Trustee upon the trusts herein contained. Anything in this Section to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section is subject to the provisions of Sections 10.3 and 10.4. SECTION 3.5 Written Statement to Trustee. The Issuer will deliver to the Trustee on or before April 30 in each year (beginning with April 30, 1989) a written statement, signed by two of its officers (which need not comply with Section 11.5), stating that in the course of the performance of their duties as officers of the Issuer they would normally have knowledge of any default by the Issuer in the performance or fulfillment of any covenant, agreement or condition contained in this Indenture, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. SECTION 3.6 Luxembourg Publications. In the event of the publication of any notice pursuant to Section 5.11, 6.10(a), 6.11, 8.2, 10.4 or 12.2, the party making such publication in London shall also, to the extent that notice is required to be given to Holders of Securities of any series by applicable Luxembourg law or stock exchange regulation, as evidenced by an Officers' Certificate delivered to such party, make a similar publication in Luxembourg. 30 22 ARTICLE FOUR SECURITYHOLDERS' LISTS AND REPORTS BY THE ISSUER AND THE TRUSTEE SECTION 4.1 Issuer to Furnish Trustee Information as to Names and Addresses of Securityholders. The Issuer covenants and agrees that it will furnish or cause to be furnished to the Trustee a list in such form as the Trustee may reasonably require of the names and addresses of the holders of the Securities of each series: (a) semiannually and not more that 15 days after each record date for the payment of interest on such Securities, as hereinabove specified, as of such record date and on dates to be determined pursuant to Section 2.3 for not-interest bearing securities in each year, and (b) at such other times as the Trustee may request in writing, within 30 days after receipt by the Issuer of any such request as of a date not more than 15 days prior to the time such information is furnished, PROVIDED that if and so long as the Trustee shall be the Security registrar for such series and all of the Securities of such series are Registered Securities, such list shall not be required to be furnished. The Trustee shall, at the request of the Issuer, provide such list to the Issuer for so long as the Trustee shall be the Security registrar. SECTION 4.2 Preservation and Disclosure of Securityholders' Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of each series of Securities (i) contained in the most recent list furnished to it as provided in Section 4.1, (ii) received by it in the capacity of Security registrar for such series, if so acting and (iii) filed with it within the preceding two years pursuant to Section 4.4(c)(ii). The Trustee may destroy any list furnished to it as provided in Section 4.1 upon receipt of a new list so furnished. (b) In case three or more holders of Securities (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Securities of a particular series (in which case the applicants must all hold Securities of such series) or with Holders of all 31 23 Securities with respect to their rights under this Indenture or under such Securities and such application is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business Days after the receipt of such application, at its election, either (i) afford to such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section, or (ii) inform such applicants as to the approximate number of holders of Securities of such series or all Securities, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee, in accordance with the provisions of subsection (a) of this Section, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford to such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder of such series or all Securities, as the case may be, whose name and address appears in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Commission together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Securities of such series or all Securities, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met, and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall 32 24 be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Securities and Coupons, by receiving and holding the same, agrees with the Issuer and the Trustee that neither the Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Securities in accordance with the provisions of subsection (b) of this Section, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under such subsection (b). SECTION 4.3 Reports by the Issuer. The Issuer covenants: (a) to file with the Trustee, within 15 days after the Issuer is required to file the same with the Commission, copies of the annual reports and of the information, documents, any other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Issuer may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, of if the Issuer is not required to file information, documents, or reports pursuant to either of such Sections, then to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents, and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934, or in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (b) to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents, and reports with respect to compliance by the Issuer with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations; and (c) to transmit by mail to the holders of Securities, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Issuer pursuant to subsections (a) and (b) of this Section as may be required 33 25 to be transmitted to such Holders by rules and regulations prescribed from time to time by the Commission. SECTION 4.4 Reports by the Trustee. (a) On or before July 15 in each year following the date hereof, so long as any Securities are Outstanding hereunder, the Trustee shall transmit by mail as provided below to the Securityholders of each series, as hereinafter in this Section provided, a brief report dated as of the preceding May 15 with respect to: (i) its eligibility under Section 6.9 and its qualification under Section 6.8, or in lieu thereof, if to the best of its knowledge it has continued to be eligible and qualified under such Sections, a written statement to such effect; (ii) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities of any series, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to report such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount of the securities of any series Outstanding on the date of such report; (iii) the amount, interest rate, and maturity date of all other indebtedness owing by the Issuer (or by any other obligor on the Securities) to the Trustee in its individual capacity on the date of such report, with a brief description of any property held as collateral security therefor, except any indebtedness based upon a creditor relationship arising in any manner described in Section 6.13(b)(2), (3), (4) or (6); (iv) the property and funds, if any, physically in the possession of the Trustee (as such) on the date of such report; (v) any additional issue of Securities which the Trustee has not previously reported; and (vi) any action taken by the Trustee in the performance of its duties under this Indenture which it has not previously reported and which in its opinion materially affects the Securities, except action in respect of a default, notice of which has been or is to be withheld by it in accordance with the provisions of Section 5.11. 34 26 (b) The Trustee shall transmit to the Securityholders of each series, as provided in subsection (c) of this Section, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee, as such, since the date of the last report transmitted pursuant to the provisions of subsection (a) of this Section (or if no such report has yet been so transmitted, since the date of this Indenture) for the reimbursement of which it claims or may claim a lien or charge prior to that of the Securities of such series on property or funds held or collected by it as Trustee and which it has not previously reported pursuant to this subsection (b), except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of Securities of such series outstanding at such time, such report to be transmitted within 90 days after such time. (c) Reports pursuant to this Section shall be transmitted by mail: (i) to all registered Holders of Securities, as the names and addresses of such Holders appear upon the registry books of the Issuer; (ii) to such other Holders of Securities as have, within two years preceding such transmission, filed their names and addresses with the Trustee for that purpose; and (iii) except in the case of reports pursuant to subsection (b), to each Holder of a Security whose name and address are preserved at the time by the Trustee as provided in Section 4.2(a). (d) A copy of each such report shall, at the time of such transmission to Securityholders, be furnished to the Issuer and be filed by the Trustee with each stock exchange upon which the Securities of any applicable series are listed and also with the Commission. The Issuer agrees to notify the Trustee with respect to any series when and as the Securities of such series become admitted to trading on any national securities exchange. 35 27 ARTICLE FIVE REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.1 Event of Default Defined; Acceleration of Maturity; Waiver of Default. "Event of Default" with respect to Securities of any series wherever used herein, means each one of the following events which shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any installment of interest upon any of the Securities of such series as and when the same shall become due and payable, and continuance of such default for a period of 30 days; or (b) default in the payment of all or any part of the principal on any of the Securities of such series as and when the same shall become due and payable either at maturity, upon redemption, by declaration or otherwise; or (c) default in the payment of any sinking fund installment as and when the same shall become due and payable by the terms of the Securities of such series; or (d) default in the performance, or breach, of any covenant or warranty of the Issuer in respect of the Securities of such series (other than a covenant or warranty in respect of the Securities of such series a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Issuer by the Trustee or to the Issuer and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of all series affected thereby, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Issuer in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the 36 28 Issuer or for any substantial part of its property or ordering the winding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (f) the Issuer shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Issuer or for any substantial part of its property, or make any general assignment for the benefit of creditors; or (g) any other Event of Default provided in the supplemental indenture or resolution of the Board of Directors under which such series of Securities is issued or in the form of Security for such series. If an Event of Default described in clauses (a), (b), (c) or (d) above (if the Event of Default under clause (d) is with respect to less than all series of Securities then Outstanding) occurs and is continuing, then, and in each and every such case, unless the principal of all of the Securities of such series shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Securities of such series then Outstanding hereunder (each such series voting as a separate class) by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if the Securities of such series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) of all Securities of such series and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. If an Event of Default described in clause (d) (if the Event of Default under clause (d) is with respect to all series of Securities then Outstanding), (e) or (f) occurs and is continuing, then and in each and every such case, unless the principal of all the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in 37 29 aggregate principal amount of all the Securities then Outstanding hereunder (treated as one class), by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if any Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of all the Securities then Outstanding and interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal (or, if the Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of the Securities of any series (or of all the Securities, as the case may be) shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Issuer shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities of such series (or of all the Securities, as the case may be) and the principal of any and all Securities of such series (or of all the Securities, as the case may be) which shall have become due otherwise than by acceleration (with interest upon such principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series (or at the respective rates of interest or Yields to Maturity of all the Securities, as the case may be, to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee, its agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6, and if any and all Events of Default under the Indenture, other than the non-payment of the principal of Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case the holders of a majority in aggregate principal amount of all the Securities of such series, each series voting as a separate class (or of all the Securities, as the case may be, voting as a single class) then outstanding, by written notice to the Issuer and to the Trustee, may waive all defaults with respect to such series (or with respect to all the 38 30 Securities, as the case may be) and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. For all purposes under this Indenture, if a portion of the principal of any Original Issue Discount Securities shall have been accelerated and declared due and payable pursuant to the provisions hereof, then, from and after such declaration, unless such declaration has been rescinded and annulled, the principal amount of such Original Issue Discount Securities shall be deemed, for all purposes hereunder, to be such portion of the principal thereof as shall be due and payable as a result of such acceleration, and payment of such portion of the principal thereof as shall be due and payable as a result of such acceleration, together with interest, if any, thereon and all other amounts owing thereunder, shall constitute payment in full of such Original Issue Discount Securities. SECTION 5.2 Collection of Indebtedness by Trustee, Trustee May Prove Debt. The Issuer covenants that (a) in case default shall be made in the payment of any installment of interest on any of the Securities of any series when such interest shall have become due and payable, and such default shall have continued for a period of 30 days or (b) in case default shall be made in the payment of all or any part of the principal of any of the Securities of any series when the same shall have become due and payable, whether upon maturity of the Securities of such series or upon any redemption or by declaration or otherwise -- then upon demand of the Trustee, the Issuer will pay to the Trustee for the benefit of the Holders of the Securities of such series the whole amount that then shall have become due and payable on all Securities of such series, and Coupons appertaining thereto, for principal or interest, as the case may be (with interest to the date of such payment upon the overdue principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series); and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and any expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of its negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6. 39 31 Until such demand is made by the Trustee, the Issuer may pay the principal of and interest on the Securities of any series to the holders, whether or not the principal of and interest on the Securities of such series be overdue. In case the Issuer shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree, and may enforce any such judgment or final decree against the Issuer or other obligor upon such Securities and collect in the manner provided by law out of the property of the Issuer or other obligor upon such Securities, wherever situated, the moneys adjudged or decreed to be payable. In case there shall be pending proceedings relative to the Issuer or any other obligor upon the Securities under Title 11 of the United States Code or any other applicable Federal or state bankruptcy, insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Issuer or its property or such other obligor, or in case of any other comparable judicial proceedings relative to the Issuer or other obligor upon the Securities of any series, or Coupons appertaining thereto, or to the creditors or property of the Issuer or such other obligor, the Trustee, irrespective of whether the principal of any Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section, shall be entitled and empowered, by intervention in such proceedings or otherwise: (a) to file and prove a claim or claims for the whole amount of principal and interest (or, if the Securities of any series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) owing and unpaid in respect of the Securities of any series, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and 40 32 each predecessor Trustee, except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6) and of the Securityholders allowed in any judicial proceedings relative to the Issuer or other obligor upon the Securities of any series, or to the creditors or property of the Issuer or such other obligor, (b) unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Securities of any series in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and (c) to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute all amounts received with respect to the claims of the Securityholders and of the Trustee on their behalf; and any trustee, receiver, or liquidator, custodian or other similar official is hereby authorized by each of the Securityholders to make payments to the Trustee, and, in the event that the Trustee shall consent to the making of payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Securityholder any plan or reorganization, arrangement, adjustment or composition affecting the Securities or Coupons appertaining thereto of any series or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar person. All rights of action and of asserting claims under this Indenture, or under any of the Securities, or Coupons appertaining thereto, may be enforced by the Trustee without the possession of any of the Securities, or Coupons appertaining thereto, or the production thereof on any trial or other proceedings relative thereto, and any such action or proceedings 41 33 instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements, compensation and all other amounts due pursuant to Section 6.6 to the Trustee, each predecessor Trustee and their respective agents and attorneys, shall be for the ratable benefit of the holders of the Securities, or Coupons appertaining thereto, in respect of which such action was taken. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Securities in respect to which such action was taken, and it shall not be necessary to make any holders of such Securities parties to any such proceedings. SECTION 5.3 Application of Proceeds. Any moneys collected by the Trustee pursuant to this Article in respect of any series shall be applied in the following order at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of principal or interest, upon presentation of the several Securities, and Coupons appertaining thereto, in respect of which monies have been collected and stamping (or otherwise noting) thereon the payment, or issuing Securities of such series in reduced principal amounts in exchange for the presented Securities of like series if only partially paid, or upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses applicable to such series in respect of which monies have been collected, including reasonable compensation to the Trustee and each predecessor Trustee and their respective agents and attorneys and of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6; SECOND: In case the principal of the Securities of such series in respect of which moneys have been collected shall not have become and be then due and payable, to the payment of interest on the Securities of such series in default in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest at the same rate as the rate of interest or Yield 42 34 to Maturity (in the case of Original Issue Discount Securities) specified in such Securities, such payments to be made ratably to the persons entitled thereto, without discrimination or preference; THIRD: In case the principal of the Securities of such series in respect of which moneys have been collected shall have become and shall be then due and payable, to the payment of the whole amount then owing and unpaid upon all the Securities of such series for principal and interest, with interest upon the overdue principal, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series; and in case such moneys shall be insufficient to pay in full the whole amount so due and unpaid upon the Securities of such series, then to the payment of such principal and interest or yield to maturity, without preference or priority of principal over interest or yield to maturity, or of interest or yield to maturity over principal, or of any installment of interest over any other installment of interest, or of any Security of such series over any other Security of such series, ratably to the aggregate of such principal and accrued and unpaid interest or yield to maturity; and FOURTH: To the payment of the remainder, if any, to the Issuer or any other person lawfully entitled thereto. SECTION 5.4 Suits for Enforcement. In case an Event of Default has occurred, has not been waived and is continuing, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.5 Restoration of Rights on Abandonment of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued 43 35 or abandoned for any reason, or shall have been determined adversely to the Trustee, then and in every such case the Issuer and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Issuer, the Trustee and the Securityholders shall continue as though no such proceedings had been taken. SECTION 5.6 Limitations on Suits by Securityholders. No holder of any Security of any series or of any Coupon appertaining thereto shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture, or for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of default and in of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Securities of such series then Outstanding shall have made written request upon the Trustee to institute such action or proceedings in its own name as trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 5.9; it being understood and intended, and being expressly covenanted by the taker and Holder of every Security or Coupon with every other taker and Holder and the Trustee, that no one or more Holders of Securities of any series or of any Coupon appertaining thereto shall have any right in any manner whatever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other such Holder of Securities or Coupons, or to obtain or seek to obtain priority over or preference to any other such Holder or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders of Securities of the applicable series or of any Coupon appertaining thereto. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. 44 36 SECTION 5.7 Unconditional Right of Securityholders to Institute Certain Suits. Notwithstanding any other provision in this Indenture and any provision of any Security, the right of any holder of any Security or Coupon to receive payment of the principal of an interest on such Security or Coupon on or after the respective due dates expressed in such Security or Coupon, or in any Coupon appertaining thereto, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 5.8 Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default. Except as provided in Section 2.9, no right or remedy herein conferred upon or reserved to the Trustee or to the Securityholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. No delay or omission of the Trustee or of any Securityholder to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; and, subject to Section 5.6, every power and remedy given by this Indenture or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 5.9 Control by Securityholders. The Holders of a majority in aggregate principal amount of the Securities of each series affected (with each series voting as a separate class) at the time Outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to the Securities of such series by this Indenture; PROVIDED that such direction shall not be otherwise than in accordance with law and the provisions of this Indenture and PROVIDED FURTHER that (subject to the provisions of Section 6.1) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, shall determine that the action or proceeding so directed may not lawfully be 45 37 taken or if the Trustee in good faith by its board of directors, the executive committee, or a trust committee of directors or Responsible Officers of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability or if the Trustee in good faith shall so determine that the actions or forebearances specified in or pursuant to such direction would be unduly prejudicial to the interests of Holders of the Securities of all series so affected not joining in the giving of said direction, it being understood that (subject to Section 6.1) the Trustee shall have no duty to ascertain whether or not such actions or forebearances are unduly prejudicial to such Holders. Nothing in this Indenture shall impair the right of the Trustee in its discretion to take any action deemed proper by the Trustee and which is not inconsistent with such direction or directions by Securityholders. SECTION 5.10 Waiver of Past Defaults. Prior to the declaration of the acceleration of the maturity of the Securities of any series as provided in Section 5.1, the Holders of a majority in aggregate principal amount of the Securities of such series at the time Outstanding may on behalf of the Holders of all the Securities of such series waive any past default or Event of Default described in clause (d) of Section 5.1 (or, in the case of an event specified in clause (d) of Section 5.1 which relates to less than all series of Securities then Outstanding, the Holders of a majority in aggregate principal amount of the Securities then Outstanding affected thereby (each series voting as a separate class) may waive any such default or Event of Default, or, in the case of all event specified in clause (d) (if the Event of Default under clause (d) relates to all series of Securities then Outstanding), (e) or (f) of Section 5.1 the Holders of Securities of a majority in principal amount of all the Securities then Outstanding (voting as one class) may waive any such default or Event of Default), and its consequences except a default in respect of a covenant or provision hereof which cannot be modified or amended without the consent of the Holder of each Security affected. In the case of any such waiver, the Issuer, the Trustee and the Holders of the Securities of such series shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Upon any such waiver, such default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of 46 38 Default arising therefrom shall be deemed to have been cured, and not to have occurred for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 5.11 Trustee to Give Notice of Default, But May Withhold in Certain Circumstances. The Trustee shall, within 90 days after the occurrence of a default known to the Trustee with respect to the Securities of any series, provide notice to the Holders of Securities of such series and Coupons appertaining thereto, if any, (i) if any Unregistered Securities of that series are then Outstanding, to the Holders thereof, by publication at least once in an Authorized Newspaper in London (and, if required by Section 3.6, at least once in an Authorized Newspaper in Luxembourg), (ii) if any Unregistered Securities of that series are then Outstanding, to all Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing such notice to such Holders at such addresses and (iii) to all Holders of then Outstanding Registered Securities of that series, by mailing such notice to such Holders at their addresses as they shall appear in the registry books, unless such defaults shall have been cured before the giving of such notice (the term "default" or "defaults" for the purposes of this Section being hereby defined to mean any event or condition which is, or with notice or lapse of time or both would become, an Event of Default); PROVIDED that, except in the case of default in the payment of the principal of or interest on any of the Securities of such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors or trustees and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders of such series. SECTION 5.12 Right of Court to Require Filing of Undertaking to Pay Costs. All parties to this Indenture agree, and each Holder of any Security or Coupon by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any 47 39 party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder or group of Securityholders of any series holding in the aggregate more than 10% in aggregate principal amount of the Securities of such series, or, in the case of any suit relating to or arising under clause (d) of Section 5.1 (if the suit relates to Securities of more than one but less than all series), 10% in aggregate principal amount of Securities Outstanding affected thereby, or in the case of any suit relating to or arising under clause (d) (if the suit under clause (d) relates to all the Securities then Outstanding), (e) or (f) of Section 5.1, 10% in aggregate principal amount of all Securities Outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of or interest on any Security or Coupon on or after the due date expressed in such Security or Coupon. ARTICLE SIX CONCERNING THE TRUSTEE SECTION 6.1 Duties and Responsibilities of the Trustee; During Default; Prior to Default. With respect to the Holders of any series of Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Securities of a particular series and after the curing or waiving of all Events of Default which may have occurred with respect to such series, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Securities of a series has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that (a) prior to the occurrence of an Event of Default with respect to the Securities of any series and after the curing or waiving of all such Events of Default with respect to such series which may have occurred: (i) the duties and obligations of the Trustee with respect to the Securities of any series shall be determined solely by the 48 40 express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such statements, certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders pursuant to Section 5.9 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there shall be reasonable ground for believing that the repayment of such funds or adequate indemnity against such liability is not reasonably assured to it. SECTION 6.2 Certain Rights of the Trustee. Subject to Section 6.1: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, Officers' Certificate or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, note, coupon, security or 49 41 other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Issuer mentioned herein shall be sufficiently evidenced by an Officers' Certificate or order of the Issuer (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the secretary or an assistant secretary of the Issuer; (c) the Trustee may consult with counsel and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the trusts, rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; (f) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, appraisal, bond, debenture, note, coupon, security, or other paper or document unless requested in writing so to do by the holders of not less than a majority in aggregate principal amount of the Securities of all series affected then Outstanding; provided that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a 50 42 condition to proceeding; the reasonable expenses of every such investigation shall be paid by the Issuer or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Issuer upon demand; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys not regularly in its employ and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder; and (h) the Trustee shall not be deemed to have knowledge or notice of any default or Event of Default unless a Responsible Officer has actual knowledge thereof or unless the holders of not less than 25% of the aggregate principal amount of the then Outstanding Securities of any affected series have notified the Trustee thereof. SECTION 6.3 Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Issuer, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Securities or Coupons. The Trustee shall not be accountable for the use or application by the Issuer of any of the Securities or of the proceeds thereof. SECTION 6.4 Trustee and Agents May Hold Securities or Coupons; Collections, etc. The Trustee or any agent of the Issuer or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities or Coupons with the same rights it would have if it were not the Trustee or such agent and, subject to Sections 6.8 and 6.13, if operative, may otherwise deal with the Issuer and receive, collect, hold and retain collections from the Issuer with the same rights it would have if it were not the Trustee or such agent. SECTION 6.5 Moneys Held by Trustee. Subject to the provisions of Section 10.4 hereof, all moneys received by the Trustee shall until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except 51 43 to the extent required by mandatory provisions of law. Neither the Trustee nor any agent of the Issuer or the Trustee shall be under any liability for interest on any moneys received by it hereunder. SECTION 6.6 Compensation and Indemnification of Trustee and Its Prior Claim. The Issuer covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) and the Issuer covenants and agrees to pay or reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of it in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Issuer also covenants to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including the costs and expenses of defending itself against or investigating any claim of liability in the premises. The obligations of the Issuer under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. Such additional indebtedness shall be a senior claim to that of the Securities and Coupons upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Securities or Coupons, and the Securities and Coupons are hereby subordinated to such senior claim. SECTION 6.7 Right of Trustee to Rely on Officers' Certificate, etc. Subject to Sections 6.1 and 6.2, whenever in the administration of the trusts of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed 52 44 to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.8 Qualification of Trustee; Conflicting Interests. