-----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, DSHxMk+Jvt9RsA+PKDN5bATlJ57mThEo5RxeIz3F2cx2s9MjxC7M0jyOCH52OhRU HYo0w0v4GoPU8ymNQIDaeA== 0000950133-99-001779.txt : 19990514 0000950133-99-001779.hdr.sgml : 19990514 ACCESSION NUMBER: 0000950133-99-001779 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19990513 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: S-4 SEC ACT: SEC FILE NUMBER: 333-78403 FILM NUMBER: 99620921 BUSINESS ADDRESS: STREET 1: 1932 WYNNTON RD CITY: COLUMBUS STATE: GA ZIP: 31999 BUSINESS PHONE: 7063233431 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN FAMILY CORP DATE OF NAME CHANGE: 19920306 S-4 1 AFLAC INC. FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AFLAC INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) GEORGIA 6321 58-1167100 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
1932 WYNNTON ROAD COLUMBUS, GEORGIA 31999 (706) 323-3431 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ JOEY LOUDERMILK, ESQ. SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY AFLAC INCORPORATED 1932 WYNNTON ROAD COLUMBUS, GEORGIA 31999 (706) 323-3431 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ Copies to: STEPHEN W. HAMILTON, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 1440 NEW YORK AVENUE, N.W. WASHINGTON, D.C. 20005 (202) 371-7000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this form is filed to register securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______ ------------------------
CALCULATION OF REGISTRATION FEE ================================================================================================================================ PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) OFFERING PRICE (1) REGISTRATION FEE (1) - -------------------------------------------------------------------------------------------------------------------------------- 6 1/2% Senior Notes Due 2009 $450,000,000 100% $450,000,000 $125,100 ================================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(f) under the Securities Act. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS PERMITTED. SUBJECT TO COMPLETION-DATED MAY 13, 1999 OFFER TO EXCHANGE ALL 6 1/2% SENIOR NOTES DUE 2009 FOR 6 1/2% SENIOR NOTES DUE 2009 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OF AFLAC INCORPORATED THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON , 1999, UNLESS EXTENDED. - -------------------------------------------------------------------------------- Terms of the exchange offer: - - We are offering a total of $450,000,000 of new notes, which are registered with the Securities and Exchange Commission, to all holders of old notes. - - We will exchange all old notes that are validly tendered and not validly withdrawn. - - You may withdraw tenders of old notes at any time before the exchange offer expires. - - We will not receive any proceeds from the exchange offer. - - The exchange of notes will not be a taxable exchange for U.S. federal income tax purposes. - - The economic terms of the new notes are substantially identical to those of the old notes. CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 9. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE NOTES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Each broker-dealer that receives new notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver this prospectus in connection with any resale of those new notes. THE DATE OF THIS PROSPECTUS IS , 1999 3 TABLE OF CONTENTS
PAGE ---- Summary..................................................... 4 Risk Factors................................................ 9 Forward-Looking Statements.................................. 12 Use of Proceeds............................................. 12 Capitalization.............................................. 13 Ratio of Earnings to Fixed Charges.......................... 13 Selected Historical Consolidated Financial Information...... 14 The Exchange Offer.......................................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 23 Business.................................................... 52 Description of Certain Indebtedness......................... 55 Description of the Senior Notes............................. 59 United States Federal Tax Considerations.................... 80 Plan of Distribution........................................ 83 Legal Matters............................................... 84 Experts..................................................... 84 Documents Incorporated by Reference......................... 84 Where You Can Find More Information......................... 85 Index to Financial Statements............................... F-1
------------------------ Unless the context indicates otherwise, all references in this offering memorandum to: - "AFLAC Incorporated," "we," "our," "ours" and "us" refer to AFLAC Incorporated and its consolidated subsidiaries; - "AFLAC" refer to American Family Life Assurance Company of Columbus; - "AFLAC U.S." refer to the operations of AFLAC in the United States; - "AFLAC Japan" refer to the operations of AFLAC in Japan; - "initial purchasers" refer collectively to Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette, First Union Capital Markets Corp., NationsBanc Montgomery Securities LLC and Salomon Smith Barney Inc.; - "dollars" or "$" refer to United States dollars; and - "yen" or "Y" refer to Japanese yen. 3 4 SUMMARY This summary highlights selected information from this prospectus and may not contain all the information that may be important to you. You should read the entire prospectus, including the financial data and related notes, before deciding whether to exchange your old notes for new notes. SUMMARY OF THE EXCHANGE OFFER On April 21, 1999, we completed the private offering of our 6 1/2% Senior Notes due 2009. We entered into a registration rights agreement with the initial purchasers in the private offering in which we agreed to deliver to you this prospectus and to complete the exchange offer. Additional interest will accrue on the old notes if the exchange offer registration statement is not filed with the SEC on or before July 20, 1999, the exchange offer registration statement is not declared effective on or before October 18, 1999, or the exchange offer is not consummated and a shelf registration statement is not declared effective on or before November 17, 1999. This additional interest will continue to accrue until we complete each of these three tasks. See "The Exchange Offer -- Registration Rights." You should read the discussion under the headings "-- Summary Description of the New Notes" and "Description of the Senior Notes" for more information about the new notes. We believe that the notes issued in the exchange offer may be resold by you without compliance with the registration and prospectus delivery provisions of the Securities Act, unless you are an affiliate of AFLAC or an underwriter or a broker-dealer. You should read the discussion under the heading "The Exchange Offer" for further information regarding the exchange offer and resale of the notes. Registration rights agreement................ This agreement entitles holders of old notes to exchange their notes for registered notes with identical economic terms. The exchange offer will satisfy those rights. After the exchange offer is complete, you will no longer be entitled to any exchange or registration rights with respect to your notes. The exchange offer........................... We are offering to exchange up to $450,000,000 of the new notes for up to $450,000,000 of the old notes. Old notes may be exchanged only in $1,000 increments. Tenders; expiration date; withdrawal......... The exchange offer will expire at 5:00 p.m., New York City time, on , 1999, unless we extend it. If you decide to exchange your old notes for new notes, you must acknowledge that you are not engaging in, and do not intend to engage in, a distribution of the new notes. You may withdraw your tender of old notes at any time before , 1999. If we decide for any reason not to accept your notes for exchange, we will return them to you promptly and without expense after the exchange offer expires or terminates. Conditions to the exchange offer............. We are not required to accept any old notes in ex-change for new notes. We may terminate or amend the exchange offer if we determine that the exchange offer violates applicable law or any applicable interpretation of the SEC.
4 5 Federal tax considerations................... The exchange of old notes for new notes under the exchange offer will not result in any gain or loss to you for federal income tax purposes. Use of proceeds.............................. We will receive no proceeds from the exchange offer. Exchange agent............................... The Bank of New York is the exchange agent for the exchange offer. The address and telephone number of the exchange agent are set forth under the heading "The Exchange Offer -- Exchange Agent."
SUMMARY DESCRIPTION OF THE NEW NOTES The following is a brief summary of material terms of the new notes. For a more complete description of the senior notes, see "Description of the Senior Notes" in this prospectus. The terms of the new notes and the old notes are identical in all material respects but two: - the transfer restrictions and registration rights relating to the old notes do not apply to the new notes; and - Additional interest will accrue on the old notes if the exchange offer registration statement is not filed with the SEC on or before July 20, 1999, the exchange offer registration statement is not declared effective on or before October 18, 1999, or the exchange offer is not consummated and a shelf registration statement is not declared effective on or before November 17, 1999. This additional interest will continue to accrue until we complete each of these three tasks. See "The Exchange Offer -- Registration Rights." Issuer..................... AFLAC Incorporated. Senior Notes Offered....... $450,000,000 aggregate principal amount of 6 1/2% Senior Notes due 2009, which have been registered under the Securities Act. Maturity Date.............. April 15, 2009. Interest Payment Dates..... April 15 and October 15, beginning October 15, 1999. Ranking.................... The senior notes are unsecured senior obligations and rank equal to all our existing and future senior indebtedness and senior to all our existing and future subordinated indebtedness. The senior notes effectively rank junior to all liabilities of our subsidiaries and also rank junior to any existing or future secured indebtedness as to the assets securing such indebtedness. As of March 31, 1999, after giving pro forma effect to the offering of old notes and our use of the net proceeds from that offering, - we would have had outstanding approximately $1.0 billion of senior indebtedness; and - our subsidiaries would have had approximately $18 million of indebtedness. Optional Redemption........ We may redeem all or a portion of the senior notes at our option and at any time at a redemption price equal to the sum of (1) the principal amount of the senior notes being redeemed, plus any 5 6 accrued and unpaid interest up to but not including the redemption date and (2) a make-whole amount, if any. Certain Covenants.......... The indenture governing the senior notes contains covenants that limit our ability and, in certain instances, the ability of our subsidiaries to: - create liens; or - consolidate, merge or transfer all or substantially all our assets and the assets of our subsidiaries on a consolidated basis. These covenants are subject to important exceptions, which are described under the heading "Description of the Senior Notes" in this prospectus. Sinking Fund............... None. Risk Factors............... You should carefully consider all of the information contained in this prospectus prior to exchanging your old notes for the new notes. In particular, we urge you to carefully consider the factors set forth under "Risk Factors" beginning on page 9 of this prospectus. BUSINESS AFLAC U.S. is a leading provider of supplemental insurance at the worksite and a top seller of accident insurance in the United States. AFLAC Japan is the largest foreign insurer in Japan in terms of premium and profits and the second largest life insurer in terms of policies in force. We were incorporated in 1973 under the laws of the State of Georgia. We are a general business holding company and act as a management company overseeing the operations of our subsidiaries by providing management services and making capital available. Our supplemental health insurance business is marketed and administered primarily through AFLAC. Most of our policies are individually underwritten and marketed at the worksite, with premiums paid by the employee. Our products are designed for people who already have major medical or other primary insurance coverage and are intended to cover medical and nonmedical costs that are not reimbursed by other forms of health insurance coverage. We pay benefits regardless of reimbursements from other insurers. In recent years, we have diversified our product offerings to include other types of supplemental health products in both the United States and Japan. We guarantee that our supplemental health insurance plans will be renewable for the lifetime of the policyholder. We cannot cancel guaranteed-renewable coverage. However, we can increase premium rates on existing and future policies in the United States by class of policy if we experience claims higher than originally expected (subject to federal and state loss-ratio guidelines) on a uniform, nondiscriminatory basis. All premium rate increases are subject to state regulatory approval. 6 7 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION The summary consolidated financial information presented below as of and for the years ended December 31, 1994, 1995, 1996, 1997 and 1998 has been derived from our consolidated financial statements and the related notes included in this prospectus. The summary consolidated financial information presented below for, and as of, each of the three-month periods ended March 31, 1998 and 1999 was derived from our unaudited consolidated financial statements. The summary consolidated financial information set forth below is qualified in its entirety by, and should be read in conjunction with, the report of KPMG LLP, our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, --------------------- --------------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- --------- --------- (IN MILLIONS) CONSOLIDATED STATEMENTS OF EARNINGS DATA: Revenues: Premiums, principally supplemental health insurance..................... $1,728 $1,472 $5,943 $5,874 $5,910 $6,071 $5,181 Net investment income........... 320 279 1,138 1,078 1,022 1,025 839 Realized investment gains (losses)...................... (5) -- (2) (5) 2 -- -- Gain on sale of television business...................... -- -- -- 267 60 -- -- Other income.................... 5 6 25 37 106 95 91 --------- --------- --------- --------- --------- --------- --------- Total revenues................ 2,048 1,757 7,104 7,251 7,100 7,191 6,111 --------- --------- --------- --------- --------- --------- --------- Benefits and expenses: Benefits and claims............. 1,400 1,214 4,877 4,833 4,896 5,034 4,257 Expenses........................ 445 490 1,676 1,553 1,554 1,556 1,350 --------- --------- --------- --------- --------- --------- --------- Total benefits and expenses... 1,845 1,704 6,553 6,386 6,450 6,590 5,607 --------- --------- --------- --------- --------- --------- --------- Pretax earnings............... 203 53 551 865 650 601 504 Income taxes...................... 7 (107) 64 280 256 252 211 --------- --------- --------- --------- --------- --------- --------- Net earnings.................. $196(1) $160(2) $487(3) $585(4) $394(5) $349 $293 ========= ========= ========= ========= ========= ========= =========
THREE MONTHS ENDED MARCH 31, AT DECEMBER 31, --------------------- --------------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- --------- --------- (IN MILLIONS) BALANCE SHEET DATA: Assets: Investments and cash............ $27,217 $22,971 $26,994 $22,880 $20,744 $20,045 $15,994 Other........................... 4,132 4,557 4,189 6,574 4,276 5,172 4,293 --------- --------- --------- --------- --------- --------- --------- Total assets.............. $31,349 $27,528 $31,183 $29,454 $25,020 $25,217 $20,287 ========= ========= ========= ========= ========= ========= ========= Liabilities and shareholders' equity: Policy liabilities.............. 23,976 20,184 $24,034 $19,885 $20,234 $19,514 $16,007 Notes payable................... 573 511 596 523 354 327 185 Income taxes.................... 1,733 1,694 1,865 1,827 1,181 1,398 1,392 Other liabilities............... 1,208 1,685 918 3,789 1,125 1,844 951 Shareholders' equity............ 3,859 3,454 3,770 3,430 2,126 2,134 1,752 --------- --------- --------- --------- --------- --------- --------- Total liabilities and shareholders' equity.... $31,349 $27,528 $31,183 $29,454 $25,020 $25,217 $20,287 ========= ========= ========= ========= ========= ========= =========
- --------------- (1) Includes gain of $67 ($.25 per basic share, $.24 per diluted share) due to a reduction in the deferred income tax liabilities from a tax rate cut in Japan. (2) Includes gain of $121 ($.45 per basic share, $.44 per diluted share) due to a reduction in the deferred income tax liabilities from a tax rate cut in Japan and a charge of $65 ($.24 per basic and diluted share) for a mandated policyholder protection fund in Japan in 1998. (3) Includes gain of $121 ($.46 per basic share, $.44 per diluted share) due to a reduction in deferred income tax liabilities from a tax rate cut in Japan and a charge of $65 ($.24 per basic and diluted share) for a mandated policyholder protection fund in Japan in 1998. (4) Includes gain of $211 ($.77 per basic share, $.75 per diluted share) from the sale of the television business in 1997. (5) Includes gain of $48 ($.17 per basic share, $.16 per diluted share) from the sale of the television business in 1996. 7 8
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- SUPPLEMENTAL DATA: Operating earnings (in millions)(6).... $132 $104 $429 $374 $347 $349 $293 Ratio of earnings to fixed charges(7)........................... 56.7 x 16.8 x 41.8 x 43.6 x 36.1 x 37.7 x 42.1 x Ratio of debt to capitalization(8)..... 18.0 % 18.5 % 19.6 % 19.6 % 16.1 % 16.5 % 10.8 % Ratio of debt to capitalization........ 12.9 % 12.9 % 13.6 % 13.2 % 14.3 % 13.3 % 9.5 % Pretax profit margin(9)................ 10.1 % 9.4 % 9.3 % 8.6 % 8.4 % 8.4 % 8.3 % After-tax profit margin(9)............. 6.4 % 5.9 % 6.0 % 5.4 % 4.9 % 4.8 % 4.8 % Operating return on equity(10)......... 20.9 % 18.9 % 18.7 % 18.8 % 19.9 % 22.0 % 20.4 % Yen/dollar exchange rate at period end.................................. Y120.55 Y132.10 Y115.70 Y130.10 Y116.10 Y102.95 Y99.85 Average yen/dollar exchange rate....... 116.58 128.09 130.89 121.07 108.84 94.10 102.26
- --------------- (6) Excludes realized investment gains/losses and, in 1996 and 1997, the gains from the sale of the television business. Excludes the charge for the policyholder protection fund in 1998 and the benefit of the tax rate reductions in 1998 and 1999. (7) "Earnings" consists of operating earnings before income taxes and fixed charges. "Fixed charges" consists of interest on indebtedness (including capitalized interest) and a share of rental expenses deemed to be representative of interest. (8) Excludes unrealized gains on investment securities. (9) Operating basis. (10) Based on operating earnings and excluding unrealized gains on investment securities, net. 8 9 RISK FACTORS You should carefully consider the information below in addition to all other information provided to you in this prospectus in deciding whether to exchange your old notes for the new notes. There may be additional risks and uncertainties not presently known to us or that we currently do not believe are material that may also impair our business operations. Except for the first risk factor described below, the risk factors generally apply to the old notes as well as to the new notes. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of the senior notes could decline and you may lose all or part of your investment. IF YOU DO NOT EXCHANGE YOUR NOTES PURSUANT TO THIS EXCHANGE, YOU MIGHT NOT BE ABLE TO EVER SELL YOUR NOTES. It may be difficult for you to sell old notes that are not exchanged in the exchange offer. Those notes may not be offered or sold unless they are registered or there are exemptions from the registration requirements under the Securities Act and applicable state securities laws. If you do not tender your old notes or if we do not accept some of your old notes, those notes will continue to be subject to the transfer and exchange restrictions in: - the indenture; - the legend on the old notes; and - the offering circular relating to the old notes. The restrictions on transfer of your old notes arise because we issued the old notes pursuant to an exemption from the registration requirements of the Securities Act and applicable state securities laws. In general, you may only offer or sell the old notes if they are registered under the Securities Act and applicable state securities laws, or offered and sold pursuant to an exemption from such requirements. We do not intend to register the old notes under the Securities Act. To the extent old notes are tendered and accepted in the exchange offer, the trading market, if any, for the old notes would be adversely affected. YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THESE NOTES. The new notes are being offered to the holders of the old notes only. There is no public market for the new notes. The initial purchasers have informed us that they currently intend to make a market in the new notes. However, the initial purchasers may cease their market making at any time. The new notes could trade at prices that may be higher or lower than the initial offering price of the old notes. The liquidity of the trading market in these notes, and the market price quoted for these notes, may be adversely affected by changes in the overall market for similar securities, existing interest rates, and by our operating results. OUR CONCENTRATION OF BUSINESS IN JAPAN IMPOSES RISKS TO OUR OPERATIONS AND MAY IMPAIR OUR ABILITY TO MAKE PAYMENTS ON THE SENIOR NOTES. Continued weakness of Japan's economy could materially adversely affect our business and our ability to make payments on the senior notes. Our operations in Japan accounted for 80%, 79% and 82%, of our total revenues for 1998, 1997 and 1996, respectively, and 86% and 87% of our total assets at December 31, 1998 and 1997, respectively. Japan's economy has been weak for several years. The financial strength of many Japanese financial institutions has deteriorated, and some have experienced bankruptcy. The economic downturn has spread to several other Asian countries since mid-1997. The weak economy in Japan has resulted in a difficult marketing environment for AFLAC Japan, declining available investment yields for new investments and decreased consumer confidence. 9 10 Although the Japanese government has developed various economic stimulus packages, the time required for the Japanese economy to recover remains uncertain. UNAVAILABILITY OF LONGER TERM YEN-DENOMINATED INVESTMENTS COULD ADVERSELY AFFECT OUR PROFITS AND ABILITY TO REPAY THE NOTES. We attempt to match the duration of our assets with the duration of our liabilities. For AFLAC Japan, the duration of policy benefit liabilities is longer than that of the related invested assets due to the unavailability of acceptable yen-denominated long-duration securities. Therefore, there is a risk that the reinvestment of the proceeds at the maturity of such investments will be at a yield below that of the interest required for the accretion of policy liabilities. At December 31, 1998, for AFLAC Japan the average duration of policy liabilities was approximately 13 years and the average duration of yen-denominated debt securities was approximately nine years. When our debt securities mature, there is a risk that the proceeds will be reinvested at a yield below that of the interest required for the accretion of policy liabilities. If this occurs, AFLAC Japan would be adversely affected, which could impair our ability to make payments on the senior notes. Over the next five years, 14.8% of AFLAC Japan's yen-denominated debt securities are scheduled to mature. ACTIONS BY JAPANESE REGULATORS COULD HARM OUR BUSINESS AND MAY IMPAIR OUR ABILITY TO MAKE PAYMENTS ON THE SENIOR NOTES. An agreement between the governments of the United States and Japan calls for the gradual liberalization of the insurance industry in Japan through the year 2001. However, this agreement contains provisions to avoid "radical change" in the third sector of the insurance industry. The third sector includes the supplemental insurance products which constitutes our primary operations. One of the measures for avoiding radical change in the third sector is the prohibition of new entrants into the cancer or medical insurance businesses until January 1, 2001. If the process for deregulation in Japan is significantly altered or accelerated to permit numerous new competitors to enter the supplemental insurance products market prior to 2001, our business could be materially adversely affected and our ability to make payments on the senior notes could be impaired. In addition, the ultimate impact of insurance deregulation on our business cannot be determined. JAPANESE CURRENCY EXCHANGE RATE RISK COULD HARM OUR BUSINESS AND OPERATING RESULTS AND MAY IMPAIR OUR ABILITY TO MAKE PAYMENTS ON THE SENIOR NOTES. All of our premiums and most of our investment income in Japan is received in yen, and our claims and expenses are paid in yen. In addition, the majority of our invested assets in Japan are denominated in yen. Therefore, our economic condition in Japan is not materially affected by currency fluctuations. However, we must translate yen into dollars for financial reporting purposes. The fluctuations in the yen/dollar exchange rate may have a significant effect on our balance sheets and income statements as reported in dollars. The yen has weakened since mid-1995, which has caused fewer dollars to be reported. In addition, with a weaker yen we receive fewer dollars when converting yen into dollars for repatriation of profits from AFLAC Japan to AFLAC U.S. OUR OPERATING SUBSIDIARIES PROVIDE OUR CASH FLOW BUT THEY ARE NOT OBLIGATED TO PAY OR GUARANTEE THE SENIOR NOTES, WHICH EFFECTIVELY SUBORDINATES THE SENIOR NOTES TO INDEBTEDNESS OF OUR SUBSIDIARIES. We are a holding company and have no direct operations and no significant assets other than the stock of our subsidiaries. Because we conduct our operations through our operating subsidiaries, we depend on those entities for dividends and other payments to generate the funds necessary to meet our financial obligations, including the payment of principal and interest on the senior notes. In addition, there is no assurance that the earnings from, or other available assets of, our operating subsidiaries will be sufficient to make distributions to us to enable us to pay interest on the senior 10 11 notes when due or principal of the senior notes at maturity. Our subsidiaries have no direct obligation to pay amounts due on the senior notes and do not guarantee the senior notes. As a result, the senior notes have the effect of being subordinated to existing and future unsecured third party indebtedness and other liabilities of the subsidiaries, including policyholder claims and trade payables. If a subsidiary liquidates or reorganizes, the subsidiary's creditors, including policyholders and trade creditors, will generally have preferential rights to satisfy their claims from the subsidiary's remaining assets before AFLAC Incorporated and its creditors, including the holders of the senior notes, may satisfy their claims from the subsidiary's assets. INSURANCE REGULATIONS LIMIT THE ABILITY OF OUR SUBSIDIARIES TO MAKE PAYMENTS TO US AND MAY IMPAIR OUR ABILITY TO MAKE PAYMENTS ON THE SENIOR NOTES. Insurance regulations limit the ability of our insurance subsidiaries to make payments to us and may impair our ability to make payments on the senior notes. Dividends, management fees and other payments to us by our insurance subsidiaries are subject to various regulatory restrictions and approvals related to safeguarding the interests of insurance policyholders. For example, dividend payments by AFLAC to us in 1999 in excess of $213 million would require prior regulatory approval. FAILURE TO BE YEAR 2000 COMPLIANT COULD DISRUPT OUR OPERATIONS, ADVERSELY AFFECT OUR BUSINESS AND IMPAIR OUR ABILITY TO MAKE PAYMENTS ON THE SENIOR NOTES. Our business is significantly dependent upon accurate and efficient operation of our computer systems. We also rely on a widely distributed customer base in the United States and Japan for continued payment of premiums. Many of the systems utilized by our group accounts are automated and date dependent. If a large number of our customers are unable to submit premium payments or policy and claim data in a timely or accurate manner due to year 2000 issues, the resulting delays could have a material adverse effect on our financial condition or results of operations. Although we have taken steps to address the year 2000 issue, we are not currently able to predict the probability of any delays occurring or the extent of such delays. Due to the uncertainty inherent in year 2000 issues, particularly with regard to Japanese customers' year 2000 readiness and the various governmental functions, public utilities, financial infrastructures and similar outside facilities on which we depend in both the United States and Japan, we are unable to determine at this time whether the consequences of external year 2000 failures will have a material impact on our financial condition or results of operations. Although a year 2000 failure with respect to any single internal or external system may not have a material adverse effect on us, the failure of multiple systems may cause a material disruption to our business. A material disruption in our business could materially affect our ability to make payments on the senior notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the actions we have taken and expenses we have incurred and intend to incur in connection with the year 2000 issue. 11 12 FORWARD-LOOKING STATEMENTS This prospectus and the documents incorporated herein by reference contain forward-looking statements. In addition, from time to time, we or our representatives may make forward-looking statements orally or in writing. We base these forward-looking statements on our expectations and projections about future events, which we derive from the information currently available to us. Such forward-looking statements relate to future events or our future performance, including: - our financial performance; - our growth in net sales and earnings; - our cash flows from operations; - our capital expenditures; - our ability to refinance indebtedness; and - sales of our assets. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "contemplates," "anticipates," "believes," "estimates," "projected," "predicts," "potential" or "continue" or the negative of these or similar terms. In evaluating these statements, you should consider various factors, including the risk factors described in this prospectus. Such factors may cause our actual results to differ materially from any forward-looking statement. Forward-looking statements are only predictions. The forward-looking events discussed in this prospectus may not occur and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about us. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur. USE OF PROCEEDS We will not receive any proceeds from the exchange offer. Our net proceeds from the sale of old notes were approximately $445 million, after deducting discounts and offering expenses. We currently intend that those net proceeds will be used primarily for the repurchase of shares of our common stock. Remaining net proceeds may be used to repay our indebtedness or for general corporate purposes. We have temporarily invested the net proceeds in investment grade securities. 12 13 CAPITALIZATION The following table sets forth our unaudited consolidated capitalization as of March 31, 1999 and as adjusted (1) to give effect to the sale of the senior notes, but without giving effect to the payment of expenses, and (2) to give effect to the stock repurchase. This table should be read in conjunction with the consolidated financial statements and the related notes, "Selected Historical Consolidated Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
AT MARCH 31, 1999 -------------------------- Long-term debt: ACTUAL AS ADJUSTED ------ ------ (IN MILLIONS, Due to banks (yen-denominated): EXCEPT FOR SHARE AMOUNTS) 2.29% due annually through July 2001.............. $ 282 $ 282 1.24% due November 2002........................... 129 129 Variable interest rate due annually through July 2001............................................ 32 32 Variable interest rate due November 2002.......... 112 112 Senior notes subject to this exchange offer............ -- 450 Capitalized leases..................................... 18 18 ------ ------ Total long-term debt.............................. 573 1,023 ------ ------ Equity: Common stock, $.10 par value; 400,000,000 shares authorized; 318,570,482 shares issued................. 32 32 Additional paid-in capital............................. 241 241 Retained earnings...................................... 3,040 3,040 Accumulated other comprehensive income: Unrealized foreign currency translation gains..... 214 214 Unrealized gains on investment securities......... 1,243 1,243 Treasury stock......................................... (910) (1,360) Notes receivable for stock purchases................... (1) (1) ------ ------ Total equity...................................... 3,859 3,409 ------ ------ Total capitalization.............................. $4,432 $4,432 ====== ====== Ratio of debt to capitalization*....................... 18.0% 32.1% Ratio of debt to capitalization........................ 12.9% 23.1%
- --------------- * Excludes unrealized gains on investment securities. RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth the ratio of earnings to fixed charges of AFLAC Incorporated for the periods indicated:
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ----------------- ----------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ----- ----- ----- ----- ----- ----- ----- Ratio of earnings to fixed charges*................. 56.7x 16.8x 41.8x 43.6x 36.1x 37.7x 42.1x
- --------------- * "Earnings" consists of operating earnings before income taxes and fixed charges. "Fixed charges" consists of interest on indebtedness (including capitalized interest) and a share of rental expenses deemed to be representative of interest. 13 14 SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION The selected historical consolidated financial information presented below for, and as of, each of the years ended December 31, 1994, 1995, 1996, 1997, and 1998 were derived from our audited consolidated financial statements, which have been audited by KPMG LLP, independent certified public accountants. The selected historical consolidated financial data for, and as of, each of the three-month periods ended March 31, 1998 and 1999 were derived from our unaudited consolidated financial statements which, in the opinion of management, have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, necessary for a fair and consistent presentation of our results of operations and financial position for such periods and as of such dates. The results for the three months ended March 31, 1999 are not necessarily indicative of results to be expected for the full fiscal year. The following financial information should be read in conjunction with the report of KPMG LLP, our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (IN MILLIONS) CONSOLIDATED STATEMENTS OF EARNINGS DATA: Revenues: Premiums, principally supplemental health insurance.................................. $1,728 $1,472 $5,943 $5,874 $5,910 $6,071 $5,181 Net investment income........................ 320 279 1,138 1,078 1,022 1,025 839 Realized investment gains (losses)........... (5) -- (2) (5) 2 -- -- Gain on sale of television business.......... -- -- -- 267 60 -- -- Other income................................. 5 6 25 37 106 95 91 -------- -------- -------- -------- -------- -------- -------- Total revenues......................... 2,048 1,757 7,104 7,251 7,100 7,191 6,111 -------- -------- -------- -------- -------- -------- -------- Benefits and expenses: Benefits and claims.......................... 1,400 1,214 4,877 4,833 4,896 5,034 4,257 Expenses..................................... 445 490 1,676 1,553 1,554 1,556 1,350 -------- -------- -------- -------- -------- -------- -------- Total benefits and expenses............ 1,845 1,704 6,553 6,386 6,450 6,590 5,607 -------- -------- -------- -------- -------- -------- -------- Pretax earnings........................ 203 53 551 865 650 601 504 Income taxes................................... 7 (107) 64 280 256 252 211 -------- -------- -------- -------- -------- -------- -------- Net earnings........................... $196(1) $160(2) $487(3) $585(4) $394(5) $349 $293 ======== ======== ======== ======== ======== ======== ========
THREE MONTHS ENDED MARCH 31, AT DECEMBER 31, ------------------- ---------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (IN MILLIONS) BALANCE SHEET DATA: Assets: Investments and cash......................... $27,217 $22,971 $26,994 $22,880 $20,744 $20,045 $15,994 Other........................................ 4,132 4,557 4,189 6,574 4,276 5,172 4,293 -------- -------- -------- -------- -------- -------- -------- Total assets........................... $31,349 $27,528 $31,183 $29,454 $25,020 $25,217 $20,287 ======== ======== ======== ======== ======== ======== ======== Liabilities and shareholders' equity: Policy liabilities........................... $23,976 $20,184 $24,034 $19,885 $20,234 $19,514 $16,007 Notes payable................................ 573 511 596 523 354 327 185 Income taxes................................. 1,733 1,694 1,865 1,827 1,181 1,398 1,392 Other liabilities............................ 1,208 1,685 918 3,789 1,125 1,844 951 Shareholders' equity......................... 3,859 3,454 3,770 3,430 2,126 2,134 1,752 -------- -------- -------- -------- -------- -------- -------- Total liabilities and shareholders' equity................. $31,349 $27,528 $31,183 $29,454 $25,020 $25,217 $20,287 ======== ======== ======== ======== ======== ======== ========
- --------------- (1) Includes gain of $67 ($.25 per basic share, $.24 per diluted share) due to a reduction in the deferred income tax liabilities from a tax rate cut in Japan. (2) Includes gain of $121 ($.45 per basic share, $.44 per diluted share) due to a reduction in the deferred income tax liabilities from a tax rate cut in Japan and a charge of $65 ($.24 per basic and diluted share) for a mandated policyholder protection fund in Japan in 1998. (3) Includes gain of $121 ($.46 per basic share, $.44 per diluted share) due to a reduction in deferred income tax liabilities from a tax rate cut in Japan and a charge of $65 ($.24 per basic and diluted share) for a mandated policyholder protection fund in Japan in 1998. (4) Includes gain of $211 ($.77 per basic share, $.75 per diluted share) from the sale of the television business in 1997. (5) Includes gain of $48 ($.17 per basic share, $.16 per diluted share) from the sale of the television business in 1996. 14 15
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- SUPPLEMENTAL DATA: Operating earnings (in millions)(6)............... $132 $104 $429 $374 $347 $349 $293 Ratio of earnings to fixed charges(7)................. 56.7 x 16.8 x 41.8 x 43.6 x 36.1 x 37.7 x 42.1 x Ratio of debt to capitalization(8).......... 18.0 % 18.5 % 19.6 % 19.6 % 16.1 % 16.5 % 10.8 % Ratio of debt to capitalization............. 12.9 % 12.9 % 13.6 % 13.2 % 14.3 % 13.3 % 9.5 % Pretax profit margin(9)...... 10.1 % 9.4 % 9.3 % 8.6 % 8.4 % 8.4 % 8.3 % After-tax profit margin(9)... 6.4 % 5.9 % 6.0 % 5.4 % 4.9 % 4.8 % 4.8 % Operating return on equity(10)................. 20.9 % 18.9 % 18.7 % 18.8 % 19.9 % 22.0 % 20.4 % Yen/dollar exchange rate at period end................. Y120.55 Y132.10 Y115.70 Y130.10 Y116.10 Y102.95 Y 99.85 Average yen/dollar exchange rate....................... 116.58 128.09 130.89 121.07 108.84 94.10 102.26
