-----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, PKfuSqjlnT9xArigcNYarAK+eSgVUTzjra6zzAkanoc0p4JovJqR7o1htd/KgjHx 0OWvurQQMU+gyOuob3bPdQ== 0000004977-95-000023.txt : 19951118 0000004977-95-000023.hdr.sgml : 19951118 ACCESSION NUMBER: 0000004977-95-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951109 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFLAC INC CENTRAL INDEX KEY: 0000004977 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 581167100 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07434 FILM NUMBER: 95588600 BUSINESS ADDRESS: STREET 1: 1932 WYNNTON RD CITY: COLUMBUS STATE: GA ZIP: 31999 BUSINESS PHONE: 4043233431 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN FAMILY CORP DATE OF NAME CHANGE: 19920306 10-Q 1 3RD QUARTER FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarter ended September 30, 1995 Commission File No. 1-7434 AFLAC INCORPORATED ------------------------------------------------------ (Exact name of Registrant as specified in its charter) GEORGIA 58-1167100 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1932 WYNNTON ROAD, COLUMBUS, GEORGIA 31999 ----------------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number, including area code (706) 323-3431 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. Yes X . No . ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class November 3, 1995 - ---------------------------- ------------------ Common Stock, $.10 Par Value 94,752,640 shares AFLAC INCORPORATED AND SUBSIDIARIES INDEX Page No. ---- Part I. Financial Information: Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1995, and December 31, 1994.............. 1 Consolidated Statements of Earnings - Three Months Ended September 30, 1995 and 1994 Nine Months Ended September 30, 1995 and 1994........... 3 Consolidated Statements of Shareholders' Equity - Nine Months Ended September 30, 1995 and 1994........... 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1995 and 1994........... 5 Notes to Consolidated Financial Statements................ 7 Review by Independent Certified Public Accountants............................................. 10 Independent Auditors' Report.............................. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 12 Part II. Other Information: Item 1. Legal Proceedings................................. 24 Item 6. Exhibits and Reports on Form 8-K.................. 24 Items other than those listed above are omitted because they are not required or are not applicable. i Part I. Financial Information AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (In thousands - Unaudited) September 30, December 31, 1995 1994 ------------ ------------ ASSETS Investments: Securities available for sale, at fair value: Fixed maturities (amortized cost, $16,593,479 in 1995 and $14,709,820 in 1994) $ 19,385,647 $ 15,530,694 Equity securities (cost, $74,199 in 1995 and $71,585 in 1994) 99,535 84,373 Mortgage loans on real estate 21,459 25,104 Other long-term investments 4,865 5,038 Short-term investments 497,459 330,916 ------------- ------------- Total investments 20,008,965 15,976,125 Cash 18,060 17,643 Receivables, primarily premiums 325,209 303,748 Accrued investment income 210,409 220,757 Deferred policy acquisition costs 2,596,078 2,402,869 Property and equipment, net 572,476 580,247 Securities held as collateral for loaned securities 980,940 556,937 Intangible assets, net 106,665 109,865 Other 121,959 118,888 ------------- ------------- Total assets $ 24,940,761 $ 20,287,079 ============= ============= See accompanying Notes to Consolidated Financial Statements. (continued) 1 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In thousands, except for per-share amounts - Unaudited) September 30, December 31, 1995 1994 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Policy liabilities: Future policy benefits $ 18,130,146 $ 14,586,171 Unpaid policy claims 1,055,956 929,350 Unearned premiums 333,996 339,514 Other policyholders' funds 172,610 151,572 ------------- ------------- Total policy liabilities 19,692,708 16,006,607 Notes payable 352,437 184,901 Income taxes, primarily deferred 1,444,204 1,392,441 Payable for return of collateral on loaned securities 980,940 556,937 Payables for security transactions 25,048 46,371 Other 385,242 348,055 ------------- ------------- Total liabilities 22,880,579 18,535,312 ------------- ------------- Shareholders' equity: Common stock of $.10 par value. Authorized 175,000; issued 104,208 in 1995 and 104,000 in 1994 10,421 10,400 Additional paid-in capital 201,398 198,099 Unrealized foreign currency translation gains 213,306 174,091 Unrealized gains on securities available for sale 471,501 228,844 Retained earnings 1,506,617 1,277,487 Treasury stock (341,949) (135,776) Notes receivable for stock purchases (1,112) (1,378) ------------- ------------- Total shareholders' equity 2,060,182 1,751,767 ------------- ------------- Total liabilities and shareholders' equity $ 24,940,761 $ 20,287,079 ============= ============= Shareholders' equity per share $ 21.72 $ 17.58 ============= ============= Shares outstanding at end of period 94,835 99,636 ============= ============= See accompanying Notes to Consolidated Financial Statements. 2 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Earnings
(In thousands, except for Three Months Ended September 30, Nine Months Ended September 30, per-share amounts - Unaudited) -------------------------------- ------------------------------- 1995 1994 1995 1994 Revenues: ------------ ------------ ------------ ------------ Premiums, principally supplemental health insurance $ 1,531,396 $ 1,362,309 $ 4,617,262 $ 3,796,341 Net investment income 259,125 217,298 772,168 612,547 Realized investment gains (losses) (64) (248) 85 (345) Other income 21,261 22,152 68,650 66,153 ------------ ------------ ------------ ------------ Total revenues 1,811,718 1,601,511 5,458,165 4,474,696 ------------ ------------ ------------ ------------ Benefits and expenses: Benefits and claims 1,270,332 1,119,696 3,830,392 3,109,235 Acquisition and operating expenses: Amortization of deferred policy acquisition costs 41,016 41,138 123,849 107,762 Insurance commissions 202,562 181,731 609,836 503,834 Insurance expenses 109,856 91,916 321,804 276,939 Interest expense 4,086 3,794 12,096 9,918 Capitalized interest on building construction - - - (2,419) Other operating expenses 32,135 33,724 102,591 97,413 ------------ ------------ ------------ ------------ Total acquisition and operating expenses 389,655 352,303 1,170,176 993,447 ------------ ------------ ------------ ------------ Total benefits and expenses 1,659,987 1,471,999 5,000,568 4,102,682 ------------ ------------ ------------ ------------ Earnings before income taxes 151,731 129,512 457,597 372,014 Income taxes 63,771 53,453 191,848 156,620 ------------ ------------ ------------ ------------ Net earnings $ 87,960 $ 76,059 $ 265,749 $ 215,394 ============ ============ ============ ============ Net earnings per share $ .89 $ .74 $ 2.64 $ 2.08 ============ ============ ============ ============ Shares used in computing earnings per share 98,436 102,812 100,484 103,513 ============ ============ ============ ============ Cash dividends per share $ .13 $ .115 $ .375 $ .33 ============ ============ ============ ============ See accompanying Notes to Consolidated Financial Statements. 3
AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In thousands - Unaudited) Nine Months Ended September 30, 1995 1994 Common stock: -------------- ------------- Balance at beginning of year $ 10,400 $ 10,371 Exercise of stock options 21 19 -------------- ------------ Balance at end of period 10,421 10,390 -------------- ------------ Additional paid-in capital: Balance at beginning of year 198,099 195,730 Exercise of stock options 2,313 1,319 Gain on treasury stock reissued 986 118 -------------- ------------ Balance at end of period 201,398 197,167 -------------- ------------ Unrealized foreign currency translation gains: Balance at beginning of year 174,091 123,294 Change in unrealized translation gains during year 39,215 51,858 -------------- ------------ Balance at end of period 213,306 175,152 -------------- ------------ Unrealized gains on securities available for sale: Balance at beginning of year 228,844 14,811 Change in unrealized gains (losses) during year, net of income taxes 242,657 (205,409) Cumulative effect of accounting change, adopted January 1, 1994 (SFAS 115), net of income taxes - 461,478 -------------- ------------ Balance at end of period 471,501 270,880 -------------- ------------ Retained earnings: Balance at beginning of year 1,277,487 1,029,625 Net earnings 265,749 215,394 Cash dividends on common stock ($.375 per share in 1995, $.33 per share in 1994) (36,619) (33,487) -------------- ------------ Balance at end of period 1,506,617 1,211,532 -------------- ------------ Treasury stock: Balance at beginning of year (135,776) (6,568) Purchases of treasury stock (5,215 shares in 1995 and 3,819 shares in 1994) (213,186) (119,009) Shares issued to sales associates stock plan 7,013 938 -------------- ------------ Balance at end of period (341,949) (124,639) -------------- ------------ Notes receivable for stock purchases (1,112) (1,401) -------------- ------------ Total shareholders' equity $ 2,060,182 $ 1,739,081 ============== ============ See accompanying Notes to Consolidated Financial Statements. 4 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands - Unaudited) Nine Months Ended September 30, ----------------------------- 1995 1994 ------------ ------------ Cash flows from operating activities: Net earnings $ 265,749 $ 215,394 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities 1,964,745 1,615,173 Deferred income taxes 44,455 57,473 Decrease in income taxes payable (5,862) (47,703) Increase in deferred policy acquisition costs (188,326) (196,507) Increase in receivables (26,572) (42,833) Other, net 107,292 116,052 ------------ ------------ Net cash provided by operating activities 2,161,481 1,717,049 ------------ ------------ Cash flows from investing activities: Proceeds from investments sold or matured: Fixed-maturity securities matured or called 451,706 61,303 Fixed-maturity securities sold 515,920 788,222 Equity securities 17,978 37,676 Mortgage loans, net 3,683 34,288 Other long-term, net 173 - Costs of investments acquired: Fixed-maturity securities (2,881,037) (2,204,738) Equity securities (24,038) (30,525) Other long-term, net - (3,078) Short-term, net (174,312) (127,824) Additions to property and equipment, net (13,080) (183,152) ------------ ------------ Net cash used by investing activities (2,103,007) (1,627,828) ------------ ------------ See accompanying Notes to Consolidated Financial Statements. (continued) 5 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) (In thousands - Unaudited) Nine Months Ended September 30, ----------------------------- 1995 1994 ------------ ------------ Cash flows from financing activities: Proceeds from borrowings 209,250 83,000 Principal payments under debt obligations (27,053) (12,384) Dividends paid to shareholders (36,618) (33,487) Purchases of treasury stock (213,186) (119,009) Treasury stock reissued 7,999 1,056 Other, net 2,334 1,338 ------------ ------------ Net cash used by financing activities (57,274) (79,486) ------------ ------------ Effect of exchange rate changes on cash (783) 3,714 ------------ ------------ Net change in cash 417 13,449 Cash at beginning of year 17,643 23,413 ------------ ------------ Cash at end of period $ 18,060 $ 36,862 ============ ============ Supplemental disclosures of cash flow information: Cash payments during the year for: Interest on debt obligations $ 10,080 $ 8,630 Income taxes 153,381 145,932 Non-cash financing activities included capital lease obligations incurred for computer equipment totaling $2,585 in 1995 and $13,594 in 1994. See accompanying Notes to Consolidated Financial Statements. 6 AFLAC INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. In the opinion of management, the accompanying unaudited consolidated financial statements of AFLAC Incorporated and subsidiaries (the "Company") contain all adjustments (none of which were other than normal recurring accruals) necessary to fairly present the financial position as of September 30, 1995, and the results of operations for the three-month and nine-month periods ended September 30, 1995 and 1994, and changes in shareholders' equity and cash flows for the nine months ended September 30, 1995 and 1994. Results of operations for interim periods are not necessarily indicative of results for the entire year. The financial statements should be read in conjunction with the financial statements included in the Company's annual report to shareholders for the year ended December 31, 1994. 2. In August 1995, the Company's board of directors authorized the purchase of up to an additional 5.0 million shares of the Company's common stock. In total, the board of directors has authorized the purchase of up to 14.2 million shares since the initiation of the repurchase program in February 1994. There were 5.2 million shares and 3.8 million shares purchased during the nine months ended September 30, 1995 and 1994, respectively. Through September 30, 1995, a total of 9.4 million shares had been purchased under the repurchase authorizations. At September 30, 1995, 9.4 million shares were held in the treasury at a cost of $341.9 million. The shares purchased during the first nine months of 1995 were financed with available cash and borrowings under revolving credit and term note agreements. The loan agreements were amended during 1995 to provide for borrowings up to $250 million in either U.S. dollars with interest at LIBOR plus 27.5 basis points or Japanese yen with interest at the Tokyo Interbank Offered Rate (TIBOR) plus 27.5 basis points. Principal payments are payable over five years beginning in June 1996. The loan agreement contains various covenants, one of which requires the Company to maintain a minimum consolidated shareholders' equity of $1.0 billion. In August 1995, all outstanding borrowings under the agreement were converted from dollar-denominated to yen-denominated loans. At September 30, 1995, bank borrowings of 23.9 billion yen ($239.3 million) were outstanding in connection with the share purchase program. Interest expense related to the share repurchase program for the nine months ended September 30, 1995 and 1994 was $4.3 million and $1.8 million, respectively. The Company has designated the yen-denominated borrowings as a hedge of its net investment in AFLAC Japan. Foreign currency translation gains/losses are included in the unrealized foreign currency translation gains component in shareholders' equity. Outstanding principal and related accrued interest payable on the yen-denominated borrowings were translated into dollars at the spot exchange rates as of September 30, 1995. Interest expense was translated at average exchange rates for the period the borrowings were outstanding in 1995. In August 1995, the Company entered into interest rate swap agreements to reduce the impact of changes in interest rates on this floating-rate long-term debt. The swaps have notional principal amounts which approximate the unpaid principal amount during the six-year loan period. Under these agreements, the Company makes fixed-rate interest payments at 2.46% and 7 receives floating-rate payments in return. As of September 30, 1995, the floating rate based on three-month TIBOR was .92%. These transactions effectively change a portion of the Company's interest rate exposure from a floating rate to a fixed rate of 2.74% (including 27.5 basis point loan margin). 