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section, it shall, within 90 days after ascertaining that it has such conflicting interest, either eliminate such conflicting interest or resign in the manner and with the effect specified in this Indenture. (b) In the event that the Trustee shall fail to comply with the provisions of subsection (a) of this Section, the Trustee shall, within 10 days after the expiration of such 90 day period, provide notice of such failure to the Securityholders in the manner and to the extent required by Section 4.4(c). (c) For the purposes of this Section, the Trustee shall be deemed to have a conflicting interest with respect to Securities of any series if (i) the Trustee is trustee under this Indenture with respect to the Outstanding Securities of any other series or is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Issuer are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Securities issued under this Indenture and this Indenture with respect to the Securities of any other series and there shall also be so excluded any other indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Issuer are outstanding and this Indenture with respect to the Securities of any other series (i) this Indenture is and, if applicable, this Indenture and any series issued pursuant to this Indenture and such other indenture or indentures are wholly unsecured, and such other indenture or indentures are hereafter qualified under the Trust Indenture Act of 1939, unless the Commission shall have found and declared by order pursuant to Section 305(b) or Section, 307(c) of such Trust Indenture Act of 1939 that differences exist between the provisions of this Indenture with respect to Securities of such series and one or more other series, or the provisions of this Indenture and the provisions of such other indenture or indentures which are so likely to involve a material conflict of interest as to make it necessary 53 45 in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to Securities of such series and such other series, or under this Indenture or such other indenture or indentures, or (ii) the Issuer shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that trusteeship under this Indenture with respect to Securities of such series and such other series, or under this Indenture and such other indenture or indentures is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to Securities of such series and such other series, or under this Indenture and such other indentures; (ii) the Trustee or any of its directors or executive officers is an obligor upon the Securities of any series issued under this Indenture or an underwriter for the Issuer; (iii) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with the Issuer or an underwriter for the Issuer; (iv) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee, or representative of the Issuer, or of an underwriter (other than the Trustee itself) for the Issuer who is currently engaged in the business of underwriting, except that (x) one individual may be a director or an executive officer, or both, of the Trustee and a director or an executive officer, or both, of the Issuer, but may not be at the same time an executive officer of both the Trustee and the Issuer; (y) if and so long as the number of directors of the Trustee in office is more than nine, one additional individual may be a director or an executive officer, or both, of the Trustee and a director of the Issuer; and (z) the Trustee may be designated by the Issuer or by any underwriter for the Issuer to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent, or depositary, or in any other similar capacity, or, subject to the provisions of subsection (c)(i) of this Section, to act as trustee, whether under all indenture or otherwise; (v) 10% or more of the voting securities of the Trustee is beneficially owned either by the Issuer or by any director, partner or executive officer thereof, or 20% or more of such voting securities 54 46 is beneficially owned, collectively, by any two or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Issuer or by any director, partner, or executive officer thereof, or is beneficially owned, collectively, by any two or more such persons; (vi) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, (x) 5% or more of the voting securities or 10% or more of any other class of security of the Issuer, not including the Securities issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (y) 10% or more of any class of security of an underwriter for the Issuer; (vii) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 5%. or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Issuer; (viii) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of the Issuer; or (ix) the Trustee owns on May 15 in any calendar year, in the capacity of executor, administrator, testamentary or INTER VIVOS trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under Section 6.8(c)(vi), (vii) or (viii). As to any such securities of which the Trustee acquired ownership through becoming executor, administrator, or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of two years from the date of such acquisition, to the extent that such securities included in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after May 15 in each calendar year, the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such May 15. If the Issuer 55 47 fails to make payment in full of principal of or interest on any of the Securities when and as the same becomes due and payable, and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph, all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of subsections (c)(vi), (vii) and (viii) of this Section. The specification of percentages in subsections (c)(v) to (ix) inclusive of this Section shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of subsections (c)(iii) or (vii) of this Section. For the purposes of subsections (c)(vi), (vii), (viii) and (ix), of this Section, only, (i) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies, or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (ii) an obligation shall be deemed to be in default when a default in payment of principal shall have continued for 30 days or more and shall not have been cured; and (iii) the Trustee shall not be deemed to be the owner or holder of (x) any security which it holds as collateral security, as trustee or otherwise, for an obligation which is not in default as defined in clause (ii) above, or (y) any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (z) any security which it holds as agent for collection, or as custodian, escrow agent, or depositary, or in any similar representative capacity. Except as provided above, the word "security" or 'securities' as used in this Section shall mean any note, stock, treasury stock, bond, 56 48 debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. (d) For purposes of this Section: (i) the term "underwriter" when used with reference to the issuer shall mean every person who, within three years prior to the time as of which the determination is made, has purchased from the Issuer with a view to, or has offered or sold for the Issuer in connection with, the distribution of any security of the Issuer outstanding at such time, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission; (ii) the term "director" shall mean any director of a corporation or any individual performing similar functions with respect to any organization whether incorporated or unincorporated; (iii) the term "person" shall mean an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization, or a government or political subdivision thereof; as used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security; (iv) the term "voting security" shall mean any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person; 57 49 (v) the term "Issuer" shall mean any obligor upon the Securities; and (vi) the term "executive officer" shall mean the president, every vice president, every trust officer, the cashier, the secretary, and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors. (e) The percentages of voting securities and other securities specified in this Section shall be calculated in accordance with the following provisions: (i) a specified percentage of the voting securities of the Trustee, the Issuer or any other person referred to in this Section (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person; (ii) a specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding; (iii) the term "amount", when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares, and the number of units if relating to any other kind of security; (iv) the term "outstanding" means issued and not held by or for the account of the issuer; the following securities shall not be deemed outstanding within the meaning of this definition: (A) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (B) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; 58 50 (C) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; and (D) securities held in escrow if placed in escrow by the issuer thereof; PROVIDED, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof; and (v) a security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; PROVIDED, that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes and PROVIDED, FURTHER, that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. SECTION 6.9 Persons Eligible for Appointment as Trustee. The Trustee for each series of Securities hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or of any State or the District of Columbia having a combined capital and surplus of at least $50,000,000, and which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by Federal, State or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition, so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. 59 51 SECTION 6.10 Resignation and Removal; Appointment of Successor Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign with respect to one or more or all series of Securities bygiving written notice of resignation to the Issuer. Upon receiving such notice of resignation, the Issuershall promptly appoint a successor trustee or trustees with respect to the applicable series by written instrument in duplicate, executed by authority of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee or trustees. If no successor trustee shall have been so appointed with respect to any series and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide Holder of a Security or Securities of the applicable series for at least six months may, subject to the provisions of Section 5.12, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (i) the Trustee shall fail to comply with the provisions of Section 6.8 with respect to any series of Securities after written request therefor by the Issuer or by any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months; or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.9 and shall fail to resign after written request therefor by the Issuer or by any Securityholder; or (iii) the Trustee shall become incapable of acting with respect to any series of Securities, or shall be adjudged a bankrupt or insolvent, or a receiver or liquidator of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property of affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Issuer may remove the Trustee with respect to the applicable series of Securities and appoint a successor trustee for such series by written instrument, in duplicate, executed by order of the Board of Directors of the Issuer, one copy of which instrument shall be 60 52 delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 5.12, any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months may on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee with respect to such series. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The Holders of a majority in aggregate principal amount of the Securities of each series at the time Outstanding may at any time remove the Trustee with respect to securities of such series and appoint a successor trustee with respect to the Securities of such series by delivering to the Trustee so removed, to the successor trustee so appointed and to the Issuer the evidence provided for in Section 7.1 of the action in that regard taken by the Securityholders. (d) Any resignation or removal of the Trustee with respect to any series and any appointment of a successor trustee with respect to such series pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11. SECTION 6.11 Acceptance of Appointment by Successor Trustee. Any successor trustee appointed as provided in Section 6.10 shall execute and deliver to the Issuer and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee with respect to all or any applicable series shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, duties and obligations with respect to such series of its predecessor hereunder, with like effect as if originally named as trustee for such series hereunder; but, nevertheless, on the written request of the Issuer or of the successor trustee, upon payment of its charges then unpaid, the trustee ceasing to act shall, subject to Section 10.4, pay over to the successor trustee all moneys at the time held by it hereunder and shall execute and deliver all instrument transferring to such successor trustee all such rights, powers, duties and obligations. Upon request of any such successor trustee, the Issuer shall execute any and all instruments in writing for more fully and certainly vesting in and 61 53 confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.6. If a successor trustee is appointed with respect to the Securities of one or more (but not all) series, the Issuer, the predecessor Trustee and each successor trustee with respect to the Securities of any applicable series shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the predecessor Trustee with respect to the Securities of any series as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such trustees or co-trustees of the same trust and that each such trustee shall be trustee of a trust or trusts under separate indentures. No successor trustee with respect to any series of Securities shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 6.8 and eligible under the provisions of Section 6.9. Upon acceptance of appointment by any successor trustee as provided in this Section 6.11, the Issuer shall mail notice thereof (a) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof, by publication of such notice at least once in an Authorized Newspaper in London (and, if required by Section 3.8, at least once in an Authorized Newspaper in Luxembourg), (b) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing such notice to such holders at such addresses as were so furnished to the Trustee (and the Trustee shall make such information available to the Issuer for such purpose) and (c) to the Holders of Registered Securities of each series affected, by first-class mail to such Holders of Securities of any series for which such successor trustee is acting as trustee at their last addresses as they shall appear in the Security register. If the Issuer fails to mail such notice within ten days after acceptance of appointment by the successor trustee, 62 54 the successor trustee shall cause such notice to be mailed at the expense of the Issuer. SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business of Trustee. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such corporation shall be qualified under the provisions of Section 6.8 and eligible under the provisions of Section 6.9, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities of any series shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities of any series shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities of such series or in this Indenture provided that the certificate of the Trustee shall have; PROVIDED, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities of any series in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13 Preferential Collection of Claims Against the Issuer. (a) Subject to the provisions of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Issuer within four months prior to a default, as defined in subsection (c) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the Holders of the Securities and the Holders of other indenture securities (as defined in this Section): (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or 63 55 interest, effected after the beginning of such four months' period and valid as against the Issuer and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in subsection (a)(2) of this Section, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Issuer upon the date of such default; and (2) all property received by the Trustee in respect of any claim as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such four months' period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the Issuer and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee: (A) to retain for its own account (i) payments made on account of any such claim by any person (other than the Issuer) who is liable thereon, (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third person, and (iii) distributions made in cash, securities or other property in respect of claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable state law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such four months' period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such four months' period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default as defined in subsection (c) of this Section would occur within four months; or (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in such paragraph (B) or (C), as the case may be, to the extent of the fair value of such property. 64 56 For the purposes of paragraphs (B), (C) and (D), property substituted after the beginning of such four months' period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned between the Trustee, the Securityholders and the Holders of other indenture securities in such manner that the Trustee, such Securityholders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Issuer of the funds and property in such special account and before crediting to the respective claims of the Trustee, such Securityholders and the holders of other indenture securities dividends on claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, whether such distribution is made in cash, securities or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceeding for reorganization is pending shall have jurisdiction (i) to apportion between the Trustee, such Securityholders and the holders of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such special account and the proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the 65 57 provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee, such Securityholders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any Trustee who has resigned or been removed after the beginning of such four months' period shall be subject to the provisions of this subsection (a) as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such four months' period, it shall be subject to the provisions of this subsection (a) if and only if the following conditions exist: (i) the receipt of property or reduction of claim which would have given rise to the obligation to account, if such Trustee had continued as trustee, occurred after the beginning of such four months' period; and (ii) such receipt of property or reduction of claim occurred within four months after such resignation or removal. (b) There shall be excluded from the operation of this Section a creditor relationship arising from (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee; (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction or by this Indenture for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advance and of the circumstances surrounding the making thereof is given to the Securityholders at the time and in the manner provided in this Indenture; (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity; 66 58 (4) an indebtedness created as a result of services rendered or premises rented or an indebtedness created as a result of goods or securities sold in a cash transaction as defined in subsection (c)(3) below; (5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Issuer; or (6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self-liquidating paper as defined in subsection (c)(4) of this Section. (c) As used in this Section: (1) the term "default" shall mean any failure to make payment in full of the principal of or interest upon any of the Securities or upon the other indenture securities when and as such principal or interest becomes due and payable; (2) the term "other indenture securities" shall mean securities upon which the Issuer is an obligor (as defined in the Trust Indenture Act of 1939) outstanding under any other indenture (i) under which the Trustee is also trustee, (ii) which contains provisions substantially similar to the provisions of subsection (a) of this Section, and (iii) under which a default exists at the time of the apportionment of the funds and property held in said special account; (3) the term "cash transaction" shall mean any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand (4) the term "self-liquidating paper" shall mean any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Issuer for the purpose of financing the purchase, processing, manufacture, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the secu- 67 59 rity, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Issuer arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation; and (5) the term "Issuer" shall mean any obligor upon the Securities. ARTICLE SEVEN CONCERNING THE SECURITYHOLDERS SECTION 7.1 Evidence of Action Taken by Securityholders. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by a specified percentage in principal amount of the Securityholders of any or all series may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such specified percentage of Securityholders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee. Proof of execution of any instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Sections 6.1 and 6.2) conclusive in favor of the Trustee and the Issuer, if made in the manner provided in this Article. SECTION 7.2 Proof of Execution of lnstruments and of Holding of Securities. Subject to Sections 6.1 and 6.2, the execution of any instrument by a Securityholder or his agent or proxy may be proved in the following manner: The fact and date of the execution by any Holder of any instrument may be proved by the certificate of any notary public or other officer of any jurisdiction authorized to take acknowledgments of deeds or administer oaths that the person executing such instruments acknowledged to him the execution thereof, or by an affidavit of a witness to such execution sworn to before any such notary or other such officer. Where such execution is by or on behalf of any legal entity other than an individual, such certificate or affidavit shall also constitute sufficient proof of the authority of the person executing the same. The fact of the holding by any Holder 68 60 of an Unregistered Security of any series, and the identifying number of such Security and the date of his holding the same, may be proved by the production of such Security or by a certificate executed by any trust company, bank, banker or recognized securities dealer wherever situated satisfactory to the Trustee, if such certificate shall be deemed by the Trustee to be satisfactory. Each such certificate shall be dated and shall state that on the date thereof a Security of such series bearing a specified identifying number was deposited with or exhibited to such trust company, bank, banker or recognized securities dealer by the person named in such certificate. Any such certificate may be issued in respect of one or more Unregistered Securities of one or more series specified therein. The holding by the person named in any such certificate of any Unregistered Securities of any series specified therein shall be presumed to continue for a period of one year from the date of such certificate unless at the time of any determination of such holding (1) another certificate bearing a later date issued in respect of the same Securities shall be produced, or (2) the Security of such series specified in such certificate shall be produced by some other person, or (3) the Security of such series specified in such certificate shall have ceased to be Outstanding. Subject to Sections 6.1 and 6.2, the fact and date of the execution of any such instrument and the amount and numbers of Securities of any series held by the person so executing such instrument and the amount and numbers of any Security or Securities for such series may also be proven in accordance with such reasonable rules and regulations as may be prescribed by the Trustee for such series or in any other manner which the Trustee for such series may deem sufficient. SECTION 7.3 Holders to be Treated as Owners. The Issuer, the Trustee and any agent of the Issuer or the Trustee may deem and treat the person in whose name any Security shall be registered upon the Security register for such series as the absolute owner of such Security (whether or not such Security shall be overdue and not withstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of and, subject to the provisions of this Indenture, interest on such Security and for all other purposes; and neither the Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. The 69 61 Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the Holder of any Unregistered Security and the Holder of any Coupon as the absolute owner of such Unregistered Security or Coupon (whether or not such Unregistered Security or Coupon shall be overdue) for the purpose of receiving payment thereof or on account thereof and for all other purposes and neither the Issuer, the Trustee, nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. All such payments so made to any such person, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Security or Coupon. SECTION 7.4 Securities Owned by Issuer Deemed Not Outstanding. In determining whether the Holders of the requisite aggregate principal amount of Outstanding Securities of any or all series have concurred in any direction, consent or waiver under this Indenture, Securities which are owned by the Issuer or any other obligor on the Securities with respect to which such determination is being made or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities with respect to which such determination is being made shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver only Securities which the Trustee knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Issuer or any other obligor upon the Securities or any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities. In case of a dispute as to such right, the advice of counsel shall be full protection in respect of any decision made by the Trustee in accordance with such advice. Upon request of the Trustee, the Issuer shall furnish to the Trustee promptly a written statement by two of its officers (which need not comply with Section 11.5) listing and identifying all Securities, if any, known by the Issuer to be owned or held by or for the account of any of the above-described persons; and, subject to Sections 6.1 and 6.2, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set 70 62 forth and of the fact that all Securities not listed therein are Outstanding for the purpose of any such determination. SECTION 7.5 Right of Revocation of Action Taken. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.1, of the taking of any action by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action, any Holder of a Security the serial number of which is shown by the evidence to be included among the serial numbers of the Securities the Holders of which have consented to such action may, by filing written notice at the Corporate Trust Office and upon proof of holding as provided in this Article, revoke such action so far as concerns such Security. Except as aforesaid any such action taken by the Holder of any Security shall be conclusive and binding upon such Holder and upon all future Holders and owners of such Security and of any Securities issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon any such Security. Any action taken by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action shall be conclusively binding upon the Issuer, the Trustee and the Holders of all the Securities affected by such action. ARTICLE EIGHT SUPPLEMENTAL INDENTURES SECTION 8.1 Supplemental Indentures Without Consent of Securityholders. The Issuer, when authorized by a resolution of its Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act of 1939 as in force at the date of the execution thereof) for one or more of the following purposes: (a) to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Securities of one or more series any property or assets; (b) to evidence the succession of another corporation to the Issuer, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Issuer pursuant to Article Nine; 71 63 (c) to add to the covenants of the Issuer such further covenants, restrictions, conditions or provisions as its Board of Directors and the Trustee shall consider to be for the protection of the Holders of Securities or Coupons, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; PROVIDED, that in respect of any such additional covenant, restriction, condition or provision such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such an Event of Default or may limit the remedies available to the Trustee upon such an Event of Default or may limit the right of the Holders of a majority in aggregate principal amount of the Outstanding Securities of such series to waive such an Event of Default; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture; or to make such other provisions in regard to matters or questions arising under this Indenture or under any supplemental indenture as the Board of Directors may deem necessary or desirable and which shall not adversely affect the interests of the Holders of the Securities; (e) to provide for the issuance under this Indenture of Securities in coupon form (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with Securities issued hereunder in fully registered form, and to make all appropriate changes for such purpose; and (f) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities of one or more series, or of the Coupons appertaining to such Securities, and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Section 6.11. The Trustee is hereby authorized to join with the Issuer in the execution of any such supplemental indenture, to make any further 72 64 appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer, assignment, mortgage or pledge of any property thereunder, but the Trustee shall not be obligated to enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed without the consent of the Holders of any of the Securities at the time Outstanding, notwithstanding any of the provisions of Section 8.2. SECTION 8.2 Supplemental Indentures With Consent of Securityholders. With the consent (evidenced as provided in Article Seven) of the Holders of not less than 66 2/3% in aggregate principal amount of the Securities at the time Outstanding of all series affected by such supplemental indenture (voting as one class), the Issuer, when authorized by a resolution of its Board of Directors, and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act of 1939 as in force at the date of execution thereof) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Securities of each such series or the coupons appertaining to such Securities; provided, that no such supplemental indenture shall (a) extend the final maturity of any Security, or reduce the principal amount thereof or the method in which amounts of payments of principal or interest thereon are determined, or reduce the rate or extend the time of payment of interest thereon, or change the coin, or currency or units based on or related to currencies (including ECU) of payment thereof, or reduce any amount payable on redemption thereof or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof pursuant to Section 5.1 or the amount thereof provable in bankruptcy pursuant to Section 5.2, or impair or affect the right of any Securityholder to institute suit for the payment thereof or, if the Securities provide therefor, any right of repayment at the option of the Securityholder without the consent of the Holder of each Security so affected, or (b) reduce the aforesaid percentage of Securities of any series, the consent of the Holders of which is required for any such supplemental indenture, without the consent of the Holders of each Security so affected. 