- --------------- (6) Excludes realized investment gains/losses and in 1996 and 1997, the gains from the sale of the television business. Excludes the charge for the policyholder protection fund in 1998 and the benefit of the tax rate reductions in 1998 and 1999. (7) "Earnings" consists of operating earnings before income taxes and fixed charges. "Fixed charges" consists of interest on indebtedness (including capitalized interest) and a share of rental expenses deemed to be representative of interest. (8) Excludes unrealized gains on investment securities. (9) Operating basis. (10) Based on operating earnings and excluding unrealized gains on investment securities, net. 15 16 THE EXCHANGE OFFER TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES Subject to the terms and conditions set forth in this prospectus and in the accompanying letter of transmittal, we will accept for exchange old notes that are properly tendered on or before the Expiration Date and not withdrawn as permitted below. As used in this prospectus, the term "Expiration Date" means 5:00 p.m., New York City time, on , 1999, or such later date and time to which we, in our sole discretion, extend the exchange offer. The form and terms of the new notes being issued in the exchange offer are the same as the form and terms of the old notes except that: - the new notes being issued in the exchange offer will have been registered under the Securities Act and thus will not bear restrictive legends restricting their transfer pursuant to the Securities Act, and - the new notes being issued in the exchange offer will not contain the registration rights contained in the old notes. As of the date of this prospectus, there is $450,000,000 in total principal amount of old notes outstanding. This prospectus and the letter of transmittal are first being sent on or about , 1999, to all holders of old notes known to us. Our obligation to accept old notes for exchange pursuant to the exchange offer is subject to the conditions set forth below under "-- Conditions to the Exchange Offer." Notes tendered in the exchange offer must be in denominations of principal amount of $1,000 and any integral multiple thereof. We expressly reserve the right, at any time or from time to time, to extend the period of time during which the exchange offer is open, and thereby delay acceptance for exchange of any old notes, by giving oral or written notice of such extension to the holders of old notes as described below. During any such extension, all old notes previously tendered will remain subject to the exchange offer and may be accepted for exchange by us. We will return, at no expense to the holder, any old notes not accepted for exchange as promptly as practicable after the expiration or termination of the exchange offer. If any of the events specified in "-- Conditions to the Exchange Offer" should occur, we may amend or terminate the exchange offer, and not accept for exchange any old notes not previously accepted for exchange. We will give oral or written notice of any extension, amendment, non-acceptance or termination to holders of old notes as promptly as practicable. In the case of an extension, we will issue a press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Following consummation of the exchange offer, we may commence one or more additional exchange offers to those holders of old notes who did not exchange their old notes for new notes on terms which may differ from those contained in the registration rights agreement. We may use this prospectus, as amended or supplemented from time to time, in connection with additional exchange offers. PROCEDURES FOR TENDERING OLD NOTES The tendering by a holder of old notes, and our mutual acceptance of the old notes, will constitute a binding agreement between us and the holder on the terms and subject to the conditions set forth in this prospectus and in the accompanying letter of transmittal. Except as set forth below, 16 17 to tender in the exchange offer, a holder must transmit to The Bank of New York, the exchange agent, at the address set forth under "--Exchange Agent" on or before the Expiration Date either: - a properly completed and duly executed letter of transmittal, including all other documents required by such letter of transmittal, or - if the old notes are tendered pursuant to the book-entry procedures set forth below, an agent's message instead of a letter of transmittal. In addition, on or prior to the Expiration Date, either: - the exchange agent must receive the certificates for the old notes along with the letter of transmittal; or - the exchange agent must receive a timely confirmation of a book-entry transfer of such old notes into the exchange agent's account at The Depository Trust Company ("DTC") according to the procedure for book-entry transfer described below, along with a letter of transmittal or an agent's message instead of a letter of transmittal; or - the holder must comply with the guaranteed delivery procedures described below. The term "agent's message" means a message, transmitted by DTC and received by the exchange agent and forming a part of the book-entry confirmation, which states that DTC has received an express acknowledgment from the tendering holder that such holder has received and agrees to be bound by the letter of transmittal and that we may enforce the letter of transmittal against the holder. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL OR AGENT'S MESSAGES AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF DELIVERY IS BY MAIL, WE RECOMMEND REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO GUARANTEE TIMELY DELIVERY. DO NOT SEND LETTERS OF TRANSMITTAL, AGENT'S MESSAGES OR NOTES TO US. Signature Requirements Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the notes surrendered for exchange are tendered: - by a registered holder of old notes who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal, or - for the account of an eligible institution. An "eligible institution" is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchanges Medallion program. If signatures on a letter of transmittal or a notice of withdrawal are required to be guaranteed, the guarantor must be an eligible institution. If old notes are registered in the name of a person other than a signer of the letter of transmittal, the old notes surrendered for exchange must be endorsed by, or be accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by us in our sole discretion, duly executed by the registered holder with the holder's signature guaranteed by an eligible institution. If a person or persons other than the registered holder or holders of old notes signs the letter of transmittal, such old notes must be endorsed or accompanied by appropriate powers of attorney, in 17 18 either case signed exactly as the name or names of the registered holder or holders that appear on the old notes. If trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity sign the letter of transmittal or any old notes or powers of attorney, those persons should so indicate when signing, and must submit proper evidence satisfactory to us of their authority to sign unless we waive this requirement. Our Interpretations are Binding on You We will determine all questions as to the validity, form, eligibility, including time of receipt, and acceptance of old notes tendered for exchange in our sole discretion. Our determination will be final and binding. We reserve the absolute right to: - reject any and all tenders of any old note not properly tendered; - refuse acceptance of any old note if, in our judgment or the judgment of our counsel, acceptance of the old note might be unlawful; and - waive any defects or irregularities or conditions of the exchange offer as to any old note either before or after the Expiration Date. This includes the right to waive the ineligibility of any holder who seeks to tender old notes in the exchange offer. Our interpretation of the terms and conditions of the exchange offer as to any particular old notes either before or after the Expiration Date, including the letter of transmittal and the instructions to it, will be final and binding on all parties. Holders must cure any defects or irregularities in connection with tenders of old notes for exchange within such reasonable period of time as we will determine, unless we waive such defects or irregularities. Neither we, the exchange agent, nor any other person shall have a duty to notify anyone of any defect or irregularity regarding any tender of old notes for exchange, nor shall any of us incur any liability for failing to notify any person. Representation You Make by Tendering By tendering your old notes, you represent to us that, among other things: - the person receiving the new notes in the exchange offer is obtaining them in the ordinary course of its business, whether or not such person is the holder; - neither you nor such other person receiving the new notes has any arrangement or understanding with any person to participate in the distribution of the new notes issued in the exchange offer; and - if you are not a broker-dealer, that you are not engaged in, or intend to be engaged in, a distribution of new notes. If you or any person receiving the new notes is an "affiliate," as defined under Rule 405 of the Securities Act, of AFLAC Incorporated, or is engaged in or intends to engage in or has an arrangement or understanding with any person to participate in a distribution of the new notes to be acquired pursuant to the exchange offer, you or any such other person receiving the notes may not rely on the applicable interpretations of the staff of the SEC, and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives new notes for its own account in exchange for old notes, where such old notes were acquired by it as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the new notes. See "Plan of Distribution." The letter of transmittal states that, by so acknowledging and by delivering a 18 19 prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" under the Securities Act. ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all of the conditions to the exchange offer, we will accept, promptly after the Expiration Date, all old notes properly tendered and will issue the new notes promptly after acceptance of the old notes. See "-- Conditions to the Exchange Offer." For purposes of the exchange offer, we will be deemed to have accepted properly tendered old notes for exchange when, as and if we have given oral or written notice to the exchange agent, with written confirmation of any oral notice to be given promptly thereafter. For each old note accepted for exchange, the old note holder will receive a new note having a principal amount of maturity equal to that of the surrendered note. Interest on the new notes will accrue from April 21, 1999, the original issue date of the old notes. In all cases, we will issue new notes in the exchange offer for old notes that are accepted for exchange only after the exchange agent timely receives either: - certificates for such old notes or a timely book-entry confirmation of such old notes into the exchange agent's account at DTC, and - a properly completed and duly executed letter of transmittal or, in the case of a book-entry confirmation, an agent's message, and all other required documents. If tendered old notes are not accepted for any reason set forth in the terms and conditions of the exchange offer or if a holder submits old notes for a greater principal amount than the holder desired to exchange, we will return such unaccepted or non-exchanged old notes without expense to the tendering holder as promptly as practicable after the expiration or termination of the exchange offer. In the case of old notes tendered by book-entry transfer into the exchange agent's account at DTC, such unaccepted or non-exchanged old notes will be credited to an account maintained with DTC as promptly as practicable after the expiration or termination of the exchange offer. BOOK-ENTRY TRANSFER The exchange agent will request to establish an account for the old notes at DTC for the exchange offer within two business days after the date of this prospectus. Any financial institution that is a participant in DTC's systems may make book-entry delivery of old notes by causing DTC to transfer such old notes into the exchange agent's account at DTC in accordance with DTC's procedures for transfer. However, although delivery of old notes may be effected through book-entry transfer at DTC, the letter of transmittal or facsimile thereof, with any required signature guarantees, or an agent's message in lieu of such letter of transmittal, and any other required documents, must, in any case, be transmitted to and received by the exchange agent at one of the addresses set forth below under "-- Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. GUARANTEED DELIVERY PROCEDURES If a registered holder of the old notes desires to tender such old notes and the old notes are not immediately available, or time will not permit such holder's old notes or other required documents to 19 20 reach the exchange agent before the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if: - the tender is made through an eligible institution; - before the Expiration Date, the exchange agent receives from such eligible institution a properly completed and duly executed letter of transmittal, or a facsimile thereof, and notice of guaranteed delivery, substantially in the form provided by us, by telegram, telex, facsimile transmission, mail or hand delivery, setting forth the name and address of the holder of old notes and the amount of old notes tendered, stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery, the certificates for all physically tendered old notes, in proper form for transfer, or a book-entry confirmation, as the case may be, and any other documents required by the letter of transmittal will be deposited by the eligible institution with the exchange agent; and - the exchange agent receives the certificates for all physically tendered old notes, in proper form for transfer, or a book-entry confirmation, as the case may be, and all other documents required by the letter of transmittal, within three New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery. WITHDRAWAL RIGHTS You may withdraw tenders of old notes at any time before the Expiration Date. For a withdrawal to be effective, you must send a written notice of withdrawal to the exchange agent at one of the addresses set forth below under "-- Exchange Agent." Any such notice of withdrawal must: - specify the name of the person having tendered the old notes to be withdrawn, - identify the old notes to be withdrawn, including the principal amount of such old notes, and - if you have transmitted certificates for old notes, specify the name in which such old notes are registered, if different from that of the withdrawing holder. If certificates for old notes have been delivered or otherwise identified to the exchange agent, then, before the release of such certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an eligible institution unless such holder is an eligible institution. If old notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn old notes and otherwise comply with the procedures of such facility. We will determine all questions as to the validity, form and eligibility, including time of receipt, of such notices. Our determination will be final and binding on all parties. Any old notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Any old notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder without cost to such holder. In the case of old notes tendered by book-entry transfer into the exchange agent's account at DTC pursuant to the book-entry transfer procedures described above, such old notes will be credited to an account maintained with DTC for the old notes. Any return or credit will occur as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn old notes may be retendered by following one of the procedures described under "-- Procedures for Tendering Old Notes" above at any time on or before the Expiration Date. 20 21 CONDITIONS TO THE EXCHANGE OFFER We are not required to accept for exchange, or to issue new notes in exchange for, any old notes. We may terminate or amend the exchange offer if, at any time before the acceptance of such old notes for exchange or the exchange of the new notes for such old notes, we determine in our sole and absolute discretion, that the exchange offer violates applicable law or any applicable interpretation of the staff of the SEC. EXCHANGE AGENT The Bank of New York has been appointed as the exchange agent for the exchange offer. All executed letters of transmittal should be directed to the exchange agent at one of the addresses set forth below. Questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for notices of guaranteed delivery should be directed to the exchange agent addressed as follows: Delivery to: The Bank of New York, Exchange Agent By Registered or Certified Mail: By Hand or Overnight Delivery: THE BANK OF NEW YORK THE BANK OF NEW YORK 101 Barclay Street, (7 East) 101 Barclay Street New York, New York 10286 Corporate Trust Services Window Attention: Ground Level Reorganization Section New York, New York 10286 Attention: Reorganization Section
By Facsimile for Eligible Institutions: (212) 815-6339 Confirm by Telephone: (212) 815- DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE IS NOT VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL. FEES AND EXPENSES We will not pay any brokers, dealers or others soliciting acceptances of the exchange offer. We will pay the estimated cash expenses to be incurred in connection with the exchange offer, which are estimated to total $ . TRANSFER TAXES Holders who tender their old notes for exchange will not be obligated to pay any transfer taxes in connection with the exchange. However, holders who instruct us to register new notes in the name of, or request that old notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder will be responsible for the paying of any applicable transfer tax. 21 22 HOLDERS, OTHER THAN AFFILIATES, MAY OFFER OR SELL THE NEW NOTES Based on interpretations by the SEC staff, as set forth in no-action letters issued to third parties, we believe that new notes issued in the exchange offer for old notes may be offered for resale, resold or otherwise transferred by the holders of such new notes, other than any such holder that is an "affiliate" of AFLAC Incorporated within the meaning of Rule 405 under the Securities Act. Such new notes may be offered for resale, resold or otherwise transferred without compliance with the registration and prospectus delivery requirements of the Securities Act, if: - such new notes issued in the exchange offer are acquired in the ordinary course of such holder's business, and - such holders have no arrangement or understanding with any person to participate in the distribution of such new notes issued in the exchange offer. Each holder, other than a broker-dealer, must acknowledge that it is not engaged in, and does not intend to engage in, a distribution of new notes and has no arrangement or understanding to participate in a distribution of new notes. However, we do not intend to request the SEC to consider, and the SEC has not considered, the exchange offer in the context of a no-action letter. We cannot guarantee that the SEC staff would make a similar determination with respect to the exchange offer as in other circumstances. If any holder is an "affiliate" of ours, as defined in Rule 405 under the Securities Act, is engaged in or intends to engage in or has any arrangement or understanding with respect to the distribution of the new notes to be acquired pursuant to the exchange offer, such holder: - could not rely on the applicable interpretations of the SEC staff, and - must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives new notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. See "Plan of Distribution." In addition, to comply with state securities laws, the new notes may not be offered or sold in any state unless they have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. The offer and sale of the new notes to "qualified institutional buyers," as that term is defined under Rule 144A of the Securities Act, is generally exempt from registration or qualification under the state securities laws. We currently do not intend to register or qualify the sale of the new notes in any state where an exemption from registration or qualification is required and not available. 22 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis should be read in conjunction with the consolidated financial statements of AFLAC Incorporated and the notes thereto and the other financial data appearing elsewhere in this prospectus. The discussion and analysis (1) for the quarter ended March 31, 1999 is extracted from our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and (2) for the three year period ended December 31, 1998, is extracted from our Annual Report on Form 10-K for the year ended December 31, 1998. In each case this analysis does not give effect to subsequent events. AFLAC Incorporated is the parent company of AFLAC. Our principal business is supplemental health insurance, which is marketed and administered through AFLAC. Most of AFLAC's policies are individually underwritten and marketed at worksites through independent agents, with premiums paid by the employee. Our operations in Japan and the United States service the two markets for our insurance operations. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1998. Due to a corporate income tax rate reduction in Japan during 1999, the statutory tax rate for AFLAC Japan declined from 41.7% to 36.2%. This tax rate decline resulted in a reduction in our deferred income tax liability as of March 31, 1999, which increased net earnings by $67 million ($.25 per basic share and $.24 per diluted share) in 1999. For additional information on the income tax reduction, see Note 4 of the notes to the consolidated financial statements at March 31, 1999. Also, due to a corporate income tax rate reduction in Japan during 1998, the statutory tax rate for AFLAC Japan declined from 45.3% to 41.7%. This tax rate decline resulted in a reduction in our deferred income tax liability as of March 31, 1998, which increased net earnings by $121 million ($.45 per basic share and $.44 per diluted share) in 1998. For additional information on the income tax reduction, see Note 4 of the notes to the consolidated financial statements at March 31, 1999. Another factor affecting net earnings was a policyholder protection fund system mandated by the Japanese government during the first quarter of 1998. The pretax charge for our obligation to the protection fund was $111 million ($65 million after tax, or $.24 per both basic and diluted shares). For further information regarding this policyholder protection fund, see Note 5 of the notes to the consolidated financial statements at March 31, 1999. 23 24 The following table sets forth the results of operations by business segment for the periods shown. SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT
THREE MONTHS PERCENTAGE CHANGE ENDED MARCH 31, OVER PREVIOUS --------------------- PERIOD 1999 1998 ----------------- ------ ------ (IN MILLIONS, EXCEPT FOR PER-SHARE AMOUNTS) Operating earnings: AFLAC Japan........................................... 26.2% $158 $125 AFLAC U.S............................................. 11.4 63 56 All other business segments........................... 1 -- ---- ---- Total business segments....................... 22.3 222 181 Interest expense, non-insurance operations............ 2.4 (3) (3) Corporate and eliminations............................ 16.5 (12) (13) ---- ---- Pretax operating earnings..................... 26.0 207 165 Income taxes.......................................... 23.8 75 61 ---- ---- Operating earnings............................ 27.3 132 104 Non-operating items: Deferred tax benefit from Japan tax rate reduction.... 67 121 Provision for the Japanese mandated policyholder protection fund, net of tax........................ -- (65) Realized investment gains (losses), net of tax........ (3) -- ---- ---- Net earnings.................................. 21.9% $196 $160 ==== ==== ==== Operating earnings per basic share...................... 28.2% $.50 $.39 Operating earnings per diluted share.................... 26.3 .48 .38 Net earnings per basic share............................ 23.3 .74 .60 Net earnings per diluted share.......................... 22.4 .71 .58
The following discussion of earnings comparisons focuses on operating earnings and excludes realized investment gains/losses, the charge for the mandated policyholder protection fund, and the deferred income tax benefit from the Japanese tax rate reductions. Operating earnings per share referred to in the following discussion are based on the diluted number of average outstanding shares. Foreign Currency Translation. Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar exchange rate can have a significant effect on our reported results. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. 24 25 The following table illustrates the effect of foreign currency translation on our reported results by comparing those results as if foreign currency rates had remained unchanged from the comparable period in the prior year. SELECTED PERCENTAGE CHANGES FOR SUPPLEMENTAL CONSOLIDATED DATA* THREE MONTHS ENDED MARCH 31, 1999
INCLUDING EXCLUDING CURRENCY CURRENCY CHANGES CHANGES** --------- --------- Premium income.............................................. 17.4% 8.8% Net investment income....................................... 14.8 8.1 Operating revenues.......................................... 16.8 8.6 Total benefits and expenses................................. 15.9 7.4 Operating earnings.......................................... 27.3 22.2 Operating earnings per share................................ 26.3 21.1
- --------------- * The numbers in this table are presented on an operating basis and therefore exclude: the deferred income tax benefit from the tax rate reductions, the charge for a mandated policyholder protection fund, and realized investment gains and losses. ** Amounts excluding foreign currency changes were determined using the same yen/dollar exchange rate for the current period as the comparable period in the prior year. The yen began to strengthen in relation to the dollar at the end of 1998 after several years of weakening. The average yen-to-dollar exchange rates were 116.58 and 128.09 for the three months ended March 31, 1999 and 1998, respectively. The 9.9% strengthening of the yen in 1999 increased operating earnings by approximately $.02 per share for the three months ended March 31, 1999. Operating earnings per share increased 26.3% to $.48 for the three-month period ended March 31, 1999 compared with the same period in 1998. Our primary financial objective is the growth of operating earnings per share before the effect of foreign currency fluctuations. In 1996, we set this objective at an annual growth rate of 15% to 17% through the year 2000. In 1998, we raised our 1999 objective for growth in operating earnings per share to 20% before the effect of currency translation. If that objective is achieved, the following table shows the likely results for operating earnings per share for the year 1999 when the estimated impact from various foreign currency translations are included.
ANNUAL AVERAGE YEN ANNUAL OPERATING % GROWTH YEN IMPACT EXCHANGE RATE DILUTED EPS OVER 1998 ON EPS - --------------- ---------------- --------- ---------- 1999 @ 115.00 $2.00 28.2% $ .13 1999 @ 120.00 1.95 25.0 .08 1999 @ 125.00 1.91 22.4 .04 1999 @ 130.89* 1.87 19.9 -- 1999 @ 135.00 1.84 17.9 (.03) 1999 @ 140.00 1.82 16.7 (.05) 1999 @ 145.00 1.79 14.7 (.08)
- --------------- * Actual exchange rate for the year ended December 31, 1998. If the exchange rate as of March 31, 1999, would remain constant for the remainder of 1999, the cumulative average rate would be approximately 119.56 and the annual operating diluted earnings per share would approximate $1.96, assuming our earnings objective is met. 25 26 Profit Repatriation. AFLAC Japan repatriated profits to AFLAC U.S. of $154 million in 1998 and $347 million in 1997. The profit transfer in 1997 included $125 million of a non-recurring nature. Since the first repatriation in 1989, AFLAC Japan has repatriated $1.2 billion, which has enhanced our flexibility and profitability. We expect to repatriate approximately 19 billion yen ($160 million using the March 31, 1999 exchange rate) from AFLAC Japan to AFLAC U.S. in July 1999. Share Repurchase Program. During the first quarter of 1999, we purchased 150,000 shares of our common stock. At the end of the first quarter of 1999, we had approximately 7.2 million shares still available for purchase under current repurchase authorizations. We have purchased 57.5 million shares (through March 31, 1999) since the inception of the share repurchase program. The difference in percentage increases in net earnings and net earnings per share primarily reflects the impact of the share repurchase program. Income Taxes. Our combined U.S. and Japanese effective income tax rates on operating earnings for the three months ended March 31, 1999 and 1998 were 36.4% and 37.0%, respectively. Japanese income taxes on AFLAC Japan's operating results, which were taxed at Japan's corporate income tax rate of 45.3% through April 30, 1998, and 41.7% thereafter, accounted for most of our income tax expense. The decline in the effective tax rate in 1999 resulted primarily from the 1998 Japanese tax rate reduction. Income tax expense for the first quarter of 1999 also includes approximately $2 million of additional taxes from our recent income tax audit in Japan. Excluding that amount the effective income tax rate on operating earnings for the first quarter was 35.4%, the same as the rate for the full year 1998. The 1999 reduction in the statutory tax rate in Japan, which is effective April 1, 1999, will not significantly change our combined U.S./Japan effective tax rate as it will largely shift income tax expense from Japan operations to U.S. operations due to the U.S. foreign tax credit provisions. We expect our effective income tax rate for financial statement purposes will be in the range of 35% to 36% for the full year 1999. Insurance Operations, AFLAC Japan AFLAC Japan, a branch of AFLAC and the principal contributor to our 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 second in terms of individual policies in force and 16th in assets. 26 27 The following table presents a summary of AFLAC Japan's operating results. AFLAC JAPAN SUMMARY OF OPERATING RESULTS
THREE-MONTH PERIOD ENDED MARCH 31, ------------------- 1999 1998 ------ ------ (IN MILLIONS) Premium income.............................................. $1,398 $1,181 Investment income........................................... 262 226 Other income................................................ -- 1 ------ ------ Total revenues.................................... 1,660 1,408 ------ ------ Benefits and claims......................................... 1,196 1,029 Operating expenses.......................................... 306 254 ------ ------ Total benefits and expenses....................... 1,502 1,283 ------ ------ Pretax operating earnings......................... $ 158 $ 125 ====== ====== Percentage changes in dollars over previous period: Premium income............................................ 18.4% .4% Investment income......................................... 15.8 5.1 Total revenues............................................ 17.9 1.1 Pretax operating earnings................................. 26.2 (1.5) Percentage changes in yen over previous period: Premium income............................................ 7.8% 6.0% Investment income......................................... 5.5 10.9 Total revenues............................................ 7.3 6.8 Pretax operating earnings................................. 15.0 3.9 Ratios to total revenues: Benefits and claims....................................... 72.0% 73.1% Operating expenses........................................ 18.5 18.0 Pretax operating earnings................................. 9.5 8.9
AFLAC Japan Sales. The increase in premium income in yen was due to sales of new policies and excellent policy persistency. AFLAC Japan's new annualized premium sales were up sharply in the quarter, rising 22.3% to 18.8 billion yen, or $161 million. These strong sales resulted from the popularity of our latest product offering, Rider MAX, which has broadened the appeal of our founding product, cancer life insurance. During the quarter, we sold nearly 282,000 of these riders and about 50% of our cancer life sales were with Rider MAX. Rider MAX accounted for approximately 40% of sales during the first quarter. New sales also benefitted from the timing of sales campaigns in advance of a scheduled mid-year premium rate increase on new policy issues. All life insurance companies are raising premium rates in 1999 to compensate for the low level of investment yields. We anticipate that many of our insurance agencies will aggressively market our policies before the new rates become effective. Therefore, sales increases will likely be greater in the first half of the year than in the second half of the year when the new premium rates take effect. However, our new pricing assumptions will have virtually no impact on the cost of Rider MAX and term life plans, and the premium increases to other lines of business will be less than in previous years. As a result, we believe that the rate increase in July of this year should be less disruptive to our future sales results than previous rate increases. 27 28 We continue to make strides toward increasing the breadth of our distribution system. We are adding more individual agencies to complement our large network of corporate agencies. The individual agencies will give us better access to Japan's substantial market of small businesses and individual customers. During the first quarter, we recruited about 360 new agencies. Our objective is to recruit 3,000 new agencies for the full year and we expect our recruiting to increase in the second quarter. Although Japan's economy remains weak, we continue to believe it is one of the best insurance markets in the world and one of great opportunities for growth. We have set an objective for AFLAC Japan's sales to increase approximately 10% to 15% for the year 1999 compared with 1998. AFLAC Japan Investments. Over the last several years, Japan's weak economy has produced an extremely challenging investment environment. Investment yields available to us in the first quarter improved over the fourth quarter of last year. However, they still remain at historically depressed levels. For instance, the yield on a composite index of 20-year Japanese government bonds averaged 2.52% during the first quarter, compared with 4.10% in the first quarter of 1995. By purchasing reverse dual-currency bonds (bonds with yen principal and a dollar coupon), we were able to invest in yen-denominated securities at an average yield of 4.36% during the quarter. Including dollar-denominated investments, our blended new money yield was 4.49% for the quarter. As of April 16, we had invested or committed to invest approximately 60% of our expected 1999 cash flow at an average yield of 4.69%. Not only do these yields compare very favorably with the yield of Japanese government bonds, they also provide a significant spread over our reserving assumptions for new business. At the end of the first quarter, the yield on AFLAC Japan's debt securities portfolio was 5.22%, compared with 5.24% at the end of 1998. The return on average invested assets, net of investment expenses, was 5.01% for the quarter, compared with 5.30% a year ago. Investment income in yen increased 5.5% in 1999 compared with 10.9% in 1998. This is due to the effect of translating dollar-denominated investment income into yen. The yen/dollar exchange rate was 128.09 yen to one U.S. dollar for the first three months of 1998 compared with 116.58 for the first three months of 1999. AFLAC Japan -- Other. The operating expense ratio has increased slightly due to investments in additional marketing programs including advertising and direct response efforts. The benefits ratio has declined due to the mix of business shifting to newer products that have a lower loss ratio than the traditional cancer life insurance and also due to favorable claims experience on cancer life insurance. Pretax operating earnings in yen increased 15.0% for the three months ended March 31, 1999. This increase was largely due to the lower loss ratio during the quarter. 28 29 Insurance Operations, AFLAC U.S. The following table presents a summary of AFLAC U.S. operating results. AFLAC U.S. SUMMARY OF OPERATING RESULTS
THREE-MONTH PERIOD ENDED MARCH 31, --------------- 1999 1998 ---- ---- (IN MILLIONS) Premium income.............................................. $330 $289 Investment income........................................... 58 51 Other income................................................ -- 3 ---- ---- Total revenues.................................... 388 343 ---- ---- Benefits and claims......................................... 205 183 Operating expenses.......................................... 120 104 ---- ---- Total benefits and expenses....................... 325 287 ---- ---- Pretax operating earnings......................... $ 63 $ 56 ==== ==== Percentage increases over previous period: Premium income............................................ 13.9% 12.7% Investment income......................................... 12.8 44.1 Total revenues............................................ 13.3 17.1 Pretax operating earnings................................. 11.4 50.3 Ratios to total revenues: Benefits and claims....................................... 52.8% 53.4% Operating expenses........................................ 31.1 30.2 Pretax operating earnings................................. 16.1 16.4
AFLAC U.S. Sales. New annualized premium sales in the United States continued to grow at a rapid pace. New sales topped $100 million for the seventh consecutive quarter, rising 15.8% to $125 million. Accident/disability insurance was once again our best selling product. However, sales of our founding product, cancer expense insurance, were extremely robust. Cancer expense sales rose 28.5% for the quarter. In addition to strong sales growth, we continue to see increased use of our electronic sales system, SmartApp. In the first quarter, we processed more than 60% of our new business electronically. With savings from innovative work processes like SmartApp, we have increased our commitment to our national television advertising. We believe that growing name recognition through advertising is one of the factors that has contributed to our strong sales growth and expanding distribution system. We have set an objective for AFLAC U.S. sales to increase by 12% to 15% for the year 1999. AFLAC U.S. Investments. Investment income increased 12.8% in the first three months of 1999 compared with 44.1% in the same period of 1998. The large increase in 1998 is the result of investment income received from investment of the proceeds from the sale of the television business in the second quarter of 1997 and from investment of profit repatriation funds of $347 million in 1997 which included $125 million of a non-recurring nature. During the first quarter of 1999, available cash flow was invested at an average yield-to-maturity of 8.08% compared with 7.47% during the first quarter of 1998. The overall return on average invested assets, net of investment expenses, was 7.52% for the first three months of 1999 compared with 7.37% for the first quarter of 1998. 29 30 AFLAC U.S. Other. Management expects the operating expense ratio, including discretionary television advertising expenses, to remain approximately level in the future. By improving administrative systems and controlling other costs, we have been able to redirect funds to national television advertising programs without significantly affecting the operating expense ratio. The aggregate benefit ratio has tended to decline slightly. The mix of business has shifted toward accident and hospital indemnity policies, which have lower benefit ratios than other products. We expect future benefit ratios for some of our supplemental products to increase slightly due to our ongoing efforts to improve policy persistency and enhance policyholder benefits. Management expects the pretax operating profit margin, which was 16.2% for the year 1998, to remain approximately the same in 1999. 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 at March 31, 1999. YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996. We paid a two-for-one stock split on June 8, 1998. All share and per-share amounts in this report have been restated for this split. Three significant items affected our net earnings during the three-year period ended December 31, 1998. First, due to a corporate income tax rate reduction in Japan during 1998, the statutory tax rate for AFLAC Japan declined from 45.3% to 41.7%. This tax rate decline resulted in a reduction in our deferred income tax liability as of March 31, 1998, which increased net earnings by $121 million ($.46 per basic share and $.44 per diluted share) in 1998. For additional information on the income tax reduction, see Note 8 of the notes to the consolidated financial statements at December 31, 1998. The second factor affecting net earnings was a policyholder protection fund system mandated by the Japanese government during the first quarter of 1998. The pretax charge for our obligation to the new protection fund was $111 million ($65 million after tax, or $.24 per both basic and diluted shares). For further information regarding this policyholder protection fund, see Note 2 of the notes to the consolidated financial statements at December 31, 1998. Also affecting net earnings was the sale of our television business, which consisted of seven network-affiliated stations. The total pretax gain from the sale was $327 million. The sale of one station closed on December 31, 1996. The pretax and after-tax gains recognized in 1996 on this sale were $60 million and $48 million, respectively. The effect of the after-tax gain on 1996 basic and diluted net earnings per share was $.17 and $.16, respectively. The pretax and after-tax gains recognized during the second quarter of 1997 on the closing of the six remaining stations were $267 million and $211 million, respectively. The effect of the after-tax gain on 1997 basic and diluted net earnings per share was $.77 and $.75, respectively. For further information, see Note 2 of the notes to the consolidated financial statements at December 31, 1998. 30 31 The results of operations by business segment for the three-year period ended December 31, 1998, were as follows: SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT
PERCENTAGE CHANGE OVER YEARS ENDED PREVIOUS YEAR DECEMBER 31, ------------- ----------------------------- 1998 1997 1998 1997 1996 ----- ---- ------- ------- ------- (IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS) Operating earnings: AFLAC Japan.................................... (.4)% (5.4)% $ 502 $ 504 $ 533 AFLAC U.S...................................... 24.9 43.4 230 184 129 Television operations.......................... -- 4 26 All other business segments.................... 2 (2) (8) ----- ----- ----- Total business segments................... 6.3 1.4 734 690 680 Interest expense, non-insurance operations..... 1.2 16.7 (10) (10) (13) Corporate and eliminations..................... 23.4 4.9 (60) (77) (79) ----- ----- ----- Pretax operating earnings................. 10.1 2.6 664 603 588 Income taxes................................... 2.8 (4.9) 235 229 241 ----- ----- ----- Operating earnings........................ 14.6 7.8 429 374 347 Non-operating items: Deferred tax benefit from Japanese tax rate reduction.................................... 121 -- -- Provision for the Japanese mandated policyholder protection fund, net of tax..... (65) -- -- Gain on sale of television business, net of tax.......................................... -- 211 48 Realized investment gains (losses), net of tax.......................................... 2 -- (1) ----- ----- ----- Net earnings.............................. (16.8)% 48.3% $ 487 $ 585 $ 394 ===== ==== ===== ===== ===== Operating earnings per basic share.................. 16.7% 11.3% $1.61 $1.38 $1.24 Operating earnings per diluted share................ 17.3 10.8 1.56 1.33 1.20 Net earnings per basic share........................ (14.9) 52.5 1.83 2.15 1.41 Net earnings per diluted share...................... (15.4) 52.9 1.76 2.08 1.36
The following discussion of earnings comparisons focuses on pretax operating earnings and excludes realized investment gains/losses, the charge for the mandated policyholder protection fund, the benefit of the Japanese tax rate reduction and the gains from the sale of the television business. Operating earnings per share referred to in the following discussion are based on the diluted number of average outstanding shares. Foreign Currency Translation. Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar exchange rate can have a significant effect on our reported results. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. Throughout 1996, 1997 and most of 1998, the yen weakened in relation to the dollar. The average yen-to-dollar exchange rates were 130.89 in 1998, 121.07 in 1997 and 108.84 in 1996. The weakening of the yen during the three-year period lowered operating earnings by $.05 per share in 1998 compared with 1997, $.09 per share in 1997 compared with 1996 and $.15 per share in 1996 compared with 1995. Despite the weakening of the yen, operating earnings per share increased 17.3% to $1.56 in 1998, 10.8% to $1.33 in 1997 and 2.6% to $1.20 in 1996. 31 32 The following table illustrates the effect of foreign currency translation by comparing our reported results with pro forma results as if foreign currency rates had remained unchanged from the previous year. SELECTED PERCENTAGE CHANGES FOR SUPPLEMENTAL CONSOLIDATED DATA*
INCLUDING FOREIGN EXCLUDING FOREIGN CURRENCY CHANGES CURRENCY CHANGES** -------------------- -------------------- YEARS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, -------------------- -------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Premium income...................... 1.2% (.6)% (2.6)% 7.7% 8.5% 10.1% Net investment income............... 5.6 5.5 (.3) 11.1 14.0 11.9 Total revenues...................... 1.7 (.7) (2.1) 8.0 8.2 10.4 Total benefits and expenses......... .9 (1.0) (2.1) 7.4 8.0 10.5 Operating earnings.................. 14.6 7.8 (.4) 18.6 15.2 11.5 Operating earnings per share........ 17.3 10.8 2.6 21.1 18.3 15.4
- --------------- * The amounts in this table are presented on an operating basis. ** Amounts excluding foreign currency changes were determined using the same yen/dollar exchange rate for the current year as each respective prior year. The increases in operating earnings per share reflected earnings contributions in the functional currencies of our core insurance operations in Japan and the United States, our share repurchase program and in 1998 lower income tax expense due to the tax rate reduction in Japan. Our primary financial objective is the growth of operating earnings per share before the effect of foreign currency translations. In 1996, we set this objective at an annual growth rate of 15% to 17% through the year 2000. In early 1998, we increased our goal for 1998 to 20% growth, which we exceeded. Excluding the effect of currency fluctuations, operating earnings per share increased 21.1% in 1998, 18.3% in 1997 and 15.4% in 1996. In April 1998, we raised our 1999 objective for growth in operating earnings per share to 20% excluding the impact of currency translation. If that objective is achieved, the following table shows the likely results for operating earnings per share in 1999 when the impact from various foreign currency translations is included.
