Progressive 2004 Annual Report Download - page 9

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APP.-B-9
(millions, except per share amounts) 2004 2003 2002
Net income, as reported $ 1,648.7 $ 1,255.4 $ 667.3
Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all awards,
net of related tax effects (6.3) (12.8) (16.9)
Net income, pro forma $ 1,642.4 $ 1,242.6 $ 650.4
Earnings per share
Basic – as reported $7.74$ 5.79 $ 3.05
Basic – pro forma 7.71 5.73 2.97
Diluted – as reported $ 7.63 $ 5.69 $ 2.99
Diluted – pro forma 7.62 5.65 2.92
The current year pro forma expense is not representative of the effect on net income for future years since the Company stopped issuing
non-qualified stock option awards as of December 31, 2002.
Supplemental Cash Flow Information Cash includes only bank demand deposits. The Company paid income taxes of $709.0 million,
$579.0 million and $392.0 million in 2004, 2003 and 2002, respectively. Total interest paid was $91.7 million during 2004, $99.0 million
during 2003 and $64.4 million during 2002. Non-cash activity includes the liability for deferred restricted stock compensation and the
changes in net unrealized gains (losses) on investment securities.
The Company effected a 3-for-1 stock split in the form of a dividend to shareholders on April 22, 2002. The Company issued its Common
Shares by transferring $147.0 million from retained earnings to the Common Share account. All share and per share amounts and stock
prices were adjusted to give effect to the split. Treasury shares were not split.
New Accounting Standards The Financial Accounting Standards Board (FASB) issued SFAS 123 (revised 2004), “Share-Based Payment,”
which requires the Company to expense the fair value at the grant date of unvested outstanding stock options. The Company intends to adopt
this statement using the modified prospective application. This new standard is effective for periods beginning after June 15, 2005, and is estimated
to reduce net income by approximately $1.5 million in 2005 and $1.0 million in 2006. The Company will not incur any additional expense relating
to stock options in years subsequent to 2006, since the latest vesting date of stock options previously granted is January 1, 2007.
Excluding the new standard discussed above, the other accounting standards recently issued by the FASB, Statements of Position and
Practice Bulletins issued by the American Institute of Certified Public Accountants and consensus positions of the Emerging Issues Task
Force are currently not applicable to the Company and, therefore, would have no effect on the Company’s financial condition, cash flows or
results of operations.
Reclassifications Certain amounts in the financial statements for prior periods were reclassified to conform to the 2004 presentation.