73 65 Upon the request of the Issuer, accompanied by a copy of a resolution of the Board of Directors certified by the secretary or an assistant secretary of the Issuer authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid and other documents, if any, required by Section 7.1, the Trustee shall join with the Issuer in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Issuer and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Issuer shall mail a notice thereof (i) by first class mail to the Holders of then Outstanding Registered Securities of each series affected thereby at their addresses as they shall appear on the registry books of the Issuer, (ii) if any Unregistered Securities of a series affected thereby are then Outstanding, to the Holders thereof who have filed their names and addresses with the Trustee pursuant to section 4.4(c)(ii), by mailing a notice thereof by first class mail to such Holders at such addresses as were so furnished to the Trustee and (iii) if any Unregistered Securities of a series affected thereby are then Outstanding, to all holders thereof, by publication of a notice thereof at least once in an Authorized ~newspaper in London (and, if required by Section 3.6, at least once in an Authorized Newspaper in Luxembourg), and in each case such notice shall set forth in general terms the substance of such supplemental indenture. Any failure of the Issuer to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 8.3 Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, 74 66 the Issuer and the Holders of Securities of each series affected thereby shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 8.4 Documents to Be Given to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article 8 complies with the applicable provisions of this Indenture. SECTION 8.5 Notation on Securities in Respect of Supplemental Indentures. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article may bear a notation in form approved by the Trustee for such series as to any matter provided for by such supplemental indenture or as to any action taken at any such meeting. If the Issuer or the Trustee shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Issuer, authenticated by the Trustee and delivered in exchange for the Securities of such series then Outstanding. ARTICLE NINE CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 9.1 Issuer May Consolidate, etc., on Certain Terms. The Issuer covenants that it will not merge or consolidate with any other corporation or sell or convey all or substantially all of its assets to any Person, unless (i) either the Issuer shall be the continuing corporation, or the successor corporation or the Person which acquires by sale or conveyance substantially all the assets of the Issuer (if other than the Issuer) shall be a corporation organized under the laws of the United States of America or any State thereof and shall expressly assume the due and punctual payment of the principal of and interest on all the Securities and Coupons, according to their tenor, and the due and 75 67 punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Issuer, by supplemental indenture satisfactory to the Trustee, executed and delivered to the Trustee by such corporation, and (ii) the Issuer or such successor corporation, as the case may be, shall not, immediately after such merger or consolidation, or such sale or conveyance, be in default in the performance of any such covenant or condition. SECTION 9.2 Successor Corporation Substituted. In case of any such consolidation, merger, sale or conveyance, and following such an assumption by the successor corporation, such successor corporation shall succeed to and be substituted for the Issuer, with the same effect as if it had been named herein. Such successor corporation may cause to be signed, and may issue either in its own name or in the name of the Issuer prior to such succession any or all of the Securities issuable hereunder, together with any Coupons appertaining thereto, which theretofore shall not have been signed by the Issuer and delivered to the Trustee; and, upon the order of such successor corporation instead of the Issuer and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities, together with any Coupons appertaining thereto, which previously shall have been signed and delivered by the officers of the Issuer to the Trustee for authentication, and any Securities, together with any Coupons appertaining thereto, which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All of the Securities, together with any Coupons appertaining thereto, so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities, together with any Coupons appertaining thereto, theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities and Coupons had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale, lease or conveyance such changes in phraseology and form (but not in substance) may be made in the Securities and Coupons thereafter to be issued as may be appropriate. In the event of any such sale or conveyance (other than a conveyance by way of lease) the Issuer or any successor corporation which shall theretofore have become such in the manner described in this Article shall be discharged from all obligations and covenants under this Indenture and the Securities and may be liquidated and dissolved. 76 68 SECTION 9.3 Opinion of Counsel to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Opinion of Counsel, prepared in accordance with Section 11.5, as conclusive evidence that any such consolidation, merger, sale, lease or conveyance, and any such assumption, and any such liquidation or dissolution, complies with the applicable provisions of this Indenture. ARTICLE TEN SATISFACTION AND DISCHARGE OR INDENTURE; UNCLAIMED MONEYS. SECTION 10.1 Satisfaction and Discharge of Indenture. (A) If at any time (a) the Issuer shall have paid or caused to be paid the principal of and interest on all the Securities of any series Outstanding hereunder and all unmatured Coupons appertaining thereto (other than Securities or Coupons which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.9) as and when the same shall have become due and payable, or (b) the Issuer shall have delivered to the Trustee for cancellation all Securities of any series theretofore authenticated and all unmatured Coupons appertaining thereto (other than any Securities or Coupons of such series which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.9) or (c) (i) all the Securities of such series not theretofore delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and (ii) the Issuer shall have irrevocably deposited or caused to be deposited with the Trustee as trust funds the entire amount in cash (other than moneys repaid by the Trustee or any paying agent to the Issuer in accordance with Section 10.4) or U.S. Government Obligations, maturing as to principal and interest in such amounts and at such times as will insure the availability of cash (without consideration of any reinvestment of such principal or interest), or a combination of U.S. Government Obligations and cash sufficient to pay at maturity or upon redemption all Securities of such series and all unmatured Coupons appertaining thereto (other than any Securities or Coupons of such series which shall have been destroyed, lost or stolen and which shall have been 77 69 replaced or paid as provided in Section 2.9) not theretofore delivered to the Trustee for cancellation, including principal and interest due or to become due to such date of maturity as the case may be, and if, in any such case, the Issuer shall also pay or cause to be paid all other sums payable hereunder by the Issuer with respect to Securities of such series and Coupons appertaining thereto, then this Indenture shall cease to be of further effect with respect to Securities of such series and Coupons appertaining thereto (except as to (i) rights of registration of transfer and exchange, and the Issuer's right of optional redemption, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of holders of Securities and Coupons appertaining thereto to receive payments of principal thereof and interest thereon, upon the original stated due dates therefor (but not upon acceleration) and remaining rights of the holders to receive mandatory sinking fund payments, if any, (iv) the rights, obligations, duties and immunities of the Trustee hereunder, including those under Section 6.6, (v) the rights of the Securityholders of such series as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them, and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, on demand of the Issuer accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Issuer, shall execute proper instruments acknowledging such satisfaction of and discharging this Indenture with respect to such series; PROVIDED, that the rights of Holders of the Securities and Coupons to receive amounts in respect of principal of and interest on the Securities and Coupons held by them shall not be delayed longer than required by then-applicable mandatory rules or policies of any securities exchange upon which the Securities are listed. The Issuer agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Securities and Coupons of such series. (B) The following provisions shall apply to the Securities of each series unless specifically otherwise provided in a Board Resolution, Officers' Certificate or indenture supplemental hereto provided pursuant to Section 2.3. In addition to discharge of the Indenture pursuant to the next preceding paragraph, the Issuer shall be deemed to have paid and discharged the entire indebtedness on all the Securities of a series and Coupons appertaining thereto on the 121st day after the date of the 78 70 deposit referred to in subparagraph (a) below, and the provisions of this Indenture with respect to the Securities of such series and Coupons appertaining thereto shall no longer be in effect (except as to (i) rights of registration of transfer and exchange of Securities of such series, and of Coupons appertaining thereto, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of holders of Securities and Coupons appertaining thereto to receive, from the trust fund described in subparagraph (a) below, payments of principal thereof and interest thereon, upon the original stated due dates therefor (but not upon acceleration) and remaining rights of the holders to receive sinking fund payments, if any, (iv) the rights, obligation, duties and immunities of the Trustee hereunder, including those under Section 6.6, (v) the rights of the holders of Securities of such series and Coupons appertaining thereto as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, at the expense of the Issuer, shall at the Issuer's request, execute proper instruments acknowledging the same, if (a) with reference to this provision the Issuer has irrevocably deposited or caused to be irrevocably deposited with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Securities of such series and Coupons appertaining thereto (i) cash, or (ii) U.S. Government Obligations, maturing as to principal and interest at such times and in such amounts as will insure the availability of cash or (iii) a combination thereof, in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay (A) the principal and interest on all Securities of such series and Coupons appertaining thereto on the date that such principal or interest is due and payable and (B) any mandatory sinking fund payments on the day on which such payments are due and payable in accordance with the terms of the Indenture and the Securities of such series; (b) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Issuer is a party or by which it is bound; (c) the Issuer has delivered to the Trustee an opinion of independent legal counsel satisfactory to the Trustee to the effect 79 71 that Holders of the Securities of such series and Coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred; and (d) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the defeasance contemplated by this provision have been complied with, and the Opinion of Counsel shall also state that such deposit does not violate applicable law. SECTION 10.2 Application by Trustee of Funds Deposited for Payment of Securities. Subject to Section 10.4, all moneys deposited with the Trustee pursuant to Section 10.1 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Issuer acting as its own paying agent), to the Holders of the particular Securities of such series and of Coupons appertaining thereto for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest; but such money need not be segregated from other funds except to the extend required by law. SECTION 10.3 Repayment of Moneys Held by Paying Agent. In connection with the satisfaction, and discharge of this Indenture with respect to Securities of any series, all moneys then held by any paying agent under the provisions of this Indenture with respect to such series of Securities shall, upon demand of the Issuer, be repaid to it or paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 10.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two Years. Any moneys deposited with or paid to the Trustee or any paying agent for the payment of the principal of or interest on any Security of any series and not applied but remaining unclaimed for two years after the date upon which such principal or interest shall have become due and payable, shall, upon the written request of the Issuer and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Issuer by the Trustee for such series or such paying agent, and the Holder of the Security of such series shall, unless 80 72 otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Issuer for any payment which such Holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such moneys shall thereupon cease; provided, the Trustee or such paying agent, before being required to make any such repayment with respect to moneys deposited with it for any payment (a) in respect of Registered Securities of any series, may at the expense of the Issuer, mail by first class mail to Holders of such Securities at their addresses as they shall appear on the Security register, and (b) in respect of Unregistered Securities of any series, may at the expense of the Issuer cause to be published once, in an Authorized Newspaper in London (and if required by Section 3.6, once in an Authorized Newspaper in Luxembourg), notice, that such moneys remain and that, after a date specified therein, which shall not be less than thirty days from the date of such mailing or publication, any unclaimed balance of such money then remaining will be repaid to the Issuer. SECTION 10.5 Indemnity for U.S. Government Obligations. The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 10.1 or the principal or interest received in respect of such obligations. ARTICLE ELEVEN MISCELLANEOUS PROVISIONS SECTION 11.1 Incorporators, Shareholders, Officers and Directors of Issuer Exempt from Individual Liability. No recourse under or upon any obligation, covenant or agreement contained in this Indenture, or in any Security or Coupon appertaining thereto, or because of any indebtedness evidenced thereby, shall be had against any incorporator, as such or against any past, present or future shareholder, officer or director, as such, of the Issuer or of any successor, either directly or through the Issuer or any successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities and any Coupons appertaining thereto by the holders thereof and as part of the consideration for the issue of the Securities and any Coupons appertaining thereto. 81 73 SECTION 11.2 Provisions of Indenture for the Sole Benefit of Parties and Securityholders. Nothing in this Indenture or in the Securities and any Coupons appertaining thereto, expressed or implied, shall give or be construed to give to any person, firm or corporation, other than the parties hereto and their successors and the Holders of the Securities or Coupons, any legal or equitable right, remedy or claim under this Indenture or under any covenant or provision herein contained, all such covenants and provisions being for the sole benefit of the parties hereto and their successors and of the Holders of the Securities. SECTION 11.3 Successors and Assigns of Issuer Bound by Indenture. All the covenants, stipulations, promises and agreements in this Indenture contained by or in behalf of the Issuer shall bind its successors and assigns, whether so expressed or not. SECTION 11.4 Notices and Demands on Issuer, Trustee and Securityholders. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities or Coupons to or on the Issuer may be given or served by being deposited postage prepaid, first-class mail (except as otherwise specifically provided herein) addressed (until another address of the Issuer is filed by the Issuer with the Trustee) to The Progressive Corporation, 6000 Parkland Boulevard, Mayfield Heights, Ohio 44124, Attn: Treasurer. Any notice, direction, request or demand by the Issuer or any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made at the Corporate Trust Office. Where this Indenture provides for notice to Holders. such notice shall be sufficiently given (unless otherwise herein expressly provided) (i) in the case of Holders of Registered Securities and Holders of Unregistered Securities who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), if in writing and mailed, first-class postage prepaid, to each holder entitled thereto, at his last address as it appears in the registry books or as so filed; and (ii) in the case of holders of Unregistered Securities who have not filed their names and addresses with the Trustee, by publication in accordance with the requirements of the provision hereof requiring such notice. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given when mailed, whether or not the Holder receives the notice. In any case 82 74 where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of or irregularities in regular mail service, it shall be impracticable to mail notice to the Issuer and Securityholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. SECTION 11.5 Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein. Upon any application or demand by the Issuer to the Trustee to take any action under any of the provisions of this Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition, (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based, (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. 83 75 Any certificate, statement or opinion of an officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of counsel may be based, insofar as it relates to factual matters, information with respect to which is in the possession of the Issuer, upon the certificate, statement or opinion of or representations by an officer or officers of the Issuer, unless such counsel knows that the certificate, statement or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of an officer of the Issuer or of counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants in the employ of the Issuer, unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate or opinion of any independent firm of public accountants filed with the Trustee shall contain a statement that such firm is independent. SECTION 11.6 Payments Due on Saturdays, Sundays and Holidays. If the date of maturity of interest on or principal of the Securities of any series or any Coupons appertaining thereto or the date fixed for redemption or repayment of any such Security or Coupon shall not be a Business Day, then payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. SECTION 11.7 Conflict of Any Provision of Indenture with Trust Indenture Act of 1939. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in 84 76 this Indenture which is required to be included herein by any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, such required provision shall control. SECTION 11.8 New York Law to Govern. This Indenture and each Security and Coupon shall be deemed to be a contract under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of such State, except as may otherwise be required by mandatory provisions of law. SECTION 11.9 Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. SECTION 11.10 Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 11.11 Securities in Foreign Currencies or in ECU. Whenever this Indenture provides for any action by, or the determination of any of the rights of, or any distribution to, Holders of Securities denominated in United States dollars and in any other currency or currency unit (including ECU), in the absence of any provision to the contrary in the form of Security of any particular series, any amount in respect of any Security denominated in a currency or currency unit (including ECU) other than United States dollars shall be treated for any such action or distribution as that amount of United States dollars that could be obtained for such amount on such reasonable basis of exchange and as of such date as the Issuer may specify in a written notice to the Trustee or in the absence of such written notice, as the Trustee shall so determine. ARTICLE TWELVE REDEMPTION or SECURITIES AND SINKING FUNDS SECTION 12.1 Applicability of Article. The provisions of this Article shall be applicable to the Securities of any series which are redeemable before their maturity or to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 2.3 for Securities of such series. 85 77 SECTION 12.2 Notice of Redemption; Partial Redemptions. Notice of redemption to the Holders of Registered Securities of any series to be redeemed as a whole or in part at the option of the Issuer shall be given by mailing notice of such redemption by first class mail, postage prepaid, at least 30 days and not more than 60 days prior to the date fixed for redemption to such Holders of Securities of such series at their last addresses as they shall appear upon the registry books. Notice of redemption to the Holders of Unregistered Securities to be redeemed as a whole or in part, who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), shall be given by mailing notice of such redemption, by first class mail, postage prepaid, at least thirty and not more than sixty days prior to the date fixed for redemption, to such Holders at such addresses as were so furnished to the Trustee (and, in the case of any such notice given by the Issuer, the Trustee shall make such information available to the Issuer for such purpose). Notice of redemption to all other holders of Unregistered Securities shall be published in an Authorized Newspaper in London (and, if required by Section 3.6, in an Authorized Newspaper in Luxembourg), in each case, once in each of two successive calendar weeks, the first publication to be not less than thirty nor more than sixty days prior to the date fixed for redemption. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives the notice. Failure to give notice by mail, or any defect in the notice to the Holder of any Security of a series designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security of such series. The notice of redemption to each such Holder shall specify the principal amount of each Security of such series held by such Holder to be redeemed, the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of such Securities, and, in the case of Securities with Coupons attached thereto, of all Coupons appertaining thereto maturing after the date fixed for redemption, that such redemption is pursuant to the mandatory or optional sinking fund, or both, if such be the case, that interest accrued to the date fixed for redemption will be paid as specified in such notice and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. In case any Security of a series is to be redeemed in part only the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of 86 78 such Security, a new Security or Securities of such series in principal amount equal to the unredeemed portion thereof will be issued. The notice of redemption of Securities of any series to be redeemed at the option of the Issuer shall be given by the Issuer or, at the Issuer's request, by the Trustee in the name and at the expense of the Issuer. On the redemption date specified in the notice of redemption given as provided in this Section, the Issuer will deposit with the Trustee or with one or more paying agents (or, if the Issuer is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 3.4) an amount of money sufficient to redeem on the redemption date all the Securities of such series so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. If any or all of the outstanding Securities of a series are to be redeemed, the Issuer will deliver to the Trustee at least 70 days prior to the date fixed for redemption an Officers' Certificate stating the date of redemption and the aggregate principal amount of Securities to be redeemed. If less than all the Securities of a series are to be redeemed, the Trustee shall select, in such manner as it shall deem appropriate and fair, Securities of such series to be redeemed in whole or in part. Securities may be redeemed in part in multiples equal to the minimum authorized denomination for Securities of such series or any integral multiple thereof. The Trustee shall promptly notify the Issuer in writing of the Securities of such series selected for redemption and, in the case of any Securities of such series selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities of any series shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. SECTION 12.3 Payment of Securities Called for Redemption. If notice of redemption has been given as above provided, the Securities or portions of Securities specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Issuer shall default in the payment of such Securities at the redemption price, together with interest accrued to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue and the 87 79 unmatured Coupons, if any, appertaining thereto shall be void and, except as provided in Sections 6.5 and 10.4, such Securities shall cease from and after the date fixed for redemption to be entitled to any benefit or security under this Indenture, and the Holders thereof shall have no right in respect of such Securities except the right to receive the redemption price thereof and unpaid interest to the date fixed for redemption. On presentation and surrender of such Securities, together with all Coupons appertaining thereto maturing after the date fixed for redemption, at a place of payment specified in said notice, said Securities and Coupons or the specified portions thereof shall be paid and redeemed by the Issuer at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption; provided that any semiannual payment of interest becoming due on the date fixed for redemption shall be payable in the case of Securities with Coupons attached thereto, to the bearers of the Coupons for such interest upon surrender thereof, and in the case of Registered Securities, to the Holders of such Securities registered as such on the relevant record date subject to the terms and provisions of Section 2.4 hereof. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate of interest or Yield to Maturity (in the case of an Original Issue Discount Security) borne by the Security. If any Security with Coupons attached thereto is surrendered for redemption and is not accompanied by all such Coupons maturing after the date fixed for redemption, the surrender of such missing Coupon or Coupons may be waived by the Issuer and the Trustee, if there be furnished to each of them such security or indemnity as they may require to save each of them harmless. Upon presentation of any Security redeemed in part only, the Issuer shall execute and the Trustee shall authenticate and deliver to or on the order of the Holder thereof, at the expense of the Issuer, a new Security or Securities of such series, together with all Coupons, if any, appertaining thereto, of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented. SECTION 12.4 Exclusion of Certain Securities from Eligibility for Selection for Redemption. Securities shall be excluded from eligibility for selection for redemption if they are identified by registra- 88 80 tion and certificate number in a written statement signed by an authorized officer of the Issuer and delivered to the Trustee at least 40 days prior to the last date on which notice of redemption may be given as being owned of record and beneficially by, and not pledged or hypothecated by either (a) the Issuer or (b) an entity specifically identified in such written statement directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer. SECTION 12.5 Mandatory and Optional Sinking Funds. The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a "mandatory sinking fund payment", and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an "optional sinking fund payment". The date on which a sinking fund payment is to be made is herein referred to as the "sinking fund payment date". In lieu of making all or any part of any mandatory sinking fund payment with respect to any series of Securities in cash, the Issuer may at its option (a) deliver to the Trustee Securities of such series theretofore purchased or otherwise acquired (except upon redemption pursuant to the mandatory sinking fund) by the Issuer or receive credit for Securities of such series (not previously so credited) theretofore purchased or otherwise acquired (except as aforesaid) by the Issuer and delivered to the Trustee for cancellation pursuant to Section 2.7, (b) receive credit for optional sinking fund payments (not previously so credited) made pursuant to this Section, or (c) receive credit for Securities of such series (not previously so credited) redeemed by the Issuer through any optional redemption provision contained in the terms of such series. Securities so delivered or credited shall be received or credited by the Trustee at the sinking fund redemption price specified in such, Securities. On or before the sixtieth day next preceding each sinking fund payment date for any series, the Issuer will deliver to the Trustee a written statement (which need not contain the statements required by Section 11.5) signed by an authorized officer of the Issuer (a) specifying the portion of the mandatory sinking fund payment to be satisfied by payment of cash and the portion to be satisfied by credit of Securities of such series, (b) stating that none of the Securities of such series has theretofore been so credited, (c) stating that no defaults in the payment of interest or Events of Default with respect to such series have occurred 89 81 (which have not been waived or cured) and are continuing and (d) stating whether or not the Issuer intends to exercise its right to make an optional sinking fund payment with respect to such series and, if so, specifying the amount of such optional sinking fund payment which the Issuer intends to pay on or before the next succeeding sinking fund payment date. Any Securities of such series to be credited and required to be delivered to the Trustee in order for the Issuer to be entitled to credit therefore as aforesaid which have not theretofore been delivered to the Trustee shall be delivered for cancellation pursuant to Section 2.10 to the Trustee with such written statement (or reasonably promptly thereafter if acceptable to the Trustee). Such written statement shall be irrevocable and upon its receipt by the Trustee the Issuer shall become unconditionally obligated to make all the cash payments or payments therein referred to, if any, on or before the next succeeding sinking fund payment date. Failure of the Issuer, on or before any such sixtieth day, to deliver such written statement and Securities specified in this paragraph, if any, shall not constitute a default but shall constitute, on and as of such date, the irrevocable election of the Issuer (i) that the mandatory sinking fund payment for such series due on the next succeeding sinking fund payment date shall be paid entirely in cash without the option to deliver or credit Securities of such series in respect thereof and (ii) that the Issuer will make no optional sinking fund payment with respect to such series as provided in this Section. If the sinking fund payment or payments (mandatory or optional or both) to be made in cash on the next succeeding sinking fund payment date plus any unused balance of any preceding sinking fund payments made in cash shall exceed $50,000 (or a lesser sum if the Issuer shall so request) with respect to the Securities of any particular series, such cash shall be applied on the next succeeding sinking fund payment date to the redemption of Securities of such series at the sinking fund redemption price together with accrued interest to the date fixed for redemption. If such amount shall be $50,000 or less and the Issuer makes no such request then it shall be carried over until a sum in excess of $50,000 is available. The Trustee shall select, in the manner provided in Section 12.2, for redemption on such sinking fund payment date a sufficient principal amount of Securities of such series to absorb said cash, as nearly as may be, and shall (if requested in writing by the Issuer) inform the Issuer of the serial numbers of the Securities of such series (or portions thereof) so selected. Securities of any series which are (a) owned by the Issuer 90 82 or an entity known by the Trustee to be directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer, as shown by the Security register, and not know to the Trustee to have been pledged or hypothecated by the Issuer or any such entity or (b) identified in an Officers' Certificate at least 60 days prior to the sinking fund payment date as being beneficially owned by, and not pledged or hypothecated by, the Issuer or an entity directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer shall be excluded from Securities of such series eligible for selection for redemption. The Trustee, in the name and at the expense of the Issuer (or the Issuer, if it shall so request the Trustee in writing) shall cause notice of redemption of the Securities of such series to be given in substantially the manner provided in Section 12.2 (and with the effect provided in Section 12.3) for the redemption of Securities of such series in part at the option of the issuer. The amount of any sinking fund payments not so applied or allocated to the redemption of Securities of such series shall be added to the next cash sinking fund payment for such series and, together with such payment, shall be applied in accordance with the provisions of this Section. Any and all sinking fund moneys held on the stated maturity date of the Securities of any particular series (or earlier, if such maturity is accelerated), which are not held for the payment or redemption of particular Securities of such series shall be applied, together with other moneys, if necessary, sufficient for the purpose, to the payment of the principal of, and interest on, the Securities of such series at maturity. On each sinking fund payment date, the Issuer shall pay to the Trustee in cash or shall otherwise provide for the payment of all interest accrued to the date fixed for redemption on Securities to be redeemed on such sinking fund payment date. The Trustee shall not redeem or cause to be redeemed any Securities of a series with sinking fund moneys or provide any notice of redemption of Securities for such series by operation of the sinking fund during the continuance of a default in payment of interest on such Securities or of any Event of Default except that, where the mailing or publication of notice of redemption of any Securities shall theretofore have been made, the Trustee shall redeem or cause to be redeemed such Securities, provided that it shall have received from the Issuer a sum sufficient for such redemption. Except as aforesaid, any moneys in the sinking fund for such series at the time when any such default or Event of Default 91 83 shall occur, and any moneys thereafter paid into the sinking fund, shall, during the continuance of such default or Event of Default, be deemed to have been collected under Article Five and held for the payment of all such Securities. In case such Event of Default shall have been waived as provided in Section 5.10 or the default cured on or before the sixtieth day preceding the sinking fund payment date in any year, such moneys shall thereafter be applied on the next succeeding sinking fund payment date in accordance with this Section to the redemption of such Securities. 92 84 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of November 15, 1988. THE PROGRESSIVE CORPORATION [CORPORATE SEAL] By ----------------------------------------------------------- Attest: By -------------------------------------------------------- THE FIRST NATIONAL BANK OF BOSTON [CORPORATE SEAL] By ----------------------------------------------------------- Attest: By --------------------------------------------------------