ANNUAL ANNUAL AVERAGE YEN OPERATING % GROWTH YEN IMPACT EXCHANGE RATE DILUTED EPS OVER 1998 ON EPS - ------------------ ----------- --------- ---------- 1999 @ 115.00 $1.98 26.9% $ .11 1999 @ 120.00 1.94 24.4 .07 1999 @ 125.00 1.91 22.4 .04 1999 @ 130.89* 1.87 19.9 -- 1999 @ 135.00 1.85 18.6 (.02) 1999 @ 140.00 1.82 16.7 (.05) 1999 @ 145.00 1.80 15.4 (.07)
- --------------- * Actual 1998 average exchange rate. Profit Repatriation. Repatriated profits represent a portion of the after-tax earnings reported to the Japanese Financial Supervisory Agency ("FSA") as of March 31 each year. Such regulatory basis earnings are determined using accounting principles that differ materially from U.S. generally accepted accounting principles. The differences relate primarily to the valuation of investments, policy benefit and claim reserves, acquisition costs and deferred income taxes. Japanese regulatory earnings 32 33 and related profit repatriations may therefore vary materially from year to year because of these differences. AFLAC Japan repatriated profits to AFLAC U.S. of $154 million in 1998, $347 million in 1997 and $217 million in 1996. The profit transfer in 1997 included $125 million of a non-recurring nature. Since the first repatriation in 1989, AFLAC Japan has repatriated $1.2 billion, which has enhanced our flexibility and profitability. We estimate that cumulative profit transfers from 1992 through 1998 have benefited consolidated net earnings by $57 million in 1998, $41 million in 1997 and $26 million in 1996. We expect that the 1999 profit repatriation will be approximately 20 billion yen ($171 million using the December 31, 1998 exchange rate). In 1999, a substantial portion of profit repatriation will be used for debt service. Share Repurchase Program. The shares purchased under the share repurchase program were financed with bank borrowings and available cash. Interest expense related to the share repurchase program was $10 million in 1998 and $9 million in both 1997 and 1996. Consolidated interest expense, including interest expense from insurance operations, was $13 million in 1998, $14 million in 1997 and $16 million in 1996. The difference between the percentage changes in net earnings and net earnings per share primarily reflects the impact of the share repurchase program. As of December 31, 1998, we had approximately 7.4 million shares still available for purchase under current repurchase authorizations from the board of directors. Income Taxes. Effective January 1, 1998, the Japanese government changed the income tax provisions for foreign companies operating in Japan, increasing income taxes on investment income and realized gains/losses from securities issued by entities located in their home country. This change increased Japanese income taxes on the income from most of AFLAC Japan's dollar-denominated securities. In addition, in March 1998, the Japanese government enacted a reduction in the Japanese corporate income tax rate. The statutory rate for AFLAC Japan declined from 45.3% to 41.7% beginning May 1, 1998. The net effect of these two Japanese tax changes increased income tax expense on consolidated operating earnings by approximately $10 million for the year ended December 31, 1998 (an increase of approximately $22 million from increased taxes on AFLAC Japan's dollar-denominated investment income, less approximately $12 million from the benefit of the statutory tax rate reduction). Our combined U.S. and Japanese effective income tax rates on operating earnings were 35.4% in 1998, 37.9% in 1997 and 40.9% in 1996. Japanese income taxes on AFLAC Japan's operating results, which were taxed at Japan's corporate income tax rate of 45.3% through April 30, 1998, and 41.7% thereafter, accounted for most of our income tax expense. The decline in the effective tax rates in 1998 and 1997 resulted primarily from: the weakening of the yen; increased contributions in earnings from the U.S. business segment; and, in 1998, the Japanese tax rate reduction less the effect of increased taxes on AFLAC Japan's dollar-denominated investment income. The most recent Japanese economic stimulus package announced in late 1998, but not yet enacted, included proposals to further reduce the Japanese statutory corporate income tax rate. Under the proposals being discussed, AFLAC Japan's statutory income tax rate would be reduced to 36.2% effective April 1, 1999. We expect the proposals to be finalized in early 1999. If the Japanese income tax rate decreases, we expect our combined effective income tax rate to remain relatively unchanged in 1999. For further information on the Japanese corporate income tax rate, see Note 8 of the notes to the consolidated financial statements at December 31, 1998. 33 34 Insurance Operations, AFLAC Japan AFLAC Japan is a branch of AFLAC and the principal contributor to our earnings. AFLAC Japan ranks number one in terms of premium income and profits among all foreign life and non-life insurance companies operating in Japan. AFLAC Japan ranks second in terms of individual policies in force and 16th in assets among all life insurance companies operating in Japan. The transfer of profits from AFLAC Japan to AFLAC U.S. can distort comparisons of operating results between years. Therefore, the following AFLAC Japan summary of operations table 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 transferred to AFLAC U.S. during 1992 through 1998. AFLAC JAPAN SUMMARY OF OPERATING RESULTS
YEARS ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------ ------ ------ (IN MILLIONS) Premium income........................................... $4,738 $4,803 $4,952 Investment income, as adjusted*.......................... 966 929 920 Other income............................................. 1 1 2 ------ ------ ------ Total revenues, as adjusted*........................ 5,705 5,733 5,874 ------ ------ ------ Benefits and claims...................................... 4,119 4,156 4,294 Operating expenses....................................... 1,035 1,037 1,022 ------ ------ ------ Total benefits and expenses......................... 5,154 5,193 5,316 ------ ------ ------ Pretax operating earnings, as adjusted*............. 551 540 558 Investment income applicable to profit repatriations..... (49) (36) (25) ------ ------ ------ Pretax operating earnings........................... $ 502 $ 504 $ 533 ====== ====== ====== Percentage changes in dollars over previous year: Premium income...................................... (1.4)% (3.0)% (4.7)% Investment income*.................................. 4.0 .9 (2.2) Total revenues*..................................... (.5) (2.4) (4.3) Pretax operating earnings*.......................... 2.0 (3.2) (4.2) Pretax operating earnings........................... (.4) (5.4) (5.1) Percentage changes in yen over previous year: Premium income...................................... 6.6 7.9 10.2 Investment income*.................................. 12.4 12.3 13.1 Total revenues*..................................... 7.6 8.6 10.7 Pretax operating earnings*.......................... 10.2 7.8 10.9 Pretax operating earnings........................... 7.6 5.4 9.8 Ratios to total revenues, as adjusted:* Benefits and claims................................. 72.2 72.5 73.1 Operating expenses.................................. 18.1 18.1 17.4 Pretax operating earnings........................... 9.7 9.4 9.5 Ratio of pretax operating earnings to total reported revenues............................................... 8.9 8.9 9.1
- --------------- * Adjusted investment income, total revenues and pretax operating earnings include estimates of additional investment income of $49 million in 1998, $36 million in 1997 and $25 million in 1996 foregone due to profit repatriations. Japanese Economy. Japan's economy has been weak for several years. The economic downturn has spread to several Asian countries since mid-1997. The financial strength of many Japanese financial institutions has deteriorated and some have experienced bankruptcy. As we have indicated in the past, the weak economy in Japan has resulted in a difficult marketing environment for AFLAC Japan, declining available investment yields for new investments and decreased consumer confidence. 34 35 Although the Japanese government has developed various economic stimulus packages, the time required for the Japanese economy to recover remains uncertain. AFLAC Japan Sales. AFLAC Japan produced strong sales results in 1998, despite the weak Japanese economy. New annualized premiums from sales were: $575 million in 1998, up 11.5%; $515 million in 1997, down 28.5%; and $721 million in 1996, down 4.8%. New annualized premiums from sales in yen were: 74.9 billion yen in 1998, up 20.1%; 62.4 billion yen in 1997, down 20.4%; and 78.4 billion yen in 1996, up 10.0%. AFLAC Japan's new policy sales in yen during 1998 approached their 1996 level. In 1997, new policy sales were adversely affected by a premium rate increase that AFLAC and the insurance industry implemented in the fourth quarter of 1996 as well as the decline of consumer confidence in the life insurance industry following the April 1997 collapse of Nissan Mutual Life Insurance Company. We have taken several actions to help mitigate the impact of the weak sales environment in Japan. Our newest product, "Rider MAX," has become one of our most successful in a very short period of time. This product provides accident and medical/sickness benefits as a rider to our cancer life policy. We also introduced a new economy cancer life policy in January 1997. This plan, which has lower premium rates and benefit levels, was developed to combat the impact of increased premium rates for new issues. In addition, AFLAC Japan increased the use of direct-mail marketing for its products as a supplemental distribution method. In 1998, we purchased a small Japanese insurance agency. Its main functions will be policyholder-related services and direct marketing programs for AFLAC Japan. We continue to invest in marketing to improve sales. The incentive pay system for AFLAC Japan's employed sales managers was revised in 1997 to better reward them for improved sales performance. We made additional expenditures in late 1997 and during 1998 for expanded sales promotion efforts in Japan. In addition, we will continue our popular television advertising program. We have also publicized our financial strength ratings in Japan and are recruiting more individual agencies. In 1998, we recruited approximately 2,200 new agencies, most of which are individual agencies, compared with fewer than 700 in 1997. Our goal is to recruit 3,000 new agencies in 1999. AFLAC Japan's sales mix is changing, although cancer life still accounts for the majority of insurance in force. Cancer life sales accounted for 49.4% of total new sales in yen in 1998, 52.5% in 1997 and 46.7% in 1996. We sold more than 948,000 riders of Rider MAX in 1998, which was its first year of availability. This product accounted for 33.2% of our sales for the year, and 39.9% of our cancer life policies were sold with Rider MAX. The rider we introduced in the fourth quarter of 1995, living benefit life, accounted for 7.2% of total new sales in 1998, 28.3% in 1997 and 39.5% in 1996. Care product sales represented 3.7% of total new sales in 1998, 6.8% in 1997 and 10.6% in 1996. In September 1997, the Japanese government increased the copayments for the employer-sponsored health care program from 10% to 20% for the primary insured, thereby increasing the portion of the costs the insured must pay. Given the increase in copayments, we believe our products and riders that provide supplemental medical benefits will be especially appealing to consumers. Our objectives for 1999 are to increase sales in yen by 10% to 15% compared with 1998 and to improve the profit margin. We also expect revenues in yen to increase 6% to 6.5% and our strong policy persistency to continue. AFLAC Japan Investments. Investment income is affected by available cash flow from operations, investment yields achievable on new investments and foreign currency exchange rates. Investment income in dollars in 1998 and 1997 was affected by the weaker yen. Despite a general 35 36 decline in available investment yields, investment income in yen increased 11.0% in both 1998 and 1997. Funds available for investment during the three-year period 1996 through 1998 were reduced by the annual profit repatriations previously discussed. Rates of return on debt securities in Japan remained low in 1998. For instance, the yield on 20-year Japanese government bonds, as measured by a composite index, fluctuated to a low of 1.16% in October 1998 and closed 1998 at a high of 2.97%. AFLAC Japan's new money rates for investments in debt securities (including dollar-denominated) were 4.19% for 1998, 5.20% for 1997 and 4.07% for 1996. The improvement in AFLAC Japan's new money yield in 1997 resulted from restructuring portions of the existing dollar-denominated investment portfolio and a greater allocation of cash flow to private placement securities, which included dual-currency securities (yen-denominated bonds with a dollar coupon) and perpetual debentures. However, the overall rate of return (net of investment expenses) on AFLAC Japan's average investments and cash at amortized cost has declined. These returns, which were 5.26% in 1998, 5.37% in 1997 and 5.55% in 1996, reflect the cumulative effect of lower investment yields available in Japan since the early 1990's. By concentrating on selected sectors of the bond market, AFLAC Japan has secured higher yields than 20-year Japanese government bonds would have provided while still adhering to conservative standards for credit quality. We believe that we can invest new money in the near term at an adequate spread over policy premium pricing assumptions for new business and assumed interest rates for policy liabilities. The premium rate increases recently implemented have a positive impact on investment margins and therefore should contribute to stability in the pretax operating profit margin. Insurance Deregulation in Japan. In December 1996, the governments of the United States and Japan reached an agreement on deregulation of the Japanese insurance industry. The agreement calls for the gradual liberalization of the industry through the year 2001 and includes provisions to avoid "radical change" in the third sector of the insurance industry, which includes our supplemental insurance products. AFLAC and other foreign-owned insurers, as well as some small to medium-sized Japanese insurers, operate primarily in the third sector. One of the measures for avoiding radical change in the third sector is the prohibition of additional Japanese life and non-life insurance companies from selling cancer or medical insurance until January 1, 2001. AFLAC has inherent competitive advantages through its distribution, products, administrative efficiency and financial soundness that should enable it to grow even in a more competitive environment. However, the ultimate impact of deregulation isn't known. AFLAC Japan -- Other. The percentage increases in premium income reflect the growth of premiums in force. The increases in annualized premiums in force in yen of 7.2% in 1998, 5.2% in 1997 and 12.2% in 1996 reflect the high persistency of AFLAC Japan's business and the sales of new policies. Annualized premiums in force were: 640.8 billion yen ($5.5 billion) at December 31, 1998; 597.8 billion yen ($4.6 billion) at December 31, 1997; and 568.1 billion yen ($4.9 billion) at December 31, 1996. The slight decline of the benefit ratio during the three-year period ended December 31, 1998, is primarily attributable to newer products that have somewhat lower loss ratios than the cancer life plan. Annual claims experience and persistency studies continue to support the current reserving assumptions. Even with Japan's depressed economic conditions, we believe the market for supplemental insurance remains bright. The need for our products in Japan has continued, and we remain optimistic about increasing penetration within existing groups, selling new products, opening new accounts and developing additional supplemental products for the Japanese market. 36 37 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. Estimated investment income earned from profits transferred to and retained by AFLAC U.S. from 1992 through 1998, along with estimated investment income earned from the sales proceeds of the television business, have been reclassified in the following presentation in order to improve comparability between years. AFLAC U.S. SUMMARY OF OPERATING RESULTS
YEARS ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------ ------ ------ (IN MILLIONS) Premium income........................................... $1,198 $1,062 $ 946 Investment income, as adjusted*.......................... 112 104 86 Other income............................................. 4 1 2 ------ ------ ------ Total revenues, as adjusted*........................ 1,314 1,167 1,034 ------ ------ ------ Benefits and claims...................................... 749 667 591 Operating expenses....................................... 439 392 347 ------ ------ ------ Total benefits and expenses......................... 1,188 1,059 938 ------ ------ ------ Pretax operating earnings, as adjusted*............. 126 108 96 Investment income applicable to profit repatriations and proceeds from the sale of the television business...... 104 76 33 ------ ------ ------ Pretax operating earnings........................... $ 230 $ 184 $ 129 ====== ====== ====== Percentage increases over previous year: Premium income...................................... 12.8% 12.2% 10.0% Investment income*.................................. 7.8 20.3 10.2 Total revenues*..................................... 12.6 12.9 10.0 Pretax operating earnings*.......................... 16.1 13.2 15.0 Pretax operating earnings........................... 24.9 43.4 23.0 Ratios to total revenues, as adjusted:* Benefits and claims................................. 57.0 57.1 57.1 Operating expenses.................................. 33.4 33.6 33.6 Pretax operating earnings........................... 9.6 9.3 9.3 Ratio of pretax operating earnings to total reported revenues............................................... 16.2 14.8 12.1
- --------------- * Excludes estimated investment income of $104 million in 1998 and $76 million in 1997 related to investment of profit repatriation funds retained by AFLAC U.S. and investment of the proceeds from the sale of the television business, and $33 million in 1996 related to investment of profit repatriation funds retained by AFLAC U.S. AFLAC U.S. Sales. The percentage increases in premium income reflect the growth of premiums in force. The increases in annualized premiums in force of 14.6% in 1998, 14.7% in 1997 and 11.1% in 1996 were favorably affected by increased sales at the worksite primarily through cafeteria plans (Internal Revenue Code Section 125) and an improvement in the persistency of several products. Annualized premiums in force were: $1.4 billion at December 31, 1998; $1.2 billion at December 31, 1997; and $1.1 billion at December 31, 1996. New annualized premiums from sales and policy conversions were: $482 million in 1998, up 20.3%; $401 million in 1997, up 22.7%; and $327 million in 1996, up 17.0%. Accident/disability coverage was the best-selling product for the fifth year in a row, accounting for more than 56% of new sales in 1998, 54% of new sales in 1997 and 48% of new sales in 1996. Cancer expense insurance 37 38 accounted for more than 25% of new sales in 1998, 24% of new sales in 1997 and 27% of new sales in 1996. AFLAC U.S. -- Other. We expect the operating expense ratio, excluding discretionary advertising expenses, to decline in the future due to continued improvements in operating efficiencies. State-of-the-art technology is one way we can control expense growth, and SmartApp is a good example. SmartApp is a laptop-based, point-of-sale system we developed in the early 1990s. Our sales associates use this system to input customer information, capture the customer's signature and electronically transmit the application to headquarters. In some cases, the policy can be "jet-issued," which requires no human intervention. In 1998, we processed approximately 58% of our business with SmartApp, and about 44% of those policies were jet-issued. Our goal for 1999 is to produce 70% of our business via SmartApp. By improving administrative systems and controlling other costs, we have been able to redirect funds to national advertising programs without significantly affecting the operating expense ratio. The aggregate benefit ratio has been relatively stable. The mix of business has shifted towards accident and hospital indemnity policies, which have lower benefit ratios than other products. We expect future benefit ratios for some of our supplemental products to increase slightly due to our ongoing efforts to improve policy persistency and enhance policyholder benefits. We expect the pretax operating profit margin to remain approximately the same in 1999. We continue to believe that there are significant opportunities to market high-quality, affordable supplemental insurance products in the U.S. marketplace. Other Operations Corporate operating expenses consist primarily of overhead expenses such as salary costs, provisions for retirement and litigation expenses and professional fees. Corporate expenses have fluctuated in recent years primarily due to changes in the legal environment in certain states and to enhanced benefits, early retirements and revisions in actuarial assumptions for retirement accruals. On December 31, 1998, we sold our insurance operation in Taiwan, resulting in a nominal gain. Financial Accounting Standards Board Statements For information regarding new Statements of Financial Accounting Standards, see Note 1 of the notes to the consolidated financial statements at December 31, 1998. ANALYSIS OF FINANCIAL CONDITION THREE MONTHS ENDED MARCH 31, 1999. Since December 31, 1998, our financial condition has remained strong in the functional currencies of our operations. The investment portfolios of AFLAC Japan and AFLAC U.S. have continued to grow and primarily consist of investment grade 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 our financial statements. The yen/dollar exchange rate at the end of each period is used to translate yen-denominated balance sheet items to U.S. dollars for reporting purposes. The exchange rate at March 31, 1999, was 120.55 yen to one U.S. dollar, 4.0% weaker than the exchange rate of 115.70 as of December 31, 1998. Management estimates that the weaker yen rate decreased reported investments and cash by $932 million, total assets by $1.1 billion, and total liabilities by $1.0 billion compared with the amounts that would have been reported for 1999 if the exchange rate had remained unchanged from year-end 1998. 38 39 Investments and Cash. The continued growth in investments and cash reflects the substantial cash flows in the functional currencies of our operations. Net unrealized gains of $1.7 billion on investment securities at March 31, 1999, consisted of $2.5 billion in gross unrealized gains and $818 million in gross unrealized losses. AFLAC invests primarily within the Japanese, U.S. and Euroyen fixed-maturity markets. We use specific criteria to judge the credit quality and liquidity of our investments and use a variety of credit rating services to monitor these criteria. Applying those various credit ratings to a standardized rating system based on the categories of a nationally recognized rating service, the percentages of our debt securities, at amortized cost, were as follows:
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ AAA................................................ 36.3% 38.1% AA................................................. 18.3 17.6 A.................................................. 30.8 31.2 BBB................................................ 12.8 13.1 BB................................................. 1.8 -- ----- ----- 100.0% 100.0% ===== =====
As of December 31, 1998, we held no debt securities rated below "BBB." However, in January 1999, the credit ratings of several major Japanese financial institutions were downgraded. We owned debt securities issued by a major Japanese bank in the amount of $436 million, or 1.8% of total debt securities at March 31, 1999. Following the downgrade, these securities were rated "Ba1" by Moody's and "BB+" by Standard & Poor's. Private placement investments accounted for 46.5% and 43.9% of our total debt securities as of March 31, 1999 and December 31, 1998, respectively. AFLAC Japan has made investments in the private placement market to secure higher yields than those available from Japanese government bonds. At the same time, we have adhered to historically conservative standards for credit quality. We require that all private placement issuers have an initial rating of Class 1 or 2 as determined by the Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC"). Most of AFLAC's private placement issues are issued under medium-term note programs and have standard covenants commensurate with credit rankings, except when internal credit analysis indicates that additional protective and/or event-risk covenants are required. During the fourth quarter of 1998, we revised our investment management policy regarding the holding-period intent for certain of our private placement debt securities. Our past practice was to hold these securities to their contractual or economic maturity dates. We have now made this our formal policy. Accordingly, debt securities carried at a fair value of $6.4 billion were reclassified as of October 1, 1998, from the category "available of sale" to "held to maturity." The related unrealized gains of $1.1 billion as of October 1, 1998, on these securities are being amortized over the remaining term of the securities. Securities that are available for sale are reported in the balance sheet at fair value and securities that are held to maturity are reported at amortized cost. 39 40 The following table shows an analysis of investment securities (at cost or amortized cost):
AFLAC JAPAN AFLAC U.S. ------------------------ ------------------------ MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1999 1998 1999 1998 --------- ------------ --------- ------------ (IN MILLIONS) Available for sale: Fixed-maturity securities...................... $12,950 $12,886 $2,829 $2,772 Perpetual debentures........................... 1,710 1,344 116 111 Equity securities.............................. 28 22 74 79 ------- ------- ------ ------ Total available for sale............... 14,688 14,252 3,019 2,962 ------- ------- ------ ------ Held to maturity: Fixed-maturity securities...................... 3,803 3,947 -- -- Perpetual debentures........................... 3,344 3,494 -- -- ------- ------- ------ ------ Total held to maturity................. 7,147 7,441 -- -- ------- ------- ------ ------ Total.................................. $21,835 $21,693 $3,019 $2,962 ======= ======= ====== ======
Policy Liabilities. Policy liabilities decreased $58 million, or .2%, during the first three months of 1999. AFLAC Japan decreased $126 million, or .6% (3.6% increase in yen), and AFLAC U.S. increased $68 million, or 3.2%. Changes in policy liabilities were primarily due to the addition of new business, the aging of policies in force, the weaker yen and the effect of the market value adjustment for securities available for sale (see Note 7 of the notes to the consolidated financial statements at March 31, 1999). The weaker yen at March 31, 1999 compared with December 31, 1998 decreased reported policy liabilities by $915 million. Debt. On April 21, 1999, we issued $450 million of senior notes with a 6.50% coupon, paid semiannually, due April 15, 2009. The notes are redeemable at our option and at any time at a redemption price equal to the principal amount of the notes being redeemed plus a make-whole amount. We received net proceeds of $445 million. We intend to use the proceeds primarily to purchase shares of our common stock. Any remaining proceeds may be used to repay indebtedness or for general corporate purposes. We intend to swap the dollar-denominated principal and interest to be yen-denominated. See Note 6 of the notes to the consolidated financial statements at March 31, 1999 for information on other debt outstanding at March 31, 1999. Our ratio of debt to total capitalization (debt plus shareholders' equity, excluding the unrealized gains on investment securities) was 18.0% and 19.6% as of March 31, 1999 and December 31, 1998, respectively. Security Lending. AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. This program increased AFLAC Japan's investment income by approximately $.3 million for the three months ended March 31, 1999 and by approximately $1 million for the year 1998. For further information regarding such arrangements, see Note 8 of the notes to the consolidated financial statements at March 31, 1999. Policyholder Guaranty Funds. Under insurance guaranty fund laws in most U.S. states, insurance companies doing business in those states can be assessed for policyholder losses up to prescribed limits that are incurred by insolvent companies with similar lines of business. Such assessments have not been material to us in the past. We believe that future assessments relating to companies in the U.S. currently involved in insolvency proceedings will not materially impact the consolidated financial statements. 40 41 The Life Insurance Association of Japan, an industry organization, implemented a voluntary policyholder protection fund in 1996 to provide capital support to insolvent life insurers. AFLAC Japan pledged investment securities to the Life Insurance Association of Japan for this program. During the first quarter of 1998, the Japanese government enacted a mandatory policyholder protection fund system. The life insurance industry is making contributions to these funds over a 10-year period. We have recorded a liability for our share of these obligations. Shareholders' Equity. Our insurance operations continue to provide the primary sources of liquidity. 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 AFLAC Incorporated for management fees and dividends. Both the sources and uses of cash are reasonably predictable. Our investment objectives provide for liquidity through the ownership of high-quality investment securities. AFLAC insurance policies are generally not interest-sensitive and therefore are not subject to unexpected policyholder redemptions due to investment yield changes. Also, the majority of AFLAC policies provide indemnity benefits rather than reimbursement for actual medical costs and therefore are not subject to the risks of medical cost inflation. The achievement of continued long-term growth will require growth in AFLAC's statutory capital and surplus. We may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by AFLAC Incorporated from funds generated through debt or equity offerings. In April 1999 we received net proceeds of $445 million from the issuance of $450 million of the senior notes which increased our capital resources. We believe outside sources for additional debt and equity capital, if needed, will continue to be available for capital expenditures, business expansion, and the funding of our share repurchase program. AFLAC Incorporated capital resources are largely dependent upon the ability of AFLAC 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 AFLAC Incorporated. In addition to restrictions by U.S. insurance regulators, the Japanese Financial Supervisory Agency ("FSA") may impose restrictions on transfers of funds from AFLAC Japan. Payments are made from AFLAC Japan to AFLAC Incorporated for management fees, and to AFLAC U.S. for allocated expenses and remittances of earnings. Total funds received from AFLAC Japan were $11 million in the first quarter of 1999 and $192 million and $386 million in the full years 1998 and 1997, respectively. Profit repatriations have been remitted annually from AFLAC Japan to AFLAC U.S. in July. The FSA maintains solvency standards, a version of risk-based capital requirements. AFLAC Japan's solvency margin remains high and reflects a strong capital and surplus position. For additional information on regulatory restrictions on dividends, profit transfers and other remittances, see Note 10 of the notes to the consolidated financial statements at December 31, 1998. Currently, prescribed or permitted statutory accounting principles ("SAP") used by insurers for financial reporting to state insurance regulators may vary between states and between companies. The National Association of Insurance Commissioners ("NAIC") has recodified SAP to promote standardization throughout the industry. These new accounting principles are presently planned by the NAIC to be effective for 2001. The most significant change to AFLAC is the requirement that insurance companies establish a deferred income tax liability for statutory accounting purposes. We estimate AFLAC's deferred tax liability would be approximately $142 million at March 31, 1999 under the provisions of the recodified SAP. AFLAC's capital and surplus, as determined on the present U.S. statutory accounting basis, was $1.7 billion at March 31, 1999. 41 42 Year 2000. The term "year 2000 issue" generally refers to incorrect date calculations that might occur in computer software and hardware as the year 2000 approaches. The use of computer programs that rely on two-digit date fields to perform computations and decision-making functions may cause systems to malfunction when processing information involving dates after 1999. For example, any computer software that has date-sensitive coding might recognize a code of "00" as the year 1900 rather than the year 2000. Our efforts to address year 2000 issues began in 1997. We established a Year 2000 Executive Steering Committee, made up of senior management and representatives of our information technology, financial, legal, internal audit and various operational areas to identify and address year 2000 issues throughout our U.S. and Japanese operations. We also established a Year 2000 Project Office consisting of department coordinators from Information Technology, Worldwide Headquarters business operations and AFLAC Japan. The Project Office established both domestic and Japanese plans to address year 2000 readiness and minimize the risk of business disruption caused by year 2000 issues. We also engaged third party consultants to assist AFLAC U.S. and AFLAC Japan with their year 2000 efforts. The plans contain five phases: (1) the assessment phase, which includes creating awareness of the issue throughout the company and assessment of all systems, significant business processes, facilities and third party dependencies; (2) the remediation phase, which includes updating or modifying systems which are identified as critical to our efforts to become year 2000 ready; (3) the testing phase, which includes the testing of systems that have been updated or modified; (4) the implementation phase, which includes placing systems into the production environment, as well as additional comprehensive testing to identify and resolve any remaining year 2000 issues; and (5) contingency planning. We have remediated substantially all of our critical production systems in both the United States and Japan. Verification that the critical production systems have been correctly remediated will continue through the third quarter of 1999 in a year 2000 test environment. The additional testing may raise new issues that require further remediation and implementation activities, all of which are scheduled to be completed in the third quarter of 1999. Testing and any further remediation and implementation activities required for non-critical systems will continue through the end of 1999. Currently, we are in the process of developing and refining contingency plans for our business systems and processes. These plans will be periodically updated throughout 1999 based on currently available information and the perceived business risk. We rely on a widely distributed customer base in the United States and Japan for continued payment of premiums. Many of the systems utilized by our group accounts are automated and date dependent. We randomly surveyed group accounts in the United States to determine their year 2000 readiness. AFLAC Japan depends heavily on substantial premium payments that are electronically transmitted by third party payment agents from employers of the insured. We have surveyed our more significant customers in Japan to determine whether such customers expect their ability to pay premiums or transmit policy and claims data in this fashion to be impacted by year 2000 issues. We will be conducting tests with our key external customers and suppliers during the second quarter of 1999. Any adverse results from this testing will be incorporated into our ongoing contingency planning process. If a large number of customers (in the U.S. and/or Japan) are unable to submit premium payments in a timely or accurate manner due to year 2000 issues, the resulting delays could have a material adverse effect on our financial condition or results of operations. It is not currently possible to predict the probability of any delays occurring or the extent of such delays. 42 43 AFLAC owns publicly traded and privately placed fixed-maturity and equity securities in the U.S. and Japan, and other foreign countries. If a material portion of such securities are adversely impacted by year 2000 issues, our investment portfolio may also be adversely impacted. Since the inception of the year 2000 project, we had incurred costs of approximately $25 million for system upgrades or modifications through March 31, 1999. Of this amount, approximately $10 million was capitalized. The remaining cost to complete the various projects is currently estimated to be $7 million, of which $1 million is expected to be capitalized. We may determine that additional expenditures are necessary as testing continues. Company personnel have spent considerable time and effort on the project, and we intend to continue to devote additional internal resources and personnel to work on the project. However, we believe that any deferral of information technology projects due to the year 2000 effort will not have a material adverse effect on our operations or financial condition. Due to the uncertainty inherent in year 2000 issues, particularly with regard to Japanese customers' year 2000 readiness and the various governmental functions, public utilities, financial infrastructures and similar outside facilities on which we depend in both the United States and Japan, we are unable to determine at this time whether the consequences of external year 2000 failures will have a material impact on our financial condition or results of operations. Although a year 2000 failure with respect to any single internal or external system may not have a material adverse effect on AFLAC, the failure of multiple systems may cause a material disruption to our business which may have a material adverse effect on our operations or financial condition. All statements made herein regarding our year 2000 efforts are "Year 2000 Readiness Disclosures" made pursuant to the Year 2000 Information and Readiness Disclosure Act, and to the extent applicable, are entitled to the protections of such act. Other. In April 1999, Standard & Poor's announced that AFLAC Incorporated will be added to the Standard & Poor's 500 index. On May 3, 1999, the board of directors approved an increase in the quarterly cash dividend from $.065 to $.075 per share. The increase is effective with the second quarter dividend, which is payable on June 1, 1999, to shareholders of record at the close of business on May 20, 1999. YEAR ENDED DECEMBER 31, 1998. Balance Sheet During the last two years, our financial condition has remained strong in the functional currencies of our operations. The investment portfolios of AFLAC Japan and AFLAC U.S. have continued to grow and consist of investment-grade securities. The yen/dollar exchange rate at the end of each period is used to translate yen-denominated balance sheet items to U.S. dollars for reporting purposes. The exchange rate at December 31, 1998, was 115.70 yen to one U.S. dollar, 12.4% stronger than the December 31, 1997 exchange rate of 130.10. The stronger yen rate increased reported investments and cash by $2.4 billion, total assets by $2.8 billion and total liabilities by $2.7 billion compared with the amounts that would have been reported for 1998 if the exchange rate had remained unchanged from year-end 1997. For additional information on exchange rates, see Note 2 of the notes to the consolidated financial statements at December 31, 1998. Market Risks of Financial Instruments. Our financial instruments are exposed primarily to three types of market risks: interest rate, equity price and foreign currency exchange rate. 43 44 Interest Rate Risk. Our primary interest rate exposure is a result of the effect of changes in interest rates on the fair value of our investments in debt securities. We use modified duration analysis, which provides a measure of price percentage volatility, to estimate the amount of sensitivity to interest rate changes in our debt securities. For example, if the current duration of a debt security is five, then the market value of that security will increase by approximately 5% if market interest rates decrease by 100 basis points. Likewise, the value of the debt security will decrease by approximately 5% if market interest rates increase by 100 basis points. The estimated effect of potential increases in interest rates on the fair values of our debt security investments and notes payable follows: SENSITIVITY OF FAIR VALUES OF FINANCIAL INSTRUMENTS TO INTEREST RATE CHANGES