3. Effective January 1, 1994, the Company adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under this standard, the Company classifies all fixed-maturity securities as "available for sale." Such securities are carried at fair value rather than amortized cost. The related unrealized gains and losses, less amounts applicable to policy liabilities and deferred income taxes, are reported in a separate component of shareholders' equity together with unrealized gains and losses on equity securities. This change in accounting method has no effect on net earnings. The effect of this accounting change on shareholders' equity was as follows: (In thousands) September 30, 1995 December 31, 1994 January 1, 1994 ------------------ ----------------- --------------- Investments $ 2,792,168 $ 820,874 $ 1,851,141 Policy liabilities (2,034,172) (315,599) (1,088,633) Deferred income taxes (312,095) (289,089) (301,030) ------------ ------------ ------------- Shareholders' equity, net unrealized gains on securities available for sale $ 445,901 $ 216,186 $ 461,478 ============ ============ ============= The portion of unrealized gains credited to policy liabilities represents gains that would not inure to the benefit of the shareholders if such gains were actually realized. These amounts are necessary to cover policy reserve interest requirements based on market investment yields at these dates. 4. AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. Fixed-maturity securities owned by AFLAC Japan are loaned to major securities firms. At September 30, 1995, the Company held Japanese government bonds as collateral for loaned securities in the amount of $1.0 billion at market value. The Company's security lending policy requires that the fair value of the securities received as collateral be greater than or equal to 105% of the fair value of the loaned securities as of the date the securities are loaned and not less than 100% thereafter. Bond market quotations are used to determine the fair value (carrying value) of the collateral asset and related liability. 5. The Company is a defendant in various litigation considered to be in the normal course of business. Some of this litigation is pending in Alabama where large punitive damage awards bearing little relation to the actual damages sustained by plaintiffs have been awarded against companies, including other insurers, in recent years. During the quarter, the Company settled certain litigation in Alabama related to an ancillary line of business. However, the settlement was not material to the Company's consolidated net earnings for the nine months ended September 30, 1995. Although the final results of any litigation cannot be predicted with 8 certainty, the Company does not believe the outcome of any litigation still pending will have a material adverse effect on the financial position of the Company. The Internal Revenue Service has proposed adjustments to the Company's U.S. consolidated federal income tax returns for the years 1989 through 1991. The proposed adjustments relate primarily to the computation of foreign source income for purposes of the foreign tax credit that, if upheld, would have a significant effect on the Company's operating results. Management does not agree with the proposed tax issues and is vigorously contesting them. The final outcome is still undetermined. However, the Company believes its position will prevail and that the ultimate liability will not materially impact the consolidated financial statements. 9 REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The September 30, 1995 and 1994 financial statements included in this filing have been reviewed by KPMG Peat Marwick LLP, independent certified public accountants, in accordance with established professional standards and procedures for such a review. The report of KPMG Peat Marwick LLP commenting upon their review is included on page 11. 10 KPMG PEAT MARWICK LLP Certified Public Accountants 303 Peachtree Street, N.E. Telephone: (404) 222-3000 Suite 2000 Telefax: (404) 222-3050 Atlanta, GA 30308 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors AFLAC Incorporated: We have reviewed the accompanying consolidated balance sheet of AFLAC Incorporated and subsidiaries as of September 30, 1995, and the related consolidated statements of earnings for the three-month and nine-month periods ended September 30, 1995 and 1994, and the consolidated statements of cash flows and shareholders' equity for the nine-month periods ended September 30, 1995 and 1994. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of any opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the accompanying consolidated balance sheet of AFLAC Incorporated and subsidiaries as of December 31, 1994, and the related consolidated statements of earnings, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 30, 1995, we expressed an unqualified opinion on those consolidated financial statements. KPMG PEAT MARWICK LLP October 25, 1995 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The primary business activity of AFLAC Incorporated and subsidiaries (the "Company") is supplemental health insurance, which is marketed and administered primarily through American Family Life Assurance Company of Columbus (AFLAC). The Company's operations in Japan (AFLAC Japan) and the United States (AFLAC U.S.) service the two principal markets for the Company's insurance operations. AFLAC Japan and AFLAC U.S. are the primary components for this discussion and analysis, due to their significance to the Company's consolidated financial condition and results of operations. 12 RESULTS OF OPERATIONS
The following table sets forth the pretax operating earnings by business component for the periods shown and the percentage change from the prior period. SUMMARY OF OPERATING RESULTS BY BUSINESS COMPONENT (In millions, except for per-share amounts) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------- -------------------------------------- Percentage Change Percentage Change Over Previous Over Previous Period 1995 1994 Period 1995 1994 ----------------- ------------------ ----------------- ------------------ Insurance operations (excluding realized investment gains and losses): AFLAC Japan........................ 14.6% $ 140.0 $ 122.2 22.0% $ 425.8 $ 349.1 AFLAC U.S.......................... 2.8 24.3 23.6 15.0 75.5 65.6 Other foreign...................... (.5) (.1) (.6) (1.2) ------ ------ ------ ------ Total insurance................... 12.4 163.8 145.7 21.1 500.7 413.5 Realized investment gains (losses)... (.1) (.2) .1 (.3) Broadcast division................... 11.7 4.4 3.9 12.7 14.8 13.1 Interest expense, noninsurance operations............. (3.1) (2.9) (9.0) (7.4) Capitalized interest, building construction............... - - - 2.4 Parent company, other operations and eliminations.................... 21.9 (13.3) (17.0) .7 (49.0) (49.3) ------ ------ ------ ------ Earnings before income taxes...... 17.2 151.7 129.5 23.0 457.6 372.0 Income taxes......................... 63.7 53.4 191.9 156.6 ------ ------ ------ ------ Net earnings...................... 15.6 $ 88.0 $ 76.1 23.4 $ 265.7 $ 215.4 ====== ====== ====== ====== Net earnings per share............ 20.3 $ .89 $ .74 26.9 $ 2.64 $ 2.08 ====== ====== ====== ====== 13
Net earnings increased 15.6% for the three months ended September 30, 1995, and 23.4% for the nine months ended September 30, 1995, compared with the respective periods in 1994. The increases primarily resulted from strong earnings from our core insurance operations in Japan and the United States and improved results by the Broadcast Division. Partially offsetting the increases was additional interest expense primarily related to the Company's stock repurchase program. Also partially offsetting the increase for the nine months was the absence of capitalized interest in 1995 due to completion of the Company's administrative office building in Japan in early 1994. The increases in reported results in U.S. dollars for AFLAC Japan and consolidated earnings for both the three months and nine months ended September 30, 1995, were aided by favorable currency translations from yen to dollars. Following the dramatic rise in the value of the Japanese yen in relation to the U.S. dollar during the second quarter of this year, the yen began to weaken in the third quarter. However, the yen was still stronger in the third quarter compared with the same period a year ago, which resulted in a benefit to operating earnings per share. The strengthening of the yen benefited operating earnings (excluding realized investment gains/losses) by approximately $.03 per share for the three months ended September 30, 1995, and $.24 per share for the nine months ended September 30, 1995. Excluding the benefit of the stronger yen, operating earnings per share increased 16.2% for the three months ended September 30, 1995, and increased 15.4% for the nine months ended September 30, 1995, compared with the respective periods in 1994. AFLAC Japan's pretax operating earnings (excluding realized investment gains/losses) in yen increased 8.6% for the three months ended September 30, 1995, compared with the third quarter of 1994, and increased 8.2% for the nine months ended September 30, 1995, compared with the nine months ended September 30, 1994. The reported U.S. dollar results for AFLAC Japan were affected by the favorable average yen-to-dollar exchange rate of 91.62 for the nine months ended September 30, 1995, compared with 103.39 for the first nine months of 1994. As a result, percentage increases in U.S. dollars for AFLAC Japan's pretax operating earnings were 14.6% for the three months ended September 30, 1995, compared with the third quarter of 1994, and 22.0% for the nine months ended September 30, 1995, compared with the nine months ended September 30, 1994. AFLAC Japan repatriated profits to AFLAC U.S. of $140.5 million in 1995, $132.9 million in 1994, and $97.9 million in 1993. The profit transfers to AFLAC U.S. adversely impact AFLAC Japan's investment income. However, repatriations benefit consolidated operations because higher investment yields can be earned on funds invested in the United States. Also, income tax expense is presently lower on investment income earned in the United States. Management estimates profit transfers from 1992 through 1995 have benefited consolidated net earnings by $5.0 million and $2.6 million for the three months ended September 30, 1995 and 1994, respectively, and $9.2 million and $4.7 million for the nine months ended September 30, 1995 and 1994, respectively. During the third quarter, AFLAC purchased 2.9 million shares of its common stock. The Company has bought a total of 9.4 million shares (through September 30, 1995) since the inception of the share repurchase program in February 1994. The spread in percentage points between the increases in net earnings and net earnings per share primarily reflects the impact of the share repurchase program. 14 AFLAC JAPAN AFLAC Japan, a branch of AFLAC and the principal contributor to the Company's earnings, is the fourth largest life insurance company in Japan in terms of individual policies in force. The transfer of profits from 1992 through 1995 from AFLAC Japan to AFLAC U.S. distorted comparisons of operating results between periods. The following AFLAC Japan summary of operations tables present investment income, total revenues and pretax operating earnings calculated on a pro forma basis in order to improve comparability between periods. The pro forma adjustment represents cumulative investment income foregone by AFLAC Japan on funds repatriated to AFLAC U.S. during 1992 through 1995. 15 AFLAC JAPAN SUMMARY OF OPERATING RESULTS THREE MONTHS ENDED SEPTEMBER 30, In Dollars (In millions) 1995 1994 -------------------------- Premium income...................... $ 1,310.4 $ 1,158.6 Investment income, as adjusted*..... 237.7 198.8 Other income........................ (1.6) .5 --------- --------- Total revenues, as adjusted*...... 1,546.5 1,357.9 --------- --------- Benefits and claims................. 1,134.2 994.3 Operating expenses.................. 266.4 237.3 --------- --------- Total benefits and expenses....... 1,400.6 1,231.6 --------- --------- Pretax operating earnings, as adjusted*................... 145.9 126.3 Investment income applicable to profit repatriations............... (5.9) (4.1) --------- --------- Pretax operating earnings....... $ 140.0 $ 122.2 ========= ========= - ---------------------------------------------------------------------------- In Dollars In Yen 1995 1994 1995 1994 ---------------- ---------------- Percentage increases over previous period: Premium income.............. 13.1% 26.1% 6.9% 18.1% Investment income*.......... 19.6 20.5 13.1 12.8 Total revenues*............. 13.9 25.3 7.6 17.3 Pretax operating earnings*.. 15.5 19.3 9.4 11.8 Pretax operating earnings... 14.6 17.8 8.6 10.4 - ---------------------------------------------------------------------------- In Dollars 1995 1994 ------------------ Ratios to total revenues, as adjusted:* Benefits and claims................ 73.4% 73.2% Operating expenses................. 17.2 17.5 Pretax operating earnings.......... 9.4 9.3 Ratio of pretax operating earnings to total reported revenues......... 9.1 9.0 - ---------------------------------------------------------------------------- *Adjusted investment income, total revenues and pretax operating earnings include estimates of additional investment income of $5.9 million in 1995 and $4.1 million in 1994, foregone due to profit repatriations. ============================================================================ 16 AFLAC JAPAN SUMMARY OF OPERATING RESULTS NINE MONTHS ENDED SEPTEMBER 30, In Dollars (In millions) 1995 1994 -------------------------- Premium income...................... $ 3,966.5 $ 3,194.4 Investment income, as adjusted*..... 711.3 558.6 Other income........................ .1 2.2 --------- --------- Total revenues, as adjusted*...... 4,677.9 3,755.2 --------- --------- Benefits and claims................. 3,426.0 2,732.7 Operating expenses.................. 811.0 665.1 --------- --------- Total benefits and expenses....... 4,237.0 3,397.8 --------- --------- Pretax operating earnings, as adjusted*................... 440.9 357.4 Investment income applicable to profit repatriations............... (15.1) (8.3) --------- --------- Pretax operating earnings....... $ 425.8 $ 349.1 ========= ========= - ---------------------------------------------------------------------------- In Dollars In Yen 1995 1994 1995 1994 ---------------- ---------------- Percentage increases over previous period: Premium income.............. 24.2% 25.3% 10.0% 15.4% Investment income*.......... 27.3 22.9 12.9 13.2 Total revenues*............. 24.6 24.9 10.4 15.1 Pretax operating earnings*.. 23.3 20.4 9.4 10.9 Pretax operating earnings... 22.0 18.8 8.2 9.4 - ---------------------------------------------------------------------------- In Dollars 1995 1994 ------------------ Ratios to total revenues, as adjusted:* Benefits and claims................ 73.3% 72.8% Operating expenses................. 17.3 17.7 Pretax operating earnings.......... 9.4 9.5 Ratio of pretax operating earnings to total reported revenues......... 