93 85 STATE OF NEW YORK COUNTY OF NEW YORK SS.:
On this _______ day of_______________, before me personally came HOWARD M. ZELIKOW, to me personally known, who, being by me duly sworn, did depose and say that he resides at Cleveland, Ohio that he is an officer of THE PROGRESSIVE CORPORATION, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. -------------------------------------------------------------- Notary Public [NOTARIAL SEAL] STATE OF NEW YORK COUNTY OF NEW YORK SS.:
On this _____ day of_______________, before me personally came to me personally known, who, being by me duly sworn,, did depose and say that he resides at New York, New York; that he is an of THE FIRST NATIONAL BANK OF BOSTON, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. -------------------------------------------------------------- Notary Public [NOTARIAL SEAL]
EX-4.E 5 EXHIBIT 4.E 1 [FORM OF FACE OF REGISTERED DEBT SECURITY] NO. R $__________ CUSIP 743315 AC 7 SEE REVERSE FOR CERTAIN DEFINITIONS THE PROGRESSIVE CORPORATION 10% NOTE DUE DECEMBER 15, 2000 THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), for value received, hereby promises to pay to ___________________________________ or registered assigns, at the office or agency of the Issuer at the office of the Trustee in Boston, Massachusetts, the principal sum of __________________ Dollars on December 15, 2000, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest semiannually on June 15 and December 15 of each year, commencing June 15, 1989, on said principal sum at said office or agency, in like coin or currency at the rate per annum specified in the title of this Note, from the June 15 or the December 15, as the case may be, next preceding the date of this Note to which interest has been paid, unless the date hereof is a date to which interest has been paid, in which case from the date of this Note, or unless no interest has been paid on these Notes, in which case from December 15, 1988, until payment of said principal sum has been made or duly provided for; PROVIDED that payment of interest may be made at the option of the Issuer by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. Notwithstanding the foregoing, if the date hereof is after the first day of June or December, as the case may be, and before the following June 15 or December 15, this Note shall bear interest from such June 15 or December 15; PROVIDED, that if the Issuer shall default in the payment of interest due on such June 15 or December 15, then this Note shall bear interest from the next preceding June 15 or December 15 to which interest has been paid or, if no interest has been paid on these Notes, from December 15, 1988. The interest so payable on any June 15 or December 15 will, subject to certain exceptions provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note is registered at the close of business on the June 1 or December 1, as the case may be, next preceding such June 15 or December 15. Reference is made to the further provisions of this Note set forth on the reverse hereof. Such further provisions 2 shall for all purposes have the same effect as though fully set forth at this place. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. IN WITNESS WHEREOF, The Progressive Corporation has caused this instrument to be signed by facsimile by its duly authorized officers, and has caused a facsimile of its corporate seal to be affixed hereunto or imprinted hereon. Dated: Attest: THE PROGRESSIVE CORPORATION /s/ David M. Schneider By /s/ Peter B. Lewis - - - ---------------------- -------------------------------- Secretary President and Chief Executive Officer 3 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 [FORM OF REVERSE OF DEBT SECURITY] THE PROGRESSIVE CORPORATION 10% NOTE DUE DECEMBER 15, 2000 This Note is one of a duly authorized issue of debentures, notes, bonds or other evidences of indebtedness of the Issuer (hereinafter called the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an indenture dated as of November 15, 1988 (herein called the "Indenture"), duly executed and delivered by the Issuer to The First National Bank of Boston, as Trustee (herein called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuer and the holders of the Securities. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption provisions (if any), may be subject to different sinking, purchase or analogous funds (if any) and may otherwise vary as in the Indenture provided. This Note is one of a series designated as the 10% Notes Due December 15, 2000 of the Issuer, limited in aggregate principal amount to $150,000,000. In case an Event of Default with respect to the 10% Notes Due December 15, 2000, as defined in the Indenture, shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Issuer and the Trustee, with the consent of the Holders of not less than 66-2/3% in aggregate principal amount of the Securities at the 4 time Outstanding (as defined in the Indenture) of all series to be affected (voting as one class), evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the Holders of the Securities of each such series; PROVIDED, HOWEVER, that no such supplemental indenture shall (i) extend the final maturity of any Security, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of any interest thereon, or impair or affect the rights of any Holder to institute suit for the payment thereof, without the consent of the Holder of each Security so affected or (ii) reduce the aforesaid percentage of Securities, the Holders of which are required to consent to any such supplemental indenture, without the consent of the Holder of each Security affected. It is also provided in the Indenture that, with respect to certain defaults or Events of Default regarding the Securities of any series, prior to any declaration accelerating the maturity of such Securities, the Holders of a majority in aggregate principal amount Outstanding of the Securities of such series (or, in the case of certain defaults or Events of Default, all or certain series of the Securities) may on behalf of the Holders of all the Securities of such series (or all or certain series of the Securities, as the case may be) waive any such past default or Event of Default and its consequences. The preceding sentence shall not, however, apply to a default in the payment of the principal of or premium, if any, or interest on any of the Securities. Any such consent or waiver by the Holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Note and any Note which may be issued in exchange or substitution herefor, irrespective of whether or not any notation thereof is made upon this Note or such other Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Note in the manner, at the respective times, at the rate and in the coin or currency herein prescribed. The Notes are issuable in registered form without coupons in denominations of $1,000 and any integral multiples of $1,000 at the office or agency of the Issuer at the office of the Trustee in Boston, Massachusetts, and in the manner and subject to the limitations provided in the Indenture, but without the payment of any service charge, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. The Notes are not subject to redemption at the option of the Issuer or through the operation of a sinking fund. 5 Upon due presentment for registration of transfer of this Note at the office or agency of the Issuer at the office of the Trustee in Boston, Massachusetts, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. The Issuer, the Trustee and any authorized agent of the Issuer or the Trustee may deem and treat the registered Holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon), for the purpose of receiving payment of, or on account of, the principal hereof and, subject to the provisions on the face hereof, interest hereon, and for all other purposes, and neither the Issuer nor the Trustee nor any authorized agent of the Issuer or the Trustee shall be affected by notice to the contrary. No recourse under or upon any obligation, covenant or agreement of the Issuer in the Indenture or any indenture supplemental thereto or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, shareholder, officer or director, as such, of the Issuer or of any successor corporation, either directly or through the Issuer or any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance hereof and as part of the consideration for the issue hereof. Terms used herein which are defined in the Indenture shall have the respective meanings assigned thereto in the Indenture. EX-4.I 6 EXHIBIT 4.I 1 January 19, 1994 National City Bank 1900 East Ninth Street Cleveland, OH 44114 Attention: Robert E. Little Vice President Re: The Progressive Corporation; $50 Million Unsecured Credit Line from National City Bank Gentlemen: Reference is hereby made to the $50 million unsecured line of credit provided to The Progressive Corporation ("Progressive") by National City Bank (the "Bank"), as described in the letters dated May 23, 1990 and July 24, 1991 from Robert E. Little, Vice President of the Bank to Progressive, and related or subsequent correspondence. Since the first half of 1993, Progressive has raised over $500 million in capital through the sale of its debt and equity securities in the public market and is, therefore, not currently in need of such a substantial credit line. Accordingly, this letter will evidence our mutual agreement to reduce the above-referenced line of credit from $50 million to $20 million, effective as of February 1, 1994. Commitment fees will be computed on the basis of the reduced credit line. If the foregoing correctly sets forth our mutual agreement with respect to the subject matter hereof, please confirm by signing and dating a copy of this letter and thereafter return a fully executed copy hereof to the undersigned. Sincerely, THE PROGRESSIVE CORPORATION /s/ David M. Schneider David M. Schneider Secretary Agreed as of this 24th day of January, 1994 NATIONAL CITY BANK By: /s/ Robert E. Little ---------------------------------------------- Title: Vice President, Senior Lending Officer ------------------------------------------- EX-4.L 7 EXHIBIT 4.L 1 (Face of Security) REGISTERED REGISTERED No. ________ $___________ CUSIP 743315 AG 8 THE PROGRESSIVE CORPORATION 6.60% NOTE DUE 2004 THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), for value received, hereby promises to pay to or registered assigns, at the office or agency of the Issuer at the office of the Trustee in Canton, Massachusetts, the principal sum of dollars on January 15, 2004, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest semiannually on January 15 and July 15 of each year, commencing on July 15, 1994, on said principal sum at said office or agency, in like coin or currency, at the rate per annum specified in the title of this Note, from the January 15 or the July 15, as the case may be, next preceding the date of this Note to which interest has been paid, unless the date hereof is a date to which interest has been paid, in which case from the date of this Note, or unless no interest has been paid on the Notes, in which case from January 12, 1994, until payment of said principal sum has been made or duly provided for; PROVIDED, that payment of interest may be made at the option of the Issuer by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. Notwithstanding the foregoing, if the date hereof is after the first day of January or July, as the case may be, and before the following January 15 or July 15, this Note shall bear interest from such January 15 or July 15; PROVIDED, that if the Issuer shall default in the payment of interest due on such January 15 or July 15, then this Note shall bear interest from the next preceding January 15 or July 15 to which interest has been paid or, if no interest has been paid on this Note, from January 12, 1994. The interest so payable on any January 15 or July 15 will, subject to certain exceptions provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note is registered at the close of business on the January 1 or July 1, as the case may be, next preceding such January 15 or July 15. 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:_______________________________ President and Chief Executive Officer Attest: _______________________________ 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 3 (Back of Security) THE PROGRESSIVE CORPORATION 6.60% NOTE DUE 2004 This Note is one of a duly authorized issue of debentures, notes, bonds or other evidences of indebtedness of the Issuer (hereinafter called the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an indenture dated as of September 15, 1993 (herein called the "Indenture"), duly executed and delivered by the Issuer to The First National Bank of Boston, as Trustee (herein called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuer and the holders of the Securities. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption provisions (if any), may be subject to different sinking, purchase or analogous funds (if any) and may otherwise vary as in the Indenture provided. This Note is one of a series designated as the 6.60% Notes Due 2004 of the Issuer, limited in aggregate principal amount to $200,000,000. In case an Event of Default, as defined in the Indenture, with respect to the 6.60% Notes Due 2004 shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Issuer and the Trustee, with the consent of the Holders of not less than 66-2/3% in aggregate principal amount of the Securities at the time Outstanding (as defined in the Indenture) of all series to be affected (voting as one class), evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the Holders of the Securities of each such series; PROVIDED, HOWEVER, that no such supplemental indenture shall (i) extend the final maturity of any Security, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of any interest thereon, or impair or affect the rights of any Holder to institute suit for the payment thereof, without the consent of the Holder of each Security so affected or (ii) reduce the aforesaid percentage of Securities, the Holders of which are required to consent to any such supplemental indenture, without the consent of the Holder of each Security so affected. It is also provided in the Indenture -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 may on behalf of the Holders of all the Securities of such series waive any such past default or Event of Default and its consequences. The preceding sentence shall not, however, apply to a default in the payment of the principal of or premium, if any, or interest on any of the Securities. Any such consent or waiver by the Holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Note and any Note which may be issued in exchange or substitution herefor, irrespective of whether or not any notation thereof is made upon this Note or such other Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Note in the manner, at the respective times, at the rate and in the coin or currency herein prescribed. The Notes are issuable in registered form without coupons in denominations of $1,000 and any integral multiple of $1,000 at the office or agency of the Issuer at the office of the Trustee in Canton, Massachusetts, and in the manner and subject to the limitations provided in the Indenture, but without the payment of any service charge. Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. The Notes are not subject to redemption at the option of the Issuer or through the operation of a sinking fund. Upon due presentment for registration of transfer of this Note at the office or agency of the Issuer at the office of the Trustee in Canton, Massachusetts, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. The Issuer, the Trustee and any authorized agent of the Issuer or the Trustee may deem and treat the registered Holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon), for the purpose of receiving payment of, or on account of, the principal hereof and, subject to the provisions on the face hereof, interest hereon, and for all other purposes, and neither the Issuer nor the Trustee nor any authorized agent of the Issuer or the Trustee shall be affected by notice to the contrary. -4- 5 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 CUST -__________________-Custodian JT TEN - as joint tenants with right of survivorship and not as tenants UNIF GIFT MIN ACT - 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 8 EXHIBIT 10.B 1 THE PROGRESSIVE CORPORATION 1994 GAINSHARING PLAN --------------------- 1. The Progressive Corporation and its subsidiaries ("Progressive" or the "Company") have adopted the 1994 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. For those executive officers who participate in the 1994 Executive Bonus Plan, their gainsharing opportunity, if any, 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 sum of (a) the following items actually paid during the Plan year to a participant through the pay period ending immediately prior to the December payment date referred to in Section 7 below: (i) regular, vacation, sick, holiday, funeral and overtime pay, (ii) lump sum merit adjustments based on performance, (iii) retroactive payments of any of the foregoing items relating to the same Plan year and (iv) the earnings replacement component of any worker's compensation award, plus (b) an additional amount equal to what the participant would have earned from the end of such pay period through the end of the Plan year had he continued to receive compensation at the same rate during such period, regardless of his actual compensation during such period. 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 50% Senior Product Managers (PM's) and Senior Division Claims Managers 30%
2
POSITION TARGET % -------- -------- Division DRG's, Function Heads and PM's 20% Regional Claims Managers, Finance Managers, new PM's, new Division DRG's and PM's with small markets 10% Senior Professionals and Managers 7% Professionals and Supervisors 5%
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 Company as a whole, and may be changed from year to year. 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 35% 15% 50% Results ------------------------------------------------------------------- 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 deemed appropriate by the Company's Chief Executive Officer ("CEO") and Chief Operating Officer ("COO"). 3 4 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. In December of each Plan year, results will be estimated for the full Plan year, based on year-to-date performance and other factors. Subject to Section 8 below, full payments for participants with Target Percentages of 5% and 7% will be made in December of each Plan year, based on such estimated results, with upward only adjustments, if any, made no later than (i) the following September 30, or, (ii) if later, within thirty (30) days following the Company's receipt of all market share information necessary to compute final Gainsharing Payment amounts. Subject to Section 8 below, for participants with target percentages of 10% or greater, 90% of the estimated payment will be paid in December and a final payment, if any, made 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. Participants who are employed as of the date of the final Gainsharing Payment determination and who have Target Percentages of 10% or greater are 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 the previous December exceeds the actual annual 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 sums then or thereafter owed by the Company to such participant, whether under this Plan or otherwise. 8. Unless otherwise determined by the Committee, 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. 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. 4 5 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 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 with respect to all employees other than executive officers of the Company. 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 Plan supersedes and replaces The Progressive Corporation Management Bonus Plan, as heretofore in effect (the "Prior Plan"), which is and shall be deemed to be terminated as of December 31, 1993 (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, 1994. This Plan shall be effective for 1994 and for each calendar year thereafter unless and until terminated by the Committee. 17. This Plan shall be interpreted and construed in accordance with the laws of the State of Ohio. 5 EX-10.C 9 EXHIBIT 10.C 1 THE PROGRESSIVE CORPORATION 1994 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 1994 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"); provided that the participation of Messrs. Chokel, Lewis, Marlow and Murr (the "senior participants") in the Plan shall be subject to shareholder approval in accordance with the requirements of Section 162(m) of the Internal Revenue Code, as amended (the "Code"), and the rules and regulations promulgated thereunder. 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 of each Plan participant shall be as established by the Committee prior to commencement of the Plan year (or prior to April 1, 1994 with respect to the 2 1994 Plan year), and will be determined through market analysis based on data reported in published national compensation surveys.
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 80% Michael C. Murr Chief Investment Officer 167% David M. Schneider Chief Legal Officer 50% Tiona M. Thompson Chief Human Resources Officer 50% 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 | 60% | 30% | 10% | +---------------+---------------------+-----------------+-----------------+ | 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 the 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 1994 and thereafter until otherwise directed by the Committee, the Target Expense Ratio shall be 34, based on a target LAE Ratio of 10 and a target Underwriting Expense Ratio of 24. 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 [Target Expense Ratio-Actual Expense Ratio] Improvement = 1+ ------------------------------------------- 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 effect of | ROE Performance | | inflation, as reflected in | Score | | 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 may 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. 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 federal, state and local taxes required to be withheld. 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. As it applies to the senior participants, the Plan shall be administered, by the Committee in accordance with the requirements of Section 162(m) of the Code. 7 8 12. 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 senior 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 as to any of the senior participants until approved by Progressive's shareholders in accordance with the requirements of Section 162(m). 13. The Plan will be unfunded and all payments due under the Plan shall be made from Progressive's general assets. 14. 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. 15. 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. 16. 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 Management Bonus Plan, as heretofore in effect (the "Prior Plan"), which is and shall be deemed to be terminated as of December 31, 1993 (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. 17. This Plan is adopted, and subject to the provisions of Paragraph 3 hereof is to be effective, as of January 1, 1994. Subject to the provisions of Paragraph 3, this Plan shall be effective for 1994 and for each year thereafter unless and until terminated by the Committee. 18. This Plan shall be interpreted and construed in accordance with the laws of the State of Ohio. 8 EX-11 10 EXHIBIT 11 1 EXHIBIT NO. 11 COMPUTATION OF EARNINGS PER SHARE 2 THE PROGRESSIVE CORPORATION COMPUTATION OF EARNINGS PER SHARE (millions - except per share amounts)
1993 1992 1991 ---------------------------------------------------------------------------------- Per Per Per Amount Share Amount Share Amount Share ---------------------------------------------------------------------------------- PRIMARY: Net income $267.3 $153.8 $32.9 Less: Preferred stock dividends (9.2) (9.4) (5.8) ---------------------------------------------------------------------------------- $258.1 $3.59 $144.4 $2.32 $27.1 $ .41 ================================================================================== Average shares outstanding 69.3 60.7 65.4 Net effect of dilutive stock options 2.5 1.6 1.2 ---------------------------------------------------------------------------------- Total 71.8 62.3 66.6 ================================================================================== FULLY DILUTED: Net income $267.3 $153.8 $32.9 Add: Interest on convertible debt instrument (net of taxes) -- 3.0 4.3 Less: Preferred stock dividends (9.2) (9.4) (5.8) ---------------------------------------------------------------------------------- $258.1 $3.58 $147.4 $2.05 $31.4 $ ** ================================================================================== Average shares outstanding 69.3 60.7 65.4 Net effect of dilutive stock options 2.7 2.6 1.2 Net effect of convertible debt instrument -- 8.6 9.0 ---------------------------------------------------------------------------------- Total 72.0 71.9 75.6 ================================================================================== **1991 earnings were antidilutive and, therefore, reported on a primary basis. All share and per share amounts were adjusted for the December 8, 1992 3-for-1 stock split.
EX-13 11 EXHIBIT 13 1 Q - DOES THE PROGRESSIVE CORPORATION HAVE ANY GOOD NEWS TO REPORT? A - WE'RE GLAD YOU ASKED THAT QUESTION. 1993 PERFORMANCE HIGHLIGHTS 4 VISION, CORE VALUES AND OBJECTIVES 6 LETTER TO SHAREHOLDERS 13 FINANCIAL REVIEW 32 2 Photograph: "Wheels Triptych," Zeke Berman, 1994 3 2 - 3 FINANCIAL HIGHLIGHTS
(millions--except per share amounts) Average Annual Compounded Rate of Increase (Decrease) FOR THE YEAR 1993 1992 % CHANGE 1989-1993 1984-1993 Direct premiums written . . . . . . . . . . . $ 1,966.4 $ 1,636.8 20 8 23 Net premiums written . . . . . . . . . . . . 1,819.2 1,451.2 25 7 22 Net premiums earned . . . . . . . . . . . . . 1,668.7 1,426.1 17 7 21 Total revenues . . . . . . . . . . . . . . . 1,954.8 1,738.9 12 8 22 Income before cumulative effect of accounting change . . . . . . . . . . . . . 267.3 139.6 91 20 28 Net income . . . . . . . . . . . . . . . . . 267.3 153.8 74 20 26 Per share: Income before cumulative effect of accounting change . . . . . . . . . . . . 3.58 1.85 94 24 28 Net income . . . . . . . . . . . . . . . . 3.58 2.05 75 24 26 Underwriting margin . . . . . . . . . . . . . 10.7% 3.5% AT YEAR-END Consolidated shareholders' equity . . . . . . $ 997.9 $ 629.0 59 19 29 Common Shares outstanding . . . . . . . . . . 72.1 67.1 7 (2) -- Book Value per Common Share . . . . . . . . . $ 12.62 $ 7.94 59 20 27 Return on average shareholders' equity . . . 36.0% 34.7% STOCK PRICE APPRECIATION 1 1-YEAR 5-YEAR 10-YEAR Progressive . . . . . . . . . . . . . . . . . 39.8% 40.7% 28.2% S&P 500 . . . . . . . . . . . . . . . . . . . 10.1% 14.6% 14.9% 1 Assumes dividend reinvestment.