AT DECEMBER 31, ------------------------------------- 1998 1997 ----------------- ----------------- +100 +100 MARKET BASIS MARKET BASIS VALUE POINTS VALUE POINTS ------- ------- ------- ------- (IN MILLIONS) Debt securities: Fixed-maturity securities: Yen-denominated....................... $16,748 $15,317 $14,906 $13,634 Dollar-denominated.................... 4,603 4,272 4,101 3,807 Perpetual debentures: Yen-denominated....................... 4,250 3,816 3,286 2,943 Dollar-denominated.................... 204 192 145 136 ------- ------- ------- ------- Total............................ $25,805 $23,597 $22,438 $20,520 ======= ======= ======= ======= Notes payable*.................................. $ 578 $ 587 $ 505 $ 520 ======= ======= ======= =======
- --------------- * Excludes capitalized leases. Should significant amounts of unrealized losses occur because of increases in market yields, we would not expect to realize significant losses because we have the ability to hold such securities to maturity. The unrealized gains and losses on debt securities, less amounts applicable to policy liabilities and deferred income taxes, are reported in accumulated other comprehensive income. 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. For further information, see Note 3 of the notes to the consolidated financial statements at December 31, 1998. 44 45 The following is a comparison of the actuarially assumed interest rates for policy reserves and investment yields (after investment expenses). COMPARISON OF INTEREST RATES FOR POLICY RESERVES AND INVESTMENT YIELDS (NET OF INVESTMENT EXPENSES)
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- U.S. JAPAN* U.S. JAPAN* U.S. JAPAN* ---- ------ ---- ------ ---- ------ Policies issued during year: Required interest on policy reserves... 6.81% 3.50% 6.80% 3.50% 6.81% 4.28% New money yield on investments......... 7.62 3.76 7.53 4.29 7.31 3.83 Policies in force at end of year: Required interest on policy reserves... 6.41 5.38 6.40 5.46 6.38 5.53 Investment yield....................... 7.44 5.17 7.61 5.34 7.31 5.58
- --------------- * Represents yen-denominated investments for Japan. We attempt to match the duration of our assets with the duration of our liabilities. For AFLAC Japan, the duration of policy benefit liabilities is longer than that of the related invested assets due to the unavailability of acceptable yen-denominated long-duration securities. At December 31, 1998, the average duration of policy liabilities was approximately 13 years, unchanged from 1997. The average duration of the yen-denominated debt securities was approximately nine years in 1998 and 1997. When our debt securities mature, there is a risk that the proceeds will be reinvested at a yield below that of the interest required for the accretion of policy liabilities. Over the next five years, $3.0 billion at amortized cost, or 14.8%, of AFLAC Japan's yen-denominated debt securities are scheduled to mature. We have outstanding interest rate swaps on 49.6 billion yen ($428 million) of our variable-interest-rate yen-denominated bank borrowings. These swaps reduce the impact of fluctuations in interest rates on our borrowing costs and effectively change our interest rates from variable to fixed. Therefore, movements in market interest rates should have no material effect on earnings. At December 31, 1998, we also had yen-denominated bank borrowings in the amount of 17.3 billion yen ($150 million) with a variable interest rate of .87%. The effect on net earnings in 1998 due to changes in market interest rates was immaterial. For further information on our notes payable, see Note 7 of the notes to the consolidated financial statements at December 31, 1998. 45 46 Equity Price Risk. Equity securities at December 31, 1998, totaled $177 million, or .7% of total investments and cash on a consolidated basis. We use beta analysis to measure the sensitivity of our equity securities portfolio to fluctuations in the broad market. The beta of our equity securities portfolio is 1.02. For example, if the overall stock market value changed by 10%, the value of AFLAC's equity securities would be expected to change by approximately 10.2%, or $18 million. Currency Risk. Most of AFLAC Japan's investments and cash are denominated in yen. When the yen-denominated financial instruments mature or are sold, the proceeds are generally reinvested in yen-denominated securities and are held to fund yen-denominated policy obligations rather than converted into dollars. Therefore, there is no significant foreign currency transaction risk. In addition to the yen-denominated financial instruments held by AFLAC Japan, AFLAC Incorporated has yen-denominated borrowings that have been designated as a hedge of our investment in AFLAC Japan. The unrealized foreign currency translation gains and losses related to these borrowings are reported in accumulated other comprehensive income. We attempt to match our yen-denominated assets to our yen-denominated liabilities on a consolidated basis in order to minimize the exposure of our shareholders' equity to foreign currency translation fluctuations. The following table compares the dollar values of our yen-denominated assets and liabilities at various exchange rates. DOLLAR VALUE OF YEN-DENOMINATED ASSETS AND LIABILITIES AT SELECTED EXCHANGE RATES
AT DECEMBER 31, --------------------------------------------------------------- 1998 1997 ------------------------------ ------------------------------ 100.70 115.70* 130.70 115.10 130.10* 145.10 YEN YEN YEN YEN YEN YEN -------- -------- -------- -------- -------- -------- (IN MILLIONS) Yen-denominated financial instruments: Assets: Securities available for sale: Fixed maturities......... $ 15,001 $ 13,057 $ 11,558 $ 16,849 $ 14,906 $ 13,365 Perpetual debentures..... 1,286 1,119 991 3,712 3,286 2,945 Equity securities........ 26 23 20 9 7 7 Securities held to maturity: Fixed maturities......... 4,534 3,947 3,494 -- -- -- Perpetual debentures..... 4,014 3,494 3,093 -- -- -- Cash and cash equivalents.............. 351 306 270 185 164 147 Securities held as collateral**............. -- -- -- 3,430 3,034 2,721 Other financial instruments.............. 12 8 8 10 8 8 -------- -------- -------- -------- -------- -------- Total................. 25,224 21,954 19,434 24,195 21,405 19,193 -------- -------- -------- -------- -------- -------- Liabilities: Payables for return of collateral**............. -- -- -- 3,430 3,034 2,721 Notes payable.............. 664 578 511 563 498 447 -------- -------- -------- -------- -------- -------- Total................. 664 578 511 3,993 3,532 3,168 -------- -------- -------- -------- -------- -------- Net yen-denominated financial instruments................... 24,560 21,376 18,923 20,202 17,873 16,025 Other yen-denominated assets.... 3,600 3,133 2,774 2,964 2,622 2,351 Other yen-denominated liabilities................... (27,767) (24,167) (21,395) (22,614) (20,007) (17,938) -------- -------- -------- -------- -------- -------- Total yen-denominated net assets subject to foreign currency fluctuation......... $ 393 $ 342 $ 302 $ 552 $ 488 $ 438 ======== ======== ======== ======== ======== ========
- --------------- * Actual year-end rate. ** Off-balance sheet financial instruments in 1998. 46 47 For information regarding the effect of foreign currency translation on operating earnings per share, see "-- Results of Operations" and Note 2 of the notes to the consolidated financial statements at December 31, 1998. Investments and Cash. The continued growth in investments and cash reflects substantial cash flows from operations. Net unrealized gains of $1.3 billion on investment securities at December 31, 1998, consisted of $2.4 billion in gross unrealized gains and $1.1 billion in gross unrealized losses. AFLAC invests primarily within the Japanese, U.S. and Euroyen fixed-maturity markets. We use specific criteria to judge the credit quality and liquidity of our investments and use a variety of credit rating services to monitor these criteria. Applying those various credit ratings to a standardized rating system based on the categories of a nationally recognized rating service, the percentages of our debt securities, at amortized cost, were as follows:
AT DECEMBER 31, ----------------- 1998 1997 ----- ----- AAA................................................ 38.1% 44.9% AA................................................. 17.6 18.1 A.................................................. 31.2 29.7 BBB................................................ 13.1 7.3 ----- ----- 100.0% 100.0% ===== =====
As of December 31, 1998, we held no debt securities rated below "BBB." However, in January 1999, the credit ratings of several major Japanese financial institutions were downgraded. We owned debt securities issued by a Japanese bank in the amount of $454 million, or 1.8% of total debt securities at December 31, 1998. Following the downgrade, these securities were rated "Ba1" by Moody's Investors Services, Inc. and "BB+" by Standard & Poor's Ratings Services. Private placement investments accounted for 43.9% and 36.3% of our total debt securities as of December 31, 1998 and 1997, respectively. AFLAC Japan has made investments in the private placement market to secure higher yields than those available from Japanese government bonds. At the same time, we have adhered to historically conservative standards for credit quality. We require that all private placement issuers have an initial rating of Class 1 or 2 as determined by the Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC"). Most of AFLAC's private placement issues are issued under medium-term note programs and have standard covenants commensurate with credit rankings, except when internal credit analysis indicates that additional protective and/or event-risk covenants are required. During the fourth quarter of 1998, we revised our investment management policy regarding the holding-period intent for certain of our private placement debt securities. Our past practice was to hold these securities to their contractual or economic maturity dates. We have now made this our formal policy. Accordingly, debt securities carried at a fair value of $6.4 billion were reclassified as of October 1, 1998, from the category "available for sale" to "held to maturity." The related unrealized gain of $1.1 billion as of October 1, 1998 on these securities is being amortized over the remaining term of the securities. Securities that are available for sale are reported in the balance sheet at fair value and securities that are held to maturity are reported at amortized cost. 47 48 The following table shows an analysis of investment securities (at cost or amortized cost):
AFLAC JAPAN AFLAC U.S. ----------------- --------------- AT DECEMBER 31, AT DECEMBER 31, ----------------- --------------- 1998 1997 1998 1997 ------- ------- ------ ------ (IN MILLIONS) Available for sale: Fixed-maturity securities.................... $12,886 $13,527 $2,772 $2,546 Perpetual debentures......................... 1,344 3,011 111 37 Equity securities............................ 22 7 79 73 ------- ------- ------ ------ Total available for sale................ 14,252 16,545 2,962 2,656 ------- ------- ------ ------ Held to maturity: Fixed-maturity securities.................... 3,947 -- -- -- Perpetual debentures......................... 3,494 -- -- -- ------- ------- ------ ------ Total held to maturity.................. 7,441 -- -- -- ------- ------- ------ ------ Total.............................. $21,693 $16,545 $2,962 $2,656 ======= ======= ====== ======
Mortgage loans on real estate and other long-term investments remained immaterial at both December 31, 1998 and 1997. Cash, cash equivalents and short-term investments totaled $384 million, or 1.4% of total investments and cash, as of December 31, 1998, compared with $279 million, or 1.2% of total investments and cash, at December 31, 1997. For additional information concerning investments and fair values, see Notes 3 and 4 of the notes to the consolidated financial statements at December 31, 1998. Policy Liabilities. Policy liabilities increased $4.1 billion, or 20.9%, during 1998. AFLAC Japan policy liabilities increased $4.0 billion, or 22.2%, and AFLAC U.S. policy liabilities increased $205 million, or 10.9%. Changes in policy liabilities were primarily due to the addition of new business, the aging of policies in force, the stronger yen and the effect of the market value adjustment for securities available for sale (see Note 3 of the notes to the consolidated financial statements at December 31, 1998). The stronger yen at year-end 1998 compared with 1997 increased reported policy liabilities by $2.4 billion. The weaker yen at year-end 1997 compared with 1996 decreased reported policy liabilities by $2.2 billion in 1997. Debt. AFLAC Incorporated has an unsecured reducing revolving credit agreement that provides for bank borrowings through July 2001 in either U.S. dollars or Japanese yen. At December 31, 1998, 38.1 billion yen ($329 million) were outstanding under this agreement. AFLAC Incorporated also has an unsecured revolving credit agreement that provides for bank borrowings through November 2002 in either U.S. dollars or Japanese yen. At December 31, 1998, 28.8 billion yen ($249 million) were outstanding. The proceeds from these loans were used to fund our share repurchase program. When any portion of these loans is denominated in yen, the principal amounts of the loans in dollars will fluctuate due to changes in the yen/dollar exchange rate. We have entered into interest rate swaps that effectively change the interest rates on a portion of these loans from variable to fixed. The variable rate on the 34.1 billion yen ($294 million) loan is .95%, and the fixed rate is 2.29% after the effect of the swaps (including loan costs of 25 basis points). The variable rate on the 15.5 billion yen ($134 million) loan is .90%, and the fixed rate is 1.24% after the effect of the swaps (including loan costs of 20 basis points). We make interest payments to the bank based on variable interest rates, and we either pay to or receive from the swap 48 49 counterparty an amount necessary to equal the fixed rate. The variable interest rate at December 31, 1998, was based on the three-month Tokyo Interbank Offered Rate of .75%, plus loan costs. We have designated these yen-denominated borrowings as a hedge of our net investment in AFLAC Japan. Foreign currency translation gains/losses on the borrowings are included in accumulated other comprehensive income. Outstanding principal and related accrued interest payable on the yen-denominated borrowings are translated into dollars at end-of-period exchange rates. Our ratio of debt to total capitalization (debt plus shareholders' equity, excluding the net unrealized gains on investment securities) was 19.6% as of December 31, 1998 and 1997. For further information concerning notes payable, see Note 7 of the notes to the consolidated financial statements at December 31, 1998. Security Lending. AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. This program increased AFLAC Japan's investment income by approximately $1 million in both 1998 and 1997. For further information regarding such arrangements, see Note 4 of the notes to the consolidated financial statements at December 31, 1998. Policyholder Guaranty Funds. Under insurance guaranty fund laws in most U.S. states, insurance companies doing business in those states can be assessed for policyholder losses up to prescribed limits that are incurred by insolvent companies with similar lines of business. Such assessments have not been material to us in the past. We believe that future assessments relating to companies in the United States currently involved in insolvency proceedings will not materially impact the consolidated financial statements. The Life Insurance Association of Japan, an industry organization, implemented a policyholder protection fund in 1996 to provide capital support to insolvent life insurers. AFLAC Japan pledged investment securities to the Life Insurance Association of Japan under this program. During the first quarter of 1998, the Japanese government enacted a mandatory policyholder protection fund system. The life insurance industry will contribute $6.0 billion over a 10-year period for these two funds. We have recorded a liability for our share of these obligations. See Note 2 of the notes to the consolidated financial statements at December 31, 1998. Shareholders' Equity. Our insurance operations continue to provide the primary sources of liquidity. 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 AFLAC Incorporated for management fees and dividends. Both the sources and uses of cash are reasonably predictable. Our 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 our policies provide indemnity benefits rather than reimbursement for actual medical costs and thus are not subject to the risks of medical-cost inflation. The achievement of continued long-term growth will require growth in AFLAC's statutory capital and surplus. We may secure additional statutory capital through various sources, such as internally-generated statutory earnings or equity contributions by AFLAC Incorporated from funds generated through debt or equity offerings. The disposition of the television business increased our capital resources. We believe outside sources for additional debt and equity capital, if needed, will continue to be available for capital expenditures, business expansion and the funding of our share repurchase program. 49 50 AFLAC Incorporated's capital resources are largely dependent upon the ability of AFLAC 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 AFLAC Incorporated. The Georgia Insurance Statutes require prior approval for dividend distributions that exceed the greater of the statutory net gain from operations for the previous year or 10% of statutory capital and surplus as of the previous year-end. In addition, the Georgia Insurance Department must approve service arrangements and other transactions within the affiliated group. These regulatory limitations are not expected to affect the level of management fees or dividends paid by AFLAC to AFLAC Incorporated. A life insurance company's statutory capital and surplus is computed according to rules prescribed by the NAIC, as modified by the insurance company's state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to emphasize policyholder protection and company solvency. Currently, prescribed or permitted statutory accounting principles ("SAP") used by insurers for financial reporting to state insurance regulators may vary between states and between companies. The NAIC has recodified SAP to promote standardization throughout the industry. These new accounting principles are presently planned by the NAIC to be effective for 2001. The most significant change to AFLAC is the requirement that insurance companies establish a deferred income tax liability for statutory accounting purposes. We estimate AFLAC's deferred tax liability would be approximately $165 million at December 31, 1998, under the provisions of the recodified SAP. AFLAC's capital and surplus, as determined on the present U.S. statutory accounting basis, was $1.6 billion at December 31, 1998. The NAIC uses a risk-based capital formula relating to insurance risk, business risk, asset risk and interest rate risk to facilitate identification by insurance regulators of inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer's operations. AFLAC's NAIC risk-based capital ratio remains high and reflects a very strong capital and surplus position. Also, there are various ongoing regulatory initiatives by the NAIC relating to investments, reinsurance, limited-benefit insurance policies, revisions to the risk-based capital formula and other related matters. In addition to restrictions by U.S. insurance regulators, the Japanese FSA may impose restrictions on transfers of funds from AFLAC Japan. Payments are made from AFLAC Japan to AFLAC Incorporated for management fees and to AFLAC U.S. for allocated expenses and remittances of earnings. Total funds received from AFLAC Japan were $192 million in 1998, $386 million in 1997 and $254 million in 1996. The FSA may not allow transfers of funds if the payment would cause AFLAC Japan to lack sufficient financial strength for the protection of policyholders. The FSA maintains solvency standards, a version of risk-based capital requirements. AFLAC Japan's solvency margin remains high and reflects a strong capital and surplus position. For additional information on regulatory restrictions on dividends, profit transfers and other remittances, see Note 10 of the notes to the consolidated financial statements at December 31, 1998. Rating Agencies. AFLAC is rated "AA" by Standard & Poor's Ratings Services and "Aa3" by Moody's Investors Service, Inc. for financial strength. Duff & Phelps Credit Rating Co. rates AFLAC "AA" in claims-paying ability. A.M. Best, an independent rating service that analyzes the financial condition and operating performance of insurance companies, gives AFLAC an "A+" or superior rating. Other. For information regarding pending litigation, see Note 12 of the notes to the consolidated financial statements at December 31, 1998. 50 51 Cash Flow Operating cash flows for AFLAC Japan are translated using average monthly exchange rates for the year. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. For additional information, see the Consolidated Statements of Cash Flows on page F-16. Operating Activities. In 1998, consolidated cash flow from operations decreased 4.2% to $2.5 billion, compared with $2.6 billion in 1997 and $2.7 billion in 1996. Net cash flow from operations for AFLAC Japan decreased 5.8% (increased .3% in yen) to $2.2 billion in 1998, compared with $2.3 billion in 1997 and $2.5 billion in 1996. AFLAC Japan represented 89% of the consolidated net cash flow from operations in 1998 and 91% in both 1997 and 1996. The decrease in cash flow from operations in 1998 and 1997 was due to the weaker yen. Investing Activities. Consolidated cash flow used by investing activities decreased 7.8% to $2.2 billion in 1998, compared with $2.4 billion in 1997 and $2.5 billion in 1996. The sale of the television business generated cash flow of $351 million in 1997 and $99 million in 1996. AFLAC Japan accounted for 86% of the consolidated net cash used by investing activities in 1998, compared with 81% in 1997 and 93% in 1996. Operating cash flow is primarily used to purchase debt securities. When market opportunities arise, we dispose of selected debt securities available for sale to improve future investment yields or lengthen maturities. Therefore, dispositions before maturity can vary significantly from year to year. Dispositions before maturity ranged between 4% and 9% of the annual average investment portfolio of debt securities available for sale during the three years ended December 31, 1998. Financing Activities. In 1998, net cash used by financing activities was $141 million, compared with $121 million in 1997 and $157 million in 1996. Treasury stock purchases of $125 million in 1998 and $314 million in 1997 were funded by proceeds from new borrowings. In 1996, treasury stock purchases of $204 million were funded by proceeds from new borrowings of $136 million and available cash. Debt repayments of $108 million in 1998, $55 million in 1997 and $36 million in 1996 on yen-denominated loans were made from annual profit repatriations from Japan. In addition to issuing treasury shares for AFLAC Japan stock options, we have sold treasury shares to our dividend reinvestment plan and to the AFLAC Associate Stock Bonus Plan. These dispositions generated proceeds in the amounts of $44 million, $40 million and $35 million for the years 1998, 1997 and 1996, respectively. Cash dividends paid to shareholders amounted to $67 million in 1998, an increase of 10.7% over 1997. Cash dividends paid to shareholders in 1997 were $61 million, an increase of 11.7% over the 1996 cash dividends of $54 million. The 1998 cash dividend of $.253 per share increased 12.9% over 1997. The 1997 cash dividend of $.224 per share represented an increase of 15.5% over the 1996 cash dividend of $.194 per share. 51 52 BUSINESS THE COMPANY AFLAC U.S. is a leading provider of supplemental insurance at the worksite and a top seller of accident insurance in the United States. AFLAC Japan is the largest foreign insurer in Japan in terms of premium and profits and the second largest life insurer in terms of policies in force. We were incorporated in 1973 under the laws of the State of Georgia. We are a general business holding company and act as a management company overseeing the operations of our subsidiaries by providing management services and making capital available. Our supplemental health insurance business is marketed and administered primarily through AFLAC. Most of our policies are individually underwritten and marketed at the worksite, with premiums paid by the employee. Our products are designed for people who already have major medical or other primary insurance coverage and are intended to cover medical and nonmedical costs that are not reimbursed by other forms of health insurance coverage. We pay benefits regardless of reimbursements from other insurers. In recent years, we have diversified our product offerings to include other types of supplemental health products in both the United States and Japan. We guarantee that our supplemental health insurance plans will be renewable for the lifetime of the policyholder. We cannot cancel guaranteed-renewable coverage. However, we can increase premium rates on existing and future policies in the United States by class of policy if we experience claims higher than originally expected (subject to federal and state loss-ratio guidelines) on a uniform, nondiscriminatory basis. All premium rate increases are subject to state regulatory approval. PRODUCTS Our insurance products can be classified into three general groups -- cancer insurance, accident and disability insurance and other supplemental health insurance. Cancer Insurance. We currently offer a series of three different cancer plans in the United States that vary by benefit amount. All three plans provide a first occurrence benefit that pays an initial amount when internal cancer is first diagnosed, a fixed amount for each day an insured is hospitalized for cancer treatment, and benefits for medical, radiation, chemotherapy and surgery and a "wellness" benefit applicable toward certain diagnostic tests such as mammograms, pap smears, prostate exams and flexible sigmoidoscopy. These plans also contain benefits that reimburse the insured for nursing services, home health care, extended care facilities, hospice, second surgical opinion, experimental treatment, evaluation/consultation from the National Cancer Institute, bone marrow and stem cell transplant, family lodging, ambulance, transportation, anesthesia, prosthesis, blood and plasma expenses related to cancer treatments. We also issue several riders, including one that increases the amount of the first occurrence benefit on each anniversary date until the covered person reaches age 65 or until internal cancer is diagnosed. AFLAC periodically introduces new forms of coverage, revising benefits and related premiums based upon the anticipated needs of our policyholders and our claim experience. AFLAC Japan offers cancer life insurance plans with a fixed daily indemnity benefit for hospitalization and outpatient services related to cancer and a lump-sum benefit upon initial diagnosis of internal cancer. The plans differ from the AFLAC U.S. cancer plans because Japanese policies also provide death benefits and cash surrender values. We estimate that approximately 32% of premiums earned from all cancer life plans are associated with these benefits. In January 1997, AFLAC Japan introduced a new economy cancer life policy with lower premium rates and benefit levels. This plan was developed to mitigate the effect of premium rate increases due to low investment yields available in Japan. Moreover, in December 1997, AFLAC Japan received approval from Japanese regulators to sell three new riders to our popular cancer life policy. The riders add 52 53 cancer surgical benefits, supplemental accident coverage and supplemental medical benefits for general hospitalization. AFLAC Japan has combined the accident and supplemental medical benefits riders into a new product offering -- Rider MAX. Rider MAX has become one of our most successful new products in a short period of time and accounted for 33% of 1998 new premium sales. Accident and Disability Insurance. We also offer in the United States an accident and disability policy to protect against losses resulting from accidents. The accident portion of the policy includes lump-sum benefits for accidental death, dismemberment and specific injuries. We also provide fixed benefits for hospital confinement, emergency treatment, follow-up treatments, ambulance, transportation, family lodging, wellness, prosthesis, medical appliances and physical therapy. Optional disability riders are available to the primary insured and include choices of a sickness disability rider, on-the-job disability rider and off-the-job disability rider. We pay these benefits up to a maximum benefit period of one year and for one disability at a time. Other Supplemental Health Insurance. We also issue other supplemental health insurance in the United States, such as intensive care, which is a low-premium policy that provides protection against the high cost of intensive care facilities during hospital confinement, regardless of reimbursements from other insurers. In addition, we issue qualified and non-qualified long-term care plans, short-term disability and a hospital confinement indemnity policy. AFLAC Japan also sells care plans, supplemental general medical expense plans and a living benefit life plan. Care insurance provides periodic benefits to those who become bedridden, demented or seriously disabled due to illness or accident. AFLAC Japan's medical expense plans are similar to hospital indemnity insurance products in the United States and provide cash benefits to policyholders when they are hospitalized. Our policy offers a maximum hospitalization benefit of 1,000 days which, as of the date of the issuance of the old notes was the longest period offered in the industry. AFLAC's living benefit life plan provides lump-sum benefits when policyholders experience a heart attack, cancer or a stroke. We are offering this product in two forms -- as a stand-alone policy or as a rider to the cancer life plan. The rider adds heart attack and stroke benefits to the cancer life policy. MARKETING AND DISTRIBUTION Our United States sales force is comprised of independent sales agents who are licensed to sell accident and health insurance. Many are also licensed to sell life insurance. Most agents' efforts are directed toward selling supplemental health insurance at the worksite. Agents' activities are principally limited to sales. We pay commissions on first-year and renewal premiums from the agents' sales of health and life insurance products. The state, regional and district sales coordinators, who are also independent contractors, are compensated by override commissions. The corresponding primary sales force in Japan are affiliated "corporate agencies" formed when companies establish subsidiary businesses to sell our products to their employees, suppliers and customers. These agencies help us reach the employees of almost all of Japan's large corporations. We have no significant ownership interest in these corporate agencies. Our products also are sold through independent corporate agencies and individual agencies that are not affiliated with large companies. Agents' activities are principally limited to insurance sales, with policyholder service functions handled by the main office in Tokyo and 60 offices located throughout Japan. In the United States and Japan, we focus our marketing efforts at the worksite. Consequently, we offer policies through common media such as employment, trade and other associations. This marketing strategy is distinct from "group" insurance sales in that each insured is contacted directly by the sales associate. Policies are individually underwritten and premiums are generally paid by the employee. Additionally, AFLAC's supplemental policies are portable because individuals may retain their full insurance coverage upon separation from employment or such affiliation, generally at the same premium. Marketing at the worksite not only enables our agents to reach a greater number of 53 54 prospective policyholders than through individual solicitation, but also lowers distribution costs. In 1997, the Japanese government increased copayments for the employer-sponsored health care program from 10% to 20% for the primary insured, thereby increasing the portion of the costs the insured must pay. Given the increase in copayments, we believe AFLAC's products and riders that provide supplemental medical benefits will be especially appealing to consumers. OTHER We are authorized to conduct insurance business in all 50 states, the District of Columbia and several United States territories and foreign countries. Our only significant foreign operation is AFLAC Japan, which accounted for 80%, 79% and 82% of our total revenues for 1998, 1997 and 1996, respectively, and 86% and 87% of total assets at December 31, 1998 and 1997, respectively. Insurance premiums and investment income from insurance operations constitute our major source of revenues. Our consolidated premium income was $5.9 billion for each of the years in the three-year period ended December 31, 1998. We invest in the international financial markets with emphasis on United States dollar- and Japanese yen-denominated securities. We maintain a strong portfolio by investing in investment grade securities that provide a predictable source of investment income. Debt securities represented 96.7% of AFLAC U.S.'s total investments and cash (at amortized cost) at the end of 1998. AFLAC Japan invested 91% of its funds available for investment in 1998 in yen-denominated debt securities at an average yield of 3.84%. We require that all private placement issuers have an initial rating of class 1 or 2 as determined by the Securities Valuation Office of the National Association of Insurance Commissioners. Most of our private placement issues are issued under medium-term note programs and have standard covenants commensurate with credit rankings, except when internal credit analysis indicates that additional protective and/or event risk covenants are required. 54 55 DESCRIPTION OF CERTAIN INDEBTEDNESS The following summary highlights selected information from our outstanding credit agreements and is qualified in its entirety by reference to such agreements, each of which is available from us upon request. Capitalized terms used in this section but not defined have the meanings specified in the respective agreements. REDUCING REVOLVING CREDIT AGREEMENT We entered into a Reducing Revolving Credit Agreement, dated as of January 31, 1996, among us, The Dai-Ichi Kangyo Bank, Limited, as Agent, and other commercial lending institutions (the "Reducing Revolving Credit Agreement"), which provides us with an unsecured reducing revolving credit facility (the "Reducing Revolving Credit Facility"). Under this agreement and subject to certain conditions: (1) We may borrow up to $500 million in either United States dollars or Japanese yen with this amount reducing over time (the "Reducing Commitment"). The current Reducing Commitment is $325 million. (2) The Reducing Commitment will be reduced each year on July 15th as follows: - 1999, reduced to $250 million; - 2000, reduced to $125 million; and - 2001, reduced to $0 when the Reducing Revolving Credit Agreement terminates in 2001, unless extended. (3) We must pay any principal amounts outstanding in excess of the Reducing Commitment on each reduction date. (4) All amounts drawn under the Reducing Revolving Credit Facility will bear interest at our option at either the: - Base Rate, which equals the greater of (A) the Prime Rate or (B) the Federal Funds Rate plus two percent; - Euroyen Rate, which equals the Tokyo Inter-Bank Offered ("TIBO") Rate plus .25%; or - Eurodollar Rate, which equals the London Inter-Bank Offered ("LIBO") Rate plus .25%. Moreover, if at four days prior to the last day of the Interest Period of every maturing Advance or on the date of a request for any new Advance the sum of the Dollar Loan plus the Dollar Equivalent of the Yen Loan exceeds the Reducing Commitment, we are required to repay a portion of the Loan in an amount sufficient to cause the sum of the Dollar Loan plus the Dollar Equivalent of the Yen Loan to equal the Reducing Commitment. REVOLVING CREDIT AGREEMENT We also entered into a Revolving Credit Agreement, dated as of October 31, 1997, among us, The Dai-Ichi Kangyo Bank, Limited, as Agent, The Bank of Tokyo-Mitsubishi, Ltd., as Co-Agent, and other commercial lending institutions (the "Revolving Credit Agreement"), which provides us with an unsecured revolving credit facility (the "Revolving Credit Facility"). Under this agreement and subject to certain conditions: (1) We may borrow up to $250 million in either U.S. dollars or Japanese yen (the "$250 Million Commitment"). 