-----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, CNIuKnPJHCX+ssx2yH0zrMsYaMUm1qBkazb2h9KtcOD49/cnESBFkL2ti4gXLXUn ACRAQ6p6eGq+sq0LWVFruQ== 0000004977-97-000011.txt : 19970513 0000004977-97-000011.hdr.sgml : 19970513 ACCESSION NUMBER: 0000004977-97-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970512 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: 97600839 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 1ST 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 March 31, 1997 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 May 2, 1997 ---------------------------- ------------------ Common Stock, $.10 Par Value 136,527,956 shares AFLAC INCORPORATED AND SUBSIDIARIES INDEX Page No. ---- Part I. Financial Information: Item 1. Financial Statements Consolidated Balance Sheets - March 31, 1997 and December 31, 1996................... 1 Consolidated Statements of Earnings - Three Months Ended March 31, 1997 and 1996.............. 3 Consolidated Statements of Shareholders' Equity - Three Months Ended March 31, 1997 and 1996.............. 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1997 and 1996.............. 5 Notes to Consolidated Financial Statements................ 7 Review by Independent Certified Public Accountants............................................. 12 Independent Auditors' Report.............................. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 14 Part II. Other Information: Item 1. Legal Proceedings................................. 26 Item 4. Submission of Matters to a Vote of Security Holders.............................. 26 Item 6. Exhibits and Reports on Form 8-K.................. 27 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) March 31, December 31, 1997 1996 (Unaudited) ------------- ------------- ASSETS: Investments: Securities available for sale, at fair value: Fixed maturities (amortized cost, $17,004,970 in 1997 and $17,941,200 in 1996) $ 19,535,132 $ 20,327,726 Equity securities (cost, $94,270 in 1997 and $86,249 in 1996) 137,044 136,328 Mortgage loans on real estate 16,772 17,802 Other long-term investments 2,989 2,999 Short-term investments 957,315 261,680 ------------ ------------ Total investments 20,649,252 20,746,535 Cash 9,698 - Receivables, primarily premiums 217,131 226,981 Accrued investment income 211,458 253,850 Deferred policy acquisition costs 2,517,646 2,582,946 Property and equipment, net 442,581 471,907 Securities held as collateral for loaned securities 2,900,482 573,911 Intangible assets, net 60,383 60,933 Other 99,138 105,749 ------------ ------------ Total assets $ 27,107,769 $ 25,022,812 ============ ============ See accompanying Notes to Consolidated Financial Statements. (continued) 1 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In thousands, except for per-share amounts) March 31, December 31, 1997 1996 (Unaudited) ------------ ------------- Liabilities and Shareholders' Equity: Liabilities: Policy liabilities: Future policy benefits $ 18,069,222 $ 18,697,173 Unpaid policy claims 1,009,738 1,039,257 Unearned premiums 279,398 288,976 Other policyholders' funds 191,436 208,799 ------------ ------------ Total policy liabilities 19,549,794 20,234,205 Notes payable 496,153 353,533 Income taxes, primarily deferred 1,268,752 1,181,121 Payables for return of collateral on loaned securities 2,900,482 573,911 Payables for security transactions 142,825 99,408 Other 452,707 455,065 ------------ ------------ Total liabilities 24,810,713 22,897,243 ------------ ------------ Shareholders' equity: Common stock of $.10 par value. Authorized 175,000; issued 157,351 in 1997 and 157,239 in 1996 15,735 15,724 Additional paid-in capital 212,583 208,994 Unrealized foreign currency translation gains 240,748 229,782 Unrealized gains on securities available for sale 424,285 280,154 Retained earnings 1,994,251 1,917,794 Treasury stock, at average cost (589,855) (526,425) Notes receivable for stock purchases (691) (454) ------------ ------------ Total shareholders' equity 2,297,056 2,125,569 ------------ ------------ Total liabilities and shareholders' equity $ 27,107,769 $ 25,022,812 ============ ============ Shareholders' equity per share $ 16.82 $ 15.42 ============ ============ See accompanying Notes to Consolidated Financial Statements. 2 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Earnings (In thousands, except for per-share amounts - Unaudited) Three Months Ended March 31, ---------------------------------- 1997 1996 Revenues: ----------- ----------- Premiums, principally supplemental health insurance $ 1,436,087 $ 1,456,363 Net investment income 251,629 251,399 Realized investment gains (losses) (443) (643) Other income 20,270 22,801 ---------- ---------- Total revenues 1,707,543 1,729,920 ---------- ---------- Benefits and expenses: Benefits and claims 1,187,069 1,209,009 Acquisition and operating expenses: Amortization of deferred policy acquisition costs 41,662 41,216 Insurance commissions 188,803 191,970 Insurance expenses 105,550 101,951 Interest expense 3,334 5,086 Other operating expenses 32,006 33,505 ---------- ---------- Total acquisition and operating expenses 371,355 373,728 ---------- ---------- Total benefits and expenses 1,558,424 1,582,737 ---------- ---------- Earnings before income taxes 149,119 147,183 Income taxes 58,962 60,660 ---------- ---------- Net earnings $ 90,157 $ 86,523 ========== ========== Net earnings per share $ .64 $ .59 ========== ========== Shares used in computing earnings per share 141,864 146,366 ========== ========== Cash dividends per share $ .10 $ .087 ========== ========== See accompanying Notes to Consolidated Financial Statements. 3 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In thousands - Unaudited) Three Months Ended March 31, ---------------------------- 1997 1996 ---------- ---------- Common Stock: Balance at beginning of year $ 15,724 $ 15,636 Exercise of stock options 11 30 ---------- ---------- Balance at end of period 15,735 15,666 ---------- ---------- Additional paid-in capital: Balance at beginning of year 208,994 196,928 Exercise of stock options 969 2,292 Gain on treasury stock reissued 2,620 1,326 Cash in lieu of fractional shares - (83) ---------- ---------- Balance at end of period 212,583 200,463 ---------- ---------- Unrealized foreign currency translation gains: Balance at beginning of year 229,782 213,319 Change in unrealized translation gains, net of income taxes 10,966 6,619 ---------- ---------- Balance at end of period 240,748 219,938 ---------- ---------- Unrealized gains on securities available for sale: Balance at beginning of year 280,154 482,787 Change in unrealized gains (losses), net of income taxes 144,131 (126,154) ---------- ---------- Balance at end of period 424,285 356,633 ---------- ---------- Retained earnings: Balance at beginning of year 1,917,794 1,577,605 Net earnings 90,157 86,523 Cash dividends ($.10 per share in 1997 and $.087 in 1996) (13,700) (12,329) ---------- ---------- Balance at end of period 1,994,251 1,651,799 ---------- ---------- Treasury stock: Balance at beginning of year (526,425) (351,117) Purchases of treasury stock (70,109) (9,563) Cost of shares issued to sales associates stock bonus plan and dividend reinvestment plan 6,679 5,004 ---------- ---------- Balance at end of period (589,855) (355,676) ---------- ---------- Notes receivable for stock purchases (691) (978) ---------- ---------- Total shareholders' equity $ 2,297,056 $ 2,087,845 ========== ========== See accompanying Notes to Consolidated Financial Statements. 4 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands - Unaudited) Three Months Ended March 31, ----------------------------- 1997 1996 ------------ ------------ Cash flows from operating activities: Net earnings $ 90,157 $ 86,523 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities 589,071 618,717 Deferred income taxes 13,508 18,276 Change in income taxes payable (53,658) (79,271) Increase in deferred policy acquisition costs (66,166) (59,202) Change in receivables and advance premiums 3,635 (9,993) Other, net 36,086 75,425 ---------- ---------- Net cash provided by operating activities 612,633 650,475 ---------- ---------- Cash flows from investing activities: Proceeds from investments sold or matured: Fixed-maturity securities sold 1,033,228 334,768 Fixed-maturity securities matured 79,347 196,061 Equity securities 17,841 181 Mortgage loans, net 811 1,762 Other long-term investments, net 11 362 Costs of investments acquired: Fixed-maturity securities (1,103,036) (1,099,926) Equity securities (18,313) (1,474) Short-term investments, net (701,844) (182,606) Additions to property & equipment, net (797) (4,367) ---------- ---------- Net cash used by investing activities $ (692,752) $ (755,239) ---------- ---------- (continued) 5 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) (In thousands - Unaudited) Three Months Ended March 31, ----------------------------- 1997 1996 ------------ ------------ Cash flows from financing activities: Proceeds from borrowings $ 169,689 $ 125,917 Principal payments under debt obligations (4,986) (4,617) Dividends paid to shareholders (13,700) (12,329) Purchases of treasury stock (70,109) (9,563) Treasury stock reissued 9,299 6,330 Other, net 980 2,240 ---------- ---------- Net cash provided by financing activities 91,173 107,978 ---------- ---------- Effect of exchange rate changes on cash (1,356) (728) ---------- ---------- Net change in cash 9,698 2,486 Cash at beginning of year - 4,139 ---------- ---------- Cash at end of period $ 9,698 $ 6,625 ========== ========== Supplemental disclosures of cash flow information: Cash payments during the period for: Interest on debt obligations $ 2,753 $ 3,787 Income taxes 98,778 121,699 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 March 31, 1997, and the results of operations and statements of cash flows and shareholders' equity for the three months ended March 31, 1997 and 1996. Results of operations for interim periods are not necessarily indicative of results for the entire year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, based on the best information available, in recording transactions resulting from business operations. The balance sheet amounts that involve a greater extent of accounting estimates and actuarial determinations subject to future changes are: deferred policy acquisition costs, liabilities for future policy benefits and unpaid policy claims, accrued liabilities for unfunded retirement plans for various officers and beneficiaries, and contingent liabilities. As additional information becomes available (or actual amounts are determinable), the recorded estimates may be revised and reflected in operating results. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. 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, 1996. Effective January 1, 1997 the Company changed its method of determining the costs of investment securities sold from the first-in, first-out (FIFO) method to the specific identification method. The specific identification method allows the Company greater financial flexibility in the matching of its assets and liabilities. Also, the specific identification method is the predominant method used by the insurance industry. This accounting change had no material effect on net earnings for the three months ended March 31, 1997. 2. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, on January 1, 1997. This Statement was amended by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No. 125 establishes criteria for determining whether transfers of financial assets are sales or secured borrowings and must be applied prospectively to all applicable transactions occurring after December 31, 1996. The adoption of the 1997 provisions of SFAS No. 125 had no material affect on the Company's net earnings or shareholders' equity. SFAS No. 127 amended the effective date for those transactions concerning secured obligations and collateral, which must now be applied prospectively to all applicable transactions occurring after December 31, 1997. Earlier or retroactive application is not permitted. Beginning in 1998, as required by these standards, the Company will no longer recognize securities held as collateral as an asset, nor the related liability for return of such collateral. This change will have no affect on the Company's net earnings or shareholders' equity. 