4 1993 PERFORMANCE HIGHLIGHTS Q - HOW DID PROGRESSIVE PERFORM AGAINST THE PROPERTY-CASUALTY INDUSTRY? A - GREAT! OUR 10.7 PERCENT COMPANYWIDE UNDERWRITING PROFIT MARGIN WAS ALMOST 20 POINTS BETTER THAN THE INDUSTRY, THE 5TH TIME IN 15 YEARS THAT WE EXCEEDED THE INDUSTRY BY MORE THAN 15 POINTS. Q - HOW DID THE CORE BUSINESS DO? A - THE CORE BUSINESS CONTINUES TO GROW PROFITABLY, DESPITE MORE COMPANIES TRYING TO WRITE IN THE NONSTANDARD AUTO NICHE. IN 1993, THE CORE BUSINESS GREW 25 PERCENT WITH AN UNDERWRITING PROFIT OF 10 PERCENT. ABOUT THE ART Five years ago, Progressive set out on the path of change. Knowing we have to respond to consumers' dissatisfaction with auto insurance, we are learning how to lower consumers' cost and improve their experience sufficiently to turn their anger into delight. We have redefined our strategy, driven by our strong belief that lower prices, more information, more options and immediate service is what is needed to delight customers. We commissioned artist Zeke Berman to respond visually to this strategy. Berman constructed a series of images representing his unique interpretation of the "car." His beautifully crafted diagrammatic tableaux are assembled into forms that balance whimsy, illusion and invention. Berman's photographs will become part of Progressive's growing collection of contemporary art. Intrigued by the diagrammatic character of Berman's work and the concept of redefinition, our annual report designers looked up the word "progressive" in the dictionary. That inquiry inspired the use of the Merriam-Webster illustrations and many of the graphic elements that appear throughout this annual report. 5 4 - 5 Q - IS PROGRESSIVE IN THE STANDARD/PREFERRED AUTO MARKET? A - YES, WE CONTINUE TESTING OUR STANDARD AND PREFERRED PRODUCTS, AND, IN 1993, THESE PRODUCTS REPRESENTED 4.5 PERCENT OF OUR TOTAL PRIVATE PASSENGER AUTO PREMIUMS. WE ARE THE NINTH LARGEST PRIVATE PASSENGER AUTO INSURER IN THE COUNTRY. Q - HOW DOES PROGRESSIVE DETERMINE HOW MUCH CAPITAL IT NEEDS? A - WHEN WE ANTICIPATE SLOW GROWTH, WE CONSIDER REDUCING CAPITAL. WHEN WE EXPECT RAPID GROWTH, WE INCREASE CAPITAL. OVER THE LAST 20 YEARS, OUR GROWTH RATE HAS RANGED FROM SMALL DECLINES TO NEARLY 70 PERCENT GROWTH AND OUR RATIO OF FUNDED DEBT TO CAPITAL RANGED FROM 61 PERCENT TO 24 PERCENT. ABOUT PROGRESSIVE The Progressive insurance organization began business in 1937. Progressive Casualty Insurance Company was founded in 1956. The Progressive Corporation, an insurance holding company formed in 1965, owns 52 operating subsidiaries and has one mutual insurance company affiliate. The companies provide personal automobile insurance and other specialty property-casualty insurance and related services sold primarily through independent insurance agents in the United States and Canada. The 1993 estimated industry premiums, which include personal auto insurance in the U.S. and Ontario, Canada, as well as insurance for commercial vehicles, were $115 billion and Progressive's share was 1.5 percent. 6 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 free-enterprise system rewards most those who most enhance the health and happiness of their customers, communities and people. Profit motivates Progressive to invest in new ways to do this. Enhancing people's health and happiness is the ultimate goal, and healthy, happy people do it best. Q - IF I SPENT $1,800 TO BUY 100 SHARES OF PROGRESSIVE STOCK IN THE INITIAL PUBLIC OFFERING IN 1971, WHAT WOULD IT BE WORTH TODAY? 7 6 - 7 A - WHAT A GREAT INVESTMENT. AT THE END OF 1993, AFTER ALL OF THE STOCK SPLITS, YOU WOULD HAVE 7,689 SHARES WORTH OVER $311,000 AND RECEIVED OVER $9,000 IN DIVIDENDS -- A 25.5 PERCENT ANNUAL RETURN. 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 successive 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. Most Progressive businesses are managed by a product manager, who is responsible to a Division President. Each business has different capital requirements, risks, growth rate, potential, competition, regulatory issues, cash flows and investment income. We consider these differences when reaching agreement with the product manager and Division President on their volume and profit plans. 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 GDP deflator which was 2.8 percent in 1993, and averaged 3.9 percent over the past five years and ten years). Return on equity was 36.0 percent in 1993, averaged 24.8 percent over the past five years and 25.3 percent over the past ten years. PROFITABILITY Progressive is driven by the goal of producing a four percent underwriting profit. The Core businesses had an underwriting profit of 10.5 percent in 1993, an underwriting profit of 5.8 percent for the past five years and 6.4 percent for the past ten years. Estimated industry results for the personal auto insurance market for the same periods were underwriting losses of 2.0 percent, 5.1 percent and 6.4 percent. Profitability in our Diversified businesses, which include service operations, is measured on a return on revenue basis. We seek a minimum of a ten percent return on revenue in these businesses. For 1993, the return on revenue was 33.7 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 written, which increased 25.5 percent in 1993, 13.3 percent compounded annually over the past five years and 22.5 percent over the past ten years. Net premiums written in the personal auto insurance market for the same periods grew 5.2 percent, 6.0 percent and 8.7 percent. For Diversified businesses, volume is measured by operating revenues (net premiums earned plus service revenue). Operating revenues decreased 17.1 percent in 1993, decreased 14.7 percent compounded annually over the past five years and increased 22.1 percent over the past ten years. 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, 1993, with a market value of $311,000, for a 25.5 percent annual return, compared to the seven percent return achieved by investors in the Standard & Poor's 500 during the same period. In addition, the shareholder received dividends, which were $1,500 in 1993. In the ten years since December 31, 1983, Progressive shareholders have realized compound returns of 28.2 percent, compared to 14.9 percent for the S&P 500. In the five years since December 31, 1988, Progressive shareholders' returns were 40.7 percent, compared to 14.6 percent for the S&P 500. In 1993, the returns were 39.8 percent on Progressive shares and 10.1 percent on 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 $492.2 million to repurchase shares, at an average cost of $6.15 per share. 8 8 - 9
RETURN ON SHAREHOLDERS' EQUITY 1993 LAST 5 YEARS LAST 10 YEARS Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.8% 18.9% 18.9% Companywide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.0 24.8 25.3 UNDERWRITING PROFIT Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 4.0 4.0 Core Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 5.8 6.4 Industry-Personal Auto Insurance Market . . . . . . . . . . . . . . . . (2.0) (5.1) (6.4) GROWTH (ANNUALIZED) Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.8 18.9 18.9 Net Premiums Written Core Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.5 13.3 22.5 Industry-Personal Auto Insurance Market . . . . . . . . . . . . . . . 5.2 6.0 8.7 Operating Revenues Diversified Businesses . . . . . . . . . . . . . . . . . . . . . . . (17.1) (14.7) 22.1
Q - WHAT IS PROGRESSIVE'S MOST IMPORTANT FINANCIAL OBJECTIVE? 9 Photograph: "Three Wheels," Zeke Berman, 1994 10 Photograph: "Tires Diptych," Zeke Berman, 1993 11 Photograph: "Tires Diptych," Zeke Berman, 1993 12 Photograph: "Hubcap Diptych," Zeke Berman, 1993 13 LETTER TO SHAREHOLDERS 12 - 13 RESULTS I am proud to describe Progressive's best ever financial results. We had record annual earnings and insurance premium volume, and achieved the 22nd annual underwriting profit since our founding in 1965. Return on shareholders' equity was 36.0 percent, compared to 34.7 percent in 1992. Net income increased 74 percent to $267.3 million, or $3.58 per share, compared to $153.8 million, or $2.05 per share, in 1992. Operating income increased 52 percent to $197.3 million, or $2.61 per share, compared to $129.8 million, or $1.72 per share, in 1992. Net premiums written increased 25 percent to $1,819.2 million, compared to $1,451.2 million in 1992. We achieved a 10.7 percent underwriting profit, compared to 3.5 percent in 1992. We reduced underwriting and loss adjustment expenses by almost six more percentage points in 1993, after a nine percentage point reduction in 1992. Ninety-three percent of Progressive's net premiums written come from 14 Core divisions, which write insurance for private passenger autos and small commercial and recreational vehicles. Core business net premiums written grew 25 percent to $1,700 million, compared to $1,355 million in 1992. The Core business underwriting profit margin was ten percent, compared to eight percent in 1992. Three smaller Diversified divisions, Financial Services, Risk Management Services and Motor Carrier, provide combinations of service and indemnity to businesses. Diversified divisions' net premiums written and underwriting profit margins were $118 million and 14 percent, respectively, compared to $107 million and minus 33 percent in 1992. The Diversified divisions produced service revenues and pretax profits of $43.7 million and $6.8 million, respectively, compared to $53.3 million service revenue and a $4.3 million pretax loss in 1992. A - THE MOST IMPORTANT OBJECTIVE IS RETURN ON SHAREHOLDERS' EQUITY, WHICH WAS 36.0 PERCENT IN 1993. HOWEVER, WE ARE COMMITTED TO ACHIEVING ALL OUR FINANCIAL OBJECTIVES (ROE, PROFITABILITY AND GROWTH) OVER SUCCESSIVE FIVE-YEAR PERIODS. 14 THE STATE OF OUR BUSINESSES CORE BUSINESS We are in the midst of a multi-year strategy to change and greatly enhance the Core business. We began as almost entirely a provider of niche products through independent insurance agents. Our goal is to become a low-cost provider of a full line of auto insurance and related services, distributed through many different channels. This full product line will be marketed under a distinctive brand based on our commitment to delight customers. The transition strategy is to build on the excellent people, customer-focused divisionalized product manager organization, superb claim service, broad independent agent distribution and creative rate segmentation that are the basis for our extraordinary results to date. In 1993, we made substantial progress by reducing expenses, improving control of loss costs, expanding product offerings, testing new distribution methods and developing the Progressive brand experience. EXPENSES The Core business underwriting expense ratio was reduced to 25.9 percent from 28.4 percent in 1992, compared to the personal auto insurance industry expense ratio of 22.7 percent. Our achievement in lowering expenses was in line with our goal of having a 20 percent expense ratio by the year 2000. The 1993 reductions came from process improvements developed by empowered work teams and from technology like our ProRater (registered trade- mark) Plus program where agents quote and submit applications electronically. LOSS COSTS Payments for policyholders' losses and the expenses associated with handling them were 63.7 percent of 1993 earned premium. Immediate Response (Registered trademark) claims service begins with our customers' understanding that we are available around-the-clock, 24 hours a day, 365 days a year, and WANT THEM TO CALL 1-800-274-4499 immediately--from the scene of their accident or as soon as possible thereafter. During 1993, we improved on key claim service reporting measurements, including median hours between claims occurring and being reported, and the number of claims reported within four hours of occurrence. Once a claim is reported, we try to communicate with all appropriate parties within hours to obtain necessary information, determine damages, assess fault and make a fair settlement offer. This often involves claim reps meeting personally with our insured or claimant within hours of the accident. The percentage of third-party property damage and first-party collision claims closed within seven days of the accident increased from 51 percent in 1992 to 56 percent in 1993. Delivering this claim service cost 9.1 percent of 1993 earned premium, down from 10.7 percent in 1992 and 14.2 percent in 1991. We plan for ten percent loss adjustment expense long-term because we believe it achieves the optimum balance between the cost of adjusting and the costs of settlements, because it takes into account that loss ratios will increase and because we will write more policies with high liability limits. PRODUCT OFFERINGS Our traditional nonstandard auto product provides coverage for people cancelled and rejected by other insurers. However, more insurers are surcharging and retaining the risks they formerly rejected, thereby shrinking the market available to Progressive. Also, there is more low-cost competition for nonstandard drivers. In response, we now, or soon will, offer consumers three different price levels, each with a different commission that produces the same amount net to Progressive. This way agents can choose the commission rate that matches their costs of servicing particular customers, promoting competition and consumer choice. Progressive divides the $94 billion United States personal auto insurance market, which includes recreational vehicles and pick-up trucks, into "nonstandard," "standard" and "preferred." Nonstandard private passenger auto insurance premiums, including all residual market mechanisms, are $18 billion, 19 percent of the total. The other 81 percent is standard and preferred. In 1993, we continued testing standard and preferred products by writing $64 million, 4.5 percent of our total private passenger auto premiums. Q - HAS PROGRESSIVE'S PRODUCTIVITY INCREASED OVER THE LAST FIVE YEARS? 15 14 - 15 We see the chance to become an increasingly important factor in the standard and preferred markets and will expand as we gain understanding of and confidence in our pricing, expense structure and service. Taken with our programs for recreational vehicles and small fleet commercial vehicles, plus auto insurance in Ontario, Canada, our potential market is approximately $115 billion, making Progressive's share 1.5 percent, and leaving us much room to grow. We continually revise rates in every program to reflect loss costs and expenses. During 1993, we became more competitive by reducing rates an average of .8 percent in existing private passenger auto programs. We did this by decreasing expenses and controlling loss costs. This compares with a 1.9 percent increase in 1992 and larger increases in prior years. Offering agents a choice of lower commissions and serving more customers are steps toward offering auto insurance to every auto owner and operator at prices that will be competitive for many. DISTRIBUTION We want consumers to be able to buy Progressive insurance how, when and where THEY choose. We continued testing multiple distribution, which we call "Community Marketing," in the Miami and Tampa markets. These experiments involve consumer advertising, telephone quoting, and allowing customers to buy from an agent, at a company office, over the phone or by mail. Test results are encouraging, have produced some premium in new channels and, most importantly, have dramatically increased premium volume from independent agents, who have been and continue to be Progressive's most important channel of distribution. PROCESS We define a "process" as a collection of inputs, resources and activities focused on creating value for customers and shareholders. Resources include people, capital, technology, information and external suppliers. The key aspect of process management is the design of how inputs and resources work together to delight customers, by reducing the error rate, cost and cycle time of the process. We have a system for Process Leadership where Division Presidents serve in the dual role of line manager for their division and Process Leader for a key element of our business, such as Policy Quoting, Billing and Claims. Working with cross-divisional and cross-functional teams of line people to address specific issues, Process Leaders make key decisions for the process and oversee the design and implementation of "best practices" for the entire Core business for their process. This additional responsibility reinforces Division Presidents becoming a team because they work together not only to decide and execute business strategy but also to integrate processes. EXPERIMENTATION The transition from a niche provider of nonstandard auto to a broad-based provider of personal auto with compelling competitive advantages will take several years. Our approach is to test and refine our techniques in selected markets before expanding any aspect of the change. We have introduced disciplined experimental techniques and closely monitor the performance of all market tests against pre-agreed milestones. CONTROLS Recognizing the challenge of growing fast and simultaneously improving products and processes, we monitor performance against detailed forecasts which are updated monthly, and against monthly customer and employee surveys. We will curtail growth if service levels deteriorate, or if underwriting profit drops below four percent. BRAND We have begun to define a "Progressive Brand" for auto insurance, focusing on creating distinctive and delightful Buying, Ownership and Claims experiences for our customers. The purpose of brand development is to reduce the cost of acquiring a new customer and to increase customer retention. During 1993, we defined and improved internal methods that create positive customer experiences, and created an external com-munication package for the Progressive brand, by testing television, radio, print and targeted direct mail programs. A - IT SURE HAS. OVER THAT PERIOD, OUR DIRECT PREMIUMS WRITTEN GREW 47 PERCENT WHILE THE NUMBER OF EMPLOYEES GREW ONLY FOUR PERCENT. AS A RESULT, OUR DIRECT PREMIUMS PER PERSON INCREASED FROM $228,000 TO $322,000. 16 16 - 17 DIVERSIFIED DIVISIONS Diversified divisions account for seven percent of Progressive's total volume. Past efforts to manage core and diversified divisions in the same way did not recognize important differences between them and detracted from the results of both. In 1993, we separated the Diversified divisions' information, claim handling and incentive compensation systems from those used by the Core divisions, and Diversified divisions began to accept risk in one of our wholly-owned subsidiary insurers, instead of Progressive Casualty, to keep the emerging Progressive brand focused on auto insurance and to insulate the Core business from distractions caused by Diversified divisions' operations. In 1994, we expect to further reduce both the risk in these businesses and their distraction from the Core business. FINANCIAL SERVICES Financial Services' principal product is collateral protection for automobile lenders. The division, enjoying its fourth consecutive profitable year, produced a 13 percent return on $90 million revenue, compared to a 14 percent return on $91 million revenue in 1992. During the year, we were privileged to begin serving Toyota Motor Services, First Interstate Bank and the Associates. RISK MANAGEMENT SERVICES Risk Management Services' 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 insurer controlled by its bank customers. The program is sponsored by the American Bankers Association. In 1993, Risk Management Services produced a 69 percent return on $16 million revenue, compared to 35 percent on $14 million revenue in 1992. MOTOR CARRIER The Motor Carrier Division manages involuntary commercial auto plans (CAIP) and pricing and risk management for select former customers of our defunct Transportation business as well as a growing number of intermediate size trucking companies, reinsuring them to limit Progressive's loss to $100,000 per occurrence. The Division produced a 13 percent return on $44 million revenue, compared to an 11 percent loss on $44 million revenue in 1992. INVESTMENTS AND CAPITAL MANAGEMENT The balance of revenue and profit comes from interest, dividends and capital gains produced by Progressive's invested assets ($2,786.4 million at December 31, 1993, compared to $2,386.1 million at December 31, 1992). These funds are under the management of Progressive Partners, Inc., our investment and capital management subsidiary. Total investment income was $242.4 million before taxes and $177.2 million after taxes, compared to $153.5 million before taxes and $120.0 million after taxes in 1992. On December 31, 1993, our portfolio had $70.2 million in total unrealized gains, compared to $138.7 million at December 31, 1992. In 1993, we realized $107.9 million in capital gains, of which $74.3 million came from selling all the stock we owned in MBNA Corporation. Progressive Partners, which became fully integrated as part of the Company during 1993, is guided by conservative investment and capital management policies which support Progressive's overriding focus on underwriting and are intended to assure that we always have enough capital to support all the insurance premium we can write profitably. In addition to the increase in capital from 1993's record earnings, we raised $177 million by selling common stock, to support the anticipated rapid expansion of our insurance business and to reduce the financial leverage which resulted from previous years' stock repurchases. To assure adequate capital at relatively low cost, we also raised $350 million during 1993 (the last $200 million closed January 12, 1994) by issuing long-term debt securities at some of the lowest interest rates available during the last twenty years. Q - HOW DOES PROGRESSIVE PLAN FOR THE FUTURE? 17 Photograph: "Lens (Headlight, Hubcap, Grill)," Zeke Berman, 1994 18 18 - 19 Photograph: "Headlight, Mirrors, Grill," Zeke Berman, 1993 19 Photograph: "Steering-wheel and Shoe," Zeke Berman, 1993 20 20 - 21 A - WE ANTICIPATE THAT CHANGE IS CONSTANT, ORGANIZE TO EMBRACE IT AND USE OUR ABILITY TO RESPOND QUICKLY AS A TACTICAL ADVANTAGE. WHAT PROGRESSIVE HAS CHANGED AND WHY Progressive's consistent success stems from our great people, clear Core Values, ambitious objectives, high standards, constant creativity, data-driven decision making, customer-focussed organization, excellent partners and unusual flexibility. Our Core Value of "Excellence" guides us to "strive constantly to improve." From our beginning, Progressive has constantly raised standards, added more excellent people, developed better systems and controls, and explored new markets. Our ambition to be a major factor in the extremely competitive private passenger auto insurance business requires creativity in developing ways to attract new customers AND to provide superior service. Six years ago, Progressive was enjoying what was our greatest year until then. As 1987 ended, we were confident that we could sustain profitable growth by continuing to do what we were doing. Eleven months later, we learned just how fast our circumstances can change. In November 1988, we were shocked into action when California voters passed Proposition 103, threatening auto insurance as we knew it. It opened our eyes to auto insurance consumers' anger and mistrust, and our vulnerability to capricious legislation and regulation. Consumer dissatisfaction with auto insurance appeared to put Progressive's existence in danger; we knew we had to do something. We pulled back in California, but the situation required much more positive action. About the same time, we learned that Allstate had passed us in total U.S. volume on OUR specialty of nonstandard auto insurance, making it our most threatening competitor. After 25 years of observing Progressive's success, Allstate and other competitors, like the Penn Central companies, recognized that our high expense ratios and wide profit margins gave them a perfect opportunity to take market share from us by mimicking our programs, operating at lower cost and accepting slimmer profit margins. We saw that Allstate, with its distribution and data advantages, could overwhelm us unless we acted quickly and decisively. Auto owners and operators reward Progressive in direct proportion to how our service, quality and cost compare to their options. In five years of intensive study of U.S. auto owners and operators, we are learning their needs and attitudes. We have concluded that Progressive has an opportunity to continue to grow profitably IF we work within our highly regulated, highly competitive, very staid industry, figuring out how to lower consumers' cost and improve their experience sufficiently to turn their anger with auto insurance to delight. "Re-engineering" is what we have been doing to respond to these threats and opportunities, as well as to the changing environment. The result is Progressive's new strategy for the 1990's. When we set on the path of change five years ago, not only were we uncertain where it would lead, but also did not realize how difficult it would be, how long it would take and how much of what we tried would not work. Our profitable growth has obscured many of the following profound, steady, incremental, continuing changes: bullet EXPENSE REDUCTION -- Our underwriting expenses were among the industry's highest, but we passed them along by constantly increasing prices. Continuing cost reduction is a critically important initiative. We went through painful layoffs in 1991 and 1992, dramatically reducing costs, and we continue to drive them down by implementing operating efficiencies. 21 bullet LOWER PROFIT MARGINS -- Our underwriting profit margins have been among the industry's highest. We have learned that margins greater than four percent are unsustainable and undesirable for the long-term, because good results lure effective competitors happy to operate at lower profit margins, as well as encouraging onerous regulation and legislation. We now strive to achieve our four percent target in each program, but not more, so as to keep prices attractive to customers and to make it more difficult for competitors to charge less and still make a profit. We expect to convert operating improvements into lower prices, written premium growth and subsequent earnings growth. bullet DIVERSIFICATION CURTAILED -- Our diversification efforts--both Transportation and Financial Services--were motivated by our not seeing the growth opportunities in personal auto insurance that we see today. In diversifying, we promoted many programs too fast, before fully understanding all the risks and how to price them. We are now more restrained and disciplined in how we develop new businesses. bullet REDUCED VARIATION -- We encouraged individual, relatively undisciplined experimentation, resulting in unnecessarily expensive variation in our products and processes and some very unprofitable programs. Now we depend on cross-divisional and cross-functional teams, operating under careful control, to manage experiments while we seek to align our products and implement our best practices, driven by customer needs and wants. bullet REDEFINE OUR BUSINESS -- Our concept was that we were in the auto insurance business. Now we know we are in the business of reducing the human trauma and economic costs of auto accidents. Our attitude about auto accidents was that more accidents costing more created a larger auto insurance market and more profit per transaction for us. Now we act on our conviction that we and our customers will be healthier and happier if there are fewer accidents costing less. bullet IMMEDIATE RESPONSE (registered trademark) CLAIMS SERVICE -- Our previous claim service objective (and accomplishment) was to provide the best available from any auto insurer. Now we are creating a whole new standard for auto accident claim service by responding Q - WHAT SERVICE LEVELS CAN CUSTOMERS EXPECT FROM PROGRESSIVE? 22 22 - 23 THE TYPE OF SERVICE THAT CONSUMERS CAN'T EVEN IMAGINE IS POSSIBLE TODAY, BUT WILL BE COMMONPLACE IN THE FUTURE. WE PROVIDE IMMEDIATE RESPONSE TO THEIR REQUESTS FOR CLAIMS AND CUSTOMER SERVICE, 24 HOURS A DAY, SEVEN DAYS A WEEK, 365 DAYS A YEAR. immediately on all claims in ways that delight our customers and claimants. bullet BROADENED MARKET -- Our target customer was cancelled and rejected auto insureds. Now it is all auto owners and operators that can be profitably underwritten. bullet MULTIPLE DISTRIBUTION -- We have historically depended almost entirely on the independent agents to distribute our products, despite knowing we could not stem the agency system's plummeting market share or the threat of that decline to Progressive. Now we are changing consumers' experience of auto insurance AND involving agents in a way that can REVERSE more than 30 years of market share loss by agents. At the same time, we have shifted our focus to the consumer and will distribute our products how, when and where the consumer wants to buy. bullet CONSUMER INFORMATION -- Consumers' comparison shopping for auto insurance required a tiresome, confusing, unreliable search of agents and/or companies to obtain quotes they often found to be inaccurate and difficult to compare. In several states, we now offer consumers comparable, competitive quotes for their specific situation from the companies with the largest market share in their state. bullet INVESTMENT AND CAPITAL MANAGEMENT -- Our philosophy, process and people for managing investments and capital involved policy setting and decision making by a committee comprised of independent money managers, investment bankers, consultants, operating managers and directors. Now investment professionals employed by Progressive are empowered to execute our clear, conservative investment philosophy and to lead it in different directions as circumstances change. bullet CORE AND DIVERSIFIED BUSINESSES -- We worked for years to have all our businesses function within one organization, with the result that each sacrificed something. We are now separating the "Core" and "Diversified" businesses operationally and corporately to achieve the focus that makes both more efficient and effective. bullet TEAMWORK -- Our organization was stable, structured and hierarchical. Now it involves interlocking and constantly changing teams established to understand and meet specific customer needs. Teams disband when their mission is complete. Our people interactions were top down, directive and internally competitive (win-lose). Now they are driven by people consulting and cooperating with each other to find better ways to serve our customers in a Total Quality Management environment (win-win). bullet NEW COMPENSATION SYSTEM -- Our compensation was based on individual skills and scope of authority. It was more generous for the highest paid people, was predominantly salary and was applied inconsistently enough to irritate people. Now it is market-based with the same standards for all people and more aligned with shareholders' interest because total compensation can vary greatly from year to year depending on company, division, team and individual results. Our best performers earn at the top of the market in years we achieve our objectives and more when we surpass them. The new companywide bonus plan, which we call "gainsharing", reinforced these changes by paying Progressive's people $23.4 million for 1993's extraordinary performance. bullet PROCESS LEADERSHIP -- Managing our important processes was impossible when doing so was a staff responsibility, because our excellent, strong-willed Division Presidents liked to do things their own way. Now we achieve regular cost savings and customer service improvements because most Division Presidents are individually responsible for a specific key process, and all have agreed to follow the others' leadership. bullet CONSUMER IDENTITY -- Progressive is virtually unknown except to our agents and customers. We are now defining our "brand" and its symbolism, and beginning to communicate a unified and consistent image in order to develop our consumer franchise. 23 24 - 25 CHANGE AND COMPETITION Making all these changes demanded much of our people. There were disappointments, failures and large costs, but what we have done may allow Progressive to offer all auto owners and operators lifetime insurance, easy comparison shopping, and superb service, as well as providing the lowest cost to many. Progressive will reduce its customers' and claimants' trauma and costs caused by auto accidents with immediate, around-the-clock service, in-person when appropriate on a claim. These changes will work into our businesses slowly and unevenly. Our divisions and departments are in different stages of evolution toward Progressive's vision. The strategy is driven by our strong belief that lower prices, more information, more options and immediate service will delight customers and make it possible for us to achieve our ambitious objectives. In Florida, we are testing how many of these changes operate together. Consumers can now call 1-800-AUTO-PRO( service mark) 24 hours a day, seven days a week, and in ten minutes get an accurate list of the prices charged by State Farm, Allstate, Prudential and Progressive for the caller's particular insurance package. Progressive will accept and guarantee to renew every consumer who chooses to insure with us, and will help them purchase their auto insurance either through an independent insurance agent, at a Progressive operated location, by telephone or through the mail. We will tell callers who ask how to get in touch with the competitors. Once insured with Progressive, our customers can call us at any time about claims, policy changes, payment status and other services. Whenever our customer, the claimant or Progressive feels it is appropriate, a Progressive person will almost always be face-to-face with our customer or the claimant within hours of our receiving the first call. To the extent that competitors effectively copy (and improve on) our good ideas, Progressive will have less opportunity for rapid growth and unusually good profit margins. But that is the beauty of competitive free-enterprise for consumers and for society, and why the system should be honored, nurtured and sustained. If competitors follow Progressive's lead, auto insurance will become less of a political football. Auto insurers will be partners in changing insurance regulation and improving traffic safety, not victims of sometimes opportunistic finger-pointers. The system will work better for consumers, and everybody will win because there will be fewer, less costly accidents that cause less human trauma. Q - WHAT DOES PROGRESSIVE SEE AS AN ESPECIALLY GREAT RISK? 24 Photograph: "Belts Triptych," Zeke Berman, 1994 25 Photograph: "Seatbelt Diptych," Zeke Berman, 1994 26 26 - 27 A - INSURANCE LAWS AND REGULATIONS CHANGE CONTINUALLY. WE REACT PROMPTLY TO THESE CHANGES WHEN THEY PROHIBIT US FROM MAKING OUR TARGET PROFIT MARGINS. RISKS We perceive Progressive's opportunity as one which must be realized now. The risk of competitors copying and improving on what we are doing, or of new restrictive regulation (or both) inhibiting our ability to do it, leads us to want to develop and spread our new price levels, services and ways of doing business throughout the United States as quickly as possible. Here are factors shareholders need to understand concerning 1994 earnings and the risks in our strategy: bullet LEGISLATIVE AND REGULATORY RISK -- Insurance laws and regulations change continually. We react promptly when they prohibit us from making our target profit margins. Such reaction could result in reduced volume. bullet UNPREDICTABLE UNDERWRITING MARGIN AND GROWTH RATE - Margins in auto insurance are inherently unstable. In the short run, pricing to produce our long-time four percent underwriting profit goal means operating earnings may not increase in proportion to volume growth. Our growth rate will be influenced by agent and competitor reaction to our strategies, and by the trend in loss costs. WE CANNOT PREDICT WITH ANY PRECISION THE TIMING AND PACE OF THE DECREASE IN UNDERWRITING MARGINS NOR THE RATE OF GROWTH. bullet OPERATING EARNINGS VOLATILITY -- Growth requires investment in training, new systems and improved processes, and rapid growth can generate expensive mistakes. This risk and our continuing to do nothing to influence current earnings or the price of our stock could make short-term earnings trends difficult to predict. bullet UNPREDICTABLE INVESTMENT INCOME -- The average maturity of our $2.6 billion fixed-income portfolio is approximately two years, meaning investment income is unusually sensitive to short-term interest rates. This could be a positive if rates go up as many predict. bullet PRICING RISK -- We may not yet have learned quite enough to price standard and preferred auto insurance to produce our planned results. This risk is small because our commitment to the philosophy that "Progressive's alternative to making its targeted underwriting profit is not to do business" requires us to change rates immediately when experience dictates. bullet GROWTH ITSELF -- To accomplish our objectives, we must build many new systems, train thousands of claim and telephone service people, continue to improve our claim handling and ability to sell by telephone, align our products, validate new pricing criteria AND simultaneously continue to reduce costs. We have experience managing our planned level of growth (including periods when we grew at 40 percent compounded) but not at our current size. 27 28 - 29 THE FUTURE Progressive can and will lead a wave of change in the United States system for dealing with auto accident injuries and property damage. We believe we will reduce accident victims' trauma and costs, improve how consumers feel about auto insurance and be rewarded handsomely for our leadership. 1993's results are significant, not only because a profit surge is always welcome, but because, heartened by our success, we will pursue our new strategy. We will expand our core private passenger auto insurance business at a pace that will test our ability to provide the service we guarantee, could reduce 1994 and 1995 earnings growth and may unnerve investors who focus disproportionately on short-term earnings. This approach is consistent with our strategy of creating long-term capital appreciation. Much will be required to realize our vision. Thus we begin 1994 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. At Progressive, it is always as if we are just beginning our business and looking 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 1993. We are particularly grateful for our shareholders' continued confidence. Happily, 1993 was a year in which the men and women of Progressive rebounded from the stresses and anxieties implicit in any change. To you, thanks for all your contributions in 1993 and the promise you bring to our future. Joy, Love and Peace Peter B. Lewis, Chairman, President and Chief Executive Officer 28 Photograph: "Road 1, Road 2," Zeke Berman, 1993 29 Photograph: "Tour (Lightbulb and Steering-wheel Diptych)," Zeke Berman, 1993 30 Photograph: "Tour (Lightbulb and Steering-wheel Diptych)," Zeke Berman, 1993 31 1993 Financial Review 32 - 33 Consolidated Financial Statements 34 Management's Discussion and Analysis 47 Ten Year Summaries 50 Loss Reserves 54 Direct Premiums Written by State 54 Quarterly Financial and Common Share Data 55 32 REPORT OF COOPERS & LYBRAND, 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, 1993 and 1992, 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, 1993. 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, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Note 3 to the consolidated financial statements, in 1993, The Progressive Corporation and subsidiaries adopted the provisions of Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." Coopers & Lybrand Cleveland, Ohio January 26, 1994 33 CONSOLIDATED STATEMENTS OF INCOME