55 56 (2) The Revolving Credit Facility terminates on the earlier of November 3, 2002, or at such time as the $250 Million Commitment is terminated or reduced to $0 pursuant to its terms. (3) We are obligated to pay a facility fee of .065% on the $250 Million Commitment. (4) All amounts drawn under the Revolving Credit Facility will bear interest at our option at either the: - Base Rate, which equals the greater of (A) the Prime Rate or (B) the Federal Funds Rate plus two percent; - Euroyen Rate, which equals the TIBO Rate plus .135%; or - Eurodollar Rate, which equals the LIBO Rate plus .135%. Moreover, if at four days prior to the last day of the Interest Period of every maturing Advance or on the date of a request for any new Advance the sum of the Dollar Loan plus the Dollar Equivalent of the Yen Loan exceeds the $250 Million Commitment, we are required to repay a portion of the Loan in an amount sufficient to cause the sum of the Dollar Loan plus the Dollar Equivalent of the Yen Loan to equal the $250 Million Commitment. COVENANTS AND FINANCIAL REQUIREMENTS FOR THE CREDIT AGREEMENTS Both the Reducing Revolving Credit Agreement and the Revolving Credit Agreement (together, the "Credit Agreements") contain negative covenants limiting, among other things, our ability to: (1) incur debt; (2) create liens; (3) sell substantially all of our assets; (4) engage in mergers and acquisitions; and (5) assume or make guarantees. The Credit Agreements also contain affirmative covenants requiring us to: (1) comply with laws; (2) maintain our corporate existence; (3) pay taxes; (4) perform other material obligations; and (5) deliver financial and other information to the respective banks. The Credit Agreements require us to comply with certain financial tests and to maintain certain financial ratios on a consolidated basis including: (1) maintaining a consolidated net worth of not less than $1 billion, excluding the effect of Statement of Financial Accounting Standards Board Statement No. 115; and 56 57 (2) on the last day of each calendar quarter, maintaining a ratio of not less than 2.00 to 1.00 of: - our consolidated earnings before interest and taxes, plus the current portion of our consolidated long-term debt repaid, excluding voluntary prepayments, for the immediately preceding four calendar quarters to - our consolidated interest expense, plus the current portion of our consolidated long-term debt repaid, excluding voluntary prepayments, for the immediately preceding four calendar quarters. Certain Definitions used above are: - "consolidated earnings before interest and taxes" which includes any consolidated earnings before interest and taxes during such fiscal period of any person (an "acquired person") that became a subsidiary of ours during such period or was merged into or consolidated with us or any subsidiary or where such person's assets were acquired during such period; - "consolidated interest expense" which includes any consolidated interest expense during such fiscal period for such acquired person; and - "long-term debt repaid" which includes repayments of long-term debt by such acquired person during such period, excluding voluntary prepayments which includes prepayments required by the acquisition of such acquired person by us or any subsidiary. EVENTS OF DEFAULT UNDER THE CREDIT AGREEMENTS Our Credit Agreements contain customary default provisions, which include, but are not limited to: (1) failure to satisfy any of the financial covenants discussed above; (2) cross-default to other indebtedness; (3) material undischarged judgments; and (4) bankruptcy. Upon default or upon a "change of control," we are required to prepay immediately all advances and all accrued interest. A "change of control" occurs when: (1) a person or group acquires beneficial ownership representing 51% or more of our combined voting power for all securities entitled to vote; and (2) within 12 months thereafter, a majority of our Board of Directors were not either: (A) directors as of the date of such acquisition, (B) selected to become directors by the Board of which a majority consisted of individuals described in (A), or (C) selected to become directors by the Board of which a majority consisted of individuals described in (A) or (B). OUTSTANDING BALANCES At March 31, 1999, 37.9 billion yen ($314 million) was outstanding under the Reducing Revolving Credit Agreement and 29.0 billion yen ($241 million) was outstanding under the Revolving Credit Agreement. We also have outstanding interest rate swaps on a portion of our variable-interest-rate yen-denominated borrowings (49.6 billion yen or $411 million at March 31, 1999). These swaps reduce the impact of changes in interest rates on our borrowing costs and effectively change our interest rate from variable to fixed. The interest rate swaps have notional principal amounts that equal the 57 58 anticipated unpaid principal amounts. Under these agreements, we make fixed-rate payments at 2.29% on one loan and 1.24% on another loan and receive floating-rate payments (.19% at March 31, 1999 plus loan costs of 25 or 20 basis points, respectively) based on the three-month TIBO Rate. 58 59 DESCRIPTION OF THE SENIOR NOTES We issued the old notes, and will issue the new notes, under an indenture, dated April 21, 1999, between us and The Bank of New York, as trustee. Upon the issuance of the new notes, the indenture will be subject to and governed by the Trust Indenture Act of 1939. We have summarized portions of the indenture below. You should read the entire indenture for provisions that are important to you. We have filed a copy of the indenture as an exhibit to the registration statement, which includes this prospectus. The indenture and not this summary defines your rights as holders of the senior notes. Capitalized terms used in this summary have the meanings specified in the indenture. You can find the definitions for certain terms used in this summary under the subheading "-- Definitions." GENERAL The old notes were, and the new notes will be, issued under an indenture, dated April 21, 1999, between us and The Bank of New York, as trustee. The terms of the senior notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act. The senior notes are subject to all such terms, and holders of senior notes are referred to the indenture and the Trust Indenture Act for a statement thereof. The old notes are, and the new notes will be, senior unsecured obligations that rank senior in right of payment to all our existing and future subordinated indebtedness and equally in right of payment to all our existing and future senior indebtedness. The old notes are, and the new notes will be, effectively subordinated to all our future secured indebtedness to the extent of the value of the assets securing such indebtedness and, because we are a holding company, effectively subordinated to indebtedness and other liabilities of our subsidiaries. As of March 31, 1999, on a pro forma basis after giving effect to the sale of the old notes and the use of the net proceeds therefrom, we would have had approximately $1.0 billion of senior indebtedness and our subsidiaries would have had approximately $18 million of indebtedness. Restrictions in the indenture on our ability to enter into mergers, consolidations or sales of all or substantially all our assets may make it more difficult to encourage or discourage a takeover, whether favored or opposed by our management. The indenture may not afford holders protection in all circumstances from the adverse aspects of a leveraged transaction, reorganization, restructuring, merger or similar transaction. PRINCIPAL, MATURITY AND INTEREST The trustee authenticated and delivered old notes for original issue in an aggregate principal amount of $450 million. The new notes will be treated as a continuation of the old notes, which will mature on April 15, 2009. Interest on the senior notes accrues at the rate of 6 1/2% per annum and is payable semi-annually in arrears in cash on each April 15 and October 15, commencing October 15, 1999, to holders of record on the immediately preceding April 1 and October 1, respectively. Interest is to be computed on the basis of a 360-day year of twelve 30-day months. The old notes were, and the new notes will be, issued only in fully registered form, without coupons, in denominations of $1,000 of principal amount at maturity and any integral multiples thereof. See "--Book-Entry; Delivery and Form." No service charge will be made for any registration of transfer or exchange of senior notes, but we may require payment of a sum sufficient to cover transfer tax or other similar governmental charges. OPTIONAL REDEMPTION We have the right to redeem the senior notes, in whole or in part, at any time and from time to time, subject to the receipt of any consent required under the terms of any of our indebtedness which 59 60 may be outstanding from time to time, upon not less than 30 nor more than 60 days notice, at a redemption price equal to the sum of (1) 100% of the principal amount of the senior notes being redeemed, plus accrued and unpaid interest and Additional Interest, if any, thereon to the redemption date, and (2) the Make-Whole Amount, if any, with respect to such senior notes. The term "Make-Whole Amount" means, in connection with any optional redemption of any senior notes, the excess, if any, of (1) the sum, as determined by a Quotation Agent of the present values of the principal amount of such senior notes, together with scheduled payments of interest from the redemption date to the stated maturity of the senior notes, in each case discounted to the redemption date on a semi-annual basis, which assumes a 360-day year consisting of twelve 30-day months, at the Adjusted Treasury Rate over (2) 100% of the principal amount of the senior notes to be redeemed. The term "Adjusted Treasury Rate" means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue, which is expressed as a percentage of its principal amount, equal to the Comparable Treasury Price for such redemption date, calculated on the third business day preceding the redemption date, plus in each case 25 basis points. The term "Comparable Treasury Issue" means the United States Treasury security selected by the quotation agent as having a maturity comparable to the remaining term from the redemption date to the stated maturity of the senior notes that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the senior notes. The term "Quotation Agent" means the Reference Treasury Dealer appointed by us. The term "Reference Treasury Dealer" means: (1) Merrill Lynch, Pierce, Fenner & Smith Incorporated and its respective successors and two additional Primary Treasury Dealers selected by us; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), we shall substitute therefor another Primary Treasury Dealer; and (2) any other Primary Treasury Dealer selected by the trustee after consultation with us. The term "Comparable Treasury Price" means, with respect to any redemption date, (1) the average of the bid and asked prices for the Comparable Treasury Issue, which is expressed in each case as a percentage of its principal amount, on the third business day preceding such redemption date, as set forth in the daily statistical release, or any successor release, published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (2) if such release is not published or does not contain such prices on such business day, (A) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Quotation Agent obtains fewer than three such Reference Treasury Dealer Quotations, the average of all such quotations. The term "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Quotation Agent, of the bid and asked prices for the Comparable Treasury Issue, which is expressed in each case as a percentage of its principal amount, quoted in writing to the trustee by such quotation agent at 5:00 p.m., New York City time, on the third business day preceding such redemption date. Notice of any redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of senior notes to be redeemed at its registered address. Unless we 60 61 default in payment of the redemption price, on and after the redemption date interest will cease to accrue on the senior notes called for redemption. In the case of any partial redemption, selection of senior notes for redemption will be made by the trustee in compliance with the requirements of the principal national securities exchange, if any, on which the senior notes are listed or, if not listed, on a pro rata basis, by lot or by such other method as the trustee in its sole discretion shall deem fair and appropriate. However, the senior notes to be redeemed shall be equal to at least $1,000 or any multiple thereof. If any senior note is to be redeemed in part, the notice of redemption relating to the senior note shall state the portion of the principal amount to be redeemed. A new senior note in principal amount equal to the unredeemed portion will be issued in the name of the holder upon cancellation of the original senior note. SINKING FUND The senior notes will not have the benefit of a sinking fund. CERTAIN COVENANTS Merger, Consolidation or Sale of Assets. We will not consolidate with or merge with or into any other entity or, directly or indirectly, sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of our assets in one or more related transactions to any entity or group of affiliated entities unless, at the time and after giving effect thereto: (1) (A) We shall be the continuing corporation, or (B) the entity, if other than us, formed by such consolidation, or into which we are merged, or the entity that acquires by sale, assignment, transfer, lease, conveyance or other disposition our assets, substantially as an entirety, is a corporation duly organized and validly existing under the laws of the United States or any other jurisdiction that is not materially adverse to the holders of the senior notes and shall, in the case of clause (B), expressly assume, by supplemental indenture, executed and delivered to the trustee, in form reasonably satisfactory to the trustee, all of our obligations under the indenture; (2) immediately before and after such transaction, giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (3) immediately after giving effect to such transaction on a pro forma basis, the successor entity's Consolidated Net Worth, after giving pro forma effect to such transaction but not including the effect to any purchase accounting adjustments or the accrual of deferred tax liabilities resulting from the transaction, is at least equal to our Consolidated Net Worth immediately before such transaction; (4) if any of our property or assets would thereupon become subject to any Lien, the outstanding senior notes shall be secured equally and ratably with, or prior to, the obligation or liability secured by such Lien, unless we could create such Lien without equally and ratably securing the senior notes; and (5) we have delivered to the trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger, transfer or lease and the supplemental indenture, if one is required, comply with the provisions described herein and that all conditions precedent provided for in the indenture relating to such transaction have been complied with. Upon any consolidation or merger or any sale, assignment, transfer, lease or conveyance or other disposition of all or substantially all of our assets in accordance with the provisions described above, the successor entity formed by such consolidation or into which we are merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be 61 62 substituted for, and may exercise every right and power of, us under the indenture with the same effect as if such successor entity had been named as the issuer therein. When a successor assumes all the obligations of its predecessor under the indenture and the senior notes, the predecessor will be released from those obligations; provided that in the case of a transfer by lease, the predecessor corporation shall not be released from the payment of principal of, premium and Additional Interest, if any, and interest on the senior notes. Liens. We will not, and will not permit any of our subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Indebtedness, other than Permitted Liens, on any property or asset now owned or hereafter acquired, or on any income or profits therefrom or assign or convey any right to receive income therefrom, unless all payments due under the indenture and the senior notes are secured on an equal and ratable basis with, or prior to in the case of Liens with respect to subordinated obligations, the obligations so secured until such time as such obligations are no longer secured by a Lien. EVENTS OF DEFAULT AND REMEDIES Each of the following constitutes an Event of Default, whether or not it shall be voluntary or involuntary or be effected by the operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body: (1) default in the payment of interest on or Additional Interest with respect to any senior note when the same becomes due and payable and the continuance of such default for a period of 30 days; or (2) default in the payment of the principal of and any premium on any senior note when the same becomes due and payable at its Maturity upon acceleration, optional redemption or otherwise; or (3) default in the performance, or breach, of any covenant or agreement of ours under the indenture, other than a default in the performance, or breach, of a covenant or agreement that is specifically dealt with in clauses (1), (2) and (8) of this subsection, and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to us by the trustee or to us and the trustee by the holders of at least 25% in principal amount of the outstanding senior notes, a written notice specifying such default or breach and stating that such notice is a "Notice of Default"; or (4) (A) an event of default shall have occurred under any mortgage, bond, indenture, loan agreement or other document evidencing any issue of Indebtedness of us or any of our subsidiaries for money borrowed, or the payment of which is guaranteed by us or any of our subsidiaries, which issue has an aggregate outstanding principal amount of not less than $25 million, and such default shall have resulted in such Indebtedness becoming, whether by declaration or otherwise, due and payable prior to the date on which it would otherwise become due and payable, or (B) a default in any payment when due at final Stated Maturity of any such Indebtedness outstanding in an aggregate principal amount of not less than $25 million and, in each case, ten business days shall have elapsed after such event during which period such event shall not have been cured or rescinded or such Indebtedness shall not have been satisfied; or (5) final judgments or orders are rendered against us or any of our subsidiaries by a court or regulatory agency of competent jurisdiction which require the payment in money, either individually or in an aggregate amount, that is more than $25 million, other than any judgment to the extent a reputable non-affiliated insurance company has accepted liability, and such judgment or order shall not be discharged and either (A) any creditor shall have commenced an enforcement proceeding upon such judgment or order, which enforcement proceeding shall have 62 63 remained unstayed for a period of ten days, or (B) a period of 60 days during which a stay of enforcement shall not be in effect shall have elapsed following the date on which any period for appeal has expired; or (6) a decree or order is entered by a court having jurisdiction (A) for relief in respect of us or any Principal Subsidiary in an involuntary case or other bankruptcy proceeding under the applicable federal or state bankruptcy, insolvency, reorganization or similar law, or (B) adjudging us or any Principal Subsidiary bankrupt or insolvent, or seeking reorganization, arrangement, adjustment or composition of or in respect of us or any Principal Subsidiary under the applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator, or other similar official, of us or any Principal Subsidiary or of any substantial part of any of our or their properties, or ordering the winding up or liquidation of any of our or their affairs, and any such decree or order remains unstayed and in effect for a period of 60 consecutive days; or (7) we or any Principal Subsidiary institute a voluntary case or proceeding under the applicable federal or state law or any other case or proceedings to be adjudicated bankrupt or insolvent, or we or any Principal Subsidiary consent to the entry of a decree or order for relief in respect of us or any Principal Subsidiary in any involuntary case or proceeding under the applicable federal or state law or the initiation of bankruptcy or insolvency proceedings against us or any Principal Subsidiary, or we or any Principal Subsidiary file a petition or answer or consent seeking reorganization or relief under the applicable federal or state law, or consent to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or sequestrator, or other similar official, of any of us or any Principal Subsidiary or of any substantial part of our or its property, or make an assignment for the benefit of creditors, or admit in writing our or its inability to pay our or its debts generally as they become due or take corporate action in furtherance of any such action; or (8) default in the performance or breach of the provisions described under "-- Certain Covenants -- Merger, Consolidation or Sale of Assets." If any Event of Default, other than an Event of Default described in clauses (6) or (7) above, occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the outstanding senior notes, by written notice to us, and to the trustee if such notice is given by the holders, may, and the trustee at the request of such holders shall, declare all unpaid principal of, premium and Additional Interest, if any, and accrued interest on, all the senior notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default described in clauses (6) or (7) above, the amounts described above shall by such fact itself become and be immediately due and payable without any declaration or other act on the part of the trustee or any holder. After a declaration of acceleration, but before a judgment or decree for payment of the money due has been obtained by the trustee, the holders of at least a majority in aggregate principal amount of the outstanding senior notes, by written notice to us and the trustee, may annul such declaration if: (1) We have paid or deposited with the trustee a sum sufficient to pay (A) all sums paid or advanced by the trustee under the indenture and the reasonable compensation, expenses, disbursements and advances of the trustee, its agents and counsel, (B) all overdue interest on all senior notes, (C) the principal of, premium and Additional Interest, if any, on any senior notes which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the senior notes, and (D) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the senior notes; and (2) all Events of Default, other than the non-payment of principal of the senior notes which have become due solely by such declaration of acceleration, have been waived as provided 63 64 in the indenture or cured. No such rescission shall affect any subsequent default or impair any right consequent thereon. Notwithstanding the preceding paragraph, in the event that a declaration of acceleration in respect of the senior notes because of an Event of Default specified in clause (4) above shall have occurred and be continuing, such declaration of acceleration shall be automatically rescinded and annulled if the Indebtedness that is the subject of such Event of Default has been discharged or the holders thereof have rescinded their declaration of acceleration in respect of such Indebtedness, and written notice of such discharge or rescission, as the case may be, shall have been given to the trustee by us and countersigned by the holders of such Indebtedness or a trustee, fiduciary or agent for such holders, within 60 days after such declaration of acceleration in respect of the senior notes, and no other Event of Default has occurred during such 60-day period which has not been cured or waived during such period. The holders of not less than a majority in aggregate principal amount of the outstanding senior notes by notice to the trustee may on the behalf of all holders waive any existing or past Default or Event of Default and its consequences under the indenture, except a Default or Event of Default: (1) in the payment of the principal of, premium or Additional Interest, if any, or interest on any senior note when the same becomes due and payable, (2) in respect of a covenant or provision in the indenture which cannot be modified or amended without the consent of a holder of each outstanding senior note affected, or (3) in respect of a covenant or provision of the indenture which cannot be modified or amended without the consent of the holders of a greater percentage in principal amount of, or all of, the outstanding senior notes. The holders of not less than a majority in principal amount of the outstanding senior notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee, or exercising any trust or power conferred on the trustee; provided that: (1) such direction shall not be in conflict with any rule of law or with the indenture or expose the trustee to personal liability, and (2) subject to the provisions of the Trust Indenture Act, the trustee may take any other action deemed proper by the trustee which is not inconsistent with such direction. No holder of senior notes shall have any right to institute any proceeding, judicial or otherwise, with respect to the indenture or the senior notes, or for the appointment of a receiver or trustee, or for any other remedy under the indenture, unless: (1) such holder has previously given written notice to the trustee of a continuing Event of Default; (2) the holders of not less than 25% in principal amount of the outstanding senior notes shall have made written request to the trustee to institute proceedings in respect of such Event of Default in the trustee's own name; (3) such holder or holders of senior notes have offered to the trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the trustee during such 60-day period by the holders of a majority in principal amount of the outstanding senior notes; 64 65 it being understood and intended that no one or more holders of senior notes shall have any right in any manner whatever by virtue of, or by availing of, any provision of the indenture to affect, disturb or prejudice the rights of any other holders, or to obtain or to seek to obtain priority or preference over any other holders or to enforce any right under the indenture except in the manner provided in the indenture and for the equal and ratable benefit of all the holders of senior notes. We will deliver to the trustee, within 120 days after the end of each fiscal year, an officers' certificate stating that we are in compliance with all covenants and conditions to be complied with by us under the indenture. We will also be obligated to notify the trustee of any default under the indenture within five business days of its occurrence. DEFEASANCE AND COVENANT DEFEASANCE Upon compliance with certain conditions, we may, at our option and at any time, elect to have our obligations discharged with respect to all outstanding senior notes ("defeasance"). Such defeasance means that we shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding senior notes and to have satisfied all other obligations under such senior notes and the indenture, except for: (1) the rights of holders of outstanding senior notes to receive payments in respect of the principal of, premium and Additional Interest, if any, and interest on such senior notes when such payments are due, or on the redemption date, as the case may be; (2) our obligations with respect to the senior notes concerning transferring senior notes, issuing temporary senior notes, registering senior notes, replacing mutilated, destroyed, lost or stolen senior notes and maintaining an office or agency for payment and money for senior note payments held in trust; (3) the rights, powers, trusts, duties and immunities of the trustee and our obligations in connection therewith; and (4) the defeasance provisions of the indenture. In addition, upon compliance with certain conditions, we may, at our option and at any time, elect to have our obligations released with respect to certain covenants that are described in the indenture with respect to the outstanding senior notes ("covenant defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or an Event of Default with respect to the senior notes. In order to exercise either defeasance or covenant defeasance: (1) we shall irrevocably deposit or cause to be deposited with the trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, for the benefit of the holders of the senior notes, (A) cash in U.S. dollars in an amount, (B) U.S. Government Obligations which through the scheduled payment of principal and interest thereof in accordance with their terms provide, not later than one day before the due date of any payment, cash in U.S. dollars in an amount, or (C), a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof to the trustee, or other qualifying trustee, to pay and discharge the principal of, premium and Additional Interest, if any, and interest on the outstanding senior notes on the Stated Maturity or on the applicable optional redemption date, as the case may be, of such principal or installment of principal of, premium and Additional Interest, if any, and interest on the senior notes, and we shall instruct the trustee in writing to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the senior notes; 65 66 (2) in the case of defeasance, we shall have delivered to the trustee an opinion of counsel in the United States reasonably satisfactory to the trustee confirming that: (A) we have received from, or there has been published by, the IRS a ruling; or (B) since the date of the indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the holders of the outstanding senior notes will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (3) in the case of covenant defeasance, we shall have delivered to the trustee an opinion of counsel in the United States reasonably satisfactory to the trustee confirming that the holders of the outstanding senior notes will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (4) no Default or Event of Default with respect to the senior notes shall have occurred and be continuing on the date of such deposit or, insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of such deposit; (5) such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, the indenture or any other material agreement or instrument to which we are a party or by which we are bound; (6) we shall have delivered to the trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (7) we shall have delivered to the trustee an officers' certificate stating that the deposit of money described in clause (1) above was not made by us with the intent of preferring the holders of senior notes over our other creditors or with the intent of defeating, hindering, delaying or defrauding our creditors or others; and (8) we shall have delivered to the trustee an officers' certificate and an opinion of counsel in the United States, each stating that all conditions precedent provided for relating to either the defeasance or the covenant defeasance, as the case may be, have been complied with. AMENDMENT, SUPPLEMENT AND WAIVER With the consent of the holders of not less than a majority in principal amount of the outstanding senior notes, including consents obtained in connection with a tender offer or exchange offer for the senior notes, by act of such holders delivered to us and the trustee, we, when authorized by a board resolution, and the trustee may enter into one or more supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the indenture or of waiving or modifying in any manner the rights of the holders under the indenture; provided, however, that no such supplemental indenture, amendment or waiver shall without the consent of the holder of each outstanding senior note affected thereby: (1) change the Stated Maturity or the principal of, or any installment of interest on, or change our obligation to pay any Additional Interest with respect to, any senior note or reduce the principal amount thereof or the rate of interest thereon or any provisions relating to the redemption price of the senior notes or the periods during which redemption may be effected, or change the coin or currency in which the principal of any senior note or premium or Additional Interest, if any, or the interest thereon is payable, or impair the right to institute suit for the 66 67 enforcement of any such payment after the Stated Maturity thereof, or, in the case of redemption, on or after the redemption date; or (2) reduce the percentage in principal amount of the outstanding senior notes, the consent of whose holders is required for any such supplemental indenture or the consent of whose holders is required for any waiver of compliance with certain provisions of the indenture or certain defaults and their consequences provided for in the indenture; or (3) modify any of the provisions of the indenture relating to amendments or waivers of payment or covenant defaults, except to increase any such percentage or to provide that certain other provisions of the indenture cannot be modified or waived without the consent of the holder of each senior note affected thereby. Notwithstanding the foregoing, without the consent of any holder of senior notes, we, when authorized by a board resolution, and the trustee, at any time and from time to time, may enter into one or more supplemental indentures in form satisfactory to the trustee, for any of the following purposes: (1) to cure any ambiguity or to correct any provision in the indenture which may be defective or inconsistent with any other provision therein; or (2) to provide for the assumption of our obligations to holders of the senior notes in the case of a merger or consolidation; or (3) to secure the senior notes pursuant to the requirements of the provisions described under "-- Certain Covenants -- Merger, Consolidation or Sale of Assets" or "-- Certain Covenants -- Liens," or otherwise; or (4) to comply with the requirements of the SEC in order to effect or maintain the qualification of the indenture under the Trust Indenture Act, as contemplated by the indenture or otherwise; or (5) to evidence and provide the acceptance of the appointment of a successor trustee under the indenture; or (6) to make any other change that would provide any additional rights or benefits to the holders of the senior notes or that does not adversely affect the legal rights of any holder under the indenture or the senior notes. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee or stockholder, as such, of AFLAC Incorporated or any of our subsidiaries shall have any liability for any payment of the principal of, premium or Additional Interest, if any, or interest on, any of the senior notes or for any obligation, covenant or agreement made by AFLAC Incorporated in the indenture. Each holder of old notes by accepting any of the old notes waived and released all such liability and each holder of new notes by accepting any of the new notes waives and releases all such liability. The waiver and release are part of the consideration for issuance of the senior notes. GOVERNING LAW The indenture and the senior notes shall be governed by and construed in accordance with the laws of the State of New York. 67 68 CURRENCY INDEMNITY U.S. dollars are the sole currency of account and payment for all sums payable by us under or in connection with the senior notes, including damages. Any amount received or recovered in a currency other than dollars (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction, in our winding-up or dissolution or otherwise) by any holder of senior notes in respect of any sum expressed to be due to it from us shall only constitute a discharge to us to the extent of the dollar amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery (or, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so). If that dollar amount is less than the dollar amount expressed to be due to the recipient under any senior note, we shall indemnify the recipient against any loss sustained by it as a result. In any event, we shall indemnify the recipient against the cost of making any such purchase. For the purposes of this provision of the indenture, it will be sufficient for the holder to certify in a satisfactory manner (indicating the sources of information used) that it would have suffered a loss had an actual purchase of dollars been made with the amount so received in that other currency on the date of receipt or recovery (or, if a purchase of dollars on such date had not been practicable, on the first date on which it would have been practicable, it being required that the need for a change of date be certified in the manner mentioned above). These indemnities constitute a separate and independent obligation from our other obligations, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by any holder and shall continue in full force and effect despite any other judgment, order, claim or proof for a liquidated amount in respect of any sum due under any senior note. CONCERNING THE TRUSTEE The indenture contains certain limitations on the rights of the trustee, should it become our creditor, to obtain payment of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. The trustee is permitted to engage in other transactions; however, if the trustee acquires any conflicting interest, it must eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign. The holders of a majority in principal amount of the outstanding senior notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the trustee, subject to certain exceptions. The indenture provides that in case an Event of Default shall occur, which shall not be cured, the trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any holder of senior notes, unless such holder shall have offered to the trustee security and indemnity satisfactory to it against any loss, liability or expense. DEFINITIONS Set forth below are certain defined terms used in the indenture. Reference is made to the indenture for a full disclosure of all such terms, as well as certain other terms used herein for which no definition is provided. The term "Capital Lease Obligation" means, as to any entity, any obligation of such entity and its subsidiaries on a consolidated basis under any capital lease of real or personal property which, in accordance with GAAP, has been recorded as a capitalized lease obligation. The term "Capital Stock" of any entity means any and all shares, interests, participation or other equivalent, however designated, of such entity's capital stock and any rights, other than debt securities 68 69 convertible into or exchangeable for capital stock, warrants or options to purchase the foregoing whether now outstanding or issued after the date hereof. The term "Consolidated Net Worth" of any entity means the consolidated stockholders' equity of such entity and its subsidiaries as determined in accordance with GAAP. The term "Currency Agreement" means any currency swap agreements, forward exchange rate agreements, foreign currency futures or options, exchange rate collar agreements, exchange rate insurance or other similar agreements or arrangements, or combinations thereof, principally designed to protect an entity or any of its subsidiaries against fluctuations in currency values. A Currency Agreement may also include an Interest Swap Obligation. The term "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. The term "Fair Market Value" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy. The term "GAAP" means generally accepted accounting principles in the United States, set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants ("AICPA") and statements and pronouncements of the Financial Accounting Standards Board ("FASB") or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, consistently applied except for accounting changes required by the AICPA, FASB or the SEC, as in effect from time to time. The term "Guaranteed Debt" of any entity means, without duplication, all Indebtedness of any other entity guaranteed directly or indirectly in any manner by such entity, or in effect guaranteed directly or indirectly by such entity through an agreement: (1) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness; (2) to purchase, sell or lease property, as lessee or lessor, or to purchase or sell services, primarily for the purpose of enabling such other entity to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss; (3) to supply funds to, or in any other manner invest in, such other entity, including any agreement to pay for property or services to be acquired by such other entity irrespective of whether such property is received or such services are rendered; (4) to maintain working capital or equity capital of such other entity, or otherwise to maintain the net worth, solvency or other financial condition of the debtor; or (5) otherwise to assure a creditor of such other entity against loss; provided that the term "guarantee" shall not include endorsements for collection or deposit, in either case in the ordinary course of business, or any obligation or liability of such other entity in respect of leasehold interests assigned by such other entity to any other entity. The term "Indebtedness" means, with respect to any entity, without duplication: (1) all obligations of such entity for borrowed money or for the deferred purchase price of property or services, excluding any trade payables and other accrued current liabilities incurred in the ordinary course of business, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such entity prepared in accordance with GAAP; 69 70 (2) all obligations of such entity evidenced by bonds, notes, debentures or other similar instruments, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such entity prepared in accordance with GAAP; (3) all obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such entity, even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property, but excluding trade accounts payable arising in the ordinary course of business; (4) all Capital Lease Obligations of such entity; (5) all obligations referred to in, but not excluded from, clause (1), (2), (3) or (4) above of other entities and all dividends of other entities, the payment of which is secured by, or for which the holder of such obligations has an existing right, contingent or otherwise, to be secured by, any Lien, upon or in property, including, without limitation, accounts and contract rights, owned by such entity, even though such entity has not assumed or become liable for the payment of such obligations; (6) all Guaranteed Debt of such entity; (7) all Redeemable Capital Stock issued by such entity valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends; (8) all obligations under Currency Agreements or Interest Swap Obligations of such entity; (9) all obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, other than obligations with respect to letters of credit securing insurance obligations entered into in the ordinary course of business of such entity to the extent that such letters of credit are not drawn upon, or if and to the extent drawn upon, such drawing is reimbursed not later than the 30th business day following a demand for reimbursement following payment on the letter of credit; and (10) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of the types referred to in clauses (1) through (9) above. Indebtedness shall not include obligations under insurance, reinsurance or retrocession contracts entered into in the ordinary course of business. For purposes hereof the "maximum fixed repurchase price" of any Redeemable Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the indenture, and if such price is based upon, or measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair Market Value shall be determined in good faith by the board of directors of the issuer of such Redeemable Capital Stock. The term "Interest Swap Obligations" means the obligations of any entity pursuant to any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement principally designed to protect such entity or any of its subsidiaries against fluctuations in interest rates. The term "Lien" means any mortgage, charge, pledge, security interest, lien or other encumbrance of any kind. The term "Maturity" when used with respect to any senior note means the date on which the principal of, premium and Additional Interest, if any, and interest on such senior note becomes due 70 71 and payable as therein provided, whether at Stated Maturity or redemption date and whether by declaration of acceleration, call for redemption or otherwise. The term "Permitted Liens" means: (1) Liens securing Indebtedness pursuant to any senior credit agreement or senior credit facility of ours or any of our subsidiaries existing on the date of the indenture as such agreement may be supplemented, extended, renewed, replaced or otherwise modified from time to time, and any refinancing, replacement or substitution thereof; (2) Liens in favor of us or any of our subsidiaries; (3) Liens on property of an entity existing at the time such entity is merged into or consolidated with us or any of our subsidiaries; provided that such Liens were not incurred in connection with, or in contemplation of, such merger or consolidation and such Liens do not extend to any assets of ours or any of our subsidiaries other than the assets of the entity so merged into or consolidated with us or such subsidiaries; (4) Liens on property existing at the time of acquisition thereof by us or any of our subsidiaries; provided that such Liens were not incurred in connection with, or in contemplation of, such acquisition and do not extend to any assets of ours or any of our subsidiaries other than the property so acquired; (5) Liens incurred or deposits required to secure the performance of U.S. or foreign statutory obligations (including insurance regulations), tenders, surety or appeal bonds or performance or return of money bonds or similar obligations, or landlords', carriers', warehousemen's, mechanics', suppliers', materialmen's or other like Liens, in any case incurred in the ordinary course of business; (6) Liens required by any U.S., state or foreign authority pursuant to applicable insurance regulations; (7) Liens existing on the date of the indenture; (8) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (9) Liens to secure Capital Lease Obligations or operating leases; (10) judgment and attachment Liens not giving rise to an Event of Default; (11) Liens with respect to obligations under Currency Agreements or Interest Swap Obligations of ours or any of our subsidiaries; (12) Liens incurred in the ordinary course of business of us or any of our subsidiaries other than in connection with Indebtedness for borrowed money; (13) purchase money Liens to finance property or assets of ours or any of our subsidiaries acquired in the ordinary course of business; provided, however, that (A) the related purchase money Indebtedness shall not be secured by any property or assets of ours or any of our subsidiaries other than the property and assets so acquired, and (B) the Lien securing such Indebtedness shall be created within 90 days of such acquisition; (14) Liens on assets of our subsidiaries to secure obligations of such subsidiaries to us; 71 72 (15) Liens in favor of collecting or payor banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of ours or any of our subsidiaries on deposit with or in possession of such bank; (16) Liens attributable to sale and leaseback transactions that collectively do not exceed 30% of our total assets; (17) easements, covenants, zoning restrictions, rights-of-way or other similar changes or encumbrances not interfering in any material respect with the ordinary conduct of our business or the business of any of our subsidiaries; (18) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit; (19) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of ours or any of our subsidiaries, including rights of offset and set-off; (20) leases or subleases granted to others that do not materially interfere with the ordinary course of business of us and our subsidiaries; and (21) any Lien extending, renewing or replacing, in whole or in part, any Permitted Lien; provided that any such Lien is limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or, under the written arrangements under which the original Lien arose, could secure) the Indebtedness being refinanced or is in respect of property that is the security for a Permitted Lien. The term "Principal Subsidiary" means: (1) our insurance company subsidiaries in existence on the issue date; (2) any other of our insurance company subsidiaries that becomes a "significant subsidiary" as defined in Regulation S-X, as promulgated by the SEC; and (3) any other of our insurance company subsidiaries that may succeed, by merger, consolidation or otherwise, to all or substantially all of the business of one or more of such entities as specified in (1) and (2) above. The term "Redeemable Capital Stock" means any Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or otherwise, is, or upon the happening of an event or passage of time would be required to be, redeemed on or prior to the final Stated Maturity of the senior notes or is redeemable at the option of the holder thereof at any time prior to such final Stated Maturity, or is convertible into or exchangeable for debt securities at any time prior to such final Stated Maturity. The term "Stated Maturity" means, when used with respect to any Indebtedness or any installment of principal or of interest thereon, the date specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of principal or of interest is due and payable. The term "U.S. Government Obligations" means securities that are (1) direct obligations of the United States for the timely payment of which its full faith and credit is pledged or (2) obligations of an entity controlled or supervised by and acting as an agency or instrumentality of the United States, the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank, as defined in Section 3(a)(2) of the Securities Act, as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt; provided that, except as required by law, such custodian is not authorized to make any deduction from the amount payable to the holder of 72 73 such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. The term "Voting Stock" means stock of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency. BOOK-ENTRY; DELIVERY AND FORM The new notes to be exchanged for old notes that were sold to qualified institutional buyers under Rule 144A in the United States initially will be in the form of one or more registered global notes without interest coupons (collectively, the "U.S. global senior note"). Upon issuance, the U.S. global senior note will be deposited with the trustee, as custodian for DTC, in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to the accounts of DTC's participating organizations ("direct participants") and other entities that clear through or maintain a direct or indirect relationship with a direct participant ("indirect participants"). The new notes to be exchanged for old notes that were sold in offshore transactions in reliance on Regulation S, if any, initially will be in the form of one or more registered, global notes without interest coupons (collectively, the "Reg S global senior note"). The Reg S global senior note will be deposited with the trustee, as custodian for DTC, in New York, New York, and registered in the name of a nominee of DTC for credit to the accounts of indirect participants at the Euroclear System ("Euroclear") and Cedel Bank, societe anonyme ("CEDEL"). The U.S. global senior note and the Reg S global senior note are referred to herein collectively as "global senior notes." Transfer of beneficial interests in any global senior notes will be subject to the applicable rules and procedures of DTC and its direct or indirect participants which may change from time to time. Beneficial interests in the global senior notes may be exchanged for senior notes in certificated form in certain limited circumstances. See "--Transfers of Interests in Global Senior Notes for Certificated Senior Notes." Initially, the trustee will act as paying agent and registrar under the indenture. The senior notes may be presented for registration of transfer and exchange at the offices of the registrar. DEPOSITARY PROCEDURES DTC has advised us that DTC is a limited-purpose trust company created to hold securities for direct participants and to facilitate the clearance and settlement of transactions in those securities between direct participants through electronic book-entry changes in accounts of direct participants. The direct participants include securities brokers and dealers, including the initial purchasers, banks, trust companies, clearing corporations and certain other organizations, including Euroclear and CEDEL. Access to DTC's system is also available to indirect participants. DTC may hold securities beneficially owned by other persons only through the direct participants or indirect participants and such other persons' ownership interest and transfer of ownership interest will be recorded only on the records of the direct participant and/or indirect participant, and not on the records maintained by DTC. DTC has also advised us that, pursuant to DTC's procedures, DTC will maintain records of the ownership interests of direct participants in the global senior notes and the transfer of ownership 73 74 interests by and between direct participants. DTC will not maintain records of the ownership interests of, or the transfer of ownership interests by and between, indirect participants or other owners of beneficial interests in the global senior notes. Direct participants and indirect participants must maintain their own records of the ownership interests of, and the transfer of ownership interests by and between, indirect participants and other owners of beneficial interests in the global senior notes. Investors in the U.S. global senior note may hold their interests therein directly through DTC if they are direct participants in DTC or indirectly through organizations that are direct participants in DTC. Investors in the Reg S global senior note may hold their interests therein directly through Euroclear or CEDEL or indirectly through organizations that are participants in Euroclear or CEDEL. Investors may also hold interests in the Reg S global senior note through organizations other than Euroclear and CEDEL that are direct participants in the DTC system. Morgan Guaranty Trust Company of New York, Brussels office, is the operator and depository of Euroclear and Citibank, N.A. is the operator and depository of CEDEL (each a "nominee" of Euroclear and CEDEL, respectively). Therefore, they will each be recorded on DTC's records as the holders of all ownership interests held by them on behalf of Euroclear and CEDEL, respectively. Euroclear and CEDEL will maintain on their records the ownership interests, and transfers of ownership interests by and between, their own customers' securities accounts. DTC will not maintain records of the ownership interests of, or the transfer of ownership interests by and between, customers of Euroclear or CEDEL. All ownership interests in any global senior note, including those of customers' securities accounts held through Euroclear or CEDEL, may be subject to the procedures and requirements of DTC. The laws of some states require that certain persons take physical delivery in definitive, certificated form of securities that they own. This may limit or curtail the ability to transfer beneficial interests in a global senior note to such persons. Because DTC can act only on behalf of direct participants, which in turn act on behalf of indirect participants and others, the ability of a person having a beneficial interest in a global senior note to pledge such interest to persons or entities that are not direct participants in DTC, or to otherwise take actions in respect of such interests, may be affected by the lack of physical certificates evidencing such interests. For certain other restrictions on the transferability of the senior notes, see "-- Transfers of Interests in Global Senior Notes for Certificated Senior Notes." EXCEPT AS DESCRIBED IN "-- TRANSFERS OF INTERESTS IN GLOBAL SENIOR NOTES FOR CERTIFICATED SENIOR NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL SENIOR NOTES WILL NOT HAVE SENIOR NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF SENIOR NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE. Under the terms of the indenture, we and the trustee will treat the persons in whose names the senior notes are registered, including senior notes represented by global senior notes, as the owners thereof for the purpose of receiving payments and for any and all other purposes whatsoever under the indenture. Payments in respect of the principal of, Additional Interest, if any, and interest on global senior notes registered in the name of DTC or its nominee will be payable by the trustee to DTC or its nominee as the registered holder under the indenture. Consequently, neither we, the trustee nor any agent of ours or the trustee has or will have any responsibility or liability for: (1) any aspect of DTC's records or any direct participant's or indirect participant's records relating to or payments made on account of beneficial ownership interests in the global senior notes or for maintaining, supervising or reviewing any of DTC's records or any direct participant's or indirect participant's records relating to the beneficial ownership interests in any global senior notes; or 74 75 (2) any other matter relating to the actions and practices of DTC or any of its direct participants or indirect participants. DTC has advised us that its current payment practice for payments of principal, interest and the like with respect to securities such as the senior notes is to credit the accounts of the relevant direct participants with such payment on the payment date in amounts proportionate to such direct participant's respective ownership interests in the global senior notes as shown on DTC's records. Payments by direct participants and indirect participants to the beneficial owners of the senior notes will be governed by standing instructions and customary practices between them and will not be the responsibility of DTC, the trustee or us. Neither we nor the trustee will be liable for any delay by DTC or its direct participants or indirect participants in identifying the beneficial owners of the senior notes, and we and the trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee as the registered owner of the senior notes for all purposes. The global senior notes will trade in DTC's Same-Day Funds Settlement System and, therefore, transfers between direct participants in DTC will be effected in accordance with DTC's procedures, and will be settled in immediately available funds. Transfers between indirect participants, other than indirect participants who hold an interest in the senior notes through Euroclear or CEDEL, who hold an interest through a direct participant will be effected in accordance with the procedures of such direct participant but generally will settle in immediately available funds. Transfers between and among indirect participants who hold interests in the senior notes through Euroclear and CEDEL will be effected in the ordinary way in accordance with their respective rules and operating procedures. Subject to compliance with the transfer restrictions applicable to the senior notes described herein, cross market transfers between direct participants in DTC, on the one hand, and indirect participants who hold interests in the senior notes through Euroclear or CEDEL, on the other hand, will be effected by Euroclear's or CEDEL's respective nominee through DTC in accordance with DTC's rules on behalf of Euroclear or CEDEL; provided, however, delivery of instructions relating to cross market transactions must be made directly to Euroclear or CEDEL, as the case may be, by the counterparty in accordance with the rules and procedures of Euroclear or CEDEL and within their established deadlines. Indirect participants who hold interests in the senior notes through Euroclear and CEDEL may not deliver instructions directly to Euroclear's or CEDEL's nominee. Euroclear or CEDEL will, if the transaction meets its settlement requirements, deliver instructions to its respective nominee to deliver or receive interests on Euroclear's or CEDEL's behalf in the relevant global senior note in DTC, and make or receive payment in accordance with normal procedures for same-day fund settlement applicable to DTC. Because of time zone differences, the securities accounts of an indirect participant who holds an interest in the senior notes through Euroclear or CEDEL purchasing an interest in a global senior note from a direct participant in DTC will be credited, and any such crediting will be reported to Euroclear or CEDEL, during the European business day immediately following the settlement date of DTC in New York. Although recorded in DTC's accounting records as of DTC's settlement date in New York, Euroclear and CEDEL customers will not have access to the cash amount credited to their accounts as a result of a sale of an interest in a Reg S global senior note to a DTC participant until the European business day for Euroclear or CEDEL immediately following DTC's settlement date. DTC has advised us that it will take any action permitted to be taken by a holder of senior notes only at the direction of one or more direct participants to whose account interests in the global senior notes are credited and only in respect of such portion of the aggregate principal amount of the senior notes as to which such direct participant or direct participants has or have given direction. However, if there is an Event of Default under the senior notes, DTC reserves the right to exchange global senior notes without the direction of one or more of its direct participants for legended senior notes in 75 76 certificated form, and to distribute such certificated forms of senior notes to its direct participants. See "-- Transfers of Interests in Global Senior Notes for Certificated Senior Notes." DTC has further advised us that its management is aware that some computer applications, systems, and the like for processing data ("Systems") that are dependent upon calendar dates, including dates before, on, and after January 1, 2000, may encounter "year 2000 problems." DTC has informed its participants and other members of the financial community (the "Industry") that it has developed and is implementing a program so that its Systems, as the same relate to the timely payment of distributions (including principal and income payments) to securityholders, book-entry deliveries and settlement of trades within DTC ("DTC Services"), continue to function appropriately. This program includes a technical assessment and a remediation plan, each of which is complete. Additionally, DTC's plan includes a testing phase, which is expected to be completed within appropriate time frames. However, DTC's ability to perform properly its services is also dependent upon other parties, including but not limited to issuers and their agents, as well as third party vendors from whom DTC licenses software and hardware and third party vendors on whom DTC relies for information or the provision of services, including telecommunication and electrical utility service providers, among others. DTC has informed the Industry that it is contacting (and will continue to contact) third party vendors from whom DTC acquires services to: (1) impress upon them the importance of such services being year 2000 compliant; and (2) determine the extent of their efforts for year 2000 remediation (and, as appropriate, testing) of their services. In addition, DTC is in the process of developing such contingency plans as it deems appropriate. According to DTC, the information contained in this paragraph with respect to DTC has been provided to the Industry for informational purposes only and is not intended to serve as a representation, warranty or contract modification of any kind. Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to facilitate transfers of interests in the Reg S global senior note and in the U.S. global senior note among direct participants, Euroclear and CEDEL, they are under no obligation to perform or to continue to perform such procedures, and such procedures may be discontinued at any time. None of us, the initial purchasers or the trustee will have any responsibility for the performance by DTC, Euroclear or CEDEL or their respective direct and indirect participants of their respective obligations under the rules and procedures governing any of their operations. The information in this section concerning DTC, Euroclear and CEDEL and their book-entry systems has been obtained from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof. TRANSFERS OF INTERESTS IN ONE GLOBAL SENIOR NOTE FOR INTERESTS IN ANOTHER GLOBAL SENIOR NOTE Transfers involving an exchange of a beneficial interest in the Reg S global senior note for a beneficial interest in the U.S. global senior note or vice versa will be effected by DTC by means of an instruction originated by the trustee through DTC/Deposit Withdraw at Custodian system. Accordingly, in connection with such transfer, appropriate adjustments will be made to reflect a decrease in the principal amount of the one global senior note and a corresponding increase in the principal amount of the other global senior note, as applicable. Any beneficial interest in the one global senior note that is transferred to a person who takes delivery in the form of the other global senior note will, upon transfer, cease to be an interest in such first global senior note and become an interest in such other global senior note and, accordingly, will thereafter be subject to all procedures applicable to beneficial interests in such other global senior note for as long as it remains such an interest. 76 77 TRANSFERS OF INTERESTS IN GLOBAL SENIOR NOTES FOR CERTIFICATED SENIOR NOTES An entire global senior note may be exchanged for certificated senior notes in registered form without interest coupons if: (1) DTC (A) notifies us that it is unwilling or unable to continue as depositary for the global senior notes and we thereupon fail to appoint a successor depositary within 90 days or (B) has ceased to be a clearing agency registered under the Exchange Act; (2) we, at our option, notify the trustee in writing that we elect to cause the issuance of certificated senior notes; or (3) there shall have occurred and be continuing a Default or an Event of Default with respect to the senior notes. In any such case, we will notify the trustee in writing that, upon surrender by the direct and indirect participants of their interest in such global senior note, certificated senior notes will be issued to each person that such direct participants and indirect participants and DTC identify as being the beneficial owner of the related senior notes. Beneficial interests in global senior notes held by any direct participant or indirect participant may be exchanged for certificated senior notes upon request to DTC, by such direct participant, for itself or on behalf of an indirect participant, by the trustee in accordance with customary DTC procedures. Certificated senior notes delivered in exchange for any beneficial interest in any global senior note will be registered in the names, and issued in any approved denominations, requested by DTC on behalf of such direct participant or indirect participant, in accordance with DTC's customary procedures. Neither we nor the trustee will be liable for any delay by the holder of any global senior note or DTC in identifying the beneficial owners of senior notes, and we and the trustee may conclusively rely on, and will be protected in relying on, instructions from the holder of the global senior note or DTC for all purposes. SAME DAY SETTLEMENT AND PAYMENT Payments in respect of the senior notes represented by the global senior notes, including principal, premium and Additional Interest, if any, and interest must be made by wire transfer of immediately available same day funds to the accounts specified by the holder of interests in such global senior notes. With respect to certificated senior notes, we will make all payments of principal, premium and Additional Interest, if any, and interest by wire transfer of immediately available same day funds to the accounts specified by the holders thereof in writing to the trustee by the record date for such payment or, if no such account is specified, by mailing a check to each such holder's registered address. We expect that secondary trading in the certificated senior notes will also be settled in immediately available funds. REGISTRATION RIGHTS We entered into the registration rights agreement with the initial purchasers for the benefit of the holders of old notes. Under this agreement, we agreed to use our best efforts, at our cost, to file and cause to become effective a registration statement with respect to a registered offer to exchange the old notes for new notes with terms identical to the old notes, except that the new notes will not bear legends restricting the transfer thereof. The registration statement, of which this prospectus is a part, constitutes the registration statement for purposes of the registration rights agreement. Upon the registration statement being declared effective, we shall offer the new notes in return for surrender of the old notes. The exchange 77 78 offer will remain open for not less than 30 days after the date notice of the exchange offer is mailed to holders of the old notes, or longer if required by applicable law. For each old note you surrender to us under the exchange offer, you will receive a new note of equal principal amount. Interest on each new note shall accrue from the last Interest Payment Date on which interest was paid on the old notes so surrendered or, if no interest has been paid on such old notes, from April 21, 1999. If the applicable interpretations of the staff of the SEC do not permit us to effect the exchange offer, or under certain other circumstances, we will, at our cost, use our best efforts: - to cause to become effective a shelf registration statement with respect to resales of the old notes, and - to keep such shelf registration statement effective until the earlier of (1) two years after the shelf registration statement is declared effective; (2) the date when all old notes covered by the shelf registration statement have been sold pursuant to the shelf registration statement; or (3) one year after the effective date of the shelf registration statement if it is filed at the request of one of the initial purchasers of old notes. We will, in the event of such a shelf registration, provide to each holder copies of the prospectus, notify each holder of old notes when the shelf registration statement for the old notes has become effective and take certain other actions as are required to permit resales of the old notes. A holder that sells its old notes pursuant to the shelf registration statement generally: - will be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, - will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and - will be bound by the provisions of the registration rights agreement that are applicable to such a holder, including certain indemnification and contribution obligations. Additional interest will accrue on the old notes if: (1) the exchange offer registration statement is not filed with the SEC on or before July 20, 1999; (2) the exchange offer registration statement is not declared effective on or before October 18, 1999; or (3) the exchange offer is not consummated and a shelf registration statement is not declared effective on or before November 17, 1999. This additional interest will be payable in cash semiannually in arrears each April 15 and October 15, at a rate per year equal to 0.25% of the principal amount of the old notes, for each event described in (1), (2) and (3) above, up to an aggregate maximum of 0.75% per year. Upon the filing of the exchange offer registration statement, the effectiveness of the exchange offer registration statement, the consummation of the exchange offer or the effectiveness of a shelf registration statement, as the case may be, after the corresponding date listed above, the additional interest payable on the old notes from the date of such filing, effectiveness or consummation, as the case may be, will cease to accrue and all accrued and unpaid additional interest as of such occurrence shall be paid to the holders of the senior notes. If we effect the exchange offer, we will be entitled to close the exchange offer 30 days after the commencement thereof, or such longer period required by applicable law, provided that we have accepted all old notes previously validly surrendered in accordance with the terms of the exchange offer. Old notes not tendered in the exchange offer shall bear interest at 6 1/2% per annum and be 78 79 subject to all of the terms and conditions specified in the indenture and to the transfer restrictions set forth in the legend on the certificate for such old notes. This summary of certain provisions of the registration rights agreement does not restate the agreement in its entirety. We urge you to read the registration rights agreement, a copy of which is filed as an exhibit to the registration statement of which this prospectus is a part. 79 80 UNITED STATES FEDERAL TAX CONSIDERATIONS The following is a summary of U.S. federal income tax considerations for beneficial owners of the senior notes. Under the Code a "U.S. Person" means a person that is any of the following: - a citizen or resident of the United States; - a corporation or partnership created or organized in or under the laws of the United States or any political subdivision thereof; - an estate the income of which is subject to U.S. federal income taxation regardless of its source; or - a trust which is either subject to the supervision of a court within the United States and the control of one or more U.S. persons or has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. A "non-U.S. Person" means a person that is not a "U.S. Person." This summary is based on current law which is subject to change (perhaps retroactively), is for general purposes only and should not be considered tax advice. This summary does not represent a detailed description of the federal income tax consequences to you in light of your particular circumstances. In addition, it does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws (including if you are a "controlled foreign corporation," "passive foreign investment company" or "foreign personal holding company"). We cannot assure you that a change in law will not alter significantly the tax considerations that we describe in this summary. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR CONCERNING THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO YOU OF THE OWNERSHIP OF THE SENIOR NOTES, AS WELL AS THE CONSEQUENCES TO YOU ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION. U.S. PERSONS AND NON-U.S. PERSONS There will be no United States federal income tax consequences to anyone exchanging an old note for a new note pursuant to the exchange offer. Such holder will have the same adjusted basis and holding period in the new note as it had in the old note immediately before the exchange. U.S. PERSONS STATED INTEREST ON SENIOR NOTES Stated interest on a senior note generally will be taxable to a U.S. Person as ordinary income at the time it accrues or is received in accordance with the U.S. Person's method of accounting for U.S. federal income tax purposes. SALE, EXCHANGE OR RETIREMENT OF SENIOR NOTES Upon the sale, exchange, redemption, retirement or other disposition of a senior note, a U.S. Person generally will recognize gain or loss equal to the difference between the amount realized upon the sale, exchange, redemption, retirement or other disposition and such holder's adjusted tax basis in the senior note. However, the amount attributable to accrued but unpaid interest will be taxable as such. A U.S. Person's adjusted tax basis in a senior note will, in general, be the U.S. Person's cost for that senior note. This gain or loss will be capital gain or loss, and net capital gain (i.e., generally capital gain in excess of capital loss) recognized by an individual U.S. Person upon the disposition of 80 81 a senior note that has been held for more than one year generally will be subject to tax at a maximum rate of 20%. A note that has been held for one year or less will be taxed at ordinary income tax rates. The deductibility of capital losses is subject to limitations. MARKET DISCOUNT U.S. Persons other than original purchasers of the old senior notes in the offering, should be aware that the sale of the new senior notes may be affected by the market discount provisions of the Code. The market discount rules generally provide that if a U.S. Person: - purchased the senior note, after the original offering, at a "market discount" (i.e., at an amount less than the adjusted issue price of the senior note as determined on the date of such purchase) exceeding a statutorily-defined de minimis amount, and - thereafter recognizes gain upon a disposition, including a partial redemption, of the new senior note received in exchange for an old senior note, the lesser of such gain or the portion of the market discount that accrued while the old senior note and new senior note were held by such U.S. Person will be treated as ordinary interest income at the time of disposition. The rules also provide that a U.S. Person who acquires a senior note at a market discount may be required to defer a portion of any interest expense that may otherwise be deductible on any indebtedness incurred or maintained to purchase or carry the senior note until the U.S. Person disposes of such senior note in a taxable transaction. If a holder of a senior note elects to include market discount in income currently, both of the foregoing rules would not apply. NON-U.S. PERSONS U.S. FEDERAL WITHHOLDING TAX The 30% U.S. federal withholding tax will not apply to any payment of principal or interest on a particular series of senior notes provided that: - you do not actually (or constructively) own 10% or more of the total combined voting power of all classes of our voting stock within the meaning of the Code and the U.S. Treasury Regulations; - you are not a controlled foreign corporation that is related to us through stock ownership; - you are not a bank whose receipt of interest on the senior notes is described in the Code; and - either (a) you provide your name and address on an IRS Form W-8, and certify, under penalty of perjury, that you are not a U.S. person or (b) a financial institution holding the senior notes on your behalf certifies, under penalty of perjury, that it has received an IRS Form W-8 from the beneficial owner and provides us with a copy. If you cannot satisfy the requirements described above, payments of premium, and interest made to you will be subject to the 30% U.S. federal withholding tax, unless you provide us with a properly executed (1) IRS Form 1001 claiming an exemption from (or reduction in) withholding under the benefit of a tax treaty, or (2) IRS Form 4224 stating that interest paid on the senior notes is not subject to withholding tax because it is effectively connected with your conduct of a trade or business in the United States. U.S. FEDERAL ESTATE TAX Your estate will not be subject to U.S. federal estate tax on senior notes of a series beneficially owned by you at the time of your death, provided that (1) you do not own 10% or more of the total combined voting power of all classes of our voting stock (within the meaning of the Code and the 81 82 U.S. Treasury Regulations), and (2) interest on the senior notes would not have been, if received at the time of your death, effectively connected with the conduct by you of a trade or business in the United States. U.S. FEDERAL INCOME TAX If you are engaged in a trade or business in the United States and interest on the senior notes is effectively connected with the conduct of that trade or business (although exempt from the 30% withholding tax), you will be subject to U.S. federal income tax on that interest on a net income basis in the same manner as if you were a U.S. person as defined under the Code. In addition, if you are a foreign corporation, you may be subject to a branch profits tax equal to 30% (or lower applicable treaty rate) of your earnings and profits for the taxable year, subject to adjustments that are effectively connected with the conduct by you of a trade or business in the United States. For this purpose, interest on senior notes will be included in earnings and profits. Any gain or income realized on the disposition of a senior note generally will not be subject to U.S. federal income tax unless (1) that gain or income is effectively connected with the conduct of a trade or business in the United States by you, or (2) you are an individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met. INFORMATION REPORTING AND BACKUP WITHHOLDING In general, information reporting and backup withholding will not be required regarding payments that we make to you provided that we do not have actual knowledge that you are a U.S. person and we have received from you the statement described above under "U.S. federal withholding tax," or you otherwise establish an exemption. In addition, you will not be required to pay backup withholding and provide information reporting regarding the proceeds of the sale of a senior note within the United States or conducted through certain U.S.-related financial intermediaries, if the payor receives the statement described above and does not have actual knowledge that you are a U.S. person, as defined under the Code, or you otherwise establish an exemption. U.S. Treasury Regulations were recently issued that generally modify the information reporting and backup withholding rules applicable to certain payments made after December 31, 1999. In general, the new U.S. Treasury Regulations would not significantly alter the present rules discussed above, except in certain special situations. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is furnished to the IRS. 82 83 PLAN OF DISTRIBUTION Each broker-dealer that receives new notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for old notes where such old notes were acquired as a result of market-making activities or other trading activities. We have agreed that starting on the Expiration Date and ending on the close of business on the 90th day following the Expiration Date, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until , 1999, all dealers effecting transactions in the new notes may be required to deliver a prospectus. We will not receive any proceeds from any sale of new notes by broker-dealers. New notes received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time: - in one or more transactions in the over-the-counter market, - in negotiated transactions, - through the writing of options on the new notes, or - a combination of such methods of resale. Such notes may be sold: - at market prices prevailing at the time of resale, - at prices related to such prevailing market prices, or - at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such new notes. Any broker-dealer that resells new notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such new notes may be deemed to be an "underwriter" within the meaning of the Securities Act. Any profit on any such resale of new notes and any commissions or concessions received by any of them may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 90 days after the Expiration Date, we will promptly send additional copies of the prospectus and any amendment or supplement to the prospectus to any broker-dealer requesting these copies in the letter of transmittal. We have agreed to pay all expenses incident to the exchange offer, including the expenses of one counsel for the holders of the old notes other than commissions or concessions of any brokers or dealers and will indemnify the holders of the notes, including any broker-dealers, against various liabilities, including liabilities under the Securities Act. Following consummation of the exchange offer, we may, in our sole discretion, commence one or more additional exchange offers to holders of old notes who did not exchange their old notes for new notes in the exchange offer on terms which may differ from those contained in the registration rights agreement. We may use this prospectus, as it may be amended or supplemented from time to time, in connection with any such additional exchange offers. 83 84 LEGAL MATTERS Certain legal matters in connection with the new notes will be passed upon for AFLAC Incorporated by Skadden, Arps, Slate, Meagher & Flom LLP, 1440 New York Avenue, N.W., Washington, D.C. 20005 and by Joey M. Loudermilk, Senior Vice President and General Counsel of AFLAC Incorporated. EXPERTS The consolidated financial statements of AFLAC Incorporated included in this prospectus have been audited by KPMG LLP, independent certified public accountants, to the extent and for the periods indicated in their report thereon. Such financial statements have been included in reliance upon the report of KPMG LLP given upon their authority as experts in accounting and auditing. DOCUMENTS INCORPORATED BY REFERENCE The SEC allows us to "incorporate by reference" certain documents, which means that we can disclose important information to you by referring you to those documents. The information in the documents incorporated by reference is considered to be part of this prospectus, and information in documents that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings we will make with the SEC under Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act: - Annual Report on Form 10-K for the fiscal year ended December 31, 1998. - Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. We will provide a copy of the documents we incorporate by reference, at no cost, to any person who receives this prospectus. To request a copy of any or all of these documents, you should write or telephone us at the following address and telephone number: AFLAC Incorporated 1932 Wynnton Road Columbus, Georgia 31999 Attention: Investor Relations Department Telephone: (706) 323-3431 TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST THIS INFORMATION NO LATER THAN FIVE DAYS BEFORE YOU MUST MAKE YOUR INVESTMENT DECISION. FIVE DAYS BEFORE THE CLOSE OF THE EXCHANGE OFFER IS , 1999, UNLESS EXTENDED. 84 85 WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC under the Exchange Act. The Exchange Act file number for our SEC filings is 1-7434. You may read and copy any document we file at the following SEC public reference rooms: Judiciary Plaza 500 West Madison Street 7 World Trade Center 450 Fifth Street, N.W. 14th Floor Suite 1300 Room 1024 Chicago, Illinois 60661 New York, New York 10048 Washington, D.C. 20549
You may obtain information on the operation of the public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. We file information electronically with the SEC. Our SEC filings also are available from the SEC's Internet site at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically. Our common stock is listed on the New York Stock Exchange. You may also read and copy our SEC filings and other information at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. Whether or not we are required to do so by law, for so long as any of the senior notes remain outstanding, we will furnish you as a holder of the senior notes and will, if permitted, file with the SEC the following: (1) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if we were required to file such forms; (2) with respect to annual information only, a report thereon by our independent certified public accountants; and (3) all reports that would be required to be filed with the SEC on Form 8-K if we were required to file such reports. For so long as any of the senior notes remain outstanding, we have agreed to make available to any prospective purchaser of the senior notes or beneficial owner of the senior notes in connection with any sale of those notes the information required by Rule 144A(d)(4) under the Securities Act. ------------------------ 85 86 AFLAC INCORPORATED INDEX TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Statements of Earnings for the Three Months Ended March 31, 1999 and 1998 Unaudited................... F-2 Consolidated Balance Sheets, at March 31, 1999 and 1998 Unaudited................................................. F-3 Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 1999 and 1998 Unaudited...... F-4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 Unaudited................... F-5 Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 1999 and 1998 Unaudited...... F-6 Notes to the Consolidated Financial Statements at March 31, 1999 Unaudited............................................ F-7 Independent Auditors' Report................................ F-12 Consolidated Statements of Earnings, for each of the years in the three-year period ended December 31, 1998.......... F-13 Consolidated Balance Sheets, at December 31, 1998 and 1997...................................................... F-14 Consolidated Statements of Shareholders' Equity, for each of the years in the three-year period ended December 31, 1998...................................................... F-15 Consolidated Statements of Cash Flows, for each of the years in the three-year period ended December 31, 1998.......... F-16 Consolidated Statements of Comprehensive Income, for each of the years in the three-year period ended December 31, 1998...................................................... F-17 Notes to the Consolidated Financial Statements at December 31, 1998.................................................. F-18
F-1 87 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, ------------------------- 1999 1998 --------- --------- (IN MILLIONS, EXCEPT FOR SHARE AND PER-SHARE AMOUNTS -- UNAUDITED) Revenues: Premiums, principally supplemental health insurance....... $ 1,728 $ 1,472 Net investment income..................................... 320 279 Realized investment gains (losses)........................ (5) -- Other income.............................................. 5 6 -------- -------- Total revenues.................................... 2,048 1,757 -------- -------- Benefits and expenses: Benefits and claims....................................... 1,400 1,214 Acquisition and operating expenses: Amortization of deferred policy acquisition costs...... 57 47 Insurance commissions.................................. 226 192 Insurance expenses..................................... 142 118 Provision for mandated policyholder protection fund.... -- 111 Interest expense....................................... 4 3 Other operating expenses............................... 16 19 -------- -------- Total acquisition and operating expenses.......... 445 490 -------- -------- Total benefits and expenses....................... 1,845 1,704 -------- -------- Earnings before income taxes...................... 203 53 Income tax expense (benefit): Operations................................................ 74 14 Deferred tax benefit from Japanese tax rate reductions.... (67) (121) -------- -------- Total income taxes................................ 7 (107) -------- -------- Net earnings...................................... $ 196 $ 160 ======== ======== Net earnings per share: Basic..................................................... $ .74 $ .60 Diluted................................................... .71 .58 ======== ======== Shares used in computing earnings per share (In thousands): Basic..................................................... 266,115 266,831 Diluted................................................... 276,769 276,294 ======== ======== Cash dividends per share.................................... $ .065 $ .058 ======== ========
See the accompanying Notes to Consolidated Financial Statements. F-2 88 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 1998 -------- -------- (IN MILLIONS, EXCEPT FOR PER-SHARE AMOUNTS -- UNAUDITED) ASSETS: Investments and cash: Securities available for sale, at fair value: Fixed maturities (amortized cost, $15,779 in 1999 and $16,028 in 1998).................................... $17,873 $18,917 Perpetual debentures (amortized cost, $1,826 in 1999 and $3,323 in 1998)................................. 1,730 3,681 Equity securities (cost, $102 in 1999 and $85 in 1998)............................................... 180 167 Securities held to maturity, at amortized cost: Fixed maturities (fair value, $3,686 in 1999)........ 3,803 -- Perpetual debentures (fair value, $3,091 in 1999).... 3,344 -- Mortgage loans and other............................... 9 16 Short-term investments................................. 9 45 Cash and cash equivalents.............................. 269 145 ------- ------- Total investments and cash........................ 27,217 22,971 Receivables, primarily premiums........................ 230 213 Receivables for security transactions.................. 25 1 Accrued investment income.............................. 279 236 Deferred policy acquisition costs...................... 3,040 2,604 Property and equipment, at cost less accumulated depreciation.......................................... 450 381 Securities held as collateral for loaned securities.... -- 1,028 Other.................................................. 108 94 ------- ------- Total assets...................................... $31,349 $27,528 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Policy liabilities: Future policy benefits............................... $22,119 $18,655 Unpaid policy claims................................. 1,305 1,052 Unearned premiums.................................... 306 278 Other policyholders' funds........................... 246 199 ------- ------- Total policy liabilities.......................... 23,976 20,184 Notes payable.......................................... 573 511 Income taxes........................................... 1,733 1,694 Payables for return of collateral on loaned securities............................................ -- 1,028 Payables for security transactions..................... 437 10 Other.................................................. 771 647 ------- ------- Total liabilities................................. 27,490 24,074 ------- ------- Shareholders' equity: Common stock of $.10 par value. In thousands: authorized 400,000 shares; issued 318,570 shares in 1999 and 317,097 shares in 1998....................... 32 16 Additional paid-in capital............................. 241 232 Retained earnings...................................... 3,040 2,588 Accumulated other comprehensive income: Unrealized foreign currency translation gains........ 214 230 Unrealized gains on investment securities............ 1,243 1,202 Treasury stock, at average cost........................ (910) (812) Notes receivable for stock purchases................... (1) (2) ------- ------- Total shareholders' equity........................ 3,859 3,454 ------- ------- Total liabilities and shareholders' equity........ $31,349 $27,528 ======= ======= Shareholders' equity per share.................... $ 14.47 $ 12.92 ======= =======
See the accompanying Notes to Consolidated Financial Statements. F-3 89 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, ------------------------ 1999 1998 ------ ------ (IN MILLIONS, EXCEPT FOR PER-SHARE AMOUNTS -- UNAUDITED) Common Stock: Balance at beginning and end of period.................... $ 32 $ 16 ------ ------ Additional paid-in capital: Balance at beginning of year.............................. 235 227 Exercise of stock options................................. 3 3 Gain on treasury stock reissued........................... 3 2 ------ ------ Balance at end of period.................................. 241 232 ------ ------ Retained earnings: Balance at beginning of year.............................. 2,862 2,442 Net earnings.............................................. 196 160 Cash dividends ($.065 per share in 1999 and $.058 in 1998).................................................. (18) (14) ------ ------ Balance at end of period.................................. 3,040 2,588 ------ ------ Accumulated other comprehensive income: Balance at beginning of year.............................. 1,551 1,559 Change in unrealized foreign currency translation gains during period, net of income taxes..................... (5) (44) Unrealized gains (losses) on investment securities during period, net of income taxes and reclassification adjustments............................................ (89) (83) ------ ------ Balance at end of period.................................. 1,457 1,432 ------ ------ Treasury stock: Balance at beginning of year.............................. (910) (813) Purchases of treasury stock............................... (11) (7) Cost of shares issued..................................... 11 8 ------ ------ Balance at end of period.................................. (910) (812) ------ ------ Notes receivable for stock purchases........................ (1) (2) ------ ------ Total shareholders' equity................................ $3,859 $3,454 ====== ======
See the accompanying Notes to Consolidated Financial Statements. F-4 90 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, --------------------- 1999 1998 ----- ----- (IN MILLIONS -- UNAUDITED) Cash flows from operating activities: Net earnings.............................................. $ 196 $ 160 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities.......................... 620 570 Deferred income taxes................................... (41) (161) Change in income taxes payable.......................... (73) (47) Increase in deferred policy acquisition costs........... (69) (53) Change in receivables and advance premiums.............. 2 5 Depreciation and amortization expense................... 7 7 Provision for mandated policyholder protection fund..... -- 111 Other, net.............................................. 53 29 ----- ----- Net cash provided by operating activities............. 695 621 ----- ----- Cash flows from investing activities: Proceeds from investments sold or matured: Securities available for sale: Fixed-maturity securities sold........................ 279 302 Fixed-maturity securities matured..................... 63 162 Equity securities..................................... 16 10 Securities held to maturity: Fixed-maturity securities matured..................... 9 -- Mortgage loans and other investments, net............... -- 1 Short-term investments, net............................. 1 -- Costs of investments acquired: Securities available for sale: Fixed-maturity securities............................. (648) (869) Perpetual debentures.................................. (434) (278) Equity securities..................................... (19) (17) Securities held to maturity: Fixed-maturity securities............................. (42) -- Short-term investments, net............................. -- (2) Additions to property and equipment, net.................. (3) (6) ----- ----- Net cash used by investing activities................. (778) (697) ----- ----- Cash flows from financing activities: Principal payments under debt obligations................. (3) (5) Dividends paid to shareholders............................ (18) (14) Purchases of treasury stock............................... (11) (7) Treasury stock reissued................................... 14 10 Other, net................................................ 5 1 ----- ----- Net cash used by financing activities................... (13) (15) ----- ----- Effect of exchange rate changes on cash and cash equivalents............................................... (9) -- ----- ----- Net change in cash and cash equivalents................. (105) (91) Cash and cash equivalents, beginning of year................ 374 236 ----- ----- Cash and cash equivalents, end of period.................... $ 269 $ 145 ===== ===== Supplemental disclosures of cash flow information: Cash payments during the period for: Interest on debt obligations............................ $ 3 $ 3 Income taxes............................................ 139 103
See the accompanying Notes to Consolidated Financial Statements. F-5 91 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, -------------------------- 1999 1998 ------ ------ (IN MILLIONS -- UNAUDITED) Net earnings................................................ $196 $160 ---- ---- Other comprehensive income, before income taxes: Foreign currency translation adjustments: Change in unrealized foreign currency translation gains during the period..................................... 24 7 Unrealized gains (losses) on investment securities: Unrealized holding gains (losses) arising during the period................................................ (95) (48) Reclassification adjustment for realized (gains) losses included in net earnings.............................. 4 (1) ---- ---- Total other comprehensive income, before income taxes........................................... (67) (42) Income tax expense related to items of other comprehensive income.................................................... 27 85 ---- ---- Other comprehensive income, net of income taxes........... (94) (127) ---- ---- Total comprehensive income........................ $102 $ 33 ==== ====
See the accompanying Notes to Consolidated Financial Statements. F-6 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements of AFLAC Incorporated and subsidiaries (the "Company") contain all adjustments necessary to fairly present the financial position as of March 31, 1999, and the results of operations and statements of cash flows, shareholders' equity and comprehensive income for the three months ended March 31, 1999 and 1998. Results of operations for interim periods are not necessarily indicative of results for the entire year. We prepare our financial statements in accordance with generally accepted accounting principles (GAAP). These principles are established primarily by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants. The preparation of financial statements in conformity with GAAP requires us to make estimates when recording transactions resulting from business operations, based on information currently available. The most significant items on our balance sheet that involve a greater extent of accounting and actuarial estimates subject to changes in the future are: deferred policy acquisition costs, liabilities for future policy benefits and unpaid policy claims, accrued liabilities for unfunded retirement plans 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, we believe the amounts provided are adequate. The financial statements should be read in conjunction with the financial statements included in our annual report to shareholders for the year ended December 31, 1998. (2) ACCOUNTING PRONOUNCEMENTS We adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information in 1998. This Statement requires that companies disclose segment data on the basis that is used internally by management for evaluating segment performance and allocating resources to segments. This Statement requires that a company report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It also requires various reconciliations of total segment information to amounts in the consolidated financial statements. SFAS No. 131 was effective for financial statements issued for annual periods beginning in 1998 and for interim periods beginning in 1999. The required interim period information is presented in Note 3. On January 1, 1999, we adopted Statement of Position (SOP) 97-3, Accounting by Insurance and Other Enterprises for Insurance Related Assessments. This SOP provides guidance for determining when an entity should recognize a liability for guaranty fund and other insurance related assessments. It also provides guidance on how to measure the liability. There was no effect on net earnings or shareholders' equity due to our adoption of this SOP since our previous accounting method for guaranty fund and other insurance related assessments conformed to the requirements of this SOP. We also adopted SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, on January 1, 1999. This SOP provides guidance for determining whether costs of software developed or obtained for internal use should be capitalized or expensed as incurred. In the past, we have expensed all such costs as they were incurred. The adoption of this SOP had no material effect on net earnings for the three months ended March 31, 1999. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in investment securities and other contracts, and F-7 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative will be included in either earnings or other comprehensive income depending on the intended use of the derivative instrument. We are currently evaluating this standard, which is effective for AFLAC January 1, 2000. (3) SEGMENT INFORMATION Information regarding components of operations for the three months ended March 31 follows:
1999 1998 ------ ------ (IN MILLIONS) Total revenues: AFLAC Japan: Earned premiums........................................ $1,398 $1,181 Net investment income.................................. 262 226 Other income........................................... -- 1 ------ ------ Total AFLAC Japan revenues........................ 1,660 1,408 ------ ------ AFLAC U.S.: Earned premiums........................................ 330 289 Net investment income.................................. 58 51 Other income........................................... -- 3 ------ ------ Total AFLAC U.S. revenues......................... 388 343 ------ ------ All other business segments............................... 7 7 ------ ------ Total business segments........................... 2,055 1,758 Realized investment gains (losses)........................ (5) -- Corporate................................................. 7 8 Intercompany eliminations................................. (9) (9) ------ ------ Total............................................. $2,048 $1,757 ====== ====== Earnings before income taxes: AFLAC Japan............................................... $ 158 $ 125 AFLAC U.S. ............................................... 63 56 All other business segments............................... 1 -- ------ ------ Total business segments........................... 222 181 Provision for the Japanese mandated policyholder protection fund........................................ -- (111) Realized investment gains (losses)........................ (5) -- Interest expense, non-insurance operations................ (3) (3) Corporate................................................. (11) (14) ------ ------ Total............................................. $ 203 $ 53 ====== ======
(4) JAPANESE INCOME TAXES At the end of March 1999, the Japanese government reduced the Japanese corporate income tax rate from 41.7% to 36.2%, which increased net earnings for the first quarter of 1999 by $67 million ($.25 per basic share, $.24 per diluted share) from the reduction of our consolidated deferred income tax liability as of March 31, 1999. This was the net effect of recalculating Japanese deferred income taxes at the new 36.2% rate on the temporary differences between the financial reporting basis of F-8 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) AFLAC Japan's assets and liabilities reduced by the limitations in the U.S. foreign tax credit provisions. At the end of March 1998, the Japanese government reduced the Japanese corporate income tax rate from 45.3% to 41.7% which increased net earnings for the first quarter of 1998 by $121 million ($.45 per basic share, $.44 per diluted share) from the reduction of AFLAC Japan's deferred income tax liability. The deferred tax reduction represented the effect of recalculating Japanese deferred income taxes at the 41.7% rate on the temporary differences between the financial reporting basis and the Japanese income tax basis of AFLAC Japan's assets and liabilities. The 1998 rate reduction for AFLAC Japan was effective May 1, 1998 for purposes of calculating income tax expense on operating earnings and the 1999 rate reduction is effective April 1, 1999. (5) POLICYHOLDER PROTECTION FUND During the first quarter of 1998, the Japanese government enacted a mandatory policyholder protection fund system. The life insurance industry is required to contribute $4.1 billion to this fund over a 10-year period. The total charge for our share of the contribution obligation was recognized in the first quarter of 1998 and decreased pretax earnings by $111 million for the three months ended March 31, 1998. The after-tax charge was $65 million, or $.24 per basic and diluted share. (6) NOTES PAYABLE A summary of notes payable is as follows:
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ (IN MILLIONS) Unsecured, yen-denominated notes payable to banks: Reducing, revolving credit agreement, due annually through July 2001: 2.29% fixed interest rate.............................. $282 $294 Variable interest rate (.93% at March 31, 1999)........ 32 35 Revolving credit agreement due November 2002: 1.24% fixed interest rate.............................. 129 134 Variable interest rate (.95% at March 31, 1999)........ 112 115 Obligations under capitalized leases, due monthly through 2003, secured by computer equipment in Japan.............. 18 18 ---- ---- Total notes payable............................... $573 $596 ==== ====
We have a reducing, revolving credit agreement that provides for bank borrowings through July 2001 in either U.S. dollars or Japanese yen. The current borrowing limit is $325 million. Under the terms of the agreement, the borrowing limit will reduce to $250 million on July 15, 1999, and $125 million on July 15, 2000. At March 31, 1999, 34.1 billion yen ($282 million) was outstanding at a fixed interest rate and 3.8 billion yen ($32 million) was outstanding at a variable interest rate under this agreement. We also have an unsecured revolving credit agreement that provides for bank borrowings through November 2002 with a borrowing limit of $250 million, payable in either U.S. dollars or Japanese yen. At March 31, 1999, 15.5 billion yen ($129 million) was outstanding at a fixed interest rate and 13.5 billion yen ($112 million) was outstanding at a variable interest rate under this agreement. F-9 95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) We have outstanding interest rate swaps on a portion of our variable interest rate yen-denominated borrowings (49.6 billion yen). These swaps reduce the impact of changes in interest rates on our borrowing costs and effectively change our interest rate from variable to fixed. The interest rate swaps have notional principal amounts that equal the anticipated unpaid principal amounts. Under these agreements, we make fixed rate payments at 2.29% on one loan and 1.24% on another loan and receive floating rate payments (.19% at March 31, 1999 plus loan costs of 25 or 20 basis points, respectively) based on the three-month Tokyo Interbank Offered Rate. We have designated our yen-denominated borrowings as a hedge of our net investment in AFLAC Japan. Foreign currency translation gains/losses are included in accumulated other comprehensive income. Outstanding principal and related accrued interest payable on the yen-denominated borrowings were translated into dollars at end-of-period exchange rates. Interest expense was translated at average exchange rates for the period the interest expense was incurred. On April 21, 1999, we issued $450 million of senior notes with a 6.50% coupon, paid semiannually. The notes are redeemable at our option and at any time at a redemption price equal to the principal amount of the notes being redeemed plus a make-whole amount. We received net proceeds of $445 million. We intend to use the proceeds primarily to purchase shares of our common stock. Any remaining proceeds may be used to repay indebtedness or for general corporate purposes. We intend to swap the dollar-denominated principal and interest to be yen-denominated. (7) UNREALIZED GAINS ON INVESTMENT SECURITIES On October 1, 1998, we reclassified certain debt securities from "available for sale" to "held to maturity." The related net unrealized gains and losses at the date of transfer on these securities are being amortized over the remaining term of the securities. These unamortized net unrealized gains and losses, plus the net unrealized gains and losses on securities available for sale, less amounts applicable to policy liabilities and deferred income taxes, are reported in accumulated other comprehensive income. The portion of unrealized gains credited to policy liabilities represents gains that would not inure to the benefit of shareholders if such gains were actually realized. These amounts relate to policy reserve interest requirements and reflect the difference between market investment yields and estimated minimum required interest rates. The net effect on shareholders' equity of unrealized gains and losses from investment securities at the following dates was:
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ (IN MILLIONS) Unrealized gains on securities available for sale........... $2,076 $1,946 Unamortized unrealized gains on securities transferred to held to maturity.......................................... 1,149 1,224 Less: Policy liabilities........................................ 1,032 885 Deferred income taxes..................................... 950 953 ------ ------ Shareholders' equity, net unrealized gains on investment securities................................................ $1,243 $1,332 ====== ======
(8) SECURITY LENDING AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. At March 31, 1999 and December 31, 1998 we had security loans outstanding in the F-10 96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amounts of $543 million and $3.0 billion at fair value, respectively. At March 31, 1999, and December 31, 1998, we held Japanese government bonds as collateral for loaned securities in the amounts of $547 million and $3.1 billion, at fair value. Our security lending policy requires that the fair value of the securities received as collateral be 105% or more of the fair value of the loaned securities as of the date the securities are loaned and not less than 100% thereafter. (9) COMMON STOCK The following is a reconciliation of the number of shares of our common stock for the three months ended March 31:
1999 1998 --------- --------- (IN THOUSANDS OF SHARES) Common stock -- issued: Balance at beginning of year.............................. 317,971 316,380 Exercise of stock options................................. 599 717 ------- ------- Balance at end of period.................................. 318,570 317,097 ------- ------- Treasury stock: Balance at beginning of year.............................. 52,287 49,944 Purchases of treasury stock: Open market............................................ 150 114 Received from employees for taxes on stock option exercises............................................. 98 139 Shares issued to sales associates stock bonus plan and dividend reinvestment plan............................. (191) (280) Exercise of stock options................................. (429) (201) ------- ------- Balance at end of period.................................. 51,915 49,716 ------- ------- Shares outstanding at end of period......................... 266,655 267,381 ======= =======
(10) LITIGATION We are 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, we believe the outcome of pending litigation will not have a material adverse effect on our financial position. F-11 97 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors AFLAC Incorporated: We have audited the accompanying consolidated balance sheets of AFLAC Incorporated and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, shareholders' equity, cash flows and comprehensive income for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AFLAC Incorporated and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Atlanta, Georgia January 28, 1999 F-12 98 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ------- ------- ------- (IN MILLIONS, EXCEPT FOR SHARE AND PER-SHARE AMOUNTS) Revenues: Premiums, principally supplemental health insurance...... $ 5,943 $ 5,874 $ 5,910 Net investment income.................................... 1,138 1,078 1,022 Realized investment gains (losses)....................... (2) (5) 2 Gain on sale of television business...................... -- 267 60 Other income............................................. 25 37 106 ------- ------- ------- Total revenues................................... 7,104 7,251 7,100 ------- ------- ------- Benefits and expenses: Benefits and claims...................................... 4,877 4,833 4,896 Acquisition and operating expenses: Amortization of deferred policy acquisition costs..... 201 180 162 Insurance commissions................................. 773 773 778 Insurance expenses.................................... 504 479 437 Provision for mandated policyholder protection fund... 111 -- -- Interest expense...................................... 13 14 16 Other operating expenses.............................. 74 107 161 ------- ------- ------- Total acquisition and operating expenses......... 1,676 1,553 1,554 ------- ------- ------- Total benefits and expenses...................... 6,553 6,386 6,450 ------- ------- ------- Earnings before income taxes..................... 551 865 650 Income tax expense (benefit): Current.................................................. 277 292 240 Deferred -- operations................................... (92) (12) 16 Deferred tax benefit from Japanese tax rate reduction.... (121) -- -- ------- ------- ------- Total income taxes............................... 64 280 256 ------- ------- ------- Net earnings..................................... $ 487 $ 585 $ 394 ======= ======= ======= Net earnings per share: Basic.................................................... $ 1.83 $ 2.15 $ 1.41 Diluted.................................................. 1.76 2.08 1.36 Common shares used in computing earnings per share (In thousands): Basic.................................................... 266,305 272,110 280,352 Diluted.................................................. 275,872 281,596 288,922