9.1 9.3 - ---------------------------------------------------------------------------- *Adjusted investment income, total revenues and pretax operating earnings include estimates of additional investment income of $15.1 million in 1995 and $8.3 million in 1994, foregone due to profit repatriations. ============================================================================ The yen began to weaken in the third quarter compared with the second quarter of 1995. However, the yen was still stronger in the first nine months of 1995 compared with the first nine months of 1994. The average 17 exchange rate for the first nine months of 1995 was 91.62, which was 12.8% stronger than the average rate of 103.39 for the first nine months of 1994. As a result, growth rates for AFLAC Japan continued to be higher in dollars than in yen. The average exchange rate for the full year 1994 was 102.26. The increase in premium income was due to: sales of new policies; the conversion of existing policies to policies with higher benefits and premiums; continued excellent policy persistency; and, in dollars, the stronger yen rate. The single-digit increases in premium income and total revenues for the third quarter reflect a moderation in sales following exceptionally strong sales in the first half of 1994. As expected, new annualized premium sales, excluding conversions, were down in the quarter, declining 9.2% in yen. For the nine months, new annualized premium sales increased 5.9% in yen. Sales in the first half of 1994 were exceptionally strong due to the agents' heightened efforts to sell the Company's cancer policy before a July 1994 rate increase on new issues. Sales for the first half of 1994, including conversions, increased 30.6% in yen compared with the first half of 1993. Sales leveled out in the second half of 1994 and increased 10%, including conversions, for the year compared with the year 1993. Management's goal is to increase new sales, excluding conversions, by 10% in yen for the year 1995. Although Japan's economy remains soft, the Company's lower third quarter sales results primarily reflect the decision to defer various major sales campaigns to accommodate the introduction of AFLAC Japan's new product - - living benefit life. Many agencies that serve large payroll accounts have planned extensive sales campaigns in the fourth quarter of this year to promote this new product. In fact, agencies have requested more than six million pre-printed application forms for the living benefit life rider to the cancer policy for use in their sales campaigns to new and existing customers. Investment income, which is affected by available cash flow from operations and investment yields available for new investments, increased during both the three months and nine months ended September 30, 1995, compared with the respective periods of 1994, despite investment yields that have generally declined. Rates of return on fixed-income securities in Japan have remained low in 1995 compared with historical levels. For instance, the yield on 10-year Japanese government bonds, as measured by a composite index, has declined from 4.72% in January to a low of 2.60% in July, reaching 3.39% in August and closing the quarter at 2.86%. By concentrating on selected sectors, the Company has secured higher yields than 10-year government bonds would have provided. At the same time, the Company has adhered to its conservative standards for credit quality. The Company purchased yen-denominated securities at an average yield to maturity of 4.73% for the third quarter and 4.61% for the nine months. Including investments in dollar-denominated securities, the blended new money yield to maturity was 5.01% for the quarter and 4.97% for the nine months. As a result of the continued low level of investment yields, the yield to maturity on AFLAC Japan's fixed-income portfolio declined from 6.00% at the end of the second quarter to 5.98% at the end of the third quarter. The return on AFLAC Japan's average invested assets was 5.83% for the nine months, compared with 6.01% for the same period in 1994. AFLAC Japan has significant cash flows -- averaging more than $250 million per 18 month this year -- to invest. However, it is difficult to find attractive investment yields in yen-denominated securities for these cash flows in the current interest rate environment. AFLAC Japan's results continue to reflect the pattern that has developed during the last several years of slightly higher benefit ratios somewhat offset by lower expense ratios. The increase in the benefit ratio reflects the strengthening of policy liabilities to provide for lower assumed interest rates and the increase in claims experience due to fewer policy lapses. AFLAC U.S. AFLAC U.S. produced good results in the third quarter, although pretax operating earnings were impacted by the decision to settle certain litigation in Alabama related to an ancillary line of business. Earnings benefited from additional investment income earned on profit transfers received from AFLAC Japan. AFLAC U.S. in turn made additional dividend payments to the Parent Company in the amounts of $16.0 million in the first nine months of 1995, and $51.9 million and $10.1 million for the full years 1994 and 1993, respectively. Estimated investment income earned from profits repatriated to and retained by AFLAC U.S. from 1992 through 1995 has been reclassified in the following presentation in order to improve comparability between periods. 19 AFLAC U.S. SUMMARY OF OPERATING RESULTS Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1995 1994 1995 1994 ------------------ ----------------- Premium income................... $ 217.0 $ 199.4 $ 638.5 $ 588.7 Investment income, as adjusted*.. 19.7 17.3 57.7 50.7 Other income..................... (.2) .5 .4 2.1 ------ ------ ------ ------ Total revenues, as adjusted*... 236.5 217.2 696.6 641.5 ------ ------ ------ ------ Benefits and claims.............. 133.3 122.0 395.2 366.1 Operating expenses............... 85.3 75.8 240.5 218.5 ------ ------ ------ ------ Total benefits and expenses.... 218.6 197.8 635.7 584.6 ------ ------ ------ ------ Pretax operating earnings, as adjusted*................ 17.9 19.4 60.9 56.9 Investment income applicable to profit repatriations............ 6.4 4.2 14.6 8.7 ------ ------ ------ ------ Pretax operating earnings.... $ 24.3 $ 23.6 $ 75.5 $ 65.6 ====== ====== ====== ====== - ---------------------------------------------------------------------------- Percentage increases over previous period: Premium income................. 8.9% 8.8% 8.5% 9.8% Investment income*............. 13.6 10.5 13.9 9.5 Total revenues*................ 8.9 8.8 8.6 9.7 Pretax operating earnings*..... (7.7) 11.3 7.0 11.7 Pretax operating earnings...... 2.8 19.1 15.0 19.9 - ---------------------------------------------------------------------------- Ratios to total revenues, as adjusted:* Benefits and claims............ 56.3% 56.2% 56.8% 57.0% Operating expenses............. 36.1 34.9 34.5 34.1 Pretax operating earnings...... 7.6 8.9 8.7 8.9 Ratio of pretax operating earnings to total reported revenues...... 10.3 10.9 10.8 10.2 - ---------------------------------------------------------------------------- *Excludes estimated investment income for the three months ended September 30, 1995 and 1994 of $6.4 million and $4.2 million, respectively, and for the nine months ended September 30, 1995 and 1994 of $14.6 million and $8.7 million, respectively, related to investment of profit repatriation funds retained by AFLAC U.S. ============================================================================ Benefit ratios have been slightly lower, which is principally due to the mix of business shifting towards accident policies. Accident policies have a lower benefit ratio compared with other products. Management expects future benefit ratios for some of the Company's supplemental products to increase slightly due to the Company's ongoing efforts to enhance 20 policyholder benefits. In addition, potential minimum benefit ratio requirements by insurance regulators may also increase the ratio. At the same time, management expects the operating expense ratio, excluding discretionary advertising, to decline in the future due to continued improvement in operating efficiencies. By improving administrative systems and controlling other costs, management has been able to redirect funds to discretionary national advertising programs without significantly affecting the operating expense ratio. The Company's advertising expense was $11.3 million and $10.1 million for the nine months ended September 30, 1995 and 1994, respectively, or 1.6% of revenues in both 1995 and 1994. Management expects the pretax operating profit margin, which was 9.0% for the year 1994 excluding the effect of repatriation, to remain approximately the same for the year 1995. The increase in premium income was due to an increase in new sales over the last 12 months and some improvement in persistency for several of the product lines. Total new annualized premium sales continued to grow at a solid rate, increasing 16.5% for the third quarter. Total new sales of $72.2 million for the three-month period set a quarterly record for production. For the nine months, total new sales rose 13.4% to $204.8 million. New products again contributed greatly to new sales growth. At the same time, the Company continued to experience declines in Medicare supplement sales, the lowest-margin product, due to a de-emphasis of this product. Excluding Medicare supplement sales, new annualized premium sales were up 22.1% for the third quarter and 20.3% for the nine months. The increase in investment income was primarily due to profit repatriations from AFLAC Japan and the continued strong cash flow from operations. During the third quarter, available cash flow was invested at an average yield-to-maturity of 7.50%, compared with 7.96% during the third quarter of 1994. The overall return on average invested assets, net of investment expenses, was 7.33% for the first nine months of 1995 versus 7.46% for the first nine months of 1994. FINANCIAL ACCOUNTING STANDARDS BOARD'S STATEMENTS On January 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures. SFAS No. 114 requires impaired mortgage loans to be measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. SFAS No. 118 eliminates certain income recognition provisions previously included in SFAS No. 114. The implementation of these standards had no material effect on the Company. In March 1995, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This statement establishes accounting standards for: 1) the impairment of long- lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used in the business; and 2) long-lived assets and certain identifiable intangibles to be disposed of. This standard, which must be adopted by March 31, 1996, will require the Company to report certain investment real estate at fair value, rather than at net realizable 21 value as previously required. The Company does not anticipate a material effect on net income, liquidity or capital related to adoption of this standard. ANALYSIS OF FINANCIAL CONDITION Since December 31, 1994, the financial condition of the Company has remained strong. Investments have continued to grow and consist of high-quality securities. Due to the relative size of AFLAC Japan, changes in the yen/dollar exchange rate can have a significant effect on the Company's financial statements. The yen/dollar exchange rate at the end of each period is used to convert yen-denominated balance sheet items into U.S. dollars for reporting purposes. The exchange rate at September 30, 1995, was 99.10 yen to one U.S. dollar, which was almost the same as the December 31, 1994, rate of 99.85. The small difference in the rates had little effect on the comparison of the September 30, 1995, balance sheet with the December 31, 1994, balance sheet. During the first nine months, the exchange rate ranged between 80.20 and 104.50. Under the provisions of SFAS No. 115 adopted January 1, 1994, fixed- maturity securities available for sale are carried at fair value. Previously, fixed-maturity securities were carried at amortized cost. Since December 31, 1994, total invested assets, including the effect of SFAS No. 115, have increased $4.0 billion, or 25.2%. AFLAC Japan invested assets increased $3.7 billion (24.8%), while AFLAC U.S. invested assets increased $353.9 million (28.2%). Since December 31, 1994, total invested assets, excluding the effect of SFAS No. 115, have increased $2.1 billion, or 13.6%. AFLAC Japan invested assets increased $1.8 billion (12.9%), while AFLAC U.S. invested assets increased $252.7 million (19.4%). The continued growth in assets reflects the substantial cash flows from new annualized premium sales by AFLAC U.S. and renewal premiums collected by AFLAC Japan. The net unrealized gains of $2.8 billion on investments in fixed- maturity securities at September 30, 1995, consisted of $2.8 billion in gross unrealized gains and $16.1 million in gross unrealized losses. During 1995, net unrealized gains increased by $2.0 billion, which was primarily due to the decrease in general-market interest rates in Japan and the United States. AFLAC Japan net unrealized gains increased $1.9 billion, and AFLAC U.S. net unrealized gains increased $101.1 million since December 31, 1994. Policy liabilities increased $3.7 billion, or 23.0%, during the first nine months of 1995. AFLAC Japan increased $3.6 billion, or 24.6% (23.7% in yen), and AFLAC U.S. increased $96.0 million, or 6.9%. The increases in policy liabilities are due to the addition of new business, the aging of policies in force and the effect of SFAS No. 115. See Note 3 of the Notes to the Consolidated Financial Statements. Notes payable has increased $167.5 million, or 90.6%, since December 31, 1994. This increase is primarily related to stock repurchase activity. For further information regarding notes payable, see Note 2 of the Notes to the Consolidated Financial Statements. 22 Shareholders' equity increased $308.4 million during the first nine months of 1995. The increase is due to: net earnings of $265.7 million, an increase in net unrealized gains on securities available for sale of $242.7 million, an increase in unrealized foreign exchange translation gains of $39.2 million, less treasury stock purchases of $213.2 million and dividends paid of $36.6 million. The Company's insurance operations continue to provide the primary sources of liquidity for the Company. Capital needs can also be supplemented by borrowed funds. The principal sources of cash from insurance operations are premiums and investment income. The primary uses of cash in the insurance operations are policy claims, commissions, operating expenses, income taxes and payments to the Parent Company for management fees and dividends. Both the sources and uses of cash are reasonably predictable. The Company's investment objectives provide for liquidity through the ownership of high-quality investment securities. AFLAC insurance policies are generally not interest-sensitive and therefore are not subject to unexpected policyholder redemptions due to investment yield changes. Also, the majority of AFLAC policies provide indemnity benefits rather than reimbursement for actual medical costs and therefore are not subject to the risks of medical cost inflation. The achievement of continued long-term growth will require growth in the statutory capital and surplus of the Company's insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by the Company from funds generated through debt or equity offerings. Management believes outside sources for additional debt and equity capital, if needed, will continue to be available for capital expenditures and business expansion. Parent Company capital resources are largely dependent upon the ability of the subsidiaries to pay management fees and dividends. The Georgia Insurance Department imposes certain limitations and restrictions on payments of dividends, management fees, loans and advances by AFLAC to the Parent Company. In addition to restrictions by U.S. insurance regulators, the Japanese Ministry of Finance (MOF) imposes restrictions on, and requires approval for, the remittances of earnings from AFLAC Japan to AFLAC U.S. Annual payments are made from AFLAC Japan for management fees to the Parent Company, and for allocated expenses and remittances of earnings to AFLAC U.S. Total funds received from AFLAC Japan were $168.9 million in the first nine months of 1995 and $167.9 million and $133.4 million in the full years 1994 and 1993, respectively. During the last two years, the MOF has developed solvency standards, a version of risk-based capital requirements, as part of its long- term deregulation process. For additional information on regulatory restrictions on dividends, profit transfers and other remittances, see Note 10 of the Notes to the Consolidated Financial Statements in the Company's annual report to shareholders for the year ended December 31, 1994. For information regarding proposed tax adjustments by the Internal Revenue Service and pending litigation, see Note 5 of the Notes to the Consolidated Financial Statements. The board of directors declared a fourth quarter cash dividend of $.13 per share. The dividend is payable on December 1, 1995, to shareholders of record at the close of business on November 17, 1995. 