7 In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share. Beginning on December 31, 1997, SFAS No. 128 will require the presentation of two earnings per share (EPS) numbers, basic EPS and diluted EPS, in the statements of earnings. Basic EPS is computed by dividing net earnings by the weighted-average number of shares outstanding for the period. Diluted EPS includes the impact of stock options and other common stock equivalents. The Company's present EPS calculation is the same as the diluted method under SFAS No. 128. Earnings per share calculated under the new Statement would be as follows for the three months ended March 31: 1997 1996 -------- -------- Basic EPS $ .66 $ .61 Diluted EPS .64 .59 SFAS No. 129, Disclosures of Information about Capital Structure, was also issued in February 1997 and is also effective December 31, 1997. This Statement establishes standards for disclosing information about an entity's capital structure. No changes in the Company's present disclosures will be required under SFAS No. 129. 3. During 1996, the Company entered into definitive agreements for the sale of its broadcast division business consisting of seven network- affiliated television stations. The total pretax gain from this transaction is estimated to be $325 million. The sale of one station, WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996. The pretax and after-tax gains recognized on the sale of WAFB-TV in the fourth quarter of 1996 were $60.3 million and $48.2 million, respectively. The sale of the remaining six stations closed on April 15, 1997. The pretax gain on the sale of these six stations is estimated to be $265 million and will be reflected in the Company's second quarter financial statements. 8 4. A summary of notes payable is as follows: March 31, December 31, (In thousands) 1997 1996 ------------ ------------ 2.74% unsecured, yen-denominated notes payable to banks under reducing revolving credit agreement, due annually through July 2001 $ 265,915 $ 284,238 Unsecured, yen-denominated notes payable to banks under reducing revolving credit agreement, variable interest rate (1.06% at March 31, 1997), due annually through July 2001 72,522 - .88% short-term, unsecured, yen-denominated notes payable to banks under reducing revolving credit agreement, variable interest rate, due July 15, 1997 103,948 - Unsecured, yen-denominated notes payable to banks, due semiannually, through October 1997, variable interest rate (.88% at March 31, 1997) 16,328 17,453 9.60% to 10.72% unsecured notes payable to bank, due semiannually, through 1998 13,667 15,389 Obligations under capitalized leases, due monthly through 2001, secured by computer equipment in Japan 22,957 25,392 Short-term yen-denominated note payable to bank under unsecured line of credit, refinanced in 1997 - 9,850 Other 816 1,211 ---------- ---------- Total notes payable $ 496,153 $ 353,533 ========== ========== The Company has a reducing revolving credit agreement that currently provides for bank borrowings of up to $450 million in either U.S. dollars or equivalent Japanese yen. At March 31, 1997, bank borrowings of 54.9 billion yen ($442.4 million) were outstanding under this agreement. The Company has entered into interest rate swaps that effectively change the Company's interest rate exposure on 33.0 billion yen of this loan from variable interest rates to fixed interest rates. The fixed-rate is 2.74% after the effect of the swaps. Interest payments are made based on variable interest rates and the Company either pays to or receives from the counterparty an amount necessary to equal the fixed swap rate. At March 31, 1997, the variable rate based on the three-month Tokyo Interbank Offered Rate plus loan costs of 25 basis points was .86%. During the first quarter, the Company borrowed an additional 21.9 billion yen ($179.4 million) under this reducing revolving credit agreement at variable interest rates of .88% and 1.06%. These amounts include the refinancing of the short-term yen-denominated variable rate loan that was outstanding at December 31, 1996. The Company has designated its 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 9 into dollars at end-of-period exchange rates. Interest expense is translated at average monthly exchange rates for the period the interest expense is incurred. 5. The Company classifies all fixed-maturity securities as "available for sale." All fixed-maturity and equity securities are carried at fair value. 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. 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. The net effect of unrealized gains and losses from securities available for sale on shareholders' equity at the following dates was: (In thousands) March 31, 1997 December 31, 1996 ---------------- ----------------- Securities available for sale - unrealized gains $ 2,572,726 $ 2,436,605 Less: Policy liabilities 1,827,514 2,023,107 Deferred income taxes 320,927 133,344 ------------ ------------ Shareholders' equity, net unrealized gains on securities available for sale $ 424,285 $ 280,154 ============ ============ 6. AFLAC Japan uses short-term (usually seven days) security lending arrangements to increase investment income with minimal risk. At March 31, 1997 and December 31, 1996, the Company held Japanese government bonds as collateral for loaned securities in the amount of $2.9 billion and $573.9 million, respectively, at fair value. Securities received as collateral for such loans are reported separately in assets at fair value with a corresponding liability of the same amount for the return of such collateral at termination of the loans. (Beginning in 1998, such collateral assets and the related liability will no longer be included on the balance sheet under the accounting provisions of SFAS No. 125 and SFAS No. 127. Note 2.) 10 7. The following is a reconciliation of the number of shares of the Company's common stock for the three months ended March 31: (In thousands) 1997 1996 ---------- ---------- Common stock - number of shares: Issued: Balance at beginning of year 157,239 156,358 Exercise of stock options 112 307 -------- -------- Balance at end of period 157,351 156,665 -------- -------- Treasury stock - number of shares: Balance at beginning of year 19,354 14,384 Purchases of treasury stock 1,709 303 Shares issued to sales associates stock bonus plan and dividend reinvestment plan (212) (200) Exercise of stock options (28) (3) -------- -------- Balance at end of period 20,823 14,484 -------- -------- Shares outstanding at end of period 136,528 142,181 ======== ======== On May 5, 1997 the shareholders approved an increase in the number of shares of common stock the Company is authorized to issue from 175 million to 400 million shares. 8. 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 damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years. Although the final results of any litigation cannot be predicted with certainty, the Company believes the outcome of pending litigation will not have a material adverse effect on the financial position of the Company. 9. On April 25, 1997 the Japanese Ministry of Finance issued an order to a Japanese life insurer to cease operations and will begin a special examination of the insurer to determine the extent of the problems. The Company's future liability under Japan's policyholder protection system is not presently determinable. 11 REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The March 31, 1997 and 1996 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 13. 12 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 Stockholders and Board of Directors AFLAC Incorporated: We have reviewed the consolidated balance sheet of AFLAC Incorporated and subsidiaries as of March 31, 1997, and the related consolidated statements of earnings for the three-month periods ended March 31, 1997 and 1996, and the consolidated statements of cash flows and shareholders' equity for the three-month periods ended March 31, 1997 and 1996. 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, 1996, 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 29, 1997, we expressed an unqualified opinion on those consolidated financial statements. KPMG PEAT MARWICK LLP April 22, 1997 13 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). Most of AFLAC's policies are individually underwritten in the payroll market, with premiums paid by the employees. 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. RESULTS OF OPERATIONS The following table sets forth the results of operations 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) Percentage Change Three Months Over Previous Ended March 31, Period 1997 1996 -------------------- ------------------ Insurance operations (excluding realized investment gains and losses): AFLAC Japan.................... (4.4)% $ 127.2 $ 133.0 AFLAC U.S...................... 24.8 37.4 30.0 ------ ------ Total ....................... 1.0 164.6 163.0 Broadcast division operations...... (18.9) 3.5 4.4 Interest expense, noninsurance operations.......... 38.9 (2.6) (4.2) Corporate expenses, other operations and eliminations...... (4.4) (15.9) (15.4) ------ ------ Pretax operating earnings........ 1.2 149.6 147.8 Realized investment gains (losses). (.5) (.6) ------ ------ Earnings before income taxes..... 1.3 149.1 147.2 Income taxes....................... (2.8) 58.9 60.7 ------ ------ Net earnings................... 4.2 $ 90.2 $ 86.5 ====== ====== Net earnings per share......... 8.5 $ .64 $ .59 ====== ====== ============================================================================ The following discussion of earnings comparisons focuses on pretax operating earnings and excludes realized investment gains/losses. 14 FOREIGN CURRENCY TRANSLATION Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar exchange rate can have a significant effect on the Company's reported results. The yen weakened in relation to the dollar throughout 1996 and the first quarter of 1997. The average yen-to-dollar exchange rates were 121.28 and 105.84 for the three months ended March 31, 1997 and 1996, respectively. Operating earnings per share, which were affected by the fluctuations in the value of the yen, increased 8.5% to $.64 for the three months ended March 31, 1997 compared with the same period in 1996. The 12.7% weakening of the yen in 1997 lowered operating earnings by approximately $.06 per share for the three months ended March 31, 1997. This per-share amount was solely attributable to the translation effect of the fluctuations in the yen and not to any fundamental change in business operations. The Company sets its growth objective for operating earnings per share before the effect of foreign currency fluctuations. Excluding the effect of currency fluctuations, operating earnings per share increased 18.6% for the three months ended March 31, 1997 compared with the same period in 1996. The table below illustrates the effect of foreign currency translation on the Company's reported results by comparing those results as if foreign currency rates had remained unchanged. In years when the yen weakens, translating yen into dollars causes smaller increases or negative percentage changes for financial results in dollars. When the yen strengthens, translating yen into dollars causes larger increases for financial results in dollars. AFLAC Incorporated and Subsidiaries Supplemental Consolidated Data Selected Percentage Changes for the Three Months Ended March 31, 1997 Adjusted to Exclude Foreign As Reported Currency Changes* ----------- ---------------- Premium income (1.4)% 10.4% Net investment income .1 11.1 Total revenues (1.3) 10.2 Total benefits and expenses (1.5) 10.1 Operating earnings** 4.1 14.6 Operating earnings per share** 8.5 18.6 - ---------------------------------------------------------------------------- *Amounts excluding foreign currency changes shown above were determined using the same yen/dollar exchange rate for the current period as the comparable period in the prior year. **Excludes realized investment gains/losses. ============================================================================ The Company's objective for 1997 is to increase operating earnings per share by 17% for the year, excluding the effect of currency translation. However, if that objective is achieved and the yen/dollar exchange rate averages 125.00 compared with the 1996 average rate of 108.84, operating earnings per share including foreign currency translation would increase by approximately 6% for the year 1997. 15 Despite the weakening of the yen during 1997, operating earnings per share increased for the three-month period ended March 31, 1997 compared with the same period in 1996. The increase reflected strong earnings in the functional currencies of AFLAC's core insurance operations in Japan and the United States, additional investment income on the proceeds from the sale of one television station, and a consolidated benefit from additional investment income associated with profit repatriations from AFLAC Japan to AFLAC U.S. PROFIT REPATRIATION AFLAC Japan repatriated profits to AFLAC U.S. of $217.3 million in 1996, $140.5 million in 1995, $132.9 million in 1994, $97.9 million in 1993 and $33.4 million in 1992. 