Share and per-share amounts reflect the 2-for-1 stock split paid on June 8, 1998. See the accompanying Notes to the Consolidated Financial Statements. F-13 99 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------- 1998 1997 -------- -------- (IN MILLIONS, EXCEPT FOR SHARE AMOUNTS) ASSETS: Investments and cash: Securities available for sale, at fair value: Fixed maturities (amortized cost $15,699 in 1998 and $16,073 in 1997).............................. $17,660 $19,007 Perpetual debentures (amortized cost $1,414 in 1998 and $3,048 in 1997)............................... 1,323 3,431 Equity securities (cost $101 in 1998 and $80 in 1997)............................................. 177 146 Securities held to maturity, at amortized cost: Fixed maturities (fair value $3,691)............... 3,947 -- Perpetual debentures (fair value $3,131)........... 3,494 -- Mortgage loans and other................................ 9 17 Short-term investments.................................. 10 43 Cash and cash equivalents............................... 374 236 ------- ------- Total investments and cash..................... 26,994 22,880 Receivables, primarily premiums............................. 229 213 Receivables for security transactions....................... 43 3 Accrued investment income................................... 316 265 Deferred policy acquisition costs........................... 3,067 2,582 Property and equipment, at cost less accumulated depreciation.............................................. 427 386 Securities held as collateral for loaned securities......... -- 3,034 Other....................................................... 107 91 ------- ------- Total assets................................... $31,183 $29,454 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Policy liabilities: Future policy benefits............................. $22,218 $18,399 Unpaid policy claims............................... 1,263 1,011 Unearned premiums.................................. 309 277 Other policyholders' funds......................... 244 198 ------- ------- Total policy liabilities....................... 24,034 19,885 Notes payable........................................... 596 523 Income taxes............................................ 1,865 1,827 Payables for return of collateral on loaned securities............................................. -- 3,034 Payables for security transactions...................... 173 216 Other................................................... 745 539 Commitments and contingencies (Notes 11 and 12) ------- ------- Total liabilities.............................. 27,413 26,024 ------- ------- Shareholders' equity: Common stock of $.10 par value. In thousands: authorized 400,000 shares; issued 317,971 shares in 1998 and 316,380 shares in 1997................................. 32 16 Additional paid-in capital.............................. 235 227 Retained earnings....................................... 2,862 2,442 Accumulated other comprehensive income: Unrealized foreign currency translation gains...... 219 274 Unrealized gains on investment securities.......... 1,332 1,285 Treasury stock, at average cost......................... (910) (813) Notes receivable for stock purchases.................... -- (1) ------- ------- Total shareholders' equity..................... 3,770 3,430 ------- ------- Total liabilities and shareholders' equity..... $31,183 $29,454 ======= =======
Share and per-share amounts reflect the 2-for-1 stock split paid on June 8, 1998. See the accompanying Notes to the Consolidated Financial Statements. F-14 100 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 ------ ------ ------ (IN MILLIONS, EXCEPT FOR PER-SHARE AMOUNTS) Common stock: Balance at beginning of year.............................. $ 16 $ 16 $ 16 Two-for-one stock split................................... 16 -- -- ------ ------ ------ Balance at end of year.................................... 32 16 16 ------ ------ ------ Additional paid-in capital: Balance at beginning of year.............................. 227 209 197 Exercise of stock options................................. 8 6 6 Gain on treasury stock reissued........................... 16 12 6 Two-for-one stock split................................... (16) -- -- ------ ------ ------ Balance at end of year.................................... 235 227 209 ------ ------ ------ Retained earnings: Balance at beginning of year.............................. 2,442 1,918 1,578 Net earnings.............................................. 487 585 394 Cash dividends ($.253 per share in 1998, $.224 in 1997 and $.194 in 1996)......................................... (67) (61) (54) ------ ------ ------ Balance at end of year.................................... 2,862 2,442 1,918 ------ ------ ------ Accumulated other comprehensive income: Balance at beginning of year.............................. 1,559 510 696 Change in unrealized foreign currency translation gains during year, net of income taxes....................... (55) 44 16 Unrealized gains (losses) on investment securities during year, net of income taxes and reclassification adjustments............................................ 47 1,005 (202) ------ ------ ------ Balance at end of year.................................... 1,551 1,559 510 ------ ------ ------ Treasury stock: Balance at beginning of year.............................. (813) (527) (352) Purchases of treasury stock............................... (125) (314) (204) Cost of shares issued..................................... 28 28 29 ------ ------ ------ Balance at end of year.................................... (910) (813) (527) ------ ------ ------ Notes receivable for stock purchases........................ -- (1) -- ------ ------ ------ Total shareholders' equity........................ $3,770 $3,430 $2,126 ====== ====== ======
Per-share amounts reflect the 2-for-1 stock split paid on June 8, 1998. See the accompanying Notes to the Consolidated Financial Statements. F-15 101 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (IN MILLIONS) Cash flows from operating activities: Net earnings.............................................. $487 $ 585 $ 394 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities.......................... 2,173 2,310 2,483 Deferred income taxes................................... (213) (12) 16 Change in income taxes payable.......................... 16 68 15 Increase in deferred policy acquisition costs........... (226) (227) (265) Change in receivables and advance premiums.............. 4 8 (32) Depreciation and amortization expense................... 43 45 48 Gain on sale of television business..................... -- (267) (60) Provision for mandated policyholder protection fund..... 111 -- -- Other, net.............................................. 95 88 95 ------- ------- ------- Net cash provided by operating activities.......... 2,490 2,598 2,694 ------- ------- ------- Cash flows from investing activities: Proceeds from investments sold or matured: Securities available for sale: Fixed-maturity securities sold....................... 941 1,722 1,708 Fixed-maturity securities matured.................... 698 422 560 Equity securities.................................... 57 64 17 Securities held to maturity: Fixed-maturity securities matured.................... 8 -- -- Mortgage loans and other investments, net............... 8 4 4 Short-term investments, net............................. 34 6 (6) Proceeds from sale of television business................. -- 351 99 Costs of investments acquired: Securities available for sale: Fixed-maturity securities............................ (2,966) (4,141) (3,942) Perpetual debentures................................. (917) (798) (912) Equity securities.................................... (60) (55) (23) Additions to property and equipment, net.................. (40) (9) (10) Purchase of subsidiary.................................... (8) -- -- ------- ------- ------- Net cash used by investing activities.............. (2,245) (2,434) (2,505) ------- ------- ------- Cash flows from financing activities: Proceeds from borrowings.................................. 124 409 136 Principal payments under debt obligations................. (125) (203) (76) Dividends paid to shareholders............................ (67) (61) (54) Purchases of treasury stock............................... (125) (314) (204) Treasury stock reissued................................... 44 40 35 Other, net................................................ 8 8 6 ------- ------- ------- Net cash used by financing activities.............. (141) (121) (157) ------- ------- ------- Effect of exchange rate changes on cash and cash equivalents............................................... 34 (16) (13) ------- ------- ------- Net change in cash and cash equivalents............ 138 27 19 Cash and cash equivalents, beginning of year................ 236 209 190 ------- ------- ------- Cash and cash equivalents, end of year...................... $ 374 $ 236 $ 209 ======= ======= ======= Supplemental disclosures of cash flow information: Cash payments during the year for: Interest on debt obligations............................ $ 12 $ 12 $ 14 Income taxes............................................ 210 222 224
Non-cash financing activities included capital lease obligations incurred for computer equipment totaling $7 in 1998, $6 in 1997 and $9 in 1996. See the accompanying Notes to the Consolidated Financial Statements. F-16 102 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ---- ------ ----- (IN MILLIONS) Net Earnings................................................ $487 $ 585 $ 394 ---- ------ ----- Other comprehensive income, before income taxes: Foreign currency translation adjustments: Change in unrealized foreign currency translation gains during year............................. (84) 43 16 Reclassification adjustment for realized currency loss on sale of subsidiary included in net earnings...................................... -- 1 -- Unrealized gains (losses) on investment securities: Unrealized holding gains (losses) arising during year.......................................... 171 1,693 (314) Reclassification adjustment for realized (gains) losses included in net earnings............... 3 4 (5) ---- ------ ----- Total other comprehensive income, before income taxes............................. 90 1,741 (303) Income tax expense (benefit) related to items of other comprehensive income.................................. 98 692 (117) ---- ------ ----- Other comprehensive income, net of income taxes... (8) 1,049 (186) ---- ------ ----- Total comprehensive income................... $479 $1,634 $ 208 ==== ====== =====
See the accompanying Notes to the Consolidated Financial Statements. F-17 103 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business: AFLAC Incorporated (the Parent Company) and its subsidiaries (the Company) primarily sell supplemental health insurance in Japan and the United States. The Company's insurance operations are conducted through American Family Life Assurance Company of Columbus (AFLAC), which operates in the United States (AFLAC U.S.) and as a branch in Japan (AFLAC Japan). Most of our insurance policies are individually underwritten and marketed through independent agents at the worksite, with premiums paid by the employee. AFLAC Japan, which conducts its insurance operations in Japanese yen, accounted for 80%, 79% and 82% of the Company's total revenues for 1998, 1997 and 1996, respectively, and 86% and 87% of total assets at December 31, 1998 and 1997, respectively. Basis of Presentation: We prepare our financial statements in accordance with generally accepted accounting principles (GAAP). These principles are established primarily by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants. The preparation of financial statements in conformity with GAAP requires us to make estimates when recording transactions resulting from business operations, based on information currently available. The most significant items on our balance sheet that involve a greater extent of accounting estimates and actuarial determinations subject to changes in the future are: deferred policy acquisition costs, liabilities for future policy benefits and unpaid policy claims, accrued liabilities for unfunded retirement plans 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, we believe the amounts provided are adequate. Translation of Foreign Currencies: The functional currency of AFLAC Japan's insurance operations is the Japanese yen. We translate financial statement accounts that are maintained in foreign currencies into U.S. dollars as follows. Assets and liabilities denominated in foreign currencies are translated at end-of-period exchange rates. Realized gains and losses on security transactions are translated at the exchange rate on the trade dates of the transactions. Other revenues, expenses and cash flows are translated from foreign currencies into U.S. dollars using average exchange rates for the year. The resulting currency translation adjustments are reported in accumulated other comprehensive income. We include realized currency exchange gains and losses resulting from foreign currency transactions in earnings. Realized currency exchange gains and losses were immaterial during the three-year period 1996 through 1998. AFLAC Japan maintains an investment portfolio of dollar-denominated securities on behalf of AFLAC U.S. The functional currency is the dollar for these investments, the related investment income and realized/unrealized investment gains and losses. We have designated the yen-denominated notes payable (Note 7) held by the Parent Company as a hedge of our net investment in AFLAC Japan. Outstanding principal and related accrued interest payable on the yen-denominated borrowings are translated into dollars at end-of-period exchange rates. Currency translation adjustments are reported in accumulated other comprehensive income. Insurance Revenue and Expense Recognition: The supplemental health insurance policies we issue are classified as long-duration contracts. The contract provisions generally cannot be changed or canceled during the contract period; however, we may adjust premiums for policies issued in the United States within prescribed guidelines and with the approval of state insurance regulatory authorities. F-18 104 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Insurance premiums for health policies are recognized as earned income ratably over the terms of the policies. When revenues are recorded, the related amounts of benefits and expenses are charged against such revenues, so as to result in recognition of profits in proportion to premium revenues during the period the policies are expected to remain in force. This association is accomplished by means of annual additions to the liability for future policy benefits and the deferral and subsequent amortization of policy acquisition costs. The calculation of deferred policy acquisition costs and the liability for future policy benefits requires the use of estimates consistent with sound actuarial valuation techniques. For new policy issues, we review our actuarial assumptions and deferrable acquisition costs each year and revise them when necessary to more closely reflect recent experience and studies of actual acquisition costs. For policies in force, we evaluate deferred policy acquisition costs to determine that they are recoverable from future revenues and charge against earnings costs that are not recoverable. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, money market instruments and other debt instruments with a maturity of 90 days or less when purchased. Investments: Our fixed-maturity securities and perpetual debentures (debt securities) are classified as either held to maturity or available for sale. Securities classified as held to maturity are securities that we have the ability and intent to hold to maturity or redemption, and are carried at amortized cost. All other debt securities and our equity securities are classified as available for sale and are carried at fair value. If the fair value is higher than the amortized cost for debt securities or the purchase cost for equity securities, the excess is an unrealized gain; and if lower than cost, the difference is an unrealized loss. In 1998, we reclassified certain debt securities from "available for sale" to "held to maturity." The related unrealized gains and losses at the date of transfer on these securities are being amortized over the remaining term of the securities. These unamortized unrealized gains and losses, plus the net unrealized gains and losses on securities available for sale, less amounts applicable to policy liabilities and deferred income taxes, are reported in accumulated other comprehensive income. The portion of unrealized gains credited to policy liabilities represents gains that would not inure to the benefit of shareholders if such gains were actually realized. These amounts relate to policy reserve interest requirements and reflect the difference between market investment yields and estimated minimum required interest rates. Amortized cost of debt securities is based on the purchase price adjusted for accrual of discount or amortization of premium. The amortized cost of debt securities purchased at a discount will equal the face or par value at maturity. Debt securities purchased at a premium will have an amortized cost equal to face or par value at the earlier of a call date or maturity. Interest is recorded as income when earned and is adjusted for amortization of any premium or discount. Dividends on equity securities are recorded as income on the ex-dividend dates. For the collateralized mortgage obligations portion of the fixed-maturity securities portfolio, we recognize income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied at the time of acquisition. This adjustment is reflected in net investment income. We identify the cost of each individual investment so that when we sell any of them, we are able to record the gain or loss on that transaction in our Consolidated Statements of Earnings. Effective January 1, 1997, we changed our method of determining the costs of investment securities sold from F-19 105 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the first-in, first-out (FIFO) method to the specific identification method. This accounting change had no material effect on net earnings for the years ended December 31, 1997 and 1998. We continually monitor the difference between the cost and estimated fair value of our investments. If any of our investments experience a decline in value that is other than temporary, we establish a valuation allowance for the decline and record a realized loss in the Consolidated Statements of Earnings. We loan fixed-maturity securities to financial institutions in short-term security lending transactions. These securities continue to be carried as investment assets on our balance sheet during the term of the loans and are not recorded as sales. We receive other securities as collateral for such loans. Beginning in 1998, the collateral was not recorded as either an asset or liability on our balance sheet due to a required change in accounting standards. In prior years, the collateral was carried as an asset, and a liability was recorded for the return of the collateral. Deferred Policy Acquisition Costs: The costs of acquiring new business and converting existing policies are deferred and amortized, with interest, over the premium payment periods in proportion to the ratio of annual premium income to total anticipated premium income. Anticipated premium income is estimated by using the same mortality and withdrawal assumptions used in computing liabilities for future policy benefits. In this manner, the related acquisition expenses are matched with revenues. Costs deferred include first-year commissions in excess of renewal commissions and certain direct and allocated policy issue, underwriting and marketing expenses, all of which vary with and are primarily related to the production of new business. Policy acquisition costs deferred were $436 million in 1998, $408 million in 1997 and $427 million in 1996. Of the policy acquisition costs deferred, commissions represented 69% in 1998, 70% in 1997 and 67% in 1996. Insurance Liabilities: The liabilities for future policy benefits are computed by a net level premium method using estimated future investment yields, withdrawals and recognized morbidity and mortality tables modified to reflect our experience, with reasonable provision for possible future adverse deviations in experience. Unpaid policy claims are estimates computed on an undiscounted basis using statistical analyses of historical claim experience adjusted for current trends and changed conditions. The ultimate liability may vary significantly from such estimates. We regularly adjust these estimates as new experience data emerges and reflect the changes in operating results in the year such adjustments are made. Income Taxes: Different rules are used in computing the U.S. and Japanese income tax expenses presented in the accompanying financial statements from those used in preparing the Company's income tax returns. Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Derivatives: We have only limited activity with derivative financial instruments. We do not use them for trading purposes nor do we engage in leveraged derivative transactions. In addition, we do not use derivatives to hedge the foreign-currency-denominated net assets of our foreign insurance operations, except for short-term hedges of our annual profit repatriations. We currently use two types of derivatives -- interest rate swaps and foreign currency forward contracts. We use the accrual method to account for the interest rate swaps in connection with our bank borrowings. The difference between amounts paid and received under such agreements is reported in interest expense in the Consolidated Statements of Earnings. Changes in the fair value of the swap F-20 106 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) agreements are not recognized in the financial statements. These swaps reduce the impact of changes in interest rates on our borrowing costs and effectively change our related interest exposure from variable to fixed. We use short-term foreign currency forward contracts (usually five months or less) in connection with annual profit transfers from AFLAC Japan. These contracts are designated at inception as hedges of our investment in AFLAC Japan and are accounted for using the deferral method. We record the gains and losses during the period that the contracts are outstanding and at termination of the contracts as unrealized foreign currency translation gains in accumulated other comprehensive income. Employee Stock Options: We use the intrinsic value method to value employee stock options. Under this method, compensation cost is recognized only for the excess, if any, of the market price of the stock at the grant date over the amount an employee must pay upon exercise to acquire the stock. Our stock option plan requires that the exercise price be equal to 100% of the fair market value at the date of grant; therefore, no compensation expense is recognized. Treasury Shares: We record treasury shares purchased at cost, which is the market value at the time of the transaction, and as a reduction of shareholders' equity. We use the weighted-average purchase cost to determine the cost of treasury shares that are reissued. We record realized gains or losses in additional paid-in capital when treasury shares are reissued. Stock Split: We paid a two-for-one stock split on June 8, 1998. All share and per-share amounts in the accompanying financial statements have been restated for this split. Earnings Per Share: We are required to present two earnings per share (EPS) calculations -- basic EPS and diluted EPS -- in the Consolidated Statements of Earnings. Basic EPS is computed by dividing net earnings by the weighted-average number of shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the weighted-average number of shares outstanding for the period plus the shares representing the dilutive effect of stock options and other common stock equivalents. The components of the weighted-average shares used in the EPS calculations are as follows:
1998 1997 1996 ------- ------- ------- (IN THOUSANDS OF SHARES) Average outstanding shares used for calculating basic EPS.................................................... 266,305 272,110 280,352 Effect of stock options.................................. 9,567 9,486 8,570 ------- ------- ------- Average outstanding shares used for calculating diluted EPS.................................................... 275,872 281,596 288,922 ======= ======= =======
Accounting Changes Adopted: We 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 established criteria for determining whether transfers of financial assets are sales or secured borrowings and established reporting requirements for those transactions involving secured obligations and collateral. Beginning in 1998, as required by this standard, we no longer recognize securities held as collateral as an asset, nor the related liability for the return of such collateral for security lending agreements entered into after December 31, 1997. The adoption of SFAS No. 125 had no effect on our net earnings or shareholders' equity. As required, we adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, in 1998. This Statement requires that companies disclose business segment data on the basis that is used internally by management for evaluating segment performance and allocating F-21 107 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) resources to segments. This Statement requires that a company report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It also requires various reconciliations of total segment information to amounts in the consolidated financial statements. This information is presented in Note 2. We also adopted SFAS No. 132, Employer's Disclosures about Pensions and Other Postretirement Benefits, in 1998. This Statement revises disclosures about pension and other postretirement benefit plans, but does not change the measurement or financial statement recognition of these plans. This information is presented in Note 11. As required, we adopted SFAS No. 128, Earnings per Share, in 1997 as described above in this Note under the caption, "Earnings Per Share." Accounting Pronouncements Not Yet Adopted: SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in investment securities and other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative will be included in either earnings or other comprehensive income depending on the intended use of the derivative instrument. We are currently evaluating this standard, which is effective January 1, 2000. The Accounting Standards Executive Committee issued Statement of Position (SOP) 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments, in December 1997. This SOP provides guidance for determining when an entity should recognize a liability for guaranty fund and other insurance-related assessments. It also provides guidance on how to measure the liability. This SOP is effective for 1999. Our present accounting method for guaranty fund and other insurance-related assessments substantially conforms to the requirements of this SOP. In March 1998, SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, was issued. This SOP provides guidance for determining whether costs of software developed or obtained for internal use should be capitalized or expensed as incurred. In the past, we have expensed all such costs when incurred. This SOP is effective beginning in 1999. Reclassifications: Certain prior-year amounts have been reclassified to conform to the current year presentation. (2) FOREIGN INFORMATION AND BUSINESS SEGMENT INFORMATION The Company consists of three reportable business segments: AFLAC Japan insurance; AFLAC U.S. insurance; and prior to April 15, 1997, AFLAC Broadcast Division (the Company's television business in the United States). We primarily sell supplemental health insurance through the AFLAC Japan and AFLAC U.S. operations. Most of our policies are individually underwritten and marketed through independent agents at the worksite, with premiums paid by the employee. These operations also offer various life insurance policies. We completed the sale of our television operations in early 1997, as discussed in this Note. Operating business segments that are not individually reportable are included in the "All other" category, which includes minor insurance operations in foreign countries other than Japan and our printing subsidiary. We evaluate our business segments based on GAAP pretax operating earnings. We do not allocate corporate overhead expenses to business segments. F-22 108 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information regarding components of operations and lines of business for the years ended December 31 follows:
1998 1997 1996 ------ ------ ------ (IN MILLIONS) Total revenues: AFLAC Japan: Earned premiums: Cancer life.................................. $3,839 $4,011 $4,315 Other accident and health.................... 413 336 318 Life insurance............................... 486 456 319 Net investment income............................. 917 893 896 Other income...................................... 2 1 1 ------ ------ ------ Total AFLAC Japan revenues.............. 5,657 5,697 5,849 ------ ------ ------ AFLAC U.S.: Earned premiums: Cancer....................................... 489 456 429 Other accident and health.................... 686 586 501 Life insurance............................... 23 20 16 Net investment income............................. 216 180 119 Other income...................................... 4 1 1 ------ ------ ------ Total AFLAC U.S. revenues............... 1,418 1,243 1,066 ------ ------ ------ Television operations -- U.S........................... -- 16 92 All other business segments............................ 39 34 36 ------ ------ ------ Total business segments................. 7,114 6,990 7,043 Realized investment gains (losses)..................... (2) (5) 2 Gain on sale of television business.................... -- 267 60 Corporate.............................................. 30 40 34 Intercompany eliminations.............................. (38) (41) (39) ------ ------ ------ Total................................... $7,104 $7,251 $7,100 ====== ====== ====== Earnings before income taxes: AFLAC Japan............................................ $ 502 $ 504 $ 533 AFLAC U.S.............................................. 230 184 129 Television operations -- U.S........................... -- 4 26 All other business segments............................ 2 (2) (8) ------ ------ ------ Total business segments........................... 734 690 680 Provision for the Japanese mandated policyholder protection fund....................................... (111) -- -- Realized investment gains (losses)..................... (2) (5) 2 Gain on sale of television business.................... -- 267 60 Interest expense, non-insurance operations............. (10) (10) (13) Corporate.............................................. (60) (77) (79) ------ ------ ------ Total............................................. $ 551 $ 865 $ 650 ====== ====== ====== Advertising expense: AFLAC Japan............................................ $ 22 $ 24 $ 14 AFLAC U.S.............................................. 34 23 22 ------ ------ ------ Total............................................. $ 56 $ 47 $ 36 ====== ====== ======
F-23 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total assets at December 31 were as follows:
1998 1997 ------- ------- (IN MILLIONS) Total assets: AFLAC Japan............................................ $26,912 $25,589 AFLAC U.S.............................................. 4,212 3,763 All other business segments............................ 59 75 ------- ------- Total business segments........................... 31,183 29,427 Corporate.............................................. 4,674 4,249 Intercompany eliminations.............................. (4,674) (4,222) ------- ------- Total............................................. $31,183 $29,454 ======= =======
Total depreciation and amortization expense was $45 million in 1998, $41 million in 1997 and $50 million in 1996. AFLAC Japan accounted for $33 million in 1998, $28 million in 1997 and $26 million in 1996. Total expenditures for long-lived assets were $47 million in 1998, $11 million in 1997 and $18 million in 1996. The increase in 1998 primarily relates to the construction of an administrative office building for AFLAC U.S. Receivables consisted primarily of monthly insurance premiums due from individual policyholders or their employers for payroll deduction of premiums. At December 31, 1998, $139 million, or 60.5% of total receivables were related to AFLAC Japan's operations ($120 million at December 31, 1997). Sale of Television Business: In 1997, we completed the sale of our television business, which consisted of seven network-affiliated television stations. The total pretax gain from the sale of our television business was $327 million. Cash sales proceeds received, after applicable selling expenses, were $449 million. Total sales proceeds also included advertising credits to be used by the Company over a five-year period with a fair value of $6 million. We also received cash for various current assets and liabilities. The sale of one station closed on December 31, 1996. The pretax and after-tax gains recognized on this sale in the fourth quarter of 1996 were $60 million and $48 million, respectively. The after-tax gain was $.17 per basic share and $.16 per diluted share in 1996. The sale of the remaining six stations closed on April 15, 1997. The pretax and after-tax gains recognized in the second quarter of 1997 were $267 million and $211 million, respectively. The 1997 after-tax gain was $.77 per basic share and $.75 per diluted share. Policyholder Protection Fund: During the first quarter of 1998, the Japanese government enacted a mandatory policyholder protection fund system. The life insurance industry is required to contribute $4.2 billion to this fund over a 10-year period. The total charge for our share of the contribution obligation was recognized in the first quarter of 1998 and decreased pretax earnings by $111 million for the year ended December 31, 1998. The after-tax charge was $65 million, or $.24 per basic and diluted share. During the second quarter of 1997, Nissan Mutual Life Insurance Company, a Japanese insurer, was declared insolvent. All life insurers doing business in Japan had previously agreed to contribute to a voluntary policyholder protection fund that would be used to help offset insurer insolvencies. During the second quarter of 1997, AFLAC Japan recognized a pretax charge of 3.0 billion yen ($25 million) for its obligation to this policyholder protection fund. The after-tax charge was F-24 110 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $14 million ($.05 per basic and diluted share). This assessment is payable semiannually over 10 years beginning in 1998. Yen-Translation Effects: AFLAC Japan owns U.S. dollar-denominated securities, which we have designated as an economic currency hedge of a portion of our investment in AFLAC Japan. In addition, we have designated the Parent Company's yen-denominated bank borrowings (Note 7) as a hedge of our net investment in AFLAC Japan. The dollar values of our yen-denominated net assets subject to foreign currency translation fluctuations for financial reporting purposes were as follows at December 31 (translated at end-of-year exchange rates):
1998 1997 ------ ------ (IN MILLIONS) AFLAC Japan net assets...................................... $2,726 $2,541 Less: AFLAC Japan dollar-denominated net assets.............. 1,805 1,555 Parent Company yen-denominated net liabilities......... 579 498 ------ ------ Total yen-denominated net assets subject to foreign currency translation fluctuations.................................. $ 342 $ 488 ====== ======
The following table shows the yen/dollar exchange rates used for the three-year period ended December 31, 1998, and their effect on selected financial data.
1998 1997 1996 ------- ------- ------- Balance Sheets: Yen/dollar exchange rate at December 31................ 115.70 130.10 116.10 Yen percent weakening (strengthening).................. (12.4)% 10.8% 11.3% Exchange effect on total assets (billions)............. $ 2.8 $ (2.9) $ (2.6) Exchange effect on total liabilities (billions)........ $ 2.7 $ (2.8) $ (2.6) Statements of Earnings: Average exchange rate for the year..................... 130.89 121.07 108.84 Yen percent weakening.................................. 7.5% 10.1% 13.5% Exchange effect on net earnings (millions)............. $ (20) $ (24) $ (43) Exchange effect on diluted EPS......................... $ (.07) $ (.08) $ (.15)
Other: 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. These payments totaled $192 million in 1998, $386 million in 1997 and $254 million in 1996. See Note 10 for information concerning restrictions on remittances from AFLAC Japan. (3) INVESTMENTS During the fourth quarter of 1998, we revised our investment management policy regarding the holding-period intent for certain of our private placement debt securities. Our past practice was to hold these securities to their contractual or economic maturity dates. We have now made this our formal policy. Accordingly, debt securities carried at a fair value of $6.4 billion were reclassified as of October 1, 1998, from the category "available for sale" to "held to maturity." The related unrealized gain of $1.1 billion as of October 1, 1998, on these securities is being amortized over the remaining term of the securities. F-25 111 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amortized cost for debt securities, cost for equity securities and the fair values of these investments at December 31 are shown in the following tables:
DECEMBER 31, 1998 --------------------------------------------- COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- (IN MILLIONS) Available for sale, carried at fair value: Fixed-maturity securities: Yen-denominated: Government and guaranteed...... $ 6,018 $1,515 $ 17 $ 7,516 Municipalities................. 541 55 -- 596 Public utilities............... 2,884 336 104 3,116 Banks/financial institutions... 1,447 30 140 1,337 