23 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A number of civil jury verdicts involving insurance sales practices and other matters have been returned against life and health insurers in the jurisdictions in which the Company does business in the United States. Some of the lawsuits have resulted in the award of substantial judgments against the insurers, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. The Company is a defendant in various litigation considered to be in the normal course of business. Some of this litigation is pending in Alabama where large punitive damage awards bearing little relation to the actual damages sustained by plaintiffs have been awarded against companies, including other insurers, in recent years. During the quarter, the Company settled certain litigation in Alabama related to an ancillary line of business. However, the settlement was not material to the Company's consolidated net earnings for the nine months ended September 30, 1995. Although the final results of any litigation cannot be predicted with certainty, the Company does not believe the outcome of any litigation still pending will have a material adverse effect on the financial position of the Company. ITEMS 2, 3, 4 and 5 Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 4.0 - The registrant is not filing one instrument evidencing indebtedness since the total amount of securities authorized does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request. 10 - AFLAC Incorporated Amended 1985 Stock Option Plan, as amended August 8, 1995. 10.1 - AFLAC Incorporated Employment Agreement with Paul S. Amos dated August 1, 1995. 27 - Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended September 30, 1995. 24 SIGNATURES Pursuant to the requirements 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. AFLAC INCORPORATED Date: November 8, 1995 /s/ Kriss Cloninger, III ------------------------ -------------------------------- KRISS CLONINGER, III Executive Vice President; Treasurer and Chief Financial Officer Date: November 8, 1995 /s/ Norman P. Foster ------------------------ -------------------------------- NORMAN P. FOSTER Executive Vice President, Corporate Finance 25 EXHIBITS FILED WITH CURRENT FORM 10-Q: 10 - AFLAC Incorporated Amended 1985 Stock Option Plan, as amended August 8, 1995. 10.1 - AFLAC Incorporated Employment Agreement with Paul S. Amos, dated August 1, 1995. 27 - Financial Data Schedule (for SEC use only) 26 EX-10 2 AMENDED STOCK OPTION PLAN AFLAC INCORPORATED AMENDED 1985 STOCK OPTION PLAN I. ESTABLISHMENT OF THE 1985 PLAN AFLAC Incorporated (hereinafter called "the Company") has amended and restated the Stock Option Plan, as amended (1985) (the "1985 Plan") and has renamed it the AFLAC Incorporated Amended 1985 Stock Option Plan (hereinafter called "the Amended 1985 Plan") upon the terms and conditions hereinafter stated. II. PURPOSES OF THE 1985 PLAN The purposes of the Amended 1985 Plan are: (1) to encourage stock ownership by selected key employees and directors of the Company; (2) to provide an incentive for such employees to expand and improve the growth and prosperity of the Company and its Subsidiary Companies; (3) to assist the Company and its Subsidiary Companies in obtaining and retaining such employees and directors; and (4) to build a proprietary interest among the Company's Non-Employee Directors and thereby secure for the Company's shareholders the benefits associated with common stock ownership by those who will oversee the Company's future growth and success. The provisions of the Amended 1985 Plan, other than the provisions relating to Noninsider Options, are intended to satisfy the requirements of Section 16(b) of the Exchange Act and Rule 16b-3 promulgated thereunder. III. DEFINITIONS A. "Advisory Director" means a director of the Company appointed by the Board pursuant to the by-laws of the Company. B. "Board" means the Board of Directors of the Company, and includes the Executive Committee of the Board as to any matter in regard to which the Executive Committee may lawfully exercise the powers of the full Board. C. "Capital Stock" means shares of the common stock ($.10 par value), of the Company. D. "Code" means the Internal Revenue Code of 1986 (or any successor federal tax law) as from time to time amended. E. "Committee" means (i) with respect to all Options other than Noninsider Options, the Compensation Committee established by the Board pursuant to Article V(A) hereof, and (ii) with respect to Noninsider Options, the Chief Executive Officer, or such other person or persons as shall be designated by the Board. F. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 1 G. "Fair Market Value" means the fair market value of the shares of Capital Stock as determined by the Committee in its sole discretion; provided, however, that if the shares of Capital Stock are admitted to trading on national securities exchanges, the Fair Market Value on any date shall be the average of the high and low sale prices as reported in the Wall Street Journal for the shares of Capital Stock on such date or on the last day preceding such date on which a sale was reported. H. "Grantee" means an individual to whom an Option is granted under the Amended 1985 Plan. I. "Non-Employee Director" means a director (including an Advisory Director) of the Company who is not an employee of the Company or any Subsidiary Company. I-A. "Noninsider Option" means a Non-Qualifying Option that is awarded pursuant to Article XIIIA hereof to a Grantee who is not subject to the reporting requirements of Section 16(a) of the Exchange Act. J. "Option" means a right granted to purchase Capital Stock under the Amended 1985 Plan. An Option may be either an Incentive Option or a Non-Qualifying Option (as both terms are defined in Article IV hereof). K. "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act. L. "Subsidiary Company" means a subsidiary of the Company that, at the time of granting the Option in question, meets the definition of a "subsidiary corporation" in Section 424(f) of the Code. IV. TYPES OF OPTION The Amended 1985 Plan provides for both: A. "Incentive Options"; that is, options intended to qualify as "incentive stock options" under the provisions of Section 422 of the Code, and B. "Non-Qualifying Options"; that is, non-qualified stock options that do not qualify as incentive stock options under the provisions of Section 422 of the Code. V. BIFURCATED ADMINISTRATION OF THE AMENDED 1985 PLAN A. The Amended 1985 Plan shall be administered by two separate Committees as described below. (i) With respect to Options other than Noninsider Options, the Committee shall be comprised of not fewer than two directors of the Company who shall be appointed by and shall serve at the pleasure of the Board, and who shall meet all requirements for qualification as "disinterested administration" within the meaning of Rule 16b-3; and (ii) with respect to Noninsider Options, the 2 Committee shall be comprised of the Chief Executive Officer, or such other person or persons as shall be designated by the Board. All references in the Amended 1985 Plan to Committee shall refer to the Compensation Committee, or any successor thereto with respect to all Options other than Noninsider Options, and shall refer to the Chief Executive Officer, or any successor thereto, with respect to Noninsider Options. The dual administration of the Amended 1985 Plan by two separate Committees is intended to satisfy the applicable "disinterested administration" requirements within the meaning of Rule 16b-3 by ensuring that the Committee that administers the Amended 1985 Plan with respect to individuals subject to the reporting requirements of Section 16(a) of the Exchange Act satisfies the applicable requirements of Rule 16b-3. B. The Committee may grant Options under the Amended 1985 Plan and shall have the authority, within the limitations of the Amended 1985 Plan, as amended or modified from time to time, to determine: 1. which of the eligible individuals will be granted Options under the Amended 1985 Plan, 2. with respect to Options other than Noninsider Options, whether Incentive Options or Non-Qualifying Options are to be granted in a particular case, 3. the number of shares that may be purchased under each Option, 4. the Fair Market Value at the time of grant of the shares subject to each Option, 5. the exercise price to be paid for shares subject to Options, such exercise price to be determined in accordance with Article IX, and 6. the terms and provisions of individual option agreements (which need not be identical). The Committee shall also have the power to make all other determinations, and to establish any rules, regulations, or policies consistent without the terms of the Amended 1985 Plan, necessary or advisable for administering the Amended 1985 Plan, including policies concerning whether interruption of service for military or public service, leaves of absence, temporary assignment to other employment, or similar reasons shall constitute a termination or interruption of employment for purposes of the Amended 1985 Plan. C. In determining the employees to whom Options shall be granted, the type of Options to be granted in each case, and the number of shares to be covered by each Option, the Committee shall take into consideration the employee's duties and responsibilities, his or her present and potential contribution to the growth and success of the Company or a Subsidiary Company and such other factors as the Committee may deem relevant to accomplish the purposes of the Amended 1985 Plan. D. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions 3 and limitations of the Amended 1985 Plan, the Committee may adopt such rules, regulations and procedures as it deems advisable for the conduct of its affairs and may appoint one of its members to be chairman and any person whether or not a member, to be its secretary or agent. E. The decisions of the Committee shall be final and binding. The date of Committee action approving a grant of an Option shall be deemed the date of grant. No member of the Committee and no member of the Board shall be liable for any action taken, or determination made in good faith related to the Amended 1985 Plan, and the Company shall indemnify, to the fullest extent permitted by law, any Committee or Board member for any expenses borne by him or her (including costs of any proceeding or threatened proceeding), or claim made against him or her, arising out of actions related to the Amended 1985 Plan. VI. ELIGIBILITY The individuals to whom Options may be granted shall be key employees (including Directors who are employees), of the Company or of a Subsidiary Company. Pursuant to Article XIII hereof, automatic awards shall be granted to Non-Employee Directors. No Options shall be granted to an employee or director of the Company or of a Subsidiary Company who owns, directly or indirectly, more than 10% of the voting power of all classes of stock of either (i) the Company or (ii) any Subsidiary Company, and no Options shall be granted to any person who is not a Director of the Company or a full-time salaried employee of the Company or of a Subsidiary Company. VII. CAPITAL STOCK SUBJECT TO OPTION The aggregate number of shares of Capital Stock that may be issued pursuant to Options granted under the Amended 1985 Plan, other than Noninsider Options, shall not exceed 9,465,832 shares, which number of shares is subject to adjustment as hereinafter provided in Article XIX. The aggregate number of shares of Capital Stock that may be issued pursuant to Noninsider Options shall not exceed 500,000 shares, which number of shares is subject to adjustment as hereinafter provided in Article XIX. If an Option as to any shares is surrendered before exercise, or expires, or is canceled, surrendered, or otherwise terminates for any reason without having been exercised in full, or for any reason ceases to be exercisable, the number of unpurchased shares covered thereby (i) with respect to Options other than Noninsider Options, shall, unless the Amended 1985 Plan shall have been terminated, again become available for the granting of Options, other than Noninsider Options, under the Amended 1985 Plan within the aggregate maximum stated above for Options other than Noninsider Options (without regard to whether the expired or terminated option was an Incentive Option or a Non-Qualifying Option) to the extent permitted by Rule 16b-3, and (ii) with respect to Noninsider Options, shall, unless the Amended 1985 Plan shall have been terminated, again become available for the granting of Noninsider Options, under the Amended 1985 Plan within the 4 aggregate maximum stated above for Noninsider Options. Notwithstanding the foregoing, commencing with the 1994 calendar year, grants of Options under the Amended 1985 Plan, other than grants of Noninsider Options, to any individual, shall be limited to Options to purchase no more than 450,000 shares of Capital Stock per calendar year. VIII. DURATION AND TERM OF PLAN Subject to the other provisions of the Amended 1985 Plan, Options may be granted under the Amended 1985 Plan at any time and from time to time during the period beginning on the date of adoption by the Board of Directors, and ending at the close of business on February 1, 1997, at which time the Amended 1985 Plan shall terminate. Termination of the Amended 1985 Plan either by reason of this Article or Board resolution under Article XX shall not affect any Options previously granted and such Options shall remain in effect until they have been fully exercised, are surrendered, or expire by their terms. IX. EXERCISE PRICE The price to be paid on exercise for each share of Capital Stock purchasable under any Option granted under the Amended 1985 Plan shall be: A. In the case of an Incentive Option, not less than the Fair Market Value thereof at the time the Incentive Option is granted. In determining such Fair Market Value the Committee shall comply with such rules and regulations as may be promulgated by the Internal Revenue Service for such determinations concerning "incentive stock options," as defined in Section 422 of the Code. B. In the case of a Non-Qualifying Option, the price determined by the Committee, but such price may not be less than one-half of the Fair Market Value thereof at the time the Non-Qualified Option is granted. X. TERMS OF THE OPTION A. Each Option granted pursuant to the Amended 1985 Plan shall state the total number of shares of Capital Stock that may be purchased under it, which number shall be subject to adjustment as hereinafter provided in Article XIX. B. Subject to the limitations of the Amended 1985 Plan, as amended or modified from time to time, every Option granted under the Amended 1985 Plan shall be evidenced by written option certificates in such form, and containing such agreements, terms and conditions (which need not be identical) as the Committee, in its discretion, may determine, and the Committee may condition the grant of any Option on execution by the Grantee of such documents as it judges appropriate to evidence the Grantee's acceptance of such agreements, limits and conditions. 