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 these transfers have benefited consolidated net earnings by $8.6 million and $5.0 million for the quarters ended March 31, 1997 and 1996, respectively. The Company expects to repatriate, subject to approval by the Japanese Ministry of Finance, approximately $300 million from AFLAC Japan to AFLAC U.S. in 1997 which includes $140 million of a non-recurring nature. SHARE REPURCHASE PROGRAM During the first quarter, the Company purchased 1.7 million shares of its common stock. The Company has purchased 22.1 million shares (through March 31, 1997) since the inception of the share repurchase program in February 1994. The difference in percentage increases in net earnings and net earnings per share primarily reflects the impact of the share repurchase program. INSURANCE OPERATIONS, AFLAC JAPAN AFLAC Japan, a branch of AFLAC and the principal contributor to the Company's earnings, ranks number one in terms of premium income and profits among all foreign life and non-life insurance companies operating in Japan. Among all life insurance companies operating in Japan, AFLAC Japan ranks fourth in terms of individual policies in force and 17th in terms of assets. The transfer of profits from AFLAC Japan to AFLAC U.S. distorts comparisons of operating results between years. Therefore, the AFLAC Japan summary of operations table on the following page presents investment income, total revenues and pretax operating earnings calculated on a pro forma basis in order to improve comparability between years. The pro forma adjustment represents cumulative investment income foregone by AFLAC Japan on funds repatriated to AFLAC U.S. during 1992 through 1996. 16 AFLAC JAPAN SUMMARY OF OPERATING RESULTS THREE-MONTH PERIOD ENDED MARCH 31, In Dollars (In millions) 1997 1996 -------------------------- Premium income......................... $ 1,176.7 $ 1,224.1 Investment income, as adjusted*........ 221.5 227.0 Other income........................... .3 .4 ---------- ---------- Total revenues, as adjusted*......... 1,398.5 1,451.5 ---------- ---------- Benefits and claims.................... 1,023.6 1,064.6 Operating expenses..................... 241.1 248.6 ---------- ---------- Total benefits and expenses.......... 1,264.7 1,313.2 ---------- ---------- Pretax operating earnings, as adjusted*...................... 133.8 138.3 Investment income applicable to profit repatriations.................. (6.6) (5.3) ---------- ---------- Pretax operating earnings.......... $ 127.2 $ 133.0 ========== ========== - ---------------------------------------------------------------------------- Percentage changes in dollars over previous period: Premium income....................... (3.9)% (1.1)% Investment income*................... (2.4) 3.4 Total revenues*...................... (3.7) (.5) Pretax operating earnings*........... (3.2) .2 Pretax operating earnings............ (4.4) (.5) - ---------------------------------------------------------------------------- Percentage changes in yen over previous period: Premium income....................... 10.2% 8.7% Investment income*................... 11.9 13.7 Total revenues*...................... 10.4 9.4 Pretax operating earnings*........... 11.1 10.1 Pretax operating earnings............ 9.7 9.3 - ---------------------------------------------------------------------------- Ratios to total revenues, as adjusted:* Benefits and claims.................. 73.2% 73.4% Operating expenses................... 17.2 17.1 Pretax operating earnings............ 9.6 9.5 Ratio of pretax operating earnings to total reported revenues........... 9.1 9.2 - ---------------------------------------------------------------------------- *Adjusted investment income, total revenues and pretax operating earnings include estimates of additional investment income of $6.6 million in 1997 and $5.3 million in 1996, foregone due to profit repatriations. ============================================================================ 17 JAPAN SALES The increase in premium income in yen was due to sales of new policies and continued excellent policy persistency. As expected, sales declined during the first quarter in Japan. New annualized premium sales decreased 19.8% to 14.0 billion yen. Management believes the sales decline reflects Japan's weak economy and the impact of the premium rate increase on new policy issues which took effect in the fourth quarter of 1996. The Ministry of Finance required all life insurers to raise premium rates on all new policy issues in order to help compensate for the continued low level of available investment yields. For the first time, AFLAC increased rates on all of its products simultaneously. In the past, the Company had implemented premium rate increases on a product-by- product basis. The Company's experience with previous rate increases showed that sales of the product with the increased price would be sluggish for six months or more following the rate hike. Management has taken several actions to help compensate for the weak sales in Japan. First, a new economy cancer life policy was introduced in January 1997. This new plan has lower premium rates and benefit levels. Based on initial marketing results of the new economy plan, management believes it will appeal to younger consumers and those who have postponed a purchase decision due to the weak economy. In addition, the Company will increase the use of direct mail marketing for its products as a supplemental distribution method, and will continue its popular television advertising program. As a result of these and other initiatives, management expects AFLAC Japan's sales to improve as the year progresses and end the year with a sales increase of 6% or more. JAPAN INVESTMENTS The historically low level of available investment yields continued to make investing AFLAC Japan's huge cash flows a difficult task during the quarter. However, the Company continued to seek the highest investment yields available in longer-dated securities without sacrificing investment quality. In fact, management was able to secure attractive yields through forward purchase commitments. As of April 11, the Company had invested or committed to invest approximately 50% of the expected 1997 cash flow at an average yield to maturity of 4.55%. This yield compares with the yield on a composite index of 10-year Japanese government bonds of 2.53% at the end of the quarter. During the first quarter, the Company purchased yen-denominated securities at an average yield to maturity of 3.96%. Including dollar- denominated investments, the blended new money yield to maturity for the quarter was 4.08%. The yield to maturity on AFLAC Japan's fixed-maturity portfolio declined from 5.58% at year-end to 5.46% at the end of the first quarter. The return on average invested assets was 5.40% for the first quarter, compared with 5.64% for the first quarter of 1996 and 5.54% for the full year 1996. 18 JAPAN OTHER In 1994, the Japanese government passed a package of tax reform bills centering on an increase in the consumption tax, which is similar to a sales tax in the United States. The consumption tax increased from the rate of 3% to 5% effective April 1, 1997. AFLAC Japan currently incurs consumption tax on agents' commissions. The Company implemented changes in its compensation arrangements with its agents to mitigate a portion of this tax increase. In March 1997, the Japanese government ratified new income tax provisions that increase Japan's income taxes on investment income received by foreign companies operating in Japan from securities issued from their home country. The new provisions are effective beginning in 1998. If the new income tax provisions had been effective January 1, 1997 in its present form, AFLAC Japan's income tax expense would have been increased, and net earnings of the Company would have decreased by approximately $5.9 million for the quarter ended March 31, 1997. Management has evaluated the impact of this tax change and will seek to mitigate some of the tax impact through investment alternatives and by restructuring portions of the existing investment portfolio. Management does not expect this tax change to materially affect future net earnings of the Company. INSURANCE OPERATIONS, AFLAC U.S. AFLAC U.S. pretax operating earnings continued to benefit from additional investment income earned on profit transfers received from AFLAC Japan. AFLAC U.S. received profit transfers in the amounts of $217.3 million in 1996, $140.5 million in 1995, $132.9 million in 1994, $97.9 million in 1993, and $33.4 million in 1992. AFLAC U.S. in turn increased dividend payments to the Parent Company in the amounts of $64.3 million, $21.2 million, $51.9 million and $10.1 million for the full years 1996, 1995, 1994 and 1993, respectively. Estimated investment income earned from profits repatriated to and retained by AFLAC U.S. from 1992 through 1996, along with estimated investment income earned from proceeds from the sale of one television station on December 31, 1996, have been reclassified in the following presentation in order to improve comparability between periods. 19 AFLAC U.S. SUMMARY OF OPERATING RESULTS THREE-MONTH PERIOD ENDED MARCH 31, (In millions) 1997 1996 -------------------------- Premium income......................... $ 256.8 $ 229.1 Investment income, as adjusted*........ 23.9 21.0 Other income........................... .4 .4 -------- -------- Total revenues, as adjusted*......... 281.1 250.5 -------- -------- Benefits and claims.................... 160.8 141.8 Operating expenses..................... 94.6 85.4 -------- -------- Total benefits and expenses.......... 255.4 227.2 -------- -------- Pretax operating earnings, as adjusted*...................... 25.7 23.3 Investment income applicable to profit repatriations and proceeds from the sale of one television station........ 11.7 6.7 -------- -------- Pretax operating earnings.......... $ 37.4 $ 30.0 ======== ======== - ---------------------------------------------------------------------------- Percentage increases over previous period: Premium income....................... 12.1% 9.3% Investment income*................... 13.7 13.1 Total revenues*...................... 12.2 9.6 Pretax operating earnings*........... 10.2 10.0 Pretax operating earnings............ 24.8 18.5 - ---------------------------------------------------------------------------- Ratios to total revenues, as adjusted:* Benefits and claims.................. 57.3% 56.6% Operating expenses................... 33.6 34.1 Pretax operating earnings............ 9.1 9.3 Ratio of pretax operating earnings to total reported revenues........... 12.8 11.7 - ---------------------------------------------------------------------------- *Excludes estimated investment income of $11.7 million in 1997 related to investment of profit repatriation funds retained by AFLAC U.S. and investment of proceeds from the sale of one television station, and $6.7 million in 1996 related to investment of profit repatriation funds retained by AFLAC U.S. ============================================================================ U.S. SALES The increase in premium income was primarily due to an increase in new sales over the last 12 months. Sales were the best in the history of AFLAC U.S. New annualized premium sales in the first quarter rose 21.0% to 20 $94.3 million. The Company continued to produce strong sales of its accident/disability plan and short-term disability policy. Management believes these sales results reflect AFLAC's strong market position and a growing need for supplemental insurance in the changing U.S. health care environment. Management expects new policy sales to increase by 15% or better for the year 1997. U.S. INVESTMENTS The increase in investment income was primarily due to the continued cash flow from operations. During the first quarter, available cash flow was invested at an average yield-to-maturity of 7.78% compared with 7.11% during the first quarter of 1996. The overall return on average invested assets, net of investment expenses, decreased slightly for the first three months of 1997 compared with the first quarter of 1996, to 7.28% from 7.43%. U.S. OTHER Management expects the operating expense ratio, excluding discretionary advertising expenses, to continue to decline slightly in the future due to continued improvements in operating efficiencies. By improving administrative systems and controlling other costs, management has been able to redirect funds to national advertising programs without significantly affecting the operating expense ratio. Management expects the pretax operating profit margin, which was 9.3% for the year 1996 excluding the effect of repatriation, to remain approximately the same in 1997. The operating results reflect slightly higher benefit ratios due to the Company's ongoing efforts to improve policy persistency by enhancing policyholder benefits. In addition, potential minimum benefit ratio requirements by insurance regulators may also result in an increase to these ratios. However, the aggregate benefit ratio has been relatively stable due to the mix of business shifting towards accident and hospital indemnity policies, which have lower benefit ratios than other products. BROADCAST OPERATIONS During 1996, the Company entered into definitive agreements for the sale of its broadcast division business consisting of seven network- affiliated television stations. The total pretax gain from this transaction is estimated to be $325 million. The sale of one station, WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996. The pretax and after-tax gains recognized on the sale of WAFB-TV in the fourth quarter of 1996 were $60.3 million and $48.2 million, respectively. The sale of the remaining six stations closed on April 15, 1997. The pretax gain on the sale of these six stations is estimated to be $265 million and will be reflected in the Company's second quarter financial statements. FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS For information regarding new Statements of Financial Accounting Standards see Note 2 of the Notes to the Consolidated Financial Statements. 