(millions-except per share amounts) For the years ended December 31, 1993 1992 1991 NET PREMIUMS WRITTEN $ 1,819.2 $ 1,451.2 $ 1,324.6 ============ =========== =========== REVENUES Premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,668.7 $ 1,426.1 $ 1,286.9 Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 134.5 139.0 144.8 Net realized gains on security sales . . . . . . . . . . . . . . . . . 107.9 14.5 7.4 Service revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.7 53.3 54.0 Proposition 103 reserve reduction . . . . . . . . . . . . . . . . . . . -- 106.0 -- ------------ ----------- ----------- Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,954.8 1,738.9 1,493.1 ------------ ----------- ----------- EXPENSES Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . 1,028.0 930.9 858.0 Policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . 311.6 304.1 313.7 Other underwriting expenses . . . . . . . . . . . . . . . . . . . . . . 151.3 141.5 162.1 Investment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 17.0 22.5 Service expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.9 57.6 56.1 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.7 44.5 47.8 Non-recurring items1 . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 64.6 -- ------------ ----------- ----------- Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,581.7 1,560.2 1,460.2 ------------ ----------- ----------- NET INCOME Income before Federal income taxes . . . . . . . . . . . . . . . . . . 373.1 178.7 32.9 Provision for Federal income taxes . . . . . . . . . . . . . . . . . . 105.8 39.1 -- ------------ ----------- ----------- Income before cumulative effect of accounting change . . . . . . . . . 267.3 139.6 32.9 Cumulative effect of adopting SFAS 109 . . . . . . . . . . . . . . . . -- 14.2 -- ------------ ----------- ----------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267.3 $ 153.8 $ 32.9 ============ =========== =========== PER SHARE Income before cumulative effect: Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.59 $ 2.09 $ .41 Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.58 1.85 .41 Cumulative effect of adopting SFAS 109: Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- .23 -- Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- .20 -- Net income: Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.59 $ 2.32 $ .41 Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.58 2.05 .41 1See Note 5-Debt and Note 10-Related Party Transactions for discussion. All per share amounts were adjusted for the December 8, 1992, 3-for-1 stock split. See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries 34 34 - 35 CONSOLIDATED BALANCE SHEETS
(millions) December 31, 1993 1992 ASSETS Investments: Held-to-maturity: Fixed maturities, at amortized cost (market: $327.4 and $271.2) . . . . . . . . . $ 309.1 $ 250.4 Available-for-sale: Fixed maturities, at market (amortized cost: $1,761.9 and $1,408.0) . . . . . . . 1,792.6 1,437.1 Equity securities, at market (cost: $433.2 and $310.3) . . . . . . . . . . . . . . 453.9 398.6 Short-term investments, at amortized cost (market: $231.3 and $300.5) . . . . . . . 230.8 300.0 ----------- ----------- Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,786.4 2,386.1 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7 22.9 Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.7 27.1 Premiums receivable, net of allowance for doubtful accounts of $8.7 and $8.9 . . . . 380.6 312.0 Reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380.9 357.8 Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84.6 78.0 Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124.6 101.3 Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78.5 58.5 Property and equipment, net of accumulated depreciation of $107.1 and $95.1 . . . . . 106.7 63.5 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.6 33.7 ----------- ----------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,011.3 $ 3,440.9 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 772.0 $ 614.8 Loss and loss adjustment expense reserves . . . . . . . . . . . . . . . . . . . . . . 1,348.6 1,274.2 Policy cancellation reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.1 52.1 Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 355.6 302.3 Funded debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477.1 568.5 ----------- ----------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,013.4 2,811.9 ----------- ----------- 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 3.6 and 4.0) . . . . . . . . . . . . . . . . . . . . . . . . . . 87.9 96.4 Common Shares, $1.00 par value (authorized 200.0, issued 82.2 and 77.1, including treasury shares of 10.1 and 10.0) . . . . . . . . . . . . . . . . . . . 72.1 67.1 Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357.6 180.7 Net unrealized appreciation on investment securities . . . . . . . . . . . . . . . . 33.5 77.5 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446.8 207.3 ----------- ----------- Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 997.9 629.0 ----------- ----------- Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . $ 4,011.3 $ 3,440.9 =========== =========== See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries 35 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(millions--except per share amounts) For the years ended December 31, 1993 1992 1991 PREFERRED SHARES, NO PAR VALUE Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 96.4 $ 96.4 -- Sale of Preferred Shares, Series A . . . . . . . . . . . . . . . . . . -- -- $ 96.4 Treasury shares purchased-cost basis . . . . . . . . . . . . . . . . . (8.5) -- -- ------------ ----------- ----------- Balance, End of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 87.9 $ 96.4 $ 96.4 ------------ ----------- ----------- COMMON SHARES, $1 PAR VALUE Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 67.1 $ 21.1 $ 23.1 Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . .1 .5 -- Stock rights issued (cancelled) . . . . . . . . . . . . . . . . . . . -- (.1) -- Sale of Common Shares . . . . . . . . . . . . . . . . . . . . . . . . 5.0 -- -- Treasury shares purchased . . . . . . . . . . . . . . . . . . . . . . (.1) (1.9) (2.0) Capitalization of stock split . . . . . . . . . . . . . . . . . . . . -- 38.5 -- Conversion of convertible debenture . . . . . . . . . . . . . . . . . -- 9.0 -- ------------ ----------- ----------- Balance, End of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 72.1 $ 67.1 $ 21.1 ------------ ----------- ----------- PAID-IN CAPITAL Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 180.7 $ 118.7 $ 126.5 Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . 1.7 3.7 -- Stock rights issued . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 2.8 3.2 Sale of Common Shares . . . . . . . . . . . . . . . . . . . . . . . . 172.0 -- -- Treasury shares purchased . . . . . . . . . . . . . . . . . . . . . . (.3) (10.5) (11.0) Conversion of convertible debenture . . . . . . . . . . . . . . . . . -- 66.0 -- ------------ ----------- ----------- Balance, End of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 357.6 $ 180.7 $ 118.7 ------------ ----------- ----------- NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 77.5 $ 20.7 $ (28.3) Change in net unrealized appreciation (depreciation) . . . . . . . . . (44.0) 56.8 49.0 ------------ ----------- ----------- Balance, End of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 33.5 $ 77.5 $ 20.7 ------------ ----------- ----------- RETAINED EARNINGS Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 207.3 $ 208.8 $ 287.2 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267.3 153.8 32.9 Cash dividends on Preferred Shares (9 3/8% annually) . . . . . . . . . (9.2) (9.4) (5.7) Cash dividends on Common Shares ($.200, $.191 and $.172 per share, split effected) . . . . . . . . . . . . . . . . (13.9) (11.4) (11.3) Treasury shares purchased: Preferred Shares . . . . . . . . . . . . . (1.3) -- -- Common Shares . . . . . . . . . . . . . . . (2.0) (93.5) (94.3) Capitalization of stock split . . . . . . . . . . . . . . . . . . . . -- (38.5) -- Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.4) (2.5) -- ------------ ----------- ----------- Balance, End of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 446.8 $ 207.3 $ 208.8 ------------ ----------- ----------- TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . $ 997.9 $ 629.0 $ 465.7 ============ =========== =========== 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 36 36 - 37 CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions) For the years ended December 31, 1993 1992 1991 CASH FLOWS FROM OPERATING ACTIVITIES Income before cumulative effect of accounting change . . . . . . . . . $ 267.3 $ 139.6 $ 32.9 Adjustments to reconcile income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 16.1 24.3 28.4 Net realized gains on security sales . . . . . . . . . . . . . . . . . (107.9) (14.5) (7.4) Changes in: Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . 157.2 19.8 51.0 Loss and loss adjustment expense reserves . . . . . . . . . . . . . 74.4 197.1 149.7 Accounts payable and accrued expenses . . . . . . . . . . . . . . . 6.2 (154.9) 139.4 Policy cancellation reserve . . . . . . . . . . . . . . . . . . . . 8.0 (13.5) (4.7) Prepaid reinsurance . . . . . . . . . . . . . . . . . . . . . . . . (6.6) 5.3 (12.7) Reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . (23.1) (103.0) (118.3) Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . (68.6) 11.3 (43.2) Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . (23.3) 8.9 (5.7) Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . 2.0 22.7 (32.9) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.8 7.5 14.1 ------------ ----------- ----------- Net cash provided by operating activities . . . . . . . . . . . . . 323.5 150.6 190.6 CASH FLOWS FROM INVESTING ACTIVITIES Purchases: Held-to-maturity: fixed maturities . . . . . . . . . . . . . . . . (118.1) (135.0) (1,083.0) Available-for-sale: fixed maturities . . . . . . . . . . . . . . . . (1,215.6) (1,089.6) -- equity securities . . . . . . . . . . . . . . . . (358.4) (123.3) (198.6) Sales: Available-for-sale: fixed maturities . . . . . . . . . . . . . . . . 323.7 419.4 -- equity securities . . . . . . . . . . . . . . . . 326.1 134.1 99.6 Maturities, paydowns, calls and other: Held-to-maturity: fixed maturities . . . . . . . . . . . . . . . . 59.5 262.2 813.6 Available-for-sale: fixed maturities . . . . . . . . . . . . . . . . 528.5 354.1 -- Net sales of short-term investments . . . . . . . . . . . . . . . . . . 69.2 188.1 229.5 (Receivable) payable on securities . . . . . . . . . . . . . . . . . . . 55.9 (21.4) 22.6 Purchase of property and equipment . . . . . . . . . . . . . . . . . . (60.0) (17.5) (45.1) Sale of property and equipment . . . . . . . . . . . . . . . . . . . . -- 5.4 -- ------------ ----------- ----------- Net cash used in investing activities . . . . . . . . . . . . . . (389.2) (23.5) (161.4) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options . . . . . . . . . . . . . . . . 1.8 4.2 -- Proceeds from issuance of stock . . . . . . . . . . . . . . . . . . . 177.0 -- 96.4 Proceeds from funded debt . . . . . . . . . . . . . . . . . . . . . . . 148.2 170.0 170.0 Payments of funded debt . . . . . . . . . . . . . . . . . . . . . . . . (240.2) (170.9) (170.8) Dividends paid to shareholders . . . . . . . . . . . . . . . . . . . . (23.1) (20.8) (17.0) Acquisition of treasury shares . . . . . . . . . . . . . . . . . . . . (12.2) (105.9) (107.3) ------------ ----------- ----------- Net cash provided by (used in) financing activities . . . . . . . . 51.5 (123.4) (28.7) ------------ ----------- ----------- Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . (14.2) 3.7 .5 Cash, Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . 22.9 19.2 18.7 ------------ ----------- ----------- Cash, End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.7 $ 22.9 $ 19.2 ============ =========== =========== See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993, 1992 and 1991 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 of which 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. In the opinion of management, there is no present indication of diminished value; however, in accordance with generally accepted accounting principles, $2.4 million of that amount is being amortized over 25 years. 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 other 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 directly as unrealized appreciation or depreciation in shareholders' equity. 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 has no trading securities as of December 31, 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. Financial instruments with off-balance-sheet risk are used in normal investment activities and include commitments to extend credit and various forward, future and interest rate swap positions. Risk is individually evaluated for each position. The difference between the cost and market value of these instruments is included in "net realized gains (losses) on security sales" when realized. 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 for assets using accelerated methods. As of December 31, 1993, the Company had contractual commitments related to the construction of its new corporate office complex totalling $69.4 million, of which $50.5 million had been paid through 1993. Capitalized interest costs were $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. Prior to the second quarter 1992, the Company established a reserve for potential premium refunds under provisions of California Proposition 103; this reserve reduced premiums written and earned $10.2 million in 1992 and $49.7 million in 1991. 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. Loss adjustment expense reserves represent the estimated expenses required to settle these claims and losses. These estimates are reported net of amounts recoverable from salvage and subrogation. The methods of making estimates and establishing these reserves are reviewed regularly, and resulting adjustments are reflected in income currently. A supplemental loss reserve provides 98 percent statistical confidence that reserves are adequate. The supplemental reserve was $73.1 million (net of $17.6 million of reinsurance recoverables) at both December 31, 1993 and 1992. See Management's Discussion and Analysis for further discussion. 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 for both the primary and fully diluted earnings per share calculations. Primary earnings per share are computed using the weighted number of Common Shares and equivalents, including stock options, assumed outstanding during the period. For 1992 and prior, fully diluted earnings per share assumed the conversion of the convertible debt instrument and the effects of related interest expense and income taxes. The Progressive Corporation and Subsidiaries 38 38 - 39 DEFERRED ACQUISITION COSTS Deferred acquisition costs include commissions, premium taxes and other costs incurred in connection with writing business. These costs are deferred and amortized over the period in which the related premiums are earned. The Company considers anticipated investment income in determining the recoverability of these costs. In 1993, the Company early adopted Statement of Position 93-7, "Reporting on Advertising Costs," which provides guidance on financial reporting of advertising costs. Included in "other assets" for 1993 are $1.6 million of direct-response advertising costs, which are capitalized and amortized over the estimated period of the benefits. Direct-response advertising costs consist primarily of direct mail expenses and are amortized over a two- to four-year 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 $91.0 million, $4.0 million and $30.4 million in 1993, 1992 and 1991, respectively. Total interest paid was $38.3 million for 1993, $44.2 million for 1992 and $47.2 million for 1991. 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 1993 presentation. 2. INVESTMENTS As of December 31, 1993, the Company elected to early adopt Statement of Financial Accounting Standards (SFAS) 115 "Accounting for Certain Investments in Debt and Equity Securities." For 1993, 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) 1993 1992 1991 Held-to-maturity: fixed maturities . . . . . . . . . . $ 17.4 $ 23.2 $ 92.2 Available-for-sale: fixed maturities . . . . . . . . . . 88.7 82.4 -- equity securities . . . . . . . . . . 19.8 23.4 21.4 Short-term investments . . . . . . . . . . . . . . . . . 8.6 10.0 31.2 -------------- -------------- -------------- Investment income . . . . . . . . . . . . . . . . . . . 134.5 139.0 144.8 Gross realized gains: Held-to-maturity: fixed maturities . . . . . . . . . . . 1.0 .5 16.2 Available-for-sale: fixed maturities . . . . . . . . . . 20.9 14.9 -- equity securities . . . . . . . . . 102.3 4.5 8.8 Short-term investments . . . . . . . . . . . . . . . . . -- -- .1 Gross realized losses: Held-to-maturity: fixed maturities . . . . . . . . . . . -- -- (1.0) Available-for-sale: fixed maturities . . . . . . . . . . (4.6) (4.2) -- equity securities . . . . . . . . . (11.7) (1.2) (16.7) -------------- -------------- -------------- Net realized gains on security sales . . . . . . . . . 107.9 14.5 7.4 -------------- -------------- -------------- $ 242.4 $ 153.5 $ 152.2 ============== ============== ==============
Changes in unrealized gains (losses) on fixed maturities and equity securities were:
(millions) 1993 1992 1991 Unrealized gains (losses): Held-to-maturity: fixed maturities . . . . . . . . . . . $ (2.5) $ (28.3) $ 35.6 ============== ============== ============== Available-for-sale: fixed maturities . . . . . . . . . . $ 1.6 $ 29.1 $ -- equity securities . . . . . . . . . (67.6) 56.9 74.2 Deferred income taxes . . . . . . . . . . . . . . . . . 22.0 (29.2) (25.2) -------------- -------------- -------------- $ (44.0) $ 56.8 $ 49.0 ============== ============== ==============
39 The composition of the investment portfolio at December 31 was:
GROSS GROSS UNREALIZED UNREALIZED MARKET (millions) COST GAINS LOSSES VALUE 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 ============= ============= ============ =========== 1992 Held-to-maturity: . . . . . . . . . . . . . . . . . . . State and local government obligations . . . . . . . . $ 250.4 $ 21.2 $ (.4) $ 271.2 Available-for-sale: U.S. government obligations . . . . . . . . . . . . . 56.0 .8 (.1) 56.7 State and local government obligations . . . . . . . . 350.8 15.8 (.1) 366.5 Foreign government obligations . . . . . . . . . . . . 31.7 .8 (.1) 32.4 Corporate debt securities . . . . . . . . . . . . . . 88.4 2.3 (.2) 90.5 Asset-backed securities . . . . . . . . . . . . . . . 840.9 11.0 (.7) 851.2 Other debt securities . . . . . . . . . . . . . . . . 40.2 .2 (.6) 39.8 ------------- ------------- ------------ ----------- 1,408.0 30.9 (1.8) 1,437.1 Equity securities . . . . . . . . . . . . . . . . . . 310.3 93.0 (4.7) 398.6 Short-term investments . . . . . . . . . . . . . . . . . 300.0 .5 -- 300.5 ------------- ------------- ------------ ----------- $ 2,268.7 $ 145.6 $ (6.9) $ 2,407.4 ============= ============= ============ ===========
The composition of fixed maturities by maturity at December 31, 1993 was:
(millions) HELD-TO-MATURITY AVAILABLE-FOR-SALE MARKET MARKET COST VALUE COST VALUE Less than one year . . . . . . . . . . . . . . . . . . . $ 42.7 $ 43.0 $ 464.6 $ 477.2 One to five years . . . . . . . . . . . . . . . . . . . 213.4 223.1 1,057.5 1,070.0 Five to ten years . . . . . . . . . . . . . . . . . . . 24.3 26.1 185.3 188.6 More than ten years . . . . . . . . . . . . . . . . . . 28.7 35.2 54.5 56.8 ------------- ------------- ------------ ------------ Total fixed maturities . . . . . . . . . . . . . . . . . $ 309.1 $ 327.4 $ 1,761.9 $ 1,792.6 ============= ============= ============ ============ Securities which do not have a single maturity date are reported at average maturity.
At December 31, 1993, bonds in the principal amount of $51.9 million were on deposit with various regulatory agencies to meet statutory requirements. As of December 31, 1993 and 1992, the Company had committed $46.0 million in uncollateralized lines and letters of credits, of which $0 and $1.7 million, respectively, were outstanding and subject to credit risk as of December 31, 1993 and 1992. In addition, as of December 31, 1993 and 1992, the Company had forward and future positions with contract values of $901.2 million and $375.9 million, respectively, offset by short forward, future or interest rate swap positions (market values of $3.5 million and $1.7 million, respectively), and unmatched short foreign currency positions as of December 31, 1993 with contract values of $80.9 million (market values of $1.9 million); net cash requirements are limited to changes in market values which may vary based upon changes in interest rates and other factors. 40 40 - 41 3. REINSURANCE In 1993, the Company adopted SFAS 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts."SFAS 113 requires 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 has resulted in the Company reporting ceded unearned premium reserves as "prepaid reinsurance premiums" on the balance sheet and reporting ceded unpaid losses and amounts recoverable on paid losses as "reinsurance recoverables." The balance sheet has been restated for the prior period. SFAS 113 also provides risk transfer criteria and prescribes the accounting and reporting standards for reinsurance contracts. The Company reviewed all contracts and determined that there was no impact to its results of operations. 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. See Management's Discussion and Analysis for further discussion. 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, 1993, 69 percent of the "prepaid reinsurance premiums" and 75 percent 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) 1993 1992 1991 WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED Direct premiums . . . . . . . . . . . . . $1,966.4 $1,808.8 $1,636.8 $1,619.4 $1,536.8 $1,486.3 Assumed . . . . . . . . . . . . . . . . . 9.2 9.7 4.3 1.9 .1 .2 Ceded . . . . . . . . . . . . . . . . . . (156.4) (149.8) (189.9) (195.2) (212.3) (199.6) ----------- ----------- ----------- ----------- ----------- ----------- Net premiums . . . . . . . . . . . . . . $1,819.2 $1,668.7 $1,451.2 $1,426.1 $1,324.6 $1,286.9 =========== =========== =========== =========== =========== =========== Losses and loss adjustment expenses are net of reinsurance ceded of $138.8 million in 1993, $196.7 million in 1992 and $155.3 million in 1991.
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) 1993 1992 1991 Income before Federal income taxes . . . $ 373.1 $ 178.7 $ 32.9 =========== =========== =========== Tax at statutory rate . . . . . . . . . . $ 130.6 35% $ 60.8 34% $ 11.2 34% Tax effect of-- Exempt interest income . . . . . . . . . (15.4) (4) (12.9) (7) (16.5) (50) Dividends received deduction . . . . . . (4.3) (1) (6.4) (4) (8.9) (27) Deferred tax asset write-down . . . . . -- -- -- -- 14.2 43 Other items, net . . . . . . . . . . . . (5.1) (2) (2.4) (1) -- -- ----------- ----------- ----------- ----------- ----------- ----------- $ 105.8 28% $ 39.1 22% $ -- --% =========== =========== =========== =========== =========== ===========
The current portion of the Federal income tax provision was $90.3 million in 1993, $8.2 million in 1992 and $20.5 million in 1991. For tax purposes, the alternative minimum tax (AMT) credit carryover was $0 and $13.3 million at December 31, 1993 and 1992, respectively. Due to strong underwriting earnings in the current year, the entire AMT credit carryover was used in 1993. 41 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, 1993 and 1992, the components of the net deferred tax asset were as follows:
(millions) 1993 1992 Deferred tax assets: Unearned premium reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48.1 $ 36.1 Non-deductible accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.4 23.1 AMT credit carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 13.3 Capitalized expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 4.3 Loss discounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 5.3 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 4.5 Deferred tax liabilities: Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43.6) (34.4) Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18.0) (40.0) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.5) -- ------------ ------------ Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13.7 $ 12.2 ============ ============
Deferred Federal income taxes include noninterest bearing special estimated tax deposits made pursuant to Section 847 of the Internal Revenue Code of $40.5 million, $36.5 million and $33.7 million at December 31, 1993, 1992 and 1991, respectively. 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. The $14.2 million write-down of the deferred tax asset in 1991 was required under SFAS 96, "Accounting for Income Taxes," because, based on facts at December 31, 1991, the Company could not demonstrate absolute assurance that the benefit of AMT credit carryover for financial statement purposes would be realized in the future. Effective January 1, 1992, the Company adopted SFAS 109, "Accounting for Income Taxes," which changed the method of accounting for income taxes. Under SFAS 109, the Company was able to demonstrate that the benefit of deferred tax assets was fully realizable. The cumulative effect of adopting SFAS 109 was to restore deferred tax assets and increased net income $14.2 million, or $.20 per share, in 1992. As of December 31, 1993, the Company included in "Federal income taxes" $6.4 million of foreign tax credit carryover. Of this amount, $1.9 million, $2.8 million and $1.7 million will expire at the end of 1996, 1997 and 1998, respectively, unless previously used. 5. DEBT During 1993, the maximum amount of bank borrowings outstanding was $170.0 million, and the daily average amount outstanding was $3.4 million, at an average annual interest rate of 5.3 percent. Funded debt at December 31 consisted of:
(millions) 1993 1992 Revolving credit agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 50.0 Credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 120.0 7% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148.2 -- 8 3/4% Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 69.7 8 3/4% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.8 28.6 10% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149.3 149.3 10 1/8% Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149.2 149.1 Other funded debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 1.8 ------------ ------------ $ 477.1 $ 568.5 ============ ============