5 XI. SPECIAL RULES FOR INCENTIVE OPTIONS Notwithstanding any other provision of the Amended 1985 Plan, in the case of any Incentive Option granted under the Plan: A. The aggregate Fair Market Value (determined as of the time the Option is granted) of the shares of Capital Stock with respect to which Incentive Options (or other options qualifying as "incentive stock options" under Section 422 of the Code) are exercisable for the first time by the Grantee during each calendar year (under all option plans of the Company and its Subsidiary Companies) shall not exceed $100,000 as computed in accordance with Section 422 of the Code and the regulations thereunder. B. If any Grantee disposes of shares of Capital Stock acquired on the exercise of an Incentive Option by sale or exchange either: 1. within two years after the date of the grant of the Option under which such shares were acquired, or 2. within one year after the transfer of the shares so acquired, such Option will no longer qualify for the favorable tax treatment provided to an "incentive stock option" (within the meaning of Section 422 of the Code). In such event, the Grantee shall promptly notify the Company of such disposition and of the amount realized and of the adjusted basis in such shares. XII. EXERCISABILITY AND DURATION OF OPTIONS A. Exercisability. Unless an Option provides otherwise, each Option granted under the Amended 1985 Plan shall be exercisable in its entirety immediately on the date of grant. B. Duration of Exercisability. Unless an Option provides otherwise, the unexercised portion of any Option granted under the Amended 1985 Plan shall automatically and without notice terminate and become null and void on the earliest to occur of the following: 1. Ten years from the date of grant or the expiration of such shorter period of time as the Option may provide; 2. a. In the case of an Incentive Option, three months following the date of termination of the Grantee's employment with the Company, or twelve months in the case of: (i) an employee who is disabled (within the meaning of Section 422(c)(6) of the Code) on the date of termination, or (ii) an employee whose death occurs during his or her employment with the Company. b. Incentive Options not exercised prior to the dates specified in Article XII(B)(2)(a) remain 6 exercisable until the date determined in accordance with Article XII(B)(1) and (3), but will not qualify for the favorable tax treatment provided for incentive stock options within the meaning of Section 422 of the Code. 3. Twelve months after the death of the Grantee. XIII. NON-EMPLOYEE DIRECTOR OPTIONS Notwithstanding any of the other provisions of the Amended 1985 Plan to the contrary, the provisions of this Article XIII shall apply only to grants of Options to Non-Employee Directors. Except as set forth in this Article XIII, the other provisions of the Amended 1985 Plan shall apply to grants of Options to Non-Employee Directors to the extent not inconsistent with this Article. For purposes of interpreting the applicable provisions of the Amended 1985 Plan, a Non-Employee Director's service as a member of the Board shall be deemed to be employment with the Company or its Subsidiary Companies. A. General. Non-Employee Directors shall receive Non-Qualifying Options in accordance with this Article and may not be granted Incentive Options under the Amended 1985 Plan. The purchase price per share of Capital Stock purchasable under Options granted to Non-Employee Directors shall be the Fair Market Value of a share of Capital Stock on the date of grant. No Option agreement with any Non-Employee Director may alter the provisions of this Article and no Option granted to a Non-Employee Director may be subject to a discretionary acceleration of exercisability. B. Initial Grant. As of August 10, 1993 each Non-Employee Director as of such date shall be granted automatically, without action by the Committee, an Option to purchase 10,000 shares of Capital Stock. C. Grants to New Non-Employee Directors. Each Non-Employee Director who, after August 10, 1993, is elected to the Board for the first time by the stockholders of the Company at any special or annual meeting of stockholders or, if earlier, is appointed to the Board, will, at the time such Non-Employee Director is elected or appointed (as the case may be) and duly qualified, be granted automatically, without action by the Committee, an Option to purchase 10,000 shares of Capital Stock. D. Vesting. Each Option shall be exercisable as to 20% of the shares of Capital Stock covered by the Option as of the date the Option is granted, and an additional 20% of the shares of Capital Stock covered by the Option on each of the first four anniversaries of the date the Option is granted; provided, however, that upon a Non-Employee Director's cessation of service by reason of retirement, such Non-Employee Director's Option shall be 100% vested and immediately exercisable. To the extent not exercised, 7 installments shall accumulate and be exercisable, in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires. E. Duration. Subject to the immediately following sentence, each Option granted to a Non-Employee Director shall be for a term of 10 years. Upon the cessation of a Non-Employee Director's membership on the Board for any reason, Options granted to such Non-Employee Director not then exercisable shall expire, and Options to the extent then exercisable may be exercised until the expiration of the respective terms of such Options. The Committee may not provide for an extended exercise period beyond the periods set forth in this Article XIII(E). XIIIA. NONINSIDER OPTIONS The individuals to whom Noninsider Options may be granted shall be employees of AFLAC Japan who are not subject to the reporting requirement of Section 16(a) of the Exchange Act. The Committee designated to grant Noninsider Options pursuant to Article V hereof shall determine which of such employees shall be granted Noninsider Options. Noninsider Options shall be Non-Qualifying Options only. Except as otherwise provided in this Article XIIIA and the Amended 1985 Plan, the provisions of the Amended 1985 Plan shall apply to grants of Noninsider Options. XIV. NON-ASSIGNABILITY Options shall not be transferable by a Grantee except by will or the laws of descent and distribution, and during a Grantee's lifetime shall be exercisable only by such Grantee. Options transferred by will or by the laws of descent and distribution may be exercised after the Grantee's death only by his or her executors or administrators, or by the person who acquired the right to exercise such Options by bequest or inheritance or by reason of the death of the Grantee. XV. PAYMENT FOR SHARES A. Payment in full of the purchase price for the shares purchased pursuant to the exercise of any Option shall be made, in accordance with Article XVI, upon exercise of the Option. All shares sold under the Amended 1985 Plan shall be fully paid and non-assessable. B. The terms of any Option granted under the Amended 1985 Plan (other than Options granted to Non-Employee Directors pursuant to Article XIII hereof), may, but need not, include an arrangement whereby the Grantee may, upon exercise of an Option, borrow all or an established part of the purchase price from the Company on such terms described in the Option agreement, consistent with applicable law or regulations, as the Committee shall from time to time determine. The principal amount of any such loan shall bear interest at a rate (or at a rate established by a formula) set forth in the Option agreement. 8 C. The terms of the Options granted to Non-Employee Directors pursuant to Article XIII hereof shall permit Non-Employee Directors, upon exercise of their Options, to pay the purchase price by tender of shares of Capital Stock of the Company owned by such Non-Employee Directors. The terms of any Option granted under the Amended 1985 Plan to any other Grantee, may, but need not, permit the Grantee, under procedures established by the Committee, upon exercise of an Option, to pay the purchase price by tender of shares of Capital Stock of the Company owned by the Grantee. In either case, the current Fair Market Value of the shares tendered as of the date of the Company's receipt of notice of exercise, given pursuant to Article XVI(A), shall be treated as payment of the corresponding amount of the purchase price of the shares being acquired under the Option. D. Subject to such rules as may be adopted by the Committee, a Grantee (other than a Non-Employee Director) who will incur federal, state or local income tax liability as a result of the exercise of a Non-Qualifying Option may, at his or her option, elect to have the Company withhold, or to transfer to the Company, on the date that the amount of such tax liability is determined, shares of Capital Stock of the Company equal in market value to an amount not exceeding the maximum amount payable under federal, state and local marginal tax rates applicable to the Grantee and the particular Option exercise transaction. The election must be made on or before the date that the amount of tax to be withheld is determined. The value of the shares of Capital Stock to be withheld by, or transferred to, the Company shall be valued at Fair Market Value as of the date that the amount of the tax is determined. XVI. MANNER OF EXERCISE A. To exercise an Option granted under the Amended 1985 Plan as to all or part of the shares covered thereby, a Grantee (or after his or her death, the person authorized to exercise the Option, as provided in Article XII) shall deliver written notice of such exercise to the Company official designated by the Committee (or, in the absence of such designation, to the Secretary of the Company). The notice shall identify the Option being exercised and specify the number of shares then being purchased. The date of receipt of such notice shall be deemed the date of exercise. B. The notice of exercise shall be accompanied by payment of the amount of the aggregate purchase price of the shares being purchased under the Option being exercised in one of the following forms: 1. A check or money order payable to the order of the Company for such amount; 2. If the terms of the Option being exercised expressly permit borrowing from the Company for exercise of the 9 Option, the Grantee's note for such amount, such note to include such terms, including terms related to time of payment and interest, and to be in such form, as is prescribed by the Committee, consistent with the terms of the Option; or 3. If the terms of the Option being exercised expressly permit payment with shares of Capital Stock for exercise of the Option, tender of shares of Capital Stock of the Company with Fair Market Value on the date of exercise equal to or exceeding such amount, such tender to be made in conformity with the applicable terms of the Option and with such requirements as the Committee may prescribe. C. The Committee shall have full authority to direct the proper officers of the Company to issue or transfer shares of Capital Stock pursuant to the exercise of an Option granted under the Amended 1985 Plan. As soon as practicable after its receipt of such notice and payment, the Company shall cause the shares so purchased to be issued to the Grantee or to the person authorized to exercise the Option after his or her death, as the case may be, and shall promptly thereafter cause one or more certificates for such shares to be delivered to such Grantee or other person. The holding periods referred to in Article XI(B)(1) and (2) shall be measured from the date of issuance. XVII. VOTING AND DIVIDEND RIGHTS No Grantee of any Option shall have any voting or dividend rights or any other rights of a stockholder in respect of any shares of Capital Stock covered by an Option prior to the time that his or her name is recorded on the Company's stockholder ledger as the holder of record of such shares acquired pursuant to an exercise of an Option. XVIII. CONDITIONS ON GRANTEE'S SALE OF SHARES A. Unless the Company has filed an effective Registration Statement, pursuant to the Securities Act of 1933, covering the shares offered under the Amended 1985 Plan, each Grantee purchasing shares shall be required to represent to the Company at that time that he or she is acquiring such shares for investment purposes and not with a view to their sale or distribution, and each certificate for such shares shall have printed or stamped thereon appropriate language, as determined by the Committee, stating such restriction. B. The Committee may in its discretion require the Grantee, on any exercise of an Option granted hereunder or any portion thereof and as a condition to the Company's obligation to accept the notice of exercise and to deliver certificates representing the shares subject to exercise, to take such action as is, in its sole judgment, necessary or prudent to insure that issuance of the shares of Capital Stock pursuant to exercise of the Option will be in compliance with applicable law. 10 XIX. EFFECT OF CHANGE IN CAPITAL STOCK The aggregate number of shares of Capital Stock available for Option under the Amended 1985 Plan, the shares subject to any Option, and the price per share, shall all be proportionately adjusted for any increase or decrease in the number of shares of Capital Stock issued subsequent to the effective date of the Amended 1985 Plan or the effective date of any shareholder approved increase in the number of shares available for issuance under Options granted under the Amended 1985 Plan, resulting from a subdivision or consolidation of shares or any other capital adjustment, the payment of a stock dividend or other increases or decreases in such shares effected without receipt of consideration by the Company. A change in the number of shares, and/or a change in the price per share, subject to an Option shall also be made in order to reflect any reduction in the Fair Market Value of shares subject to an Option in any case in which (a) such reduction arises on account of a "corporate transaction" as defined in Treasury Regulations Section 1.425-1(a)(1)(ii), (b) the excess of the aggregate Fair Market Value (determined immediately after such corporate transaction) of the shares subject to the Option immediately after such change over the aggregate new Option exercise price of such shares is not more than the excess of the aggregate Fair Market Value of the shares subject to the Option immediately before the transaction over the aggregate former Option price of such shares, (c) the ratio of the Option exercise price to the Fair Market Value of the stock subject to the Option immediately after the corporate transaction is not more favorable to the Grantee on a share-by-share comparison than the ratio of the old Option exercise price to the Fair Market Value of the stock subject to the Option immediately before such transaction, (d) the Option after such change does not give the Grantee additional benefits that he or she did not have before such change, and (e) in the case of an Incentive Option, such change does not