21 ANALYSIS OF FINANCIAL CONDITION Since December 31, 1996, the financial condition of the Company has remained strong in the functional currencies of its operations. The investment portfolios of AFLAC Japan and AFLAC U.S. have continued to grow and consist of high-quality securities. Due to the significance of yen-denominated items in the balance sheet, 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 March 31, 1997, was 124.10 yen to one U.S. dollar, 6.4% weaker than the exchange rate of 116.10 as of December 31, 1996. Management estimates that the weaker yen rate decreased invested assets by $1.2 billion, total assets by $1.6 billion, and total liabilities by $1.6 billion versus the amounts that would have been reported based on the exchange rate as of December 31, 1996. INVESTED ASSETS Securities available for sale are carried at fair value. The following table shows an analysis of invested assets (including cash): March 31, December 31, (In thousands) 1997 1996 % Change --------- ------------ -------- AFLAC U.S.: Total invested assets, at cost or amortized cost $ 2,086,544 $ 1,910,154 9.2% Unrealized gains on securities available for sale 51,208 101,258 ---------- ---------- Total invested assets $ 2,137,752 $ 2,011,412 6.3% ========== ========== ======== AFLAC Japan: Total invested assets, at cost or amortized cost $16,003,995 $16,390,997 (2.4)% Unrealized gains on securities available for sale 2,521,518 2,334,537 ---------- ---------- Total invested assets $18,525,513 $18,725,534 (1.1)% ========== ========== ========= Consolidated: Total invested assets, at cost or amortized cost $18,086,224 $18,309,930 (1.2)% Unrealized gains on securities available for sale 2,572,726 2,436,605 ---------- ---------- Total invested assets $20,658,950 $20,746,535 (.4)% ========== ========== ========= Net unrealized gains of $2.6 billion on securities available for sale at March 31, 1997 consisted of $2.6 billion in gross unrealized gains and $47.2 million in gross unrealized losses. 22 The continued growth in invested assets in their functional currencies reflects the strength of the Company's primary business, the substantial cash flows from operations, strong new annualized premium sales by AFLAC U.S., and the substantial renewal premiums collected by AFLAC Japan. In addition, the Company received $98.5 million in cash in conjunction with the sale of a television station on December 31, 1996. AFLAC invests primarily within the Japanese and U.S. fixed-maturity markets. The Company uses specific criteria to judge the credit quality and liquidity of its investments and utilizes a variety of credit rating services to monitor this criteria. Applying those various credit ratings to a standardized rating system based on a nationally recognized service's categories, the percentages of the Company's fixed-maturity securities available for sale, at amortized cost, were as follows: March 31, 1997 December 31, 1996 -------------- ----------------- AAA 46.4% 46.2% AA 18.2 19.6 A 24.6 26.0 BBB 10.8 8.2 ----- ----- 100.0% 100.0% Private placement investments accounted for 32.0% and 28.8% of the Company's total fixed-maturity securities available for sale as of March 31, 1997 and December 31, 1996, respectively. AFLAC Japan has made investments in the private sector to secure higher yields than those available from Japanese government bonds. At the same time, the Company has adhered to its conservative standards for credit quality. POLICY LIABILITIES Policy liabilities decreased $684.4 million, or 3.4%, during the first three months of 1997. AFLAC Japan decreased $730.2 million, or 4.0% (2.7% increase in yen), and AFLAC U.S. increased $49.4 million, or 2.9%. The weaker yen rate decreased reported policy liabilities by $1.2 billion. Items that offset this decrease in policy liabilities are the addition of new business and the aging of policies in force. The effect of market value adjustments on fixed-maturity securities also caused a decrease in policy liabilities (see Note 5 of Notes to the Consolidated Financial Statements). DEBT See Note 4 of the Notes to the Consolidated Financial Statements for information on debt outstanding at March 31, 1997. The Company's ratio of debt to total capitalization (debt plus shareholders' equity, excluding the unrealized gains on securities available for sale) was 20.9% and 16.1% as of March 31, 1997 and December 31, 1996, respectively. 23 SECURITY LENDING AFLAC Japan uses short-term (usually seven days) security lending arrangements to increase investment income with minimal risk. At March 31, 1997, the Company held Japanese government bonds as collateral for loaned securities in the amount of $2.9 billion at fair value. For further information regarding such arrangements, see Note 6 of the Notes to the Consolidated Financial Statements. SHAREHOLDERS' EQUITY 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. 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 increasing 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. AFLAC may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by the Parent Company from funds generated through debt or equity offerings. The disposition of the AFLAC Broadcast Division has increased the Company's capital resources. Management believes outside sources for additional debt and equity capital will continue to be available for capital expenditures, business expansion, and the Company's share repurchase program. 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. Payments are made from AFLAC Japan to the Parent Company for management fees, and to AFLAC U.S. for allocated expenses and remittances of earnings. Total funds received from AFLAC Japan were $9.5 million in the first quarter of 1997 and $253.6 million and $179.5 million in the full years 1996 and 1995, respectively. Profit repatriations have been remitted annually from AFLAC Japan to AFLAC U.S. in July. During the last few years, the MOF has developed solvency standards, a version of risk-based capital requirements. 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, 1996. 24 OTHER The Life Insurance Association of Japan, an industry organization, has established a policyholder protection fund for losses from insolvent life insurers in Japan. The Company was required to pledge investment securities to the Life Insurance Association of Japan for this program. At March 31, 1997, $47.6 million, at fair value, of AFLAC Japan's investment securities had been pledged to this fund. On April 25, 1997, the Japanese Ministry of Finance issued an order to a Japanese life insurer to cease operations and will begin a special examination of the insurer to determine the extent of the problems. The Company's future liability under Japan's policyholder protection system is not presently determinable. For information regarding pending litigation, see Note 8 of the Notes to the Consolidated Financial Statements. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward- looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. The Company desires to take advantage of these provisions. This report contains cautionary statements identifying important factors that could cause actual results to differ materially from those projected in this discussion and analysis, and in any other statements made by officers of the Company in oral discussions with analysts and contained in documents filed with the Securities and Exchange Commission (the SEC). Forward- looking statements are not based on historical information and relate to future operations, strategies, financial results or other developments. In particular, statements containing words such as "expect," "anticipate," "believe," "goal," "objective" or similar words generally qualify as forward-looking. The Company undertakes no obligation to update such forward-looking statements. The Company cautions that the following factors, in addition to other factors mentioned from time to time in the Company's reports filed with the SEC, could cause the Company's actual results to differ materially: regulatory developments, competitive conditions, new products, Japanese Ministry of Finance approval of profit repatriations to the United States, general economic conditions in the United States and Japan, changes in U.S. and/or Japan tax laws, adequacy of reserves, credit and other risks associated with the Company's investment portfolio, significant changes in interest rates and fluctuations in foreign currency exchange rates. 25 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS 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 damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years. Although the final results of any litigation cannot be predicted with certainty, the Company believes the outcome of pending litigation will not have a material adverse effect on the financial position of the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the Shareholders was held on May 5, 1997. Matters submitted to the shareholders were: (1) Election of 17 members to the board of directors; (2) Increase the Company's authorized shares of $.10 par value common stock from 175 million to 400 million shares; (3) Adopt the Company's proposed 1997 Stock Option Plan; and (4) Ratification of the selection of auditors for 1997. The four proposals were approved by the shareholders. A summary of each vote cast for, against or withheld, as well as the number of abstention and broker non-votes, as to each such matter, including a separate tabulation with respect to each nominee for office is as follows: VOTES --------------------------------------------------- Absten- With- Broker For Against tions held Non-Votes ---------------------------------------------------- (1) Election of 17 members to the board of directors: Paul S. Amos 299,638,578 N/A N/A 1,042,469 545,194 Daniel P. Amos 299,687,443 N/A N/A 993,604 545,194 J. Shelby Amos, II 299,635,456 N/A N/A 1,045,591 545,194 Michael H. Armacost 299,798,254 N/A N/A 882,793 545,194 M. Delmar Edwards, M.D. 299,571,114 N/A N/A 1,109,933 545,194 George W. Ford, Jr. 299,518,099 N/A N/A 1,162,948 545,194 Joe Frank Harris 299,355,202 N/A N/A 1,325,845 545,194 Elizabeth J. Hudson 299,853,493 N/A N/A 827,554 545,194 Kenneth S. Janke, Sr. 299,846,712 N/A N/A 834,335 545,194 Charles B. Knapp 299,813,272 N/A N/A 867,775 545,194 Hisao Kobayashi 299,824,578 N/A N/A 856,469 545,194 Yoshiki Otake 299,826,117 N/A N/A 854,930 545,194 E. Stephen Purdom 299,743,812 N/A N/A 937,235 545,194 Barbara K. Rimer 299,794,634 N/A N/A 886,413 545,194 Henry C. Schwob 299,571,560 N/A N/A 1,109,487 545,194 J. Kyle Spencer 299,455,389 N/A N/A 1,225,658 545,194 Glenn Vaughn, Jr. 299,753,097 N/A N/A 927,950 545,194 26 VOTES --------------------------------------------------- Absten- With- Broker For Against tions held Non-Votes ---------------------------------------------------- (2) Increase the Company's authorized shares of $.10 par value common stock to 400 million shares 272,329,339 27,340,030 1,550,775 N/A 6,097 (3) Adopt the Company's proposed 1997 Stock Option Plan 264,193,650 15,200,872 3,316,715 N/A 18,515,004 (4) Ratification of appointment of KPMG Peat Marwick LLP as independent auditors 298,579,148 1,266,928 1,380,165 N/A None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.0 - Articles of Incorporation, as amended. 27.0 - 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 March 31, 1997. Items other than those listed above are omitted because they are not required or are not applicable. 27 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 May 12, 1997 /s/ KRISS CLONINGER, III ------------------------ --------------------------- KRISS CLONINGER,III Executive Vice President; Treasurer and Chief Financial Officer Date May 12, 1997 /s/ NORMAN P. FOSTER ------------------------ --------------------------- NORMAN P. FOSTER Executive Vice President, Corporate Finance 28 EXHIBITS FILED WITH CURRENT FORM 10-Q: 3.0 - Articles of Incorporation, as amended. 