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. See Note 12-Subsequent Events. By selecting from available credit options, the Company may elect to pay interest at rates related 42 42 - 43 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. At December 31, 1993, the Company had no borrowings under this arrangement; at December 31, 1992, $50.0 million was outstanding. In May 1990, the Company also entered into a four-year credit facility with Morgan Guaranty Trust Company of New York under which the Company had the right to borrow up to $75.0 million. By selecting from available credit options, the Company could have elected to pay interest at rates related to the London interbank offered rate, the bank's CD rate, a base lending rate or a quoted rate. A commitment fee was payable on any unused portion of the committed facility at the rate of .15 percent per annum. At December 31, 1993 and 1992, the Company had no borrowings under this agreement. In February 1994, the Company terminated this credit facility. See Note 12--Subsequent Events. In October 1989, the Company entered into a five-year credit facility agreement with a group of banks under which the Company secured the right to borrow up to $235.0 million and request an additional $235.0 million. By selecting from available credit options, the Company could have elected to pay interest at rates related to the London interbank offered rate or the greater of the agent bank's base lending rate or a rate based on the Federal funds' rate. A commitment fee was payable on any unused portion of the committed facility at the rate of .125 percent per annum. The agreement provided for a utilization fee not to exceed .10 percent on the average amount of outstanding borrowings. At December 31, 1993, no borrowings were outstanding under this arrangement; at December 31, 1992, $120.0 million was outstanding. In February 1994, the Company terminated this agreement. See Note 12--Subsequent Events. 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 $145.3 million 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." The fair value of this debt was $69.2 million at December 31, 1992. 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 $33.7 million and $31.8 million at December 31, 1993 and 1992, 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 $180.6 million and $181.2 million, respectively, at December 31, 1993 and $170.4 million and $169.1 million, respectively, at December 31, 1992. As of December 31, 1993, the Company is in compliance with its financial debt covenants. The most restrictive financial covenant, which appeared under the recently terminated credit facilities, provided that senior indebtedness could not exceed 200 percent of long-term capital. In January 1994, the Company sold $200.0 million of its 6.60% Notes due 2004. See Note 12--Subsequent Events. Aggregate principal payments on funded debt outstanding at December 31, 1993 are $.4 million for 1994, 1995 and 1996, $.3 million for 1997, $.1 million for 1998 and $480.0 million thereafter. 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 reserves. The Company believes that the ultimate disposition of these and other pending lawsuits will not materially impact the Company's operations or financial position. 7. STATUTORY FINANCIAL INFORMATION At December 31, 1993, $91.5 million of consolidated statutory policyholders' surplus represents net admitted assets of the Company's insurance subsidiaries that are not transferable in the form of dividends, loans or advances to the Company. Generally, the net admitted assets of insurance subsidiaries available for transfer to the Company are restricted by state law and are limited to those net admitted assets, as determined in accordance with statutory accounting principles, which exceed minimum statutory capital requirements. During 1993, the insurance subsidiaries paid aggregate cash dividends of $131.3 million, and one subsidiary returned $32.9 million of previously contributed capital to the Company. Based on the dividend laws currently in effect, the insurance subsidiaries may pay aggregate dividends of $117.1 million in 1994 without prior approval from regulatory authorities. These limitations may change during 1994, which could affect the dividends permitted to be paid without prior approval. Statutory policyholders' surplus was $703.6 million and $658.3 million at December 31, 1993 and 1992, respectively. Statutory net income was $188.6 million, $61.7 million and $76.8 million for the years ended December 31, 1993, 1992 and 1991, respectively. 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, 1993 are as follows (in millions): 1994--$20.2; 1995--$14.5; 1996--$8.8; 1997--$2.6; 1998--$.7; and thereafter--$.1. Total rental expense incurred by the Company for 1993, 1992 and 1991 was $31.3 million, $35.4 million and $33.4 million, respectively. 43 9. EMPLOYEE BENEFIT PLANS RETIREMENT PLANS In 1990, the Company adopted a defined contribution pension plan covering employees hired after December 31, 1988, who meet requirements as to age and length of service. The Company's funding policy was to contribute 1.3 percent of each eligible employee's compensation up to the Social Security wage base. Company contributions were $.7 million in 1993, $.5 million in 1992 and $.3 million in 1991. Effective January 1, 1994, the plan was amended to include all employees who meet requirements as to age and length of service. Under the amended plan, contributions vary from one percent to five percent of compensation up to the Social Security wage base, based on years of eligible service. The Company has a defined benefit pension plan which covered employees hired before January 1, 1989 who met requirements as to age and length of service. This plan was 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) 1993 1992 1991 Actuarial present value of benefit obligations: Vested benefit obligation . . . . . . . . . . . . . . . . . . . . . . $ 15.8 $ 9.2 $ 5.5 ========= ========= ========== Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . $ 16.8 $ 12.3 $ 8.8 ========= ========= ========== Projected benefit obligation for service rendered to date . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16.8 $ 16.6 $ 12.3 Plan assets at fair value, primarily government and corporate taxable bonds . . . . . . . . . . . . . . . . . . . . . 17.9 13.6 16.4 Plan assets net of projected benefit obligation . . . . . . . . . . . . 1.1 (3.0) 4.1 Unrecognized actuarial gains . . . . . . . . . . . . . . . . . . . . . (1.9) (3.6) (8.8) Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . -- .7 .8 Unrecognized transition asset at January 1, 1987, recognized over 21 years . . . . . . . . . . . . . . . . . . . . . . . (.3) (.3) (.4) --------- --------- ---------- Pension liability recognized in the consolidated balance sheets . . . . . . . . . . . . . . . . . . . . . $ (1.1) $ (6.2) $ (4.3) ========= ========= ========== Net pension cost included the following components: Service cost-benefits earned during the period . . . . . . . . . . . . $ 1.9 $ 2.5 $ 2.1 Interest cost on projected benefit obligation . . . . . . . . . . . . 1.2 1.1 .9 Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . (1.2) (1.3) (2.2) Net amortization and deferral . . . . . . . . . . . . . . . . . . . . (.5) (.4) .2 --------- --------- ---------- Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . $ 1.4 $ 1.9 $ 1.0 ========= ========= ==========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0 percent for 1993, 8.0 percent for 1992 and 9.0 percent for 1991. The expected long-term rate of return on assets was 8.0 percent for 1993 and 1992 and 9.0 percent for 1991. The rate of increase in future compensation levels was 8.0 percent in 1992 and 1991. POSTEMPLOYMENT BENEFITS The Company provides various postemployment benefits to former or inactive employees, their beneficiaries and covered dependents. Postemployment benefits include salary continuation and disability-related benefits including workers' compensation and continuation of health care benefits. In 1993, the Company early adopted SFAS 112, "Accounting for Postemployment Benefits," and recognized its obligation of $.9 million at December 31, 1993. The Company's policy is to fund annually the maximum amount of its obligation that can be deducted for Federal income tax purposes. 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, 1993 and 1992 and $1.4 million at December 31, 1991. The Company's policy is to fund annually the maximum amount of its obligation that can be deducted for Federal income tax purposes. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future. LONG-TERM SAVINGS PLAN The Company has a Long-Term Savings Plan (LTSP) under which the Company matches, into Company stock purchase accounts, a maximum of 3.0 percent of an employee's eligible salary or wages contributed to the LTSP. Company contributions were $3.8 million in 1993, $3.6 million in 1992 and $3.7 million in 1991. 44 44 - 45 INCENTIVE COMPENSATION PLANS Under the Company's 1985 Restricted Stock Plan, key employees were awarded Common Shares which vested over future employment periods. An amount equal to the market value of the shares at the date of grant was charged to income over the vesting period. During 1993, the remaining 297,419 shares under this plan vested. No awards may be granted under this plan after December 31, 1993. 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 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 (adjusted for the December 1992 3-for-1 stock split) during the three years ended December 31, follows:
1993 1992 1991 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 . . . . . . 4,123,003 $ 7.666 to 19.833 3,301,176 $ 7.666 to 19.833 2,744,976 $ 7.666 to 18.291 Add (deduct): Granted . . . . . . . . . . 693,325 29.625 1,581,750 15.458 to 18.833 767,100 14.458 to 20.208 Exercised . . . . . . . . . (96,443) 9.250 to 19.666 (531,497) 7.666 to 18.291 -- -- Cancelled . . . . . . . . . (230,998) 9.125 to 29.625 (228,426) 9.125 to 19.375 (210,900) 9.250 to 20.208 ----------- ------------------- ----------- ------------------- ----------- ------------------- End 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 =========== =================== =========== =================== =========== =================== Exercisable, end of year. . . 934,592 $ 7.666 to 19.833 759,238 $ 7.666 to 19.666 788,997 $ 7.666 to 18.291 =========== =================== =========== =================== =========== =================== Available, end of year. . . . 2,808,173 1,270,500 2,623,824 =========== =========== ===========
The amounts charged to income for incentive compensation plans, including a cash bonus program for key members of management and a gainsharing payment to all other employees, were $24.7 million in 1993, $12.0 million in 1992 and $4.7 million in 1991. 10. 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 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 and $6.5 million in 1991. 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 and $19.1 million for 1991. 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. 45 46 - 47 11. 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,
(millions) 1993 1992 1991 PRETAX PRETAX PRETAX REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) Insurance operations . . . $ 1,668.7 $ 177 .8 $ 1,426.1 $ 49.6 $ 1,286.9 $ (46.9) Service operations . . . 43.7 6 .8 53.3 (4.3) 54.0 (2.1) ------------- ------------- ------------ ------------ ------------ ------------ Total operations . . . . 1,712.4 184 .6 1,479.4 45.3 1,340.9 (49.0) Proposition 103 reserve reduction . . . -- -- 106.0 106.0 -- -- Investment income . . . . 242.4 242 .4 153.5 153.5 152.2 152.2 Interest expense and other costs . . . . . -- (53.9) -- (126.1) -- (70.3) ------------- ------------- ------------ ------------ ------------ ------------ Total . . . . . . . . . $ 1,954.8 $ 373 .1 $ 1,738.9 $ 178.7 $ 1,493.1 $ 32.9 ============= ============= ============ ============ ============ ============
12. SUBSEQUENT EVENTS On January 12, 1994, the Company sold $200.0 million of its 6.60% Notes due 2004 in an underwritten public offering. The Notes were priced to yield 6.62 percent. The Notes are noncallable, and interest is payable semiannually. Effective February 1, 1994, the Company cancelled its $75.0 million credit facility with Morgan Guaranty Trust Company of New York and reduced its revolving credit arrangement with National City Bank to $20.0 million from $50.0 million. Effective February 10, 1994, the Company cancelled the remaining $185.0 million under the credit facility agreement with a group of banks. Since the first half of 1993, the Company raised over $500 million through the sale of its debt and equity securities in the public market and, therefore, is not currently in need of these credit facilities. 46 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The consolidated financial statements and the related notes on pages 34 through 46, together with the supplemental information on pages 50 through 55, 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 1993, the Company sold 4,950,000 Common Shares for net proceeds of $177.0 million, $150.0 million of its 7% Notes due 2013 and filed a shelf registration for $200.0 million of its debt securities (in January 1994, the Company sold $200.0 million of its 6.60% Notes due 2004 under the shelf registration statement). During 1993, the Company repurchased .4 million of its Serial Preferred Shares, Series A, for a cost of $9.8 million, repaid $170.0 million borrowed under its credit facilities and redeemed the entire $70.0 million of its 8 1/4 % Debentures. During the three-year period ended December 31, 1993, the Company also sold 4,000,000 Serial Preferred Shares, Series A, for net proceeds of $96.4 million, repurchased 4.4 million Common and Serial Preferred Shares at a total cost of $225.4 million, and decreased its aggregate borrowings $167.3 million. During the same period, The Progressive Corporation received $393.3 million from its insurance subsidiaries, net of capital contributions made to these subsidiaries. The regulatory restrictions on subsidiary dividends are described in Note 7 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, 1993, operations generated a positive cash flow of $664.7 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. Total capital expenditures for the three years ended December 31, 1993, aggregated $122.6 million. In spring 1992, construction began on the Company's new corporate office complex in Mayfield Village, Ohio, and in December 1993, the Company began occupying a portion of this complex. Construction is expected to be completed in 1994. The new facility will consist of approximately 520,000 square feet of space and will replace office space held under expiring leases in a number of locations in the Cleveland area. The cost of the project is currently estimated at $74.8 million, and is being funded through operating cash flows. As of December 31, 1993, $50.5 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 the second quarter 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 47 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. 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 of the portfolio at December 31, 1993, was in short-term and intermediate-term, investment-grade fixed-income securities. Fixed maturity securities which are held-to-maturity and short-term securities are reported at amortized cost; amortized cost of short-term securities approximates market. Available-for-sale securities are held for indefinite periods of time and include fixed maturities and equity securities. The available-for-sale securities are reported at market value with the changes in market value, net of deferred income taxes, reported directly in shareholders' equity as unrealized appreciation or depreciation. As of December 31, 1993, the mark-to-market net gains in the Company's available-for-sale portfolio were $51.4 million ($33.5 million, net of deferred income taxes), compared to $117.4 million ($77.5 million, net of taxes). The weighted average fully taxable equivalent yield of the portfolio was 8.7 percent, 8.6 percent and 9.4 percent as of December 31, 1993, 1992 and 1991, respectively. (See Note 2--Investments, for a more detailed breakdown of the investment portfolio.) As of December 31, 1993, the Company held $122.5 million of Collateralized Mortgage Obligations (CMOs), compared to $189.8 million last year. CMOs held by the Company are highly liquid with readily available quotes, and, at December 31, 1993, have an average life of 1.6 years. Eighty-nine percent of the CMOs held by the Company are rated AAA by Moody's and Standard & Poor's. As of December 31, 1993, the Company's total CMO portfolio had an unrealized loss of $3.7 million, compared to an unrealized gain of $.5 million last year. 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 the rights of debt holders and other creditors of the issuer. As of December 31, 1993, the mark-to-market net gains in the Company's equity portfolio were $20.7 million ($13.5 million, net of taxes), compared to $88.3 million ($58.3 million, net of taxes). 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. 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 Direct premiums written increased 20 percent to $1,966.4 million in 1993, compared to $1,636.8 million in 1992 and $1,536.8 million in 1991. These amounts include premiums written under state-mandated involuntary Commercial Auto Insurance Plans (CAIP), for which the Company retains no indemnity risk, of $98.0 million in 1993, $142.2 million in 1992 and $180.0 million in 1991. The Company provides policy and claim processing services to 28 state CAIPs, compared to 26 in 1992 and 25 in 1991; the size of the CAIP market continues to decrease. Net premiums written increased 25 percent to $1,819.2 million, compared to $1,451.2 million in 1992 and $1,324.6 million in 1991. Premiums earned, which are a function of the amount of premiums written in the current and prior periods, increased 17 percent in 1993, compared to 11 percent in 1992 and 8 percent in 1991. In 1989, the Company established a reserve for potential premium rollbacks and refunds under provisions of Proposition 103 and added to the reserve in subsequent years; the reserve reduced premiums written and earned $10.2 million and $49.7 million in 1992 and 1991, respectively. In 1992, the Company settled its financial responsibility under California Proposition 103 and reduced its reserve as described above. In 1993, the Company's Core business' net premiums written grew 25 percent, driven by an increase in unit sales. The Company anticipates continued growth in its Core business in 1994; however, it has begun to price so underwriting margins move down to four percent. As a result, in the short run, operating earnings may not increase in proportion to volume growth. 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 62 percent in 1993, compared to 65 percent in 1992 and 67 percent in 1991. The personnel reductions in late 1991 and early 1992, along with other cost-cutting measures and the favorable run-off of the Transportation business, reduced the Company's losses and loss adjustment expenses. Policy acquisition and other underwriting expenses as a percentage of premiums earned were 28 percent in 1993, compared to 31 percent in 1992 and 37 percent in 1991. The decrease re- 48 flects the cost-cutting measures discussed above, as well as process improvements, changed workflows and lower commission programs. Service revenues were $43.7 million in 1993, compared to $53.3 million in 1992 and $54.0 million in 1991; the decrease in revenues is in conjunction with the decrease in CAIP premiums written. Service businesses generated a pretax operating profit of $6.8 million in 1993, compared to a pretax loss of $4.3 million in 1992 and a pretax loss of $2.1 million in 1991. During 1992, we increased loss adjustment expense reserves $6.2 million. Recurring investment income (interest and dividends) decreased 3 percent to $134.5 million in 1993, 4 percent to $139.0 million in 1992 and 5 percent to $144.8 million in 1991, primarily due to lower prevailing interest rates. Net realized gains on security sales were $107.9 million in 1993, $14.5 million in 1992 and $7.4 million in 1991. 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 percent. Effective January 1, 1992, the Company adopted SFAS 109 and was able to demonstrate that the benefit of deferred tax assets was 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 write-down, as required under SFAS 96, was included in the Federal income tax provision. ENVIRONMENTAL AND PRODUCT LIABILITY EXPOSURES Because the Company has been 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 and, in addition, has a supplemental reserve that is in an amount substantially in excess of the potential exposure for such claims. The Company does not believe that these claims will have a material impact on the Company's liquidity, results of operations or financial condition. However, the ultimate costs of the environmental and product liability claims are inherently difficult to project due to numerous uncertainties, including causation and policy coverage issues, the possible uncollectability of related reinsurance and third party indemnity arrangements, unsettled and sometimes conflicting case law, difficulties in determining the scope of any contamination or injury and the nature and cost of the appropriate remedial action and the number and financial condition of responsible parties and their insurers, among other factors. Most of the Company's exposure for such claims results from Progressive's acquisition in 1985 of American Star Insurance Company, since renamed National Continental Insurance Company. When American Star was acquired, the seller agreed to administer all claims asserted under policies previously written by American Star and to pay all losses incurred under such policies, including those covered by reinsurance then in place on some of the policies. The seller encountered major financial difficulties as a result of losses in Hurricane Andrew and, despite having paid all losses and adjusted all claims on the old business since 1985, has contested its obligation to administer these claims and to pay the losses not being paid by some of the reinsurers. The dispute has been submitted to arbitration and is scheduled to be heard by an arbitration panel during the second quarter. If it is determined that the seller is responsible for all of these losses, the amounts could be material to it. According to a recent study by independent actuaries for the seller, aggregate reserves on this business are about $19.2 million. Of that amount, about $6.3 million is being contested in the arbitration, $7.8 million is the admitted obligation of the seller and the balance is the responsibility of reinsurance sources that are paying their obligations. The Company will continue to monitor these exposures, adjust the related reserves appropriately as additional information becomes known and disclose any material developments. 49 TEN YEAR SUMMARY -- FINANCIAL HIGHLIGHTS
Not covered by report of independent accountants (millions-except per share amounts and number of people employed) 1993 1992 INSURANCE COMPANIES' SELECTED FINANCIAL INFORMATION AND OPERATING STATISTICS-STATUTORY BASIS Reserves: Loss and loss adjustment expense . . . . . . . . . . . . . . . . . . . . . . . . . $1,053.7 $ 994.7 Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688.9 538.5 Policyholders' surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703.6 658.3 Ratios: Net premiums written to policyholders' surplus . . . . . . . . . . . . . . . . . 2.6 2.2 Loss and loss adjustment expense reserves to policyholders' surplus . . . . . . . 1.5 1.5 Loss and loss adjustment expense . . . . . . . . . . . . . . . . . . . . . . . . . 62.6 68.3 Underwriting expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.4 29.8 --------- --------- Statutory combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88.0 98.1 SELECTED CONSOLIDATED FINANCIAL INFORMATION-GAAP BASIS Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,954.8 $1,738.9 Total assets1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,011.3 3,440.9 Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 997.9 629.0 Common Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72.1 67.1 Book value per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12.62 $ 7.94 Return on average shareholders' equity2 . . . . . . . . . . . . . . . . . . . . . . 36.0% 34.7% Funded debt outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 477.1 $ 568.5 Ratio of funded debt to capital . . . . . . . . . . . . . . . . . . . . . . . . . . 32% 47% GAAP underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.7 3.5 Number of people employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,101 5,591 1 Pursuant to SFAS 113, amounts for 1990 through 1992 were restated. (See Note 3--Reinsurance) 2 Net income minus preferred share dividends divided by average common shareholders' equity. All share and per share amounts were adjusted for stock splits.
The Progressive Corporation and Subsidiaries 50 50
1991 1990 1989 1988 1987 1986 1985 1984 $ 901.7 $ 827.4 $ 787.7 $ 685.5 $ 496.1 $ 342.0 $ 226.6 $ 153.3 513.6 474.1 467.6 505.0 446.8 323.9 219.4 141.1 676.7 636.7 578.1 495.0 452.0 312.0 230.1 118.9 2.0 1.9 2.0 2.6 2.5 2.5 2.3 2.6 1.3 1.3 1.4 1.4 1.1 1.1 1.0 1.3 65.7 62.1 65.9 62.9 58.3 61.0 65.6 65.0 33.5 31.1 31.4 33.2 35.8 34.3 33.6 37.4 ---------- ---------- ---------- ---------- ---------- ---------- --------- -------- 99.2 93.2 97.3 96.1 94.1 95.3 99.2 102.4 $ 1,493.1 $ 1,376.2 $ 1,392.7 $ 1,355.8 $ 1,066.2 $ 749.4 $ 507.1 $ 303.3 3,317.2 2,912.4 2,643.7 2,316.3 1,782.5 1,259.2 810.8 538.1 465.7 408.5 435.2 417.2 395.0 311.4 118.4 74.8 63.3 69.3 76.2 80.7 86.1 84.0 65.1 65.1 $ 5.83 $ 5.89 $ 5.71 $ 5.17 $ 4.59 $ 3.71 $ 1.82 $ 1.15 6.7% 21.5% 17.4% 25.9% 24.7% 26.9% 36.9% 18.0% $ 644.0 $ 644.4 $ 645.9 $ 479.2 $ 216.9 $ 100.8 $ 158.7 $ 102.4 58% 61% 60% 53% 35% 24% 57% 58% (3.7) 1.0 (1.2) 2.9 5.6 4.3 0.0 (2.4) 6,918 6,370 6,049 5,854 5,879 4,711 3,266 2,243
51 51 TEN YEAR SUMMARY -- GAAP CONSOLIDATED OPERATING RESULTS
Not covered by report of independent accountants (millions-except per share amounts) 1993 1992 Direct premiums written: Personal lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,548.9 $1,214.6 Commercial lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417.5 422.2 ---------- ---------- Total direct premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,966.4 1,636.8 Reinsurance assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 4.3 Reinsurance ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (156.4) (189.9) ---------- ---------- Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,819.2 1,451.2 Net change in unearned premiums reserve1 . . . . . . . . . . . . . . . . . . . . . (150.5) (25.1) ---------- ---------- Premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,668.7 1,426.1 ---------- ---------- Expenses: Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . 1,028.0 930.9 Policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311.6 304.1 Other underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151.3 141.5 ---------- ---------- Total underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,490.9 1,376.5 ---------- ---------- Underwriting profit (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . . 177.8 49.6 Provision (benefit) for Federal income taxes . . . . . . . . . . . . . . . . . . . . 62.2 16.9 ---------- ---------- Underwriting profit (loss) after taxes . . . . . . . . . . . . . . . . . . . . . . . 115.6 32.7 Service operations profit (loss) after taxes . . . . . . . . . . . . . . . . . . . . 4.4 (2.8) ---------- ---------- 120.0 29.9 Investment income after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.1 110.4 Net realized gains (losses) on security sales after taxes . . . . . . . . . . . . . . 70.1 9.6 Interest expense after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25.8) (29.4) Proposition 103 reserve reduction after taxes . . . . . . . . . . . . . . . . . . . . -- 70.0 Non-recurring items after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.6) (42.6) Other income (expense) after taxes 2 . . . . . . . . . . . . . . . . . . . . . . . . (1.5) (8.3) ---------- ---------- Income before Federal tax adjustments and cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . 267.3 139.6 Federal tax adjustments 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- Cumulative effect of accounting change 4 . . . . . . . . . . . . . . . . . . . . . . -- 14.2 ---------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267.3 $ 153.8 ========== ========== Per share Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.58 $ 2.05 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .200 .191 Average equivalent shares Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.8 62.3 Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72.0 71.9 Common Share Price Range High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46 1/8 $ 29 3/8 Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5/8 14 3/4 1 Amount represents change in unearned premiums reserve less change in prepaid reinsurance premiums. 2 Reflects investment expenses after taxes and other tax adjustments. 3 1991 reflects a deferred tax asset write-down; 1990 reflects a fresh start tax benefit; and 1985 reflects benefits from capital loss carry forwards. 4 1992 reflects adoption of SFAS 109, "Accounting for Income Taxes," and 1987 reflects adoption of SFAS 96, "Accounting for Income Taxes." All share and per share amounts were adjusted for stock splits.
The Progressive Corporation and Subsidiaries 52 52 - 53
1991 1990 1989 1988 1987 1986 1985 1984 $ 1,047.4 $ 876.0 $ 800.1 $ 817.0 $ 690.2 $ 526.2 $ 396.4 $ 264.1 489.4 482.8 487.0 521.0 488.0 303.9 145.0 47.1 ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- 1,536.8 1,358.8 1,287.1 1,338.0 1,178.2 830.1 541.4 311.2 .1 .1 7.2 9.4 19.5 9.2 1.6 .1 (212.3) (162.6) (134.0) (72.4) (81.2) (58.4) (20.1) (2.8) ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- 1,324.6 1,196.3 1,160.3 1,275.0 1,116.5 780.9 522.9 308.5 (37.7) (5.1) 36.2 (59.6) (122.1) (103.7) (78.1) (35.0) ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- 1,286.9 1,191.2 1,196.5 1,215.4 994.4 677.2 444.8 273.5 ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- 858.0 762.9 799.3 752.0 571.9 406.6 288.4 176.2 313.7 292.7 296.7 321.3 292.6 190.2 130.1 82.5 162.1 123.7 114.9 106.6 74.4 51.8 26.4 21.4 ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- 1,333.8 1,179.3 1,210.9 1,179.9 938.9 648.6 444.9 280.1 ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- (46.9) 11.9 (14.4) 35.5 55.5 28.6 (.1) (6.6) (15.9) 4.0 (2.9) 10.0 12.2 13.1 (.7) (3.8) ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- (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) -- -- -- ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- (32.4) 10.7 (9.0) 24.2 42.3 15.5 .6 (2.8) 121.1 126.4 135.3 91.3 59.3 49.4 35.9 20.9 4.9 (8.4) (.4) 12.3 (1.9) 5.1 5.4 (2.3) (31.6) (32.0) (32.5) (10.5) (6.5) (3.3) (4.8) (3.3) -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (14.9) (13.2) (15.4) (9.2) (3.4) (2.0) (1.7) 1.4 ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- 47.1 83.5 78.0 108.1 89.8 64.7 35.4 13.9 (14.2) 9.9 -- -- -- -- .2 -- -- -- -- -- 3.7 -- -- -- ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- $ 32.9 $ 93.4 $ 78.0 $ 108.1 $ 93.5 $ 64.7 $ 35.6 $ 13.9 =========== =========== =========== =========== =========== ========== ========== ========== $ .41 $ 1.19 $ .94 $ 1.23 $ 1.08 $ .77 $ .52 $ .21 .172 .160 .147 .133 .077 .019 .017 .016 66.6 72.9 79.8 84.0 86.7 85.5 70.5 65.1 75.6 82.5 89.1 90.9 86.7 85.5 70.5 65.1 $ 20 5/8 $ 18 3/4 $ 14 1/2 $ 10 3/4 $ 11 7/8 $ 12 7/8 $ 7 $ 3 3/4 15 11 7 1/2 7 1/4 8 1/2 6 3/4 3 3/8 3
53 54 - 55 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 AMOUNT1 OF TOTAL UNPAID AT AS RESERVE YEAR (MILLIONS) REDUNDANCY2 DECEMBER 31, 1993 REPORTED DEVELOPMENT 1993 . . . . . . . . . . . . . $1,349 NA 100% 89.3 NA 1992 . . . . . . . . . . . . . 1,274 6% 52 96.5 96.4 1991 . . . . . . . . . . . . . 1,077 7 29 103.7 104.4 1990 . . . . . . . . . . . . . 858 8 18 99.0 99.1 1989 . . . . . . . . . . . . . 750 9 13 101.2 99.7 1988 . . . . . . . . . . . . . 654 7 6 97.1 99.0 1987 . . . . . . . . . . . . . 475 15 3 94.4 93.0 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 96.5 GAAP combined ratio as reported for 1992 was negatively impacted 0.1 points because reserve redundancy which existed at December 31, 1991 increased by $1.8 million during 1992. 1 Pursuant to SFAS 113, amounts for 1990 through 1992 were restated. (See Note 3-Reinsurance.) 2 The percentage will change as claims unpaid at December 31, 1993 are ultimately settled or the reserves adjusted. NA = Not applicable
DIRECT PREMIUMS WRITTEN
Not covered by report of independent accountants (millions) 1993 1992 1991 1990 1989 Florida $ 265.6 13.5% $ 195.3 11.9% $ 173.9 11.3% $ 169.3 12.5% $ 160.4 12.5% Ohio 175.9 8.9 140.7 8.6 137.1 8.9 116.8 8.6 92.9 7.2 New York 170.4 8.7 156.8 9.6 132.1 8.6 105.2 7.7 79.9 6.2 Texas 146.6 7.4 117.0 7.2 96.2 6.3 64.4 4.7 46.9 3.7 Georgia 120.0 6.1 114.6 7.0 122.9 8.0 106.4 7.8 93.3 7.2 Pennsylvania 113.0 5.8 70.1 4.3 52.8 3.4 53.0 3.9 43.8 3.4 California 80.2 4.1 90.6 5.5 156.1 10.2 177.8 13.1 262.5 20.4 All Other 894.7 45.5 751.7 45.9 665.7 43.3 565.9 41.7 507.4 39.4 --------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total $ 1,966.4 100.0% $1,636.8 100.0% $1,536.8 100.0% $1,358.8 100.0% $1,287.1 100.0% ========= ===== ======== ===== ======== ===== ======== ===== ======== =====
The Progressive Corporation and Subsidiaries 54 QUARTERLY FINANCIAL AND COMMON SHARE DATA
Not covered by report of independent accountants (millions--except per share amounts) NET INCOME OPERATING INCOME2 OPERATING PER PER HIGH-LOW DIVIDENDS STOCK PRICE YEAR QUARTER REVENUES TOTAL SHARE1 TOTAL3 SHARE1 PRICE4 PER SHARE APPRECIATION5 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(6) 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(7) 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% ======= ====== ===== ====== ====== =============== ===== ==== 1991 . . . . . . . 1 318.3 25.7 .34 35.5 .47 20 1/4-15 3/8 .043 2 338.6 9.7 .13 18.6 .24 20 5/8-17 3/8 .043 3 349.3 11.2 .13 25.8 .33 18 3/4-15 1/2 .043 4 334.7 (13.7) (.25)(8) 5.2 .04 18 -15 .043 ------- ------ ----- ------ ------ --------------- ----- ---- 1,340.9 32.9 .41 85.1 1.19 20 5/8-15 .172 6.4% ======= ====== ===== ====== ====== =============== ===== ==== All per share amounts and stock prices were adjusted for the December 8, 1992, 3-for-1 stock split. 1 Presented on a fully diluted basis. For 1993 and 1992, the sum does not equal the total because the average equivalent shares differ in the periods. For 1991, the sum of the quarterly earnings per share does not equal the total because fourth quarter earnings per share were antidilutive and, therefore, reported on a primary basis. 2 Represents net income less realized gains and losses and one-time non-operating items. 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 For the first quarter 1992, income before cumulative effect of accounting change was $21.9 million, or $.28 per share. 7 Adjustments which adversely impacted earnings during the fourth quarter 1992 were the payment to Alfred Lerner (see Note 10-Related Party Transactions for further discussion) and reserve adjustments based on routine actuarial analysis completed during the quarter. 8 Adjustments which adversely impacted earnings during the fourth quarter 1991 were an additional write-down of a deferred tax asset due to the Company's inability to realize this asset under the provisions of SFAS 96, an accrual for severance costs as part of the program finalized during the fourth quarter to further align staffing with declining California volume and to streamline other operations, and reserve adjustments based on routine actuarial analysis completed during the period.