constitute a modification of the Option within the meaning of Section 424 of the Code. If the Company or a Subsidiary Company issues or assumes a stock option in a transaction to which Section 424(a) of the Code applies, the per share Option price, the date or dates of exercise and the other provisions of such Option shall be as fixed by the Committee so as to meet the requirements of that section. XX. AMENDMENT AND DISCONTINUANCE The Board, by resolution, may terminate, suspend, amend or revise the Amended 1985 Plan with respect to any shares of Capital Stock, as to which Options have not been granted; provided, however, that, except as provided in Article XIX hereof, no amendment shall be effective unless approved by the stockholders of the Company where stockholder approval of such amendment is required (a) to comply with Rule 16b-3 or (b) to comply with any other law, regulation or stock exchange rule. Notwithstanding anything in this Article XX to the contrary, Article XIII shall not be amended more than once in any six-month period, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as 11 amended, or the rules or regulations thereunder. The Board or Committee may not, without the consent of the Grantee of an Option, alter or impair rights under any Option previously granted under the Amended 1985 Plan except as expressly authorized herein. XXI. EMPLOYMENT RIGHTS Neither the Amended 1985 Plan, nor the grant of any Options hereunder nor any action taken by the Committee of the Board in connection with the Amended 1985 Plan, shall create any right on the part of any person to continue in the employ of (or as a director of) the Company or a Subsidiary Company, or affect the right of the Company to terminate a Grantee's employment (or directorship) at any time, subject to the provisions of law or any contract of employment between the Company and the Grantee. XXII. GOVERNING LAW A. All references to a provision of a statute or regulation incorporate subsequent amendments and apply also to corresponding successor provisions, however denominated. B. The Amended 1985 Plan and all Options granted under the Amended 1985 Plan shall be governed by, and construed in accordance with, the laws of the State of Georgia, except to the extent that federal law is controlling, and provided that the terms of the Amended 1985 Plan and all Options granted under it, other than Noninsider Options, shall be construed so as to qualify for exemption under Rule 16b-3 and, in the case of any Incentive Options, for treatment as an incentive stock option under Section 422 of the Code. XXIII. EFFECTIVE DATE OF THE PLAN A. The 1985 Plan became effective on May 30, 1985, being the date of adoption by the Board of Directors, subject, however, to the approval by the Company's stockholders within twelve (12) months thereafter, such approval to be manifested by a vote sufficient to satisfy the federal tax and Securities and Exchange Commission ("SEC") requirements then in effect related to shareholder approval of stock option plans under the rules for incentive stock options and Rule 16b-3, respectively, which approval was so given at the stockholders' meeting held on April 28, 1986. B. The extension of the 1985 Plan's duration from May 30, 1995, to February 1, 1997, and certain other amendments approved by the Board on February 10, 1987, took effect on the approval by the Company's stockholders, which approval was so given at the stockholders' meeting held on April 27, 1987. C. The amendment and restatement of the 1985 Plan to increase the maximum number of shares of Capital Stock that may be granted thereunder, to change the administration of the 1985 Plan by reducing from two to one the number of 12 committees administering the 1985 Plan, and by eliminating the award of discretionary grants to Non-Employee Directors, and to provide instead for automatic formula grants to Non-Employee Directors, to amend the 1985 Plan to satisfy certain requirements of Rule 16b-3 and to make certain other amendments, approved by the Board on August 10, 1993, and the subsequent amendment and restatement of the 1985 Plan, to comply with certain provisions of the Omnibus Budget Reconciliation Act of 1993 regarding the exclusion of certain compensation from the $1 million dollar per year compensation deduction limit for certain executives, approved by the Board on February 8, 1994, shall take effect only on approval by the Company's stockholders on or before April 25, 1994, such approval to be manifested by a vote sufficient to satisfy the federal tax and SEC requirements then in effect related to shareholder approval of stock option plans under the rules for incentive stock options and Rule 16b-3, respectively. 13 EX-10.1 3 EMPLOYMENT AGREEMENT PSA STATE OF GEORGIA COUNTY OF MUSCOGEE EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of the 1st day of August, 1995, by and between AFLAC Incorporated, a Georgia corporation, hereinafter referred to as "Corporation," and PAUL S. AMOS, a resident of said State and county, hereinafter referred to as "Employee;" W I T N E S S E T H T H A T: WHEREAS, Employee has been employed as an executive by Corporation or otherwise affiliated with the Corporation since 1956 in various capacities, most recently in his position as Chairman of the Board; and WHEREAS, Corporation and Employee desire to set forth the existing and continuing terms and conditions of Employee's employment by Corporation as its Chairman of the Board; NOW, THEREFORE, the parties, for and in consideration of the mutual covenants and agreements hereinafter contained, do contract and agree as follows, to-wit: 1. PURPOSE AND EMPLOYMENT. The purpose of this Agreement is to define the relationship between Corporation as an employer and Employee as an employee and Chairman of the Board of Corporation. 2. DUTIES. Employee agrees to continue to provide executive management services as Chairman of the Board of Corporation to Corporation and its subsidiaries and affiliates on a full-time and exclusive basis; provided, however, nothing shall preclude Employee from serving on boards of directors of other corporations; engaging in charitable and community affairs or managing his own or his family's personal investments. 3. PERFORMANCE. Employee agrees to devote all necessary time and his best efforts in the performance of his duties as Chairman of the Board of Corporation on behalf of Corporation and its subsidiaries and affiliates. 4. TERM. The term of employment under this Agreement shall begin August 1, 1995, and shall continue for a period of three (3) years until July 31, 1998, unless extended or sooner terminated as hereinafter provided. On an annual basis beginning effective August 1, 1996, the scheduled term of this Agreement shall be extended for successive one year periods unless written notice of termination is given prior to such annual date of party to the other party that the Agreement will not be extended by its terms. Notwithstanding the foregoing, the term of employment shall not extend beyond Employee's service as an active member of the Corporation's Board of Directors. 5. BASE SALARY. For all the services rendered by Employee, Corporation shall continue to pay Employee a base salary of $1,090,984.65 per year commencing August 1, 1995 said salary to be payable in accordance with Corporation's normal payroll procedures. Employee's base salary shall be increased annually during the term of this Agreement and any extensions hereof in the same general proportion as the annual increases in the base salaries of other senior executive officers of Corporation as determined by the Corporation's Compensation Committee acting on behalf of the Board of Directors of Corporation (the "Board"). 1 6. ADJUSTMENTS TO BASE SALARY. Corporation and Employee shall, from time to time, reflect increases in Employee's base salary as provided for in Paragraph 5 by entering the change on the "Schedule of Compensation," attached hereto as Exhibit "A" and made a part hereof. If an increase in compensation is entered on said Schedule and duly signed by the proper officers of Corporation and by Employee, said entry shall constitute an amendment to this Employment Agreement as of the date of said entry and shall supersede the base salary provided for in Paragraph 5 and any other increases in Employee's base salary previously entered on said Schedule. 7. MANAGEMENT INCENTIVE PLAN. In addition to the base salary paid to Employee in accordance with Paragraph 5, Corporation shall for each calendar year of Employee's employment by Corporation, beginning with the calendar year 1995, continue to pay Employee, as performance bonus compensation, an amount determined each year under Corporation's current Management Incentive Plan (short-term Incentive Program) with a target level based on Seventy percent (70%) of base salary. Nothing in this paragraph shall preclude Employee from receiving additional discretionary bonuses approved by the Board. 8. EMPLOYEE BENEFITS. Employee shall be eligible to participate with other employees of the Corporation in all fringe benefit programs applicable to employees generally which may be authorized and adopted from time to time by the Board, including without limitation: a qualified pension plan, a profit sharing plan, a disability income or sick pay plan, a thrift and savings plan, an accident and health plan (including medical reimbursement and hospitalization and major medical benefits), and a group life insurance plan. In addition, Corporation shall furnish to Employee such other "fringe" or employee benefits as are provided to key executive employees of Corporation and such additional employee benefits which the Compensation Committee of the Board shall determine to be appropriate to Employee's duties and responsibilities as Chief Executive Officer of Corporation, including, without limitation, reimbursement of legal and accounting expenses incurred by Employee in connection with the preparation of his employment or other agreements with Corporation and any expenses for legal, accounting or financial services incurred by Employee in connection with his employment. 9. RETIREMENT PLAN FOR SENIOR OFFICERS. Employee shall continue to participate in Corporation's Retirement Plan for Senior Officers which provides retirement, medical, and other benefits to certain senior officers of the Corporation, upon all of the terms and conditions of the Plan, said Plan being entitled Retirement Plan for Senior Officers (as amended and restated October 1, 1989). 10. STOCK OPTIONS. Employee shall continue to be eligible to be awarded stock options to purchase Corporation's common stock under Corporation's Stock Option Plans for selected key employees and Directors during the term of this Agreement. 11. WORKING FACILITIES AND EXPENSES. Employee shall continue to be provided with an office, books, periodicals, stenographic and technical help, ground and air transportation, and such other facilities, equipment, supplies and services suitable to his position and adequate for the performance of his duties. The Corporation shall continue to pay Employee's dues in such social and country clubs, civic clubs and business societies and associations as shall be appropriate in facilitating Employee's job performance and in the best interest of Corporation. The Corporation shall also continue to pay all 2 appropriate business liability insurance and any business licenses and fees pertaining to the services rendered by Employee hereunder. Employee is encouraged and is expected, from time to time to incur reasonable expenses for promoting the business of Corporation, including expenses for social and civic club memberships and participation, entertainment, travel and other activities associated with Employee's duties. The cost of all such activities shall be the expense of Corporation unless the Compensation Committee of the Board shall determine in advance that any such expense of Employee should be paid by Employee. 12. VACATION. Employee shall continue to be entitled to his vacation time with pay during each calendar year in accordance with Corporation's vacation policy for senior executive employees. In addition, Employee shall be entitled to such holidays as Corporation shall recognize for its employees generally. 13. SICKNESS AND TOTAL DISABILITY. Employee's absence from work because of sickness or accident (not resulting in Employee becoming "totally disabled," as that term is hereinafter defined) shall not result in any adjustment in Employee's compensation or other benefits under this Agreement. Should Employee become totally disabled as a result of sickness or accident and unable to adequately perform his regular duties prescribed under this Agreement, his base salary (which shall continue to be adjusted as provided for in Paragraph 5), together with incentive bonuses under the Corporation's Management Incentive Plan and his participation in Corporation's employee benefit programs and retirement plans shall continue without reduction except as hereinafter provided, during the continuance of such disability for a period not exceeding the earlier of (1) the end of the term of this Agreement or any extension hereof or (2) a period of one and one-half (1-1/2) years (547 calendar days) for each continuous disability. Payments pursuant to this paragraph 13 shall be reduced by any amounts paid to Employee during any such period of disability from time to time under any disability programs, plans or policies maintained by Corporation, its subsidiaries or affiliates. Should Employee's total disability continue for a period beyond the end of the term of this Agreement or in excess of 547 calendar days, this Agreement shall, at the end of such period which first occurs, be automatically terminated. If, however, prior to such time, Employee's total disability shall have ceased and he shall have resumed the adequate performance of his duties hereunder, this Agreement shall continue in full force and effect and Employee shall be entitled to continue his employment hereunder and to receive his full compensation and other benefits as though he had not been disabled; provided, however, unless Employee shall adequately perform his duties hereunder for a continuous period of at least sixty (60) calendar days following a period of total disability before Employee again becomes totally disabled, he shall not be entitled to start a new 547-day period under this paragraph, but instead may only continue under the remaining portion of the original 547-day period of total disability. In the event Employee shall not adequately perform his duties hereunder for a continuous period of at least sixty (60) calendar days following a period of total disability, the running of the original 547-day period shall cease during the time of Employee's adequate performance of his duties hereunder before Employee again becomes totally disabled. It is understood that for purposes of this Paragraph 13, Employee shall, upon his becoming totally disabled, be given such additional "credited service" if necessary to fully qualify Employee under Corporation's Retirement Plan for 3 Senior Officers and to provide a survivor annuity to Employee's spouse under the Plan. For the purpose of this Agreement, the term "totally disabled" or "total disability" shall mean Employee's inability to adequately perform his executive and management duties hereunder on account of accident or illness. It is understood that Employee's occasional sickness or other incapacity of short duration may not result in his being or becoming "totally disabled;" however, such illness or incapacity could constitute Employee's being or becoming "totally disabled" if such illness or incapacity is prolonged or recurring. 