27.0 - Financial Data Schedule (for SEC use only). 29 EX-3 2 AMENDED ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT The shareholders of AFLAC INCORPORATED, a corporation organized and existing under the laws of the State of Georgia, did on May 5, 1997, adopt an amendment to the Articles of Incorporation of said corporation such that the first sentence of Article IV is amended to read in its entirety as follows: "The corporation shall have the authority to issue four hundred million (400,000,000) shares of common stock having a par value of $.10 per share (the "Common Stock")." Such amendment was adopted by the vote of the holders of 272,329,338.797 votes, there being 386,258,207 votes outstanding and entitled to vote thereon. The affirmative vote of the holders of a majority of the outstanding voting rights of Common Stock entitled to vote is required to amend the Articles of Incorporation. IN WITNESS WHEREOF, AFLAC INCORPORATED has caused these Articles of Amendment to be executed and its corporate seal to be affixed and has caused the foregoing to be attested, all by its duly authorized officers, on this 6th day of May, 1997. By: /s/ Daniel P. Amos ------------------------------------ Name: DANIEL P. AMOS, President Title: and Chief Executive Officer ATTEST: /s/ Joey M. Loudermilk --------------------------- Name: JOEY M. LOUDERMILK Title: Secretary (Corporate Seal) 1 ARTICLES OF AMENDMENT Pursuant to the provisions of the Georgia Business Corporation Code, Section 14-2-1006, the undersigned corporation hereby amends its Articles of Incorporation, and for that purpose, submits the following statement: (1) The name of the corporation is: American Family Corporation (2) The text of each amendment adopted is: "The name of the corporation is AFLAC Incorporated" "The title of the Bylaws of the Corporation be, effective January 1, 1992, amended to read as follows: 'Bylaws of AFLAC Incorporated.'" (3) The manner of implementation of any exchange reclassification, or cancellation of issued shares is as follows: All outstanding shares of American Family Corporation will be honored as shares of AFLAC Incorporated; all reissued or newly issued shares after January 1, 1992 will be in the name of AFLAC Incorporated. (4) The amendment was duly adopted on December 10, 1991 by the board of directors without shareholder approval, as such approval is not required. (5) The date said name change will be effective is January 1, 1992. (6) The corporation certifies that a notice of Intent to File Articles of Amendment to change name of corporation and a publishing fee of $40.00 has been delivered to the Columbus Ledger-Enquirer, as required by law, the date below written. American Family Corporation DATE: December 10, 1991 /s/ Joey M. Loudermilk ----------------------------------- JOEY M. LOUDERMILK General Counsel and Assistant Corporate Secretary 2 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF AMERICAN FAMILY CORPORATION I. The name of the corporation is American Family Corporation (the "Corporation"), II. These Articles of Amendment amend Article IV, Section (iii) of the Articles of Incorporation of the Corporation by adding the following sentence following the word "therefore": "Shares purchased by the Corporation shall become Treasury shares and may be reissued." III. The amendment was adopted by the Board of Directors of the Corporation on October 15, 1990. In accordance with Section 14-2-631(d) of the Georgia Business Corporation Code, no shareholder action was required for the amendment. IN WITNESS WHEREOF, American Family Corporation has caused these Restated Articles of Amendment to be executed and its corporate seal to be affixed and has caused the foregoing to be attested by its duly authorized officer, on this 26th day of March, 1991. AMERICAN FAMILY CORPORATION By: /s/ Daniel P. Amos ------------------------------ Daniel P. Amos Title: Chief Executive Officer ------------------------------ (Corporate Seal) ATTEST: /s/ Louis A. Hazouri, Jr. - ------------------------------------ Louis A. Hazouri, Jr. Secretary 3 ARTICLES OF AMENDMENT The shareholders of AMERICAN FAMILY CORPORATION, a corporation organized and existing under the laws of the State of Georgia, did on April 25, 1988, adopt an amendment to the Articles of Incorporation of said Corporation as follows: "No director shall be personally liable to the corporation or its stockholders for monetary damages for any breach of duty of care or other duty as a director. Notwithstanding the foregoing, a director shall be liable to the extent provided by applicable law: (i) for the appropriation in violation of his duties of any business opportunity of the corporation; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for any action for which the director could be found liable pursuant to Section 14-2-154 of the Official Code of Georgia Annotated, or any amendment thereto or successor provision thereto; and (iv) for any transaction from which the director derived an improper personal benefit. This provision shall not eliminate or limit the liability of a director for any act or omission occurring prior to April 26, 1988 (the effective date of the amendment). If the Official Code of Georgia Annotated hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of the director of the corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Official Code of Georgia Annotated. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omission of such director occurring prior to the effective date of such amendment." Said amendment was adopted by the vote of the holders of 234,783,541.672 votes, there being 80,957,884 shares outstanding and entitled to vote thereon. The vote of a majority of shareholders entitled to vote is required to amend the Articles of Incorporation. IN WITNESS WHEREOF, the American Family Corporation has caused these Articles of Amendment to be executed and its corporate seal to be affixed and has caused the foregoing to be attested, all by its duly authorized officers, on this 25th day of April, 1988. By: /s/ Joey M. Loudermilk ------------------------------- Vice President ATTEST: /s/ Jay W. Hobson ---------------------------- Assistant Secretary (Corporate Seal) 4 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF AMERICAN FAMILY CORPORATION I. The name of the Corporation is American Family Corporation. II. The Articles of Incorporation of American Family Corporation are hereby amended by striking in its entirety the first sentence of Article IV of said Articles and adding thereto the following new first sentence of Article IV so that the Articles of Incorporation of American Family Corporation, as amended, shall read as follows: "The Corporation shall have authority to issue one hundred seventy-five million (175,000,000) shares of common stock having a par value of $.10 per share (the "Common Stock"). III. The amendment to the Articles of Incorporation of the Corporation set forth in Section II hereof was adopted by the shareholders of the Corporation at a meeting duly held on April 27, 1987. IV. (a) The vote of the shareholders of the Corporation required to adopt the Amendment set forth in Section II hereof was the vote of the holders of a majority of the stock of the Corporation having voting power defined as follows: Except as otherwise provided in subparagraph (2) of this paragraph (a), every holder of record of the Corporation's common stock shall be entitled to: (1) Vote in person or by proxy on each matter submitted to a vote at a meeting of shareholders for each share of the common stock of record by such holder as of the record date of such meeting. (2) Notwithstanding subparagraph (1) of this paragraph (a), a holder of record of a share of the common stock which share meets one or both of the following criteria, shall be entitled to ten (10) votes on each matter submitted to a vote at a meeting of shareholders for each share of the common stock so owned by such holder of record as of the record of such meeting. (i) Such share of the common stock has had the same beneficial owner since April 22, 1985, or (ii) Such share of the common stock has had the same beneficial owner for a continuous period of greater than 48 months prior to the record date of such meeting. 5 (b) The number of shares of the Corporation's common stock which were issued and outstanding and entitled to vote as of March 6, 1987 the record date for said shareholders' meeting, was 80,512,901. Of said shares, 50,306,837 shares had the right to vote one vote per share and 30,206,064 shares had the right to vote ten votes per share. The total number of voting rights represented by said shares was 352,367,477. (c) The number of voting rights required to be voted to adopt the Amendment was 176,183,739 representing the majority of the voting rights represented by the issued and outstanding shares entitled to vote thereon. The number of voting rights of the Corporation's common stock being voted in favor of said Amendment, voting generally and as a class, was 227,157,291 or 64.5 percent of the voting rights represented by the issued and outstanding shares entitled to vote. The number of voting rights being voted against the Amendment was 16,015,896. The number of voting rights which affirmatively abstained from voting on the Amendment were 2,406,842. V. The majority of the votes cast by the shareholders entitled to vote at the meeting of shareholders were voted to adopt said amendment in accordance with the provisions of the charter and Section 14-2-191 of the Official Code of Georgia Annotated. VI. The Amendment to the Articles of Incorporation of the Corporation set forth in Section II hereof does not provide for an exchange or cancellation of any issued shares of the Corporation. VII. The Amendment effects no change in the stated capital of the Corporation. IN WITNESS WHEREOF, American Family Corporation has caused these Articles of Amendment to be executed and its corporate seal to be affixed and has caused the foregoing to be attested, all by its duly authorized officers, on this 11th day of June, 1987. AMERICAN FAMILY CORPORATION By: /s/ John B. Amos ------------------------------- Chairman of the Board Attest: /s/ Louis A. Hazouri, Jr. - ------------------------------- Secretary (Corporate Seal) 6 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF AMERICAN FAMILY CORPORATION I. The name of the Corporation is American Family Corporation. II. The Articles of Incorporation of American Family Corporation are hereby amended by striking in its entirety the first sentence of Article IV of said Articles and adding thereto the following new first sentence of Article IV so that the Articles of Incorporation of American Family Corporation, as amended, shall read as follows: "The Corporation shall have authority to issue not more than 100,000,000 shares of common stock having a par value of $.10 per share." III. The amendment to the Articles of Incorporation of the Corporation set forth in Section II hereof was adopted by the shareholders of the Corporation at a meeting duly held on April 28, 1986. IV. (a) The vote of the shareholders of the Corporation required to adopt the Amendment set forth in Section II hereof was the vote of the holders of a majority of the stock of the Corporation having voting power defined as follows: Except as otherwise provided in subparagraph (2) of this paragraph (a), every holder of record of the Corporation's common stock shall be entitled to: (1) Vote in person or by proxy on each matter submitted to a vote at a meeting of shareholders for each share of the common stock held of record by such holder as of the record date of such meeting. (2) Notwithstanding subparagraph (1) of this paragraph (a), a holder of record of a share of the common stock, which share meets one or both of the following criteria, shall be entitled to ten (10) votes on each matter submitted to a vote at a meeting of shareholders for each share of the common stock so owned by such holder of record as of the record of such meeting. (i) Such share of the common stock has had the same beneficial owner since April 22, 1985, or (ii) Such share of the common stock has had the same beneficial owner for a continuous period of greater than 48 months prior to the record date of such meeting. 