The Progressive Corporation and Subsidiaries 55 DIRECTORS Milton N. Allen1,2,3 Director, Various Corporations B. Charles Ames Partner, Clayton, Dubilier & Rice, Inc. (management consulting) Stephen R. Hardis1,2 Vice Chairman, Chief Financial and Administrative Officer, Eaton Corporation (manufacturing) Peter B. Lewis2 Chairman of the Board, President and Chief Executive Officer Norman S. Matthews3 Consultant, Formerly President, Federated Department Stores, Inc. (retailing) Donald B. Shackelford1,3 Chairman, State Savings Bank (savings and loan) Dr. Paul B. Sigler1 Professor, Yale University and Investigator, Howard Hughes Medical Institute (education) 1 Audit Committee member 2 Executive Committee member 3 Executive Compensation Committee member CORPORATE OFFICERS Peter B. Lewis, Chairman, President and Chief Executive Officer David M. Schneider, Secretary Daniel R. Lewis, Treasurer CORPORATE SUPPORT TEAM Charles B. Chokel Peter B. Lewis Bruce W. Marlow Michael C. Murr David M. Schneider Tiona M. Thompson DIVISION PRESIDENTS, PRODUCT AND PROCESS LEADERS Alan R. Bauer William P. Cadden G. Edward Combs Jeffrey J. Dailey Allan W. Ditchfield W. Thomas Forrester Steven B. Gellen William H. Graves Michael J. Hanerty Stephen G. Klug Moira A. Lardakis Daniel R. Lewis Robert E. Mathe Robert J. McMillan Glenn M. Renwick Andrew W. Rogacki David L. Roush Gregory J. Trapp Robert T. Williams 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 22, 1994, at 10:00 a.m. There were 4,859 shareholders of record on December 31, 1993. 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 a specific stock ownership 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. INTERIM REPORT DISTRIBUTION The Progressive Corporation has discontinued its practice of automatically mailing quarterly reports to shareholders whose shares are registered in the name of a bank, broker or nominee. Any such shareholder wishing to receive copies of the Company's quarterly shareholder reports may annually send a letter requesting the reports to The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box E61, Mayfield Village, Ohio 44143. All requests must be received by April 15 of the year for which such reports are requested. EX-21 12 EXHIBIT 21 1 EXHIBIT NO. 21 SUBSIDIARIES OF THE PROGRESSIVE CORPORATION 2 SUBSIDIARIES OF THE PROGRESSIVE CORPORATION
Jurisdiction Name of Subsidiary of Incorporation ------------------ ---------------- Airy Insurance Center, Inc. Pennsylvania Allied Insurance Agency, Inc. Ohio Auto Insurance Solutions, Inc. Maryland Classic Insurance Company Wisconsin Express Quote Services, Inc. Florida 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 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 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 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 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 Risk Management Services, Inc. Ohio Progressive Southeastern Insurance Company Florida Progressive Transportation Software, Inc. Ohio Pro-West Insurance Company California Marathon Insurance Company California Richmond Transport Corp. Ohio 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 13 EXHIBIT 24 1 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider and Dane A. Shrallow, 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 1993, 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 18th day of March, 1994. ------ Position(s) with Signature The Progressive Corporation - - - --------- --------------------------- /s/ Milton N. Allen - - - ----------------------- Milton N. Allen Director 2 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider and Dane A. Shrallow, 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 1993, 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 18th day of March, 1994. ------ Position(s) with Signature The Progressive Corporation - - - --------- --------------------------- /s/ B. Charles Ames - - - --------------------------- B. Charles Ames Director 3 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider and Dane A. Shrallow, 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 1993, 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 18th day of March, 1994. ------ Position(s) with Signature The Progressive Corporation - - - --------- --------------------------- /s/ Stephen R. Hardis - - - --------------------------- Stephen R. Hardis Director 4 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider and Dane A. Shrallow, 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 1993, 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 18th day of March, 1994. ------ Position(s) with Signature The Progressive Corporation - - - --------- --------------------------- /s/ Norman S. Matthews - - - --------------------------- Norman S. Matthews Director 5 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider and Dane A. Shrallow, 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 1993, 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, 1994. ------ Position(s) with Signature The Progressive Corporation - - - --------- --------------------------- /s/ Donald B. Shackelford - - - --------------------------- Donald B. Shackelford Director 6 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider and Dane A. Shrallow, 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 1993, 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, 1994. ------ Position(s) with Signature The Progressive Corporation - - - --------- --------------------------- /s/ Paul B. Sigler - - - ------------------------- Paul B. Sigler Director EX-28 14 EXHIBIT 28 1 Form 2 ANNUAL STATEMENT FOR THE YEAR 1993 OF THE PROGRESSIVE CASUALTY INSURANCE COMPANY - CONSOLIDATED 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. Schedule P Interrogatories (2) Lines of business A through M and R 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) (4) The Instructions to Schedule P contain directions necessary for filling out Schedule P. SCHEDULE P-PART 1-SUMMARY (000 omitted) ________________________________________________________________________________________________________________ 1 | Premiums Earned | Loss and Loss Expense Payments | |_________________________________________|_______________________________________________________| Years In | 2 | 3 | 4 | Loss Payments | Allocated Loss | Which | | | | | Expense Payments | Premiums Were| | | |___________________________|___________________________| Earned and | Direct | | Net | 5 | 6 | 7 | 8 | Losses Were | and | Ceded | (2 - 3) | Direct | | Direct | | Incurred | Assumed | | | and | Ceded | and | Ceded | | | | | Assumed | | Assumed | | _____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| 1. Prior...| X X X X | X X X X | X X X X | 166 | -- | -- | -- | 2. 1984....| 278,917 | 2,710 | 276,207 | 151,693 | 3,395 | 9,603 | 558 | 3. 1985....| 461,512 | 9,660 | 451,852 | 249,322 | 6,052 | 15,616 | 896 | 4. 1986....| 726,141 | 42,619 | 683,522 | 323,320 | 14,867 | 21,454 | 1,092 | 5. 1987....| 1,066,680 | 64,496 | 1,002,184 | 483,181 | 31,692 | 30,297 | 1,361 | 6. 1988....| 1,292,530 | 67,431 | 1,225,099 | 639,622 | 38,605 | 36,928 | 1,167 | 7. 1989....| 1,357,845 | 109,736 | 1,248,109 | 699,815 | 77,904 | 37,234 | 1,275 | 8. 1990....| 1,397,185 | 144,903 | 1,252,282 | 648,489 | 77,979 | 29,603 | 1,280 | 9. 1991....| 1,529,118 | 199,174 | 1,329,944 | 679,480 | 85,984 | 23,269 | 1,877 | 10. 1992....| 1,580,457 | 195,140 | 1,385,317 | 646,074 | 66,034 | 19,080 | 1,504 | 11. 1993....| 1,795,493 | 150,074 | 1,645,419 | 536,547 | 30,449 | 8,649 | 837 | _____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| 12. Totals | X X X X | X X X X | X X X X | 5,057,709 | 432,961 | 231,733 | 11,847 | - - - ----------------------------------------------------------------------------------------------------------------
_______________________________________________________________________ 1 | Loss and Loss Expense Payments | | |__________________________________________| | Years In | 9 | 10 | 11 | 12 | Which | | | | | Premiums Were| Salvage | Unallocated | Total | Number of | Earned and | and | Loss | Net Paid | Claims | Losses Were | Subrogation | Expense | (5 - 6 + 7 | Reported- | Incurred | Received | Payments | - 8 + 10) | Direct and | | | | | Assumed | _____________|_____________|_____________|______________|______________| 1. Prior...| -- | -- | 166 | X X X X | 2. 1984....| 8,426 | 16,448 | 173,791 | X X X X | 3. 1985....| 13,873 | 25,947 | 283,937 | X X X X | 4. 1986....| 16,668 | 40,855 | 369,670 | X X X X | 5. 1987....| 23,777 | 66,641 | 547,066 | X X X X | 6. 1988....| 33,442 | 93,709 | 730,487 | X X X X | 7. 1989....| 36,059 | 107,397 | 765,267 | X X X X | 8. 1990....| 31,514 | 118,799 | 717,632 | X X X X | 9. 1991....| 28,750 | 137,091 | 751,979 | X X X X | 10. 1992....| 28,585 | 104,152 | 701,768 | X X X X | 11. 1993....| 20,711 | 94,786 | 608,696 | X X X X | _____________|_____________|_____________|______________|______________| 12. Totals | 241,806 | 805,825 | 5,650,459 | X X X X | - - - ----------------------------------------------------------------------- Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
______________________________________________________________________________________________________________________________ | Losses Unpaid | Allocated Loss Expenses Unpaid | Years In |_______________________________________________________|_______________________________________________________| Which | Case Basis | Bulk + IBNR | Case Basis | Bulk + IBNR | Premiums Were|___________________________|___________________________|___________________________|___________________________| Earned and | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | Losses Were | Direct | | Direct | | Direct | | Direct | | Incurred | and | Ceded | and | Ceded | and | Ceded | and | Ceded | | Assumed | | Assumed | | Assumed | | Assumed | | _____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| 1. Prior...| 8,397 | 4,121 | 1,263 | -- | -- | -- | -- | -- | 2. 1984....| -- | -- | -- | -- | -- | -- | -- | -- | 3. 1985....| 124 | -- | -- | -- | 26 | 1 | 5 | -- | 4. 1986....| 1,828 | 62 | -- | -- | 223 | 15 | 37 | 1 | 5. 1987....| 2,881 | 297 | 650 | -- | 477 | 118 | 172 | 8 | 6. 1988....| 21,758 | 2,801 | 5,553 | 82 | 2,173 | 476 | 1,242 | 50 | 7. 1989....| 33,238 | 9,264 | 14,991 | 3,088 | 4,817 | 719 | 2,290 | 97 | 8. 1990....| 60,527 | 21,457 | 22,044 | 7,216 | 9,128 | 1,604 | 3,194 | 447 | 9. 1991....| 113,194 | 48,817 | 38,732 | 13,185 | 19,497 | 2,703 | 5,070 | 685 | 10. 1992....| 228,582 | 75,792 | 67,768 | 20,490 | 32,435 | 4,082 | 8,403 | 970 | 11. 1993....| 406,935 | 79,218 | 162,258 | 42,556 | 44,602 | 4,814 | 13,646 | 1,098 | _____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| 12. Totals | 877,464 | 241,829 | 313,259 | 86,617 | 113,378 | 14,532 | 34,059 | 3,356 | - - - ------------------------------------------------------------------------------------------------------------------------------
_______________________________________________________________________ | | | | | Years In | 21 | 22 | 23 | 24 | Which | | | | | Premiums Were| Salvage | Unallocated | Total | Number of | Earned and | and | Loss | Net Losses | Claims | Losses Were | Subrogation | Expenses | and Expenses |Outstanding-| Incurred | Anticipated | Unpaid | Unpaid | Direct and | | | | | Assumed | _____________|_____________|______________|______________|____________| 1. Prior...| -- | -- | 5,539 | X X X X | 2. 1984....| -- | -- | -- | X X X X | 3. 1985....| -- | -- | 154 | X X X X | 4. 1986....| -- | 31 | 2,041 | X X X X | 5. 1987....| 179 | 81 | 3,838 | X X X X | 6. 1988....| 894 | 261 | 27,578 | X X X X | 7. 1989....| 1,422 | 723 | 42,891 | X X X X | 8. 1990....| 2,270 | 1,605 | 65,774 | X X X X | 9. 1991....| 4,231 | 3,753 | 114,856 | X X X X | 10. 1992....| 7,311 | 10,061 | 245,915 | X X X X | 11. 1993....| 7,108 | 35,166 | 534,921 | X X X X | _____________|_____________|______________|______________|____________| 12. Totals | 23,415 | 51,681 | 1,043,507 | X X X X | - - - -----------------------------------------------------------------------
______________________________________________________________________________________________________________________________ | | Loss and Loss Expense Percentage | Discount for Time | Years In | Total Losses and Loss Expenses Incurred| (Incurred/Premiums Earned) | Value of Money | Which |_________________________________________|_________________________________________|___________________________| Premiums Were| | | | | | | | | Earned and | 25 | 26 | 27 | 28 | 29 | 30 | 31 | 32 | Losses Were | Direct | | | Direct | | | | | Incurred | and | Ceded | Net* | and | Ceded | Net | Loss | Loss | | Assumed | | | Assumed | | | | 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 | -- | -- | 2. 1984....| 177,744 | 3,953 | 173,791 | 63.7 | 145.9 | 62.9 | -- | -- | 3. 1985....| 291,040 | 6,949 | 284,091 | 63.1 | 71.9 | 62.9 | -- | -- | 4. 1986....| 387,748 | 16,037 | 371,711 | 53.4 | 37.6 | 54.4 | -- | -- | 5. 1987....| 584,380 | 33,476 | 550,904 | 54.8 | 51.9 | 55.0 | -- | -- | 6. 1988....| 801,246 | 43,181 | 758,065 | 62.0 | 64.0 | 61.9 | -- | -- | 7. 1989....| 900,505 | 92,347 | 808,158 | 66.3 | 84.2 | 64.8 | -- | -- | 8. 1990....| 893,389 | 109,983 | 783,406 | 63.9 | 75.9 | 62.6 | -- | -- | 9. 1991....| 1,020,086 | 153,251 | 866,835 | 66.7 | 76.9 | 65.2 | -- | -- | 10. 1992....| 1,116,555 | 168,872 | 947,683 | 70.6 | 86.5 | 68.4 | -- | -- | 11. 1993....| 1,302,589 | 158,972 | 1,143,617 | 72.5 | 105.9 | 69.5 | -- | -- | _____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| 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 | | | - - - ------------------------------------------------------------------------------------------------------------------------------
_________________________________________________________ | | Net Balance Sheet Reserves | Years In | 33 | After Discount | Which | |_____________________________| Premiums Were| | | | Earned and |Inter-Company| 34 | 35 | Losses Were | Pooling | | Loss | Incurred |Participation| Losses | Expenses | | Percentage | Unpaid | Unpaid | _____________|_____________|______________|______________| 1. Prior...| X X X X | 5,539 | -- | 2. 1984....| | -- | -- | 3. 1985....| | 124 | 30 | 4. 1986....| | 1,766 | 275 | 5. 1987....| | 3,234 | 604 | 6. 1988....| | 24,428 | 3,150 | 7. 1989....| | 35,877 | 7,014 | 8. 1990....| | 53,898 | 11,876 | 9. 1991....| | 89,924 | 24,932 | 10. 1992....| | 200,068 | 45,847 | 11. 1993....| | 447,419 | 87,502 | _____________|_____________|______________|______________| 12. Totals | X X X X | 862,277 | 181,230 | - - - --------------------------------------------------------- *Net = (25 - 26) = (11 + 23)
62 2 Form 2 ANNUAL STATEMENT FOR THE YEAR 1993 OF THE PROGRESSIVE CASUALTY INSURANCE COMPANY - CONSOLIDATED 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 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | | | | | | | | | | | | | | | | | | | _________________|_____________|____________|____________|____________|____________|____________|____________|____________| | | | | | | | | | 1. Prior.......|* 65,434 | 69,540 | 69,142 | 65,204 | 59,965 | 59,312 | 59,171 | 60,014 | 2. 1984........| 165,858 | 159,649 | 160,978 | 159,295 | 158,162 | 157,463 | 156,825 | 156,992 | 3. 1985........| X X X X | 274,757 | 269,226 | 268,315 | 262,237 | 261,392 | 258,581 | 258,380 | 4. 1986........| X X X X | X X X X | 382,994 | 353,616 | 351,417 | 340,706 | 334,564 | 331,385 | 5. 1987........| X X X X | X X X X | X X X X | 555,993 | 524,333 | 504,689 | 492,954 | 490,684 | 6. 1988........| X X X X | X X X X | X X X X | X X X X | 719,839 | 684,469 | 663,722 | 666,604 | 7. 1989........| X X X X | X X X X | X X X X | X X X X | X X X X | 786,249 | 734,190 | 710,990 | 8. 1990........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 751,597 | 692,671 | 9. 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 | X X X X | 792,930 | 10. 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 | X X X X | 11. 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 | ___________________________________________________________________________________________________________________________
_______________________________________________________________________ 1 | (cont.) INCURRED LOSSES | DEVELOPMENT** | |_________________________|___________________________| | | | | | Years | 10 | 11 | 12 | 13 | in Which | | | | | Losses Were | | | One | Two | Incurred | 1992 | 1993 | Year | Year | | | | | | | | | | | _________________|____________|____________|_____________|_____________| | | | | | 1. Prior.......| 60,783 | 62,423 | 1,640 | 2,409 | 2. 1984........| 157,399 | 157,343 | (56)| 351 | 3. 1985........| 258,206 | 258,144 | (62)| (236)| 4. 1986........| 330,779 | 330,825 | 46 | (560)| 5. 1987........| 485,339 | 484,182 | (1,157)| (6,502)| 6. 1988........| 663,150 | 664,095 | 945 | (2,509)| 7. 1989........| 704,871 | 700,038 | (4,833)| (10,952)| 8. 1990........| 676,616 | 663,002 | (13,614)| (29,669)| 9. 1991........| 753,500 | 725,991 | (27,509)| (66,939)| 10. 1992........| 900,892 | 833,470 | (67,422)| X X X X | 11. 1993........| X X X X | 1,013,665 | X X X X | X X X X | ___________________________________________|_____________|_____________| 12. Totals | (112,022)| (114,607)| ----------------------------- *Reported reserves only. Subsequent development relates only to subsequent payments and reserves. **Current year less first or second prior year, showing (redundant) or adverse.
SCHEDULE P - PART 3 - SUMMARY ___________________________________________________________________________________________________________________________ 1 | CUMULATIVE PAID LOSSES AND ALLOCATED EXPENSES REPORTED AT YEAR END (000 OMITTED) | |________________________________________________________________________________________________________| | | | | | | | | | Years | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | in Which | | | | | | | | | Losses Were | | | | | | | | | Incurred | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | | | | | | | | | | | | | | | | | | | _________________|_____________|____________|____________|____________|____________|____________|____________|____________| | | | | | | | | | 1. Prior.......| 000 | 25,067 | 40,710 | 49,780 | 53,380 | 53,955 | 54,843 | 55,936 | 2. 1984........| 81,358 | 122,069 | 137,889 | 147,816 | 151,498 | 154,009 | 155,729 | 156,060 | 3. 1985........| X X X X | 134,374 | 202,467 | 228,629 | 243,849 | 251,045 | 255,162 | 256,497 | 4. 1986........| X X X X | X X X X | 168,353 | 255,882 | 291,744 | 312,656 | 322,815 | 326,820 | 5. 1987........| X X X X | X X X X | X X X X | 240,199 | 360,939 | 420,316 | 447,789 | 467,599 | 6. 1988........| X X X X | X X X X | X X X X | X X X X | 318,747 | 482,587 | 545,480 | 582,880 | 7. 1989........| X X X X | X X X X | X X X X | X X X X | X X X X | 362,510 | 521,039 | 595,914 | 8. 1990........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 354,849 | 499,445 | 9. 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 | X X X X | 369,194 | 10. 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 | X X X X | 11. 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 | - - - ---------------------------------------------------------------------------------------------------------------------------
_______________________________________________________________________ 1 | (cont.) CUMULATIVE PAID | | | |_________________________| 12 | 13 | | | | | | Years | 10 | 11 | Number of | Number of | in Which | | | Claims | Claims | Losses Were | | | Closed | Closed | Incurred | 1992 | 1993 | With Loss | Without | | | | Payment | Loss | | | | | Payment | _________________|____________|____________|_____________|____________| | | | | | 1. Prior.......| 56,718 | 56,884 | X X X X | X X X X | 2. 1984........| 157,239 | 157,343 | X X X X | X X X X | 3. 1985........| 257,708 | 257,991 | X X X X | X X X X | 4. 1986........| 328,152 | 328,815 | X X X X | X X X X | 5. 1987........| 476,252 | 480,425 | X X X X | X X X X | 6. 1988........| 617,027 | 636,778 | X X X X | X X X X | 7. 1989........| 636,386 | 657,870 | X X X X | X X X X | 8. 1990........| 569,700 | 598,833 | X X X X | X X X X | 9. 1991........| 533,684 | 614,888 | X X X X | X X X X | 10. 1992........| 415,371 | 597,616 | X X X X | X X X X | 11. 1993........| X X X X | 513,910 | X X X X | X X X X | - - - ----------------------------------------------------------------------- Note: Net of salvage and subrogation received.
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 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | | | | | | | | | | | | | | | | | | | _________________|_____________|____________|____________|____________|____________|____________|____________|____________| | | | | | | | | | 1. Prior.......| 21,330 | 15,292 | 10,493 | 7,382 | 1,830 | 1,798 | 1,671 | 1,667 | 2. 1984........| 30,587 | 12,165 | 7,458 | 4,856 | 2,267 | 1,633 | 57 | -- | 3. 1985........| X X X X | 52,241 | 23,471 | 15,767 | 7,600 | 4,247 | 117 | -- | 4. 1986........| X X X X | X X X X | 83,987 | 35,929 | 23,115 | 10,239 | 3,162 | -- | 5. 1987........| X X X X | X X X X | X X X X | 126,103 | 57,172 | 31,435 | 13,026 | 4,203 | 6. 1988........| X X X X | X X X X | X X X X | X X X X | 161,589 | 70,035 | 33,821 | 14,301 | 7. 1989........| X X X X | X X X X | X X X X | X X X X | X X X X | 179,116 | 62,544 | 27,935 | 8. 1990........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 146,165 | 57,375 | 9. 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 | X X X X | 155,871 | 10. 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 | X X X X | 11. 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 | - - - ---------------------------------------------------------------------------------------------------------------------------
_____________________________________________ 1 | (cont.) BULK AND INCURRED| |__________________________| | | | Years | 10 | 11 | in Which | | | Losses Were | | | Incurred | 1992 | 1993 | | | | | | | _________________|____________|_____________| | | | 1. Prior.......| 1,614 | 1,263 | 2. 1984........| -- | -- | 3. 1985........| 2 | 5 | 4. 1986........| 63 | 36 | 5. 1987........| 178 | 814 | 6. 1988........| 2,013 | 6,663 | 7. 1989........| 15,702 | 14,096 | 8. 1990........| 28,293 | 17,575 | 9. 1991........| 51,534 | 29,932 | 10. 1992........| 151,702 | 54,711 | 11. 1993........| X X X X | 132,250 | - - - ---------------------------------------------
63 -----END PRIVACY-ENHANCED MESSAGE-----