14. TERMINATION OF EMPLOYMENT. A. TERMINATION BY CORPORATION. Corporation may, when acting in accordance with resolutions adopted by a two-third's (2/3) majority vote of its entire Board acting at a meeting called for the purpose of considering Employee's termination, terminate this Agreement, at any time, with or without "good cause" ("good cause" being hereinafter defined), by giving at least sixty (60) days' written notice to Employee of its intention to terminate Employee's employment without "good cause" or at least five (5) days' written notice to Employee of its intention to terminate Employee's employment for "good cause"; provided, however, Corporation may, at its election, terminate Employee's actual employment (so that Employee no longer renders services on behalf of Corporation) at any time during said sixty (60) day or five (5) day period; and, (1) In the event such termination is for "good cause," Corporation shall be obligated only to: (a) pay Employee his base salary as provided for in Paragraph 5 of this Agreement up to the termination date stated in said written notice; provided, however, if Corporation does not elect to terminate Employee's employment during said five (5) day period, but Employee, after receiving such notice of termination from Corporation, elects to leave the employ of Corporation prior to the end of said five (5) day period without the approval of Corporation, then Corporation shall pay said base salary only up to the date on which Employee actually terminates his employment; (b) pay Employee any performance bonus due Employee under Paragraph 7 of this Agreement for the period ending on the termination date stated in said written notice or on such earlier date of Employee's actual termination of his employment prior to the end of said five (5) day period if such termination is without the approval of Corporation. The amount of said bonus, if any, shall be calculated on a pro rata basis, using the number of days Employee was actually employed during such period, and the amount so calculated shall be paid to Employee within a reasonable time after the end of Corporation's fiscal year in which written notice of Employee's termination is given; (c) continue to honor all fully vested stock options, subject to the terms thereof, granted to Employee prior to the termination date stated in said written notice or prior to such earlier date of Employee's actual termination of his employment prior to the end of said five (5) day period if such termination is without the approval of the Corporation; (d) continue to pay all of Employee's fringe and other employee benefits as provided for in this Agreement up to the termination date sated in 4 said written notice or up to such earlier date of Employee's actual termination of his employment prior to the end of said five (5) day period if such termination is without the approval of the Corporation (e) For purposes of this subparagraph (1) and Paragraph 19 hereof, "good cause" shall mean: (i) the willful and deliberate failure by Employee to substantially perform his executive and management duties hereunder for a continuous period of more than sixty (60) days for reasons other than Employee's sickness, injury or disability; (ii) the willful and deliberate conduct by Employee which is intended by Employee to cause, and which does in fact result in substantial injury or damage to Corporation; or (iii) the conviction or plea of guilty by Employee of a felony crime involving moral turpitude. Prior to the Corporation's decision to terminate Employee's employment for "good cause" as hereinabove provided, the Board shall give written notice to Employee setting forth the specific charges against Employee being considered by the Board to constitute "good cause" as defined in this subparagraph and the Board shall, within thirty (30) days after such notice, give Employee an opportunity to fully respond and defend himself against such charges before the Board. Within fifteen (15) days after the last day on which Employee is given the opportunity to defend himself before the Board, the Board, acting in good faith, shall make its determination as to whether or not the charges against Employee constitute "good cause" and shall notify Employee in writing of its determination together with a full explanation of the basis thereof. (2) In the event such termination is without "good cause," as defined in subparagraph (1)(e) of this Paragraph and, if applicable, subject to the terms of Paragraph 19 Corporation shall be obligated to: (a) pay Employee his base salary as provided for in Paragraph 5 of this Agreement up to the end of the scheduled term of this Agreement; (b) pay Employee his performance bonus compensation as provided for in Paragraph 7 of this Agreement up to the end of the scheduled term of this Agreement; (c) continue to honor all stock options, subject to the terms thereof, granted to Employee prior to the termination date stated in said written notice, all of said options to be or become fully vested as of the termination date stated in said written notice; (d) continue to pay or provide to Employee all of the retirement, health, life and disability benefits, as are provided for in this Agreement or under any programs, plans or policies covering Employee at the time of any such notice of termination, up to the end of the scheduled term of this Agreement; and (e) pay Employee and, if elected by Employee, his wife such retirement benefits as provided for in the Retirement Plan for Senior Officers under Paragraph 9 hereof, said benefits to commence on the first (1st) day of the month immediately following the scheduled termination date of this Agreement. For purposes of this subparagraph, Employee shall continue to accrue "credited service" as an employee under the Retirement Plan for Senior Officers up through the scheduled termination date of this Agreement. 5 B. TERMINATION BY EMPLOYEE. Employee may terminate this Agreement, at any time, by giving at least sixty (60) days' written notice to Corporation of his intention to terminate his employment; and (1) in the event such termination by Employee shall be without "good reason" (as defined in Paragraph 19 hereof) and with a bona fide intent to retire or to work or engage in a business or activity which is not in competition with Corporation or any of its subsidiaries or affiliates, Corporation shall be obligated to: (a) pay Employee his base salary due him under Paragraph 5 of this Agreement up to the termination date stated in said written notice; (b) pay Employee any performance bonus compensation due him under Paragraph 7 of this Agreement for the period ending on the termination date stated in said written notice. The amount of such performance bonus, if any, shall be calculated on a pro rata basis, using the number of days Employee was actually employed by Corporation during such year of termination; and the amount so calculated shall be paid to Employee within a reasonable time after the end of Corporation's fiscal year in which Employee's notice of termination is given; (c) continue to honor all stock options, subject to the terms thereof, granted to Employee which are fully vested prior to the termination date stated in said written notice; (d) pay Employee, and if elected by Employee, his wife such retirement benefits as are provided for in the Retirement Plan for Senior Officers under Paragraph 9 hereof, said benefits to commence at such time as provided for under the Retirement Plan. For purposes of this subparagraph, Employee shall continue to accrue "credited service" as Employee under the Retirement Plan for Senior Officers up through the termination date stated in said written notice. (2) In the event such termination by Employee shall be for "good reason" (as defined in paragraph 19 hereof), the Corporation shall be obligated to provide employee with the payments, benefits and rights specified in subparagraphs a.(2)(a)-(e) of this Paragraph 14 hereof. (3) In the event such termination by Employee shall be without "good reason" (as defined in paragraph 19 hereof) and with the intention or purpose to work or invest, directly or indirectly, in a business or activity which is in competition, directly or indirectly, with Corporation or any of its subsidiaries or affiliates or, irrespective of Employee's intention at the time of his termination, if Employee shall violate his covenant not to compete under Paragraph 16 or the requirements of paragraph 17, then Corporation shall not be obligated to make or provide any further payments or benefits to Employee under this Agreement except as herein provided in this subparagraph. (a) Subject to Corporation's rights under Paragraphs 16 and 17, Corporation shall pay Employee his base salary due him under Paragraph 5 of this Agreement up to the termination date stated in said written notice; (b) Subject to Corporation's rights under Paragraphs 16 and 17 hereof, Corporation shall continue to honor all stock options, subject to the 6 terms thereof, granted to Employee which are fully vested prior to the termination date stated in said written notice; (c) Corporation shall, subject to consent of the Board, pay Employee, and if elected by Employee, his wife such retirement benefits as are provided for in the Retirement Plan for Senior Officers under Paragraph 9 hereof, said benefits to commence at such time as provided for under the Retirement Plan. C. TERMINATION WHILE DISABLED. If Employee is totally disabled at the time any such notice of termination is given, then, notwithstanding the provisions of this Paragraph 14, Corporation shall nevertheless continue to pay Employee, as his sole compensation hereunder, the compensation and other benefits for the remaining period of Employee's total disability as provided for in Paragraph 13 hereinabove. It is understood that in no event shall such disabled Employee be entitled to compensation under this Paragraph 14 in addition to the continuation of his compensation under Paragraph 13. D. COOPERATION AFTER NOTICE OF TERMINATION. Following any such notice of termination, Employee shall fully cooperate with Corporation in all matters relating to the winding up of his pending work on behalf of Corporation and the orderly transfer of any such pending work to other employees of Corporation as may be designated by the Board; and to that end, Corporation shall be entitled to such full-time or part-time services of Employee as Corporation may reasonably require during all or any part of the 60-day period following any such notice of termination. 15. DEATH OF EMPLOYEE. In the event of Employee's death during the term of this Agreement or any extension hereof, this Agreement shall terminate immediately, and Employee's estate shall be entitled to receive terminal pay in an amount equal to the amount of Employee's base salary and any performance bonus compensation actually paid by Corporation to Employee during the last thirty-six (36) months of his life, said terminal pay to be paid in thirty-six (36) equal monthly installments beginning on the first day of the month next following the month during which Employee's death occurs. Terminal pay as herein provided for in this paragraph shall be in addition to amounts otherwise receivable by Employee or his estate under this or any other agreements with Corporation or under any employee benefit or retirement plans established by Corporation and in which Employee is participating at the time of his death. In addition, Corporation shall honor all stock options, subject to the terms thereof, granted to Employee prior to his death and Employee or his estate shall, if not otherwise vested, become fully vested in said options as of the date of Employee's death. For purposes of this Paragraph, Employee shall, upon his death, be given such additional "credited service" as necessary to fully qualify Employee under Corporation's Retirement Plan for Senior Officers and to provide a survivor annuity to Employee's spouse under the Plan. 16. AGREEMENT NOT TO COMPETE. It is specifically agreed that, in the event Employee shall voluntarily terminate his employment without "good reason" (as defined in paragraph 19) or be terminated by Corporation for "good cause" (as defined in Paragraph 14), Employee shall not work for a period of two (2) years from the date of such termination as a manager, officer, owner, partner or employee or render any services as a consultant or advisor or engage or invest, directly or indirectly, in any business activity which is in competition, directly or indirectly, with Corporation, its subsidiaries or affiliates within the United States of America (excluding any state in which Corporation, its subsidiaries, and affiliates have not been engaged in business activities within 7 one (1) year prior to the date of Employee's termination of employment), the country of Japan, or within two hundred (200) miles of any office of Corporation, its subsidiaries or affiliates outside the United States of America or Japan which was in existence, or in the process of being established, at the time of Employee's termination of employment. Provided, however, it is agreed that Employee may invest in the publicly traded securities of any corporation, partnership or trust which is in competition with Corporation so long as such investment does not exceed three percent (3%) of such securities at any time. It is specifically agreed that if, after Employee's termination of employment, Employee engages in any such prohibited activity at any time during said two (2) year period, Corporation shall, in addition to any other rights it may have under this contract and applicable law, be entitled to injunctive relief or, if Corporation shall so elect (due to the difficulty of determining damages) be entitled to liquidated damages in the amount of One Million Dollars ($1,000,000.00) which Employee agrees to promptly pay to Corporation upon demand. 17. NONDISCLOSURE OF TRADE SECRETS AND CONFIDENTIAL INFORMATION. Employee agrees to protect the business interest of Corporation, its subsidiaries and affiliates, and not to disclose any trade secrets, confidential information or any organizations, operating, marketing, product design, or businesses know-how which Employee has access to or knowledge of as a result of his employment by Corporation. It is specifically agreed that if, at any time during the term of this Agreement and for a period of two (2) years after the date of Employee's termination of employment with Corporation for any reason, Employee shall violate the provisions of this Paragraph 17, Corporation shall, in addition to any rights it may have under this contract and applicable law, be entitled to liquidated damages of One Million Dollars ($1,000,000.00) which employee agrees to promptly pay Corporation upon demand. It is understood and agreed that Corporation's remedies under this Paragraph 17 shall be separate and in addition to the remedies provided to Corporation under Paragraph 16 hereof. It is also understood and agreed that, notwithstanding the foregoing two (2) year period, Employee shall not sue or disclose any written confidential information or any policyholder lists at any time or times hereafter, except in the performance of Employee's obligations to the Corporation. 18. RIGHT TO ACQUIRE INSURANCE. If Employee shall terminate his employment hereunder for any reason other than death, he may, at his election, acquire any insurance policies upon his life owned by the Corporation by giving written notice of his election to Corporation within ninety (90) days after his termination of employment. Such policies shall be transferred to the employee upon his payment to Corporation of the then interpolated terminal reserve value of said insurance. In the event any policies transferred to Employee as herein provided shall not have an interpolated terminal reserve value, then the amount to be paid by Employee shall be its then fair market value. 