7 (b) The number of shares of the Corporation's common stock which were issued and outstanding and entitled to vote as of March 7, 1986, the record date for said shareholders' meeting, was 39,986,385. Of said shares, 22,800,839 shares had the right to vote one vote per share and 17,185,545.6 shares had the right to vote ten votes per share. The total number of voting rights represented by said shares was 194,656,295. (c) The number of voting rights required to be voted to adopt the Amendment was 97,328,148, representing the majority of the voting rights represented by the issued and outstanding shares entitled to vote thereon. The number of voting rights of the Corporation's common stock being voted in favor of said Amendment, voting generally and as a class, was 141,679,373, or 72.8 percent of the voting rights represented by the issued and outstanding shares entitled to vote. The number of voting rights being voted against the Amendment was 2,965,271. The number of voting rights which affirmatively abstained from voting on the Amendment were 1,141,565. The number of voting rights which were represented by proxies at said meeting and which did not vote on the Amendment were 135. The number of voting rights which were not represented by proxy at the meeting and which were unvoted was 48,869,953. V. The majority of the votes cast by the shareholders entitled to vote at the meeting of shareholders were voted to adopt said amendment in accordance with the provisions of the Charter and Section 14-2-191 of the Official Code of Georgia Annotated. VI. The Amendment to the Articles of Incorporation of the Corporation set forth in Section II hereof does not provide for an exchange or cancellation of any issued shares of the Corporation. VII. The Amendment effects no change in the stated capital of the Corporation. IN WITNESS WHEREOF, American Family Corporation has caused these Articles of Amendment to be executed and its corporate seal to be affixed and has caused the foregoing to be attested, all by its duly authorized officers, on this 21st day of July, 1986. AMERICAN FAMILY CORPORATION By: /s/ Salvador Diaz-Verson, Jr. -------------------------------- Attest: President /s/ Louis A. Hazouri, Jr. - ----------------------------- Secretary (CORPORATE SEAL) 8 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF AMERICAN FAMILY CORPORATION I. The name of the corporation is American Family Corporation (hereinafter referred to as the "CORPORATION"). II. These Articles of Amendment amend Article IV of the Articles of Incorporation of the Corporation as follows: (A) By striking the first sentence in Article IV in its entirety and substituting in lieu thereof the following: "The CORPORATION shall have authority to issue Seventy-Five Million (75,000,000) shares of common stock having a par value of $.10 per share (the "Common Stock")." (B) By amending Article IV by adding the provisions set forth below at the end of the first sentence of the first paragraph: "The Common Stock shall have the following voting rights: (a) Except as otherwise provided in paragraph (b) of this Section (i) every holder of record of the Common Stock shall be entitled to one (1) vote in person or by proxy on each matter submitted to a vote at a meeting of shareholders for each share of the Common Stock held of record by such holder as of the record date of such meeting. (b) Notwithstanding paragraph (a) of this Section (i), a holder of record of a share of the Common Stock, which share meets one or both of the following criteria, shall be entitled to ten (10) votes on each matter submitted to a vote at a meeting of shareholders for each share of the Common Stock so owned by such holder of record as of the record date of such meeting: (1) such share of the Common Stock has had the same beneficial owner since April 22, 1985; or (2) such share of the Common Stock has had the same beneficial owner for a continuous period of greater than 48 months prior to the record date of such meeting. (c) For purposes of paragraphs (b) and (e) of this Section (i), any transferee of a share of the Common Stock where such share of the Common Stock was transferred by gift, devise, 9 bequest or otherwise through the law of inheritance, descent or distribution from the estate of the transferor or to a trust beneficiary or beneficiaries by a trustee holding such share of the Common Stock for said beneficiary or benefit of the beneficiaries of said trust shall be deemed to be the same "beneficial owner" as the transferor. Additionally, any shares of Common Stock acquired by the beneficial owner as a direct result of a stock split, stock dividend or other type of distribution of shares with respect to existing shares ("dividend shares") will be deemed to have been acquired and held continuously from the date on which the shares with regard to which the dividend shares were issued were acquired. (d) For purposes of paragraph (b) of this Section (i), shares of the Common Stock acquired pursuant to a stock option shall be deemed to have been acquired on the date the option was granted. (e) For purposes of paragraph (b) of this Section (i), any share of the Common Stock held in "street" or "nominee" name shall be presumed to have been acquired by the beneficial owner subsequent to April 22, 1985 and to have had the same beneficial owner for a continuous period of less than 48 months prior to the record date of the meeting in question. This presumption shall be rebuttable by presentation to the Company by such beneficial owner of satisfactory evidence that such share has had the same beneficial owner continuously since April 22, 1985 or such share has had the same beneficial owner for a period greater than 48 months prior to the record date of the meeting in question. Any disputes arising pursuant to this paragraph (e) of this Section (i) shall be definitively resolved by a determination of the Board of Directors made in good faith." (C) By amending Article IV further to insert "(i)" before the first word of the first paragraph of Article IV, "(ii)" before the first word of the paragraph beginning "The Corporation shall have authority to issue not more than 2,300,000 shares...", "(iii)" before the first word of the paragraph beginning "Except as specifically provided above the Corporation shall have the full power to purchase and otherwise acquire..." and "(iv)" before the last paragraph of Article IV." III. The amendment to the Articles of Incorporation of the Corporation set forth in Section II hereof was adopted by the shareholders of the CORPORATION at a meeting duly held on April 22, 1985. IV. (a) The vote of the shareholders of the CORPORATION required to adopt the Amendment to the Articles of Incorporation of the Corporation set forth in Section II hereof was a majority of all shares of common stock, par value ($.10) per share, of the CORPORATION issued now standing and entitled to vote, both generally and as a class (said common stock being the only capital stock of the CORPORATION issued and outstanding). 10 (b) The number of shares of the Common Stock, par value $.10 per share, of the CORPORATION issued and outstanding and entitled to vote as of April 22, 1985, the record date for the meeting of shareholders of the CORPORATION on April 22, 1985, at which said Amendment was adopted was 19,875,312 shares. (c) The number of shares of the Common Stock, par value $.10 per share, of the CORPORATION voting for the said Amendment, voting generally and as a class, was 14,260,004 shares or 71.7 percent of the shares of such stock issued and outstanding and entitled to vote, with 1,147,144 shares of such stock being voted against the Amendment and 4,468,164 shares of such stock not voting. The number of shares which must be voted to adopt the amendment is 9,937,657, representing a majority of the issued and outstanding shares entitled to vote thereon. V. The Amendment to the Articles of Incorporation of the Corporation set forth in Section II hereof does not provide for an exchange or cancellation of any issued shares of the corporation. The extent to which the Amendment to the Articles of Incorporation set forth in Section II hereof provides for a reclassification of issued shares of the CORPORATION is set forth in the Amendment. VI. The Amendment to the Articles of Incorporation of the Corporation set forth in Section II hereof does not effect a change in the stated capital of the CORPORATION. AMERICAN FAMILY CORPORATION By: /s/ John B. Amos ------------------------------- JOHN B. AMOS Chairman of the Board and Chief Executive Officer (Seal) Attest: /s/ George W. Jeter - ----------------------------- GEORGE W. JETER Secretary of American Family Corporation 11 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF AMERICAN FAMILY CORPORATION I. The name of the corporation is American Family Corporation. II. The Articles of Incorporation of American Family Corporation are hereby amended by striking in its entirety the first sentence of Article IV of said Articles and adding thereto the following new first sentence of Article IV so that the Articles of Incorporation of American Family Corporation, as amended, shall read as follows: "The Corporation shall authority to issue not more than 25,000,000 shares of common stock having a par value of $.10 per share." III. On April 23, 1984 the amendment was adopted by the vote of 14,079,909 shares, there being 17,846,550 shares outstanding and entitled to vote thereon. The vote of a majority of shareholders entitled to vote is required to amend the Articles of Incorporation. IV. The amendment does not provide for an exchange, reclassification or cancellation of any issued shares of the Corporation. V. The amendment does not effect a change in the stated capital of the Corporation. 12 VI. IN WITNESS WHEREOF, American Family Corporation has caused these Articles of Amendment to be executed and its corporate seal to be affixed and has caused the foregoing to be attested, all by its duly authorized officers, on this 24th day of May, 1984. AMERICAN FAMILY CORPORATION By: /s/ John B. Amos ------------------------------- JOHN B. AMOS Chairman of the Board and Chief Executive Officer (Corporate Seal) Attest: /s/ George W. Jeter - ----------------------------- GEORGE W. JETER Secretary 13 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF AMERICAN FAMILY CORPORATION (1) The name of the Corporation is American Family Corporation (herein referred to as the "corporation"). (2) These articles of amendment amend Article IV of the articles of incorporation of the corporation (A) by changing the first word of the second paragraph of said Article IV from "The" to "the" and adding at the beginning of such paragraph before the "the" the words "Except as specifically provided above," and (B) by adding the provisions set forth below after the first paragraph of said Article IV and before the second paragraph of said Article IV: The corporation shall have authority to issue not more than 2,300,000 shares of nonvoting cumulative preferred stock having a par value of $12.75 per share upon the following terms and conditions. (a) If issued, the preferred stock of the corporation authorized herein may be issued only in one series on a single date (the "issuance date"). The shares of such series shall be designated "Nonvoting Cumulative Preferred Stock, 1980 Series," with the year of the issuance date to be inserted in the title (hereinafter called the "preferred stock"). After the issuance date, no additional shares of the preferred stock shall be issued. (b) The holders of the preferred stock shall be entitled to receive, when, as and if declared by the Board of Directors of the corporation, out of the earnings and other funds and assets of the corporation legally available for the payment of cash dividends, cash dividends at the annual rates of $.90 per share for the first 5 years, $2.20 per share for the 6th year, $2.60 per share for the 7th year, $3.69 per share for the 8th year, $4.36 per share for the 9th year, and $5.18 per share for the 10th and subsequent years. The years for which the aforesaid annual dividend rates shall apply shall commence on the issuance date of the preferred stock and each anniversary thereof. The dividends shall be payable for each calendar quarter (ending on the last day of every March, June, September and December) on the first day of every March, June, September and December included in such quarter (or, if such date is one on which the New York Stock Exchange is not open for trading, then on the next succeeding day on which such exchange is open for trading) to holders of record of the preferred stock at the end of the 15th day of the preceding month. The first dividend, however, shall be payable on the payment date during and for the first calendar quarter commencing on or after the issuance date, and shall be in an amount, determined at the initial annual rate of $.90, for the period from the issuance date until the end of 14 such first calendar quarter. Cash dividends on the preferred stock shall commence to accrue and be accumulative from the issuance date. So long as any shares of the preferred stock shall remain outstanding, no dividend whatsoever shall be declared or paid or set apart for any shares of common stock, par value $.10 per share, of the corporation (hereinafter called the "common stock") or any other capital stock of the corporation ranking junior to the preferred stock in payment of dividends, nor shall any shares of the common stock, the preferred stock or any other capital stock of the corporation ranking on a parity with or junior to the preferred stock in payment of dividends be redeemed or purchased by the corporation or any subsidiary thereof, nor shall any monies be paid to or made available for a sinking fund for the redemption or purchase of any shares of such stock or otherwise applied to such redemption or purchase, unless in each instance all cash dividends on all outstanding shares of the preferred stock through and including the dividend payable on the last quarterly payment date shall have been paid, or dividends in such amount shall have been declared and sufficient funds set aside for the payment thereof; provided, however, that notwithstanding the foregoing limitation, any monies deposited (not in violation of the aforesaid limitation at the time of deposit) in any sinking fund in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of stock in accordance with the terms of the sinking fund; and provided further, that notwithstanding the foregoing limitation, dividends payable solely in shares of the common stock may be paid upon shares of the common stock. For purposes of this paragraph (b), no share of the preferred stock shall be deemed to be issued or outstanding at any time at which it is held by or for the account of the corporation, but the same shall be deemed to be issued and outstanding if held by or for the account of a subsidiary of the corporation. Accumulation of dividends on the preferred stock shall not bear interest. (c) At any time or from time to time after the 5th anniversary of the issuance date, the corporation may call for and require the redemption of all or any portion of the outstanding shares of the preferred stock effective in each case as of a date (the "redemption date") after the 5th anniversary of the issuance date. Such action must be authorized by resolution of the Board of Directors, and if less than all outstanding shares of the preferred stock are to be redeemed, the particular shares to be redeemed shall be chosen by allocation among the respective holders of the shares of the preferred stock pro rata or substantially pro rata as may be determined by resolution of the Board of Directors. The corporation may, however, exclude from any redemption, to the extent set forth in a resolution of the Board of Directors of the corporation any or all shares of the preferred stock held by or for the account of the corporation or any subsidiary of the corporation. Written notice of the redemption and of any change in the shares to be redeemed or the allocation thereof among holders thereof shall be given by first class mail, postage prepaid, at least 30 but not more than 90 days prior to the redemption date to each record holder of the preferred stock at 15 such holder's address as it shall appear on the stock records of the corporation. Notice so mailed shall be conclusively presumed to have been duly given whether or not actually received. The redemption price shall be $14.00 per share, together within each case an amount equal to any dividend arrearages on the preferred stock payable but undeclared or unpaid prior to the redemption date plus a pro rata (based on a 30 day month and a 360 day year) accrual in respect of preferred stock dividends, if any, not yet payable as of the redemption date but accruing for the period from the end of the last full calendar quarter (ending the last day of March, June, September or December) to the redemption date. On and after the date fixed on any notice of redemption as the date of redemption, and if funds sufficient to redeem such shares have been irrevocably set aside, all rights of holders of the preferred stock to be redeemed as stockholders of the corporation shall cease and terminate, except the right to receive the redemption price, without interest, as provided herein. Alternatively, if the corporation shall so elect, on and after a date, which shall be the redemption date or any date prior therein but not earlier than the 5th anniversary of the issuance date and which shall be the later of (i) the date on which written notice of redemption is mailed to holders of the preferred stock as provided above and (ii) the date on which funds sufficient in amount to pay on the redemption date the aggregate redemption price (determined as provided above as of the redemption date) have been deposited with a commercial bank in the United States duly designated as paying agent by the corporation by resolution of its board of directors (provided the notice of redemption shall state the name and address of such paying agent and the intention of the corporation to deposit said funds on or before the redemption date with the paying agent or the fact of such deposit), all rights of holders of the preferred stock to be redeemed as stockholders of the corporation shall cease and terminate, except the right to receive the redemption price, without interest, as provided herein. Any monies so deposited with a paying agent which shall be unclaimed by holders of the preferred stock so called for redemption at the end of a period, not less than one full year after the redemption date, designated by the corporation by resolution of its board of directors, shall be paid by the paying agent to the corporation, and thereafter the holders of the preferred stock called for redemption shall look only to the corporation for payment thereof, without interest. On and after the date fixed in any notice as the date of redemption, the respective holders of record of the preferred stock shall be entitled to receive the redemption price, without interest, upon actual delivery to the corporation or to the duly designated paying agent of certificates for the shares to be redeemed, each such certificate, if required by the corporation, to be duly endorsed in blank or accompanied by proper instruments of assignment and transfer thereof duly executed in blank. In the event the corporation shall fail to set aside irrevocably (by deposit with a paying agent or otherwise) prior to the redemption date sufficient funds to make, or shall default in making, redemption payments for preferred stock which has been called for redemption, until such failure or default shall be cured through irrevocable set aside (by deposit with a 16 paying agent or otherwise) or payment or tender of payment to all remaining holders of preferred stock called for redemption of the redemption price, which price shall in the event of such failure or default include the amount of dividends which are payable but undeclared or unpaid or have accrued through the date of such irrevocable set aside, payment or tender of payment curing such failure or default (determined in the same manner as provided above with respect to dividends through the redemption date), no dividend whatsoever shall be declared or paid or set apart for the common stock or any other capital stock of the corporation ranking junior to the preferred stock in payment of dividends, nor shall any shares of the common stock, the preferred stock or any other capital stock of the corporation ranking on a parity with or junior to the preferred stock in payment of dividends be redeemed or purchased by the corporation or any subsidiary thereof, nor shall any monies be paid to or made available for a sinking fund for the redemption or purchase of any shares of such stock or otherwise applied to such redemption or purchase; provided, however, that notwithstanding the foregoing limitation, any monies deposited (not in violation of the aforesaid limitation at the time of deposit) in any sinking fund in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of stock in accordance with the terms of the sinking fund; and provided further, that notwithstanding the foregoing limitation, dividends payable solely in shares of the common stock may be paid upon shares of the common stock. A holder of the preferred stock shall not have any right to cause the corporation to redeem any shares of the preferred stock. (d) in the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the holders of the preferred stock then outstanding shall be entitled to receive out of the assets of the corporation available for distribution to holders of its capital stock, whether from capital, surplus or earnings of any nature, before any payment shall be made to holders of the common stock or any other capital stock of the corporation ranking junior to the preferred stock as to distribution on liquidations, an amount equal to $12.75 per share together with in each case an amount equal to any dividend arrearages on the preferred stock payable but undeclared or unpaid plus a pro rata (based on a 30 day month and a 360 days year) accrual in respect of preferred stock dividends not yet payable as of the payment date but accruing for the period from the end of the last full calendar quarter (ending on the last day of March, June, September, or December) to the payment date. If the assets of the corporation available for distribution upon liquidation, dissolution or winding up of the corporation to the holders of the preferred stock and any other capital stock of the corporation ranking on a parity with the preferred stock as to distributions on liquidation upon the liquidation are insufficient to pay the holders thereof the full amounts to which they are entitled in such event, such holders shall share ratably in the assets which are so available. Holders of the preferred stock shall not be entitled to any further participation in the assets of the corporation upon its liquidation, dissolution or winding up. Written notice of any 17 voluntary or involuntary liquidation, dissolution or winding up of the corporation within the meaning of this paragraph (d), stating a payment date and the place where the distributable amounts shall be payable, shall be given by first-class mail, postage prepaid, at least 30 but not more than 90 days prior to the payment date stated therein to each record holder of the preferred stock at such holder's address as it shall appear on the stock records of the corporation. Notice so mailed shall be conclusively presumed to have been duly given whether or not actually received. Neither the sale, transfer or exchange of all or substantially all the assets of the corporation, nor the merger or consolidation of the corporation with or into any other company, nor the sale, transfer or exchange of all or substantially all the assets of the corporation in exchange for securities of another corporation, followed by liquidation of the corporation and the distribution of such securities to the holders of the capital stock of this corporation, shall be deemed to be a liquidation, dissolution or winding up of the corporation within the meaning of this paragraph (d). (e) Except as may be required by Georgia law and as set forth in paragraph (h) hereof, the holders of the preferred stock shall have no voting rights whatsoever in respect of the affairs of the corporation. (f) The holders of the preferred stock shall have no rights whatsoever to convert their shares of preferred stock into shares of the common stock or shares of any other stock or other securities of the corporation. (g) Any shares of the preferred stock redeemed, purchased or otherwise acquired by the corporation shall not be reissued or otherwise disposed of. The foregoing sentence does not apply to shares of the preferred stock purchased or otherwise acquired by a subsidiary of the corporation. The corporation may from time to time cause any or all shares of the preferred stock which has been redeemed, purchased or otherwise acquired by the corporation to be retired in the manner provided by law. (h) Except as may be provided by amendment to the articles of incorporation of the corporation approved by holders of a majority of the outstanding shares of the preferred stock voting as a class, the common stock and all other common or preferred capital stock of the corporation shall be junior to the preferred stock as to dividends and amounts distributable on liquidation, dissolution or winding up of the corporation, as provided in paragraphs (b) and (d) hereof, and the holders of the preferred stock shall be entitled to receive payments of all dividends payable (including any arrearages of cumulative dividends) or of all amounts distributable on liquidation with respect to the preferred stock, as the case may be, before or in preference and priority to any such payments with respect to any other capital stock of the corporation. The shares of the preferred stock shall not be subject to the operation of or to the benefit of any retirement or sinking fund. The shares of the