19. CHANGE IN CONTROL. A. IN GENERAL. In the event there is a Change in Control (as defined in this Paragraph) of Corporation, this Agreement shall, in order to help eliminate the uncertainties and concerns which may arise at such time, be automatically extended upon all of the same terms and provisions contained herein, for an additional period of three (3) years, beginning on the first day of the month during which such Change in Control shall occur. B. Notwithstanding the terms of subparagraphs A(2) and B(2) of Paragraph 14, and in lieu of the obligations of the Corporation under such 8 Paragraphs, if, after a Change in Control, Employee's employment is terminated by Corporation without "good cause" (as defined in Paragraph 4), or is terminated by Employee for "good reason" (as defined in this Paragraph 19), any such termination by Corporation to be made only in accordance with the requirements specified by paragraph 14A, Employee shall be entitled to the following: (1) The Corporation shall pay Employee's full base salary to Employee though the date of termination stated in Corporation's written notice required pursuant to Paragraph 14A hereof (hereinafter in this Paragraph the "Termination Date") at the rate in effect on the date such notice is given and, additionally shall pay Employee all compensation and benefits payable to Employee under the terms of any compensation or benefit plan, program or arrangement maintained by the Corporation during such period through the Termination Date. (2) The Corporation shall pay Employee all compensation and benefits due Employee under Corporation's retirement, insurance and other compensation or benefit plans, programs or arrangements as such payments become due. The amount of such compensation and benefits shall be determined under, and paid in accordance with, Corporation's retirement, insurance and other compensation or benefit plans, programs and arrangements. (3) In lieu of any further salary payments to Employee for periods subsequent to the Termination Date, the Corporation shall pay to Employee, immediately after the Termination Date, a lump sum severance payment, in cash, equal to three times the sum of (i) Employee's annual base salary in effect immediately prior to the Change in Control and (ii) the higher of the amount paid to Employee pursuant to the Corporation's Management Incentive Plan (or any successor plan thereto) for the year preceding the year in which the Termination Date occurs or paid in the year preceding the year in which the Change in Control occurs. (4) The Corporation shall pay to Employee, immediately after the Termination Date, a lump sum amount, in cash, equal to a pro rata portion (based on the number of days Employee is an employee during the year in which the Termination Date Occurs) of the aggregate value of the maximum annual target amount of all contingent incentive compensation awards to Employee for all uncompleted periods under the Corporation's Management Incentive Plan (or successor plan thereto). (5) For a thirty-six (36) month period after the Termination date, the Corporation shall provide Employee with life, disability, accident and health insurance benefits substantially similar to and equal or greater in economic value than such benefits which Employee is receiving immediately prior to the Termination Date (without giving effect to any reduction in such benefits subsequent to a Change in Control which reduction in benefits would constitute "good reason" as defined in this Paragraph). Benefits required to be provided to Employee pursuant to this subparagraph B5 shall be reduced by or made available to Employee without cost during such thirty-six (36) month period and any such benefit actually received by Employee shall be reported to the Corporation by Employee. C. In addition to the payments provided for in subparagraph B of this Paragraph 19, in the event that after a Change in Control Employee's employment by the Corporation is terminated by the Corporation without "good cause" or by Employee for "good reason," the Corporation shall continue to honor all stock 9 options granted to Employee (subject to the terms of such options) prior to the Termination Date, and all stock options granted to Employee prior to the Termination Date shall become fully vested and exercisable as of the Termination Date. D. Notwithstanding any other provision of this Agreement, in the event that any payment or benefit received or to be received by Employee in connection with a Change in Control or the termination of Employee's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Corporation, any Person whose actions result in a Change in Control or any Person affiliated with the Corporation or such Person) (all such payments and benefits being hereinafter called "Total Payments") would not be deductible (in whole or in part) by the Corporation, an affiliate or Person making such payment or providing such benefits as a result of section 280G of the Internal Revenue Code of 1986 (the "Code") then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payment provided by reason of Section 280G of the Code in such other plan, arrangement or agreement), adjustments in such payments shall be made as follows: (1) the cash payments provided pursuant to subparagraph B.(3) and B.(4) of this Paragraph 19 shall first be reduced (if necessary, to zero), and (2) benefits provided under subparagraph B.(5) of this Paragraph 19 shall next be reduced. For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which Employee shall have effectively waived in writing prior to the date of termination of employment shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Corporation's independent auditors and reasonably acceptable to Employee does not constitute a "parachute payment" within the meaning of section 280G(b) (2) of the Code, including by reason of section 280G(b) (4) (A) of the Code, (iii) the payments and benefits provided under subparagraphs B.(3)-(5) of this Paragraph 19 shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b) (4) (B) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Corporation's independent auditor in accordance with the principles of sections 280G(d) (3) and (4) of the Code. In no event shall the Corporation's obligation to continue to honor all stock options granted to Employee prior to the Termination Date nor the vesting of stock options in accordance with Paragraph 19.C hereof be effected by this Paragraph 19.D. E. Definitions. (1) "Beneficial Owner" has the meaning provided in Rule 13d-3 under the Exchange Act. (2) "Change in Control" means the occurrence of either (a), (b), (c) or (d), as hereinafter set forth: (a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from the Corporation, subsidiaries or its affiliates) representing 30% or more of the combined voting power of the Corporation's then outstanding securities; or 10 (b) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any director (other than a director designated by a Person who has entered into an agreement with the Corporation to effect a transaction described in clause (a), (c) or (d) of this subparagraph) whose election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the members of the Board (or, if Board nominations are not voted on by the full Board, members of the Board Committee voting on such nominations) then still in office who either were members of the Board at the beginning of the period or whose election or nomination for elections was previously so approved, cease for any reason to constitute a majority of the Board; or (c) the shareholders of the Corporation approve a merger or consolidation of the Corporation with any other Corporation, other than (i) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities or the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation, at least 75% of the combined voting power of the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no Person acquires more than 30% of the combined voting power of the Corporation's then outstanding securities; or (d) the shareholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all the Corporation's assets. (3) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (4) "Person" shall have the meaning given in Section 3(a) (9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) of the Exchange Act; however, a Person shall not include (a) the Corporation or any of its subsidiaries, (b) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its subsidiaries, (c) an underwriter temporarily holding securities pursuant to an offering of such securities, or (d) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation. (5) "Good reason" shall mean the termination of employment by Employee upon the occurrence of any one or more of the following events: (a) Any breach by Corporation of the terms and conditions of this Agreement affecting Employee's salary and bonus compensation, any employee benefit, stock options or the loss of any of Employee's titles or positions with Corporation; (b) A significant diminution of Employee's duties and responsibilities; 11 (c) The assignment to Employee of any duties inconsistent with or significantly different from his duties and responsibilities existing at the time of a Change in Control. (d) Any purported termination of Employee's employment by Corporation other than as permitted by this Agreement; (e) The relocation of Corporation's principal office or of Employee's own office to any place beyond twenty-five (25) miles from the current principal office of Corporation in Columbus, Georgia; (f) The failure of any successor to Corporation to expressly assume and agree to discharge Corporation's obligations to Employee under this Agreement as extended under this Paragraph, in form and substance satisfactory to Employee. F. CONTINUATION OF COMPENSATION AND BENEFIT. If Corporation shall attempt to terminate Employee's employment at any time after a Change in Control and such termination is in good faith disputed by Employee, Corporation shall continue to pay Employee all of his compensation and benefits provided for in this Agreement until the dispute is finally resolved, either by mutual written agreement or by final judgment, order or decree of a court of competent jurisdiction. 20. NO REQUIREMENT TO SEEK EMPLOYMENT AND NO OFFSET. Corporation agrees that, if Employee's employment is terminated by Corporation during the term of this Agreement, Employee is not required to seek other employment or attempt in any way to reduce the amounts payable to Employee by Corporation pursuant to the applicable terms of this Agreement; it being understood and agreed that the amount of any payment or benefit to Employee provided for hereunder shall not be reduced by any compensation or other benefits earned by Employee as a result of his employment by another employer or, after a Change in Control, by Corporation's attempt to offset any amount claimed to be owed by Employee to Corporation or otherwise. 21. WAIVER OF BREACH OR VIOLATION NOT DEEMED CONTINUING. The waiver by either party of a breach or violation of any provisions of this Agreement shall not operate as or be construed to be a waiver of any subsequent breach hereof. 22. NOTICES. Any and all notices required or permitted to be given under this Agreement will be sufficient if furnished in writing, sent by registered or certified mail to his last known residence in the case of Employee or to its principal office in Columbus, Georgia, in the case of the Corporation. 23. AUTHORITY. The provisions of this Agreement required to be approved by the Board of Directors of Corporation have been so approved and authorized. 24. ARBITRATION. Except for any dispute or matter arising after a Change in Control, as defined in Paragraph 19, any dispute arising under this Agreement, to the maximum extent allowed by applicable law, shall be subject to arbitration and prior to commencing any court action, the parties agree that they shall arbitrate all controversies. The arbitration shall be pursuant to the terms of the Federal Arbitration Act. The parties shall notify each other of the existence of an arbitrable controversy by certified mail and shall attempt in good faith to resolve their differences within fifteen (15) days after the receipt of such notice. Notice to Employee shall be sent to Employee's address as it appears in Corporation's records and notice to 12 Corporation shall be sent to: Arbitration Officer, AFLAC Incorporated, AFLAC Worldwide Headquarters, Columbus, Georgia 31999. If the dispute cannot be resolved within said fifteen (15) day period, either party may file a written demand for arbitration with the other party. The party filing such demand shall simultaneously specify his or its arbitrator, giving the name, address and telephone number of said arbitrator. The party receiving such notice shall notify the party demanding the arbitration of his or its arbitrator giving the name, address, and telephone number of said arbitrator within five (5) days of the receipt of such demand. The arbitrator named by the respective parties need not be neutral. The Senior Judge of the Superior Court of Muscogee County, Georgia, on request by either party, shall appoint a neutral person to serve as the third arbitrator and shall also appoint an arbitrator for any party failing or refusing to name his arbitrator within the time herein specified. The arbitrators thus constituted shall promptly meet, select a chairperson, fix the time and place of the hearing, and notify the parties. The majority of the panel shall render an award within ten (10) days of the completion of the hearing, and shall promptly transmit an executed copy of the award to the respective parties. Such an award shall be binding and conclusive upon the parties hereto, in the absence of fraud or corruption. Each party shall have the right to have the award made the judgment of a court of competent jurisdiction. 25. GOVERNING LAW. This Agreement shall be interpreted, construed and governed according to the laws of the State of Georgia. 26. PARAGRAPH HEADINGS. The paragraph headings contained in this Agreement are for convenience only and shall in no manner be construed as part of this Agreement. 27. TWO ORIGINALS. This Agreement is executed in two (2) originals, each of which shall be deemed an original and together shall constitute one and the same Agreement, with one original being delivered to each party hereto. IN WITNESS WHEREOF, Corporation has hereunto caused its name to be signed and its seal t be affixed by its duly authorized officers, and Employee has hereunto set his hand and seal, all being done in duplication original with one original being delivered to each party as of the 1st day of August, 1995. /s/ Paul S. Amos - ----------------------(L.S.) PAUL S. AMOS AFLAC Incorporated EMPLOYEE By /s/ Kriss Cloninger, III ---------------------------- Executive Vice President Attest /s/ Joey M. Loudermilk ------------------------ Secretary 13 EX-27 4 ARTICLE 7 FDS FOR 10-Q
7 This schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-Q for the quarter ended September 30, 1995, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 19,385,647 0 0 99,535 21,459 0 20,008,965 18,060 0 2,596,078 24,940,761 19,186,102 333,996 0 172,610 352,437 10,421 0 0 2,049,761 24,940,761 4,617,262 772,168 85 68,650 3,830,392 123,849 1,046,327 457,597 191,848 265,749 0 0 0 265,749 2.64 0 0 0 0 0 0 0 0
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