preferred stock shall not have any relative, participating, optional or other special rights and powers other than as set 18 forth herein. For purposes of paragraphs (b), (c) and (g) hereof, the term "subsidiary" shall mean any company owned directly or indirectly 50% or more by the corporation. (3) The amendment to the articles of incorporation of the corporation set forth in section (2) hereof was adopted by the stockholders of the corporation at a meeting duly held on September 22, 1980. (4)(a) The vote of the stockholders of the corporation required to adopt the amendment to the articles of incorporation of the corporation set forth in section (2) hereof was a majority of all shares of common stock, par value $.10 per share, of the corporation issued and outstanding and entitled to vote, both generally and as a class (said common stock being the only capital stock of the corporation issued and outstanding). (b) The number of shares of the common stock, par value $.10 per share, of the corporation issued and outstanding and entitled to vote as of August 15, 1980, the record date for the meeting of stockholders of the corporation on September 22, 1980, at which said amendment was adopted, was 12,156,676 shares (excluding 96,600 treasury shares not entitled to vote). (c) The number of shares of the common stock, par value $.10 per share, of the corporation voted for the said amendment, voting generally and as a class, was 7,428,203 shares or 60.09% of the shares of such stock issued and outstanding and entitled to vote, with 135,404 shares of such stock being voted against the amendment and 4,728,473 shares of such stock not voting. (5) The amendment to the articles of incorporation of the corporation set forth in section (2) hereof does not provide for an exchange, reclassification or cancellation of any issued shares of the corporation. (6) The amendment to the articles of incorporation of the corporation set forth in section (2) hereof does not effect a change in the stated capital of the corporation. AMERICAN FAMILY CORPORATION (Seal) By: /s/ John B. Amos -------------------------------- Attest: JOHN B. AMOS Chairman of the Board and Chief Executive Officer /s/ George W. Jeter American Family Corporation - ----------------------------- GEORGE W. JETER Secretary American Family Corporation 19 ARTICLES OF AMENDMENT OF CORPORATE CHARTER OF AMERICAN FAMILY CORPORATION The shareholders of American Family Corporation, a corporation organized and existing under the laws of the State of Georgia, did on April 25, 1977, adopt the following resolution: "RESOLVED, that the first sentence of Article 4 of the Articles of Incorporation of American Family Corporation shall be amended to read as follows: 'The corporation shall have authority to issue not more than 20,000,000 shares of common stock having a par value of $.10 per share.' Said Articles of Incorporation are hereby amended by deleting from Article 4 the first sentence as follows: 'The corporation shall have authority to issue not more than 12,500,000 shares of common stock having a par value of $.10 per share.' and inserting in lieu thereof, the following: 'The corporation shall have authority to issue not more than 20,000,000 shares of common stock having a par value of $.10 per share.' Said Article 4 as amended and restated is as follows: 'The corporation shall have authority to issue not more than 20,000,000 shares of common stock having a par value of $.10 per share. The corporation shall have the full power to purchase and otherwise acquire and dispose of, its own shares and securities granted by the laws of the State of Georgia and shall have the right to purchase its shares out of its unreserved and unrestricted capital surplus available therefor, as well as out of its unreserved and unrestricted earned surplus available therefor. The Board of Directors may from time to time distribute to shareholders out of capital surplus of the corporation a portion of its assets in cash or in property.'" Said amendment was adopted by the vote of the holders of 6,082,910 shares out of a total of 9,309,673 shares eligible to vote of which 6,225,817 shares were represented at said meeting in person or by proxy. A majority of the shareholders voted to adopt said amendment in accordance with the provisions of the charter and Section 22-902 of the Georgia Code Annotated. The amendment does not provide for an exchange, reclassification or cancellation of issued shares. The amendment does not effect a change in the amount of stated capital. IN WITNESS WHEREOF, American Family Corporation has caused these Articles of Amendment to be executed and its corporate seal to be affixed and has caused the foregoing to be attested all by its duly authorized officers on this 16th day of September, 1977. AMERICAN FAMILY CORPORATION By: /s/ John B. Amos -------------------------------- John B. Amos, President Attest: /s/ Frances B. King ---------------------------- Asst. Secretary (SEAL) 20 ARTICLES OF INCORPORATION I. The name of the corporation is: American Family Corporation II. The corporation shall have perpetual duration. III. The corporation is organized for the following purposes: To purchase, own and hold the stock of other corporations, and to direct the operations of other corporations through the ownership of stock therein, to purchase, subscribe for, acquire, own, hold, sell, exchange, assign, transfer, create security interests in, pledge, or otherwise dispose of shares or voting trust certificates for shares of the capital stock, or any bonds, notes, securities, or evidences of indebtedness created by any other corporation or corporations organized under the laws of this state or any other state or district or country, nation or government, including without limitation insurance companies, insurance agencies and other businesses related to insurance, and also bonds or evidences of indebtedness of the United States or of any state, district, territory, dependency or country or subdivision or municipality thereof; to issue in exchange therefor shares of the capital stock, bonds, notes, or other obligations of this corporation and while the owner thereof to exercise all the rights, powers, and privileges of ownership including the right to vote any shares of stock or voting trust certificates so owned, to promote, lend money to, and guarantee the dividends, stocks, bonds, notes, evidences of indebtedness, contracts, or other obligations of, and otherwise aid in any manner which shall be lawful, any corporation or association of which any bonds, stocks, voting trust certificates, or other securities or evidences of indebtedness shall be held by or for this corporation, or in which, or in the welfare of which, the corporation shall have any interest, to do any acts and things permitted by law and designed to protect, preserve, improve, or enhance the value of any such bonds, stocks, or other securities or evidences of indebtedness or the property of this corporation, and to generally engage in the business of and to act as a holding company. To do each and every thing necessary, suitable or proper for the accomplishment of any of the purposes or the attainment of any one or more of the objects herein enumerated, or which shall at any time appear conducive to or expedient for the protection or benefit of the corporation. IN FURTHERANCE OF AND NOT IN LIMITATION of the general powers conferred by the laws of the State of Georgia and the objects and purposes herein set forth, it is expressly provided that to such extent as a corporation organized under the Georgia Business Corporation Code may now or hereafter lawfully do, the corporation shall have power to do, either as 21 principal or agent and either alone or in connection with other corporations, firms or individuals, all and everything necessary, suitable, convenient or proper for, or in connection with, or incident to, the accomplishments of any of the purposes or the attainment of any one or more of the objects herein enumerated, or designed directly or indirectly to promote the interests of the corporation or to enhance the value of its properties; and in general to do any and all things and exercise any and all powers, rights and privileges which a corporation may now or hereafter be authorized to do or to exercise under the Georgia Business Corporation Code or under any act amendatory thereof, supplemental thereto or substituted therefor. The foregoing provisions of this Article III shall be construed both as purposes and powers and each as an independent purpose and power. The foregoing enumeration of specific purposes and powers herein specified shall, except when otherwise provided in this Article III, be in no wise limited or restricted by reference to, or inference from the terms of any provision of this or any other Article of these Articles of Incorporation. IV. The corporation shall have authority to issue not more than 12,500,000 shares of common stock having a par value of $.10 per share. The corporation shall have the full power to purchase and otherwise acquire, and dispose of, its own shares and securities granted by the laws of the State of Georgia and shall have the right to purchase its shares out of its unreserved and unrestricted capital surplus available therefor, as well as out of its unreserved and unrestricted earned surplus available therefor. The Board of Directors may from time to time distribute to shareholders out of capital surplus of the corporation a portion of its assets, in cash or in property. V. The corporation shall have the power to create and issue, whether or not in connection with the issuance and sale of any of its shares or other securities, rights or options entitling the holders thereof to purchase from the corporation, for such consideration and upon such terms and conditions as may be fixed by the Board of Directors, shares of any class or series of the corporation, whether authorized but unissued shares or treasury shares; provided that the price or prices so fixed by the Board of Directors for shares so issued shall not be less than the par value of the said shares. VI. None of the holders of any stock or other securities of the corporation of any kind, class or series now or hereafter authorized shall have pre-emptive rights with respect to any shares of capital stock or other securities of the corporation, of any kind, class or series now or hereafter authorized. 22 VII. The initial registered office of the corporation shall be at 1932 Wynnton Road, Columbus, Georgia. The initial registered agent of the corporation shall be George W. Jeter. VIII. The initial Board of Directors shall consist of eighteen members, who shall be as follows: (1) John B. Amos (10) Hashem Naraghi 1932 Wynnton Road P. O. Box 7 Columbus, Georgia 31906 Escalon, California 95320 (2) William L. Amos (11) John M. Pope 1932 Wynnton Road P. O. Box 786 Columbus, Georgia 31906 Americus, Georgia 31709 (3) James Graham (12) Norman Reitman 1932 Wynnton Road 1 Rockefeller Plaza Columbus, Georgia 31906 New York, New York 10020 (4) G. Othell Hand, Th.D. (13) Jack S. Schiffman 1660 Flournoy Drive 1363 - 13th Street Columbus, Georgia 31906 Columbus, Georgia 31901 (5) Louis A. Hazouri, M.D. (14) Henry C. Schwob P. O. Box 5196 P. O. Box 1300 Columbus, Georgia 31906 Columbus, Georgia 31902 (6) Elmer Loftin (15) J. Kyle Spencer P. O. Box 151 P. O. Box 2847 Manchester, Georgia Columbus, Georgia 31902 (7) John P. McGoff (16) J. R. Thompson P. O. Box 1860 1932 Wynnton Road East Lansing, Michigan 48823 Columbus, Georgia 31906 (8) Mark T. McKee (17) Floyd Davis Wade 580 Oxford Road P. O. Box 149 Oxford, Connecticut 06483 Douglas, Georgia 31533 (9) Gordon L. Mullis (18) Joe M. Webber, M.D. P. O. Box 345 1932 Wynnton Road Camilla, Georgia 31730 Columbus, Georgia 31906 IX. The names and addresses of the incorporators are: John B. Amos W. L. Amos J. R. Thompson 1932 Wynnton Road 1932 Wynnton Road 1932 Wynnton Road Columbus, Georgia 31906 Columbus, Georgia 31906 Columbus, Georgia 31906 23 X. The corporation shall not commence business until it shall have received not less than $500.00 in payment for the issuance of shares of stock. IN WITNESS WHEREOF, the undersigned executed these Articles of Incorporation. /s/ John B. Amos ------------------------------ JOHN B. AMOS /s/ W. L. Amos ------------------------------ W. L. AMOS /s/ J. T. Thompson ------------------------------ J. R. THOMPSON 24 EX-27 3 3/97 FDS
7 This schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-Q for the period ended March 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 19,535,132 0 0 137,044 16,772 0 20,649,252 9,698 0 2,517,646 27,107,769 19,078,960 279,398 0 191,436 496,153 0 0 15,735 2,281,321 27,107,769 1,436,087 251,629 (443) 20,270 1,187,069 41,662 329,693 149,119 58,962 90,157 0 0 0 90,157 .64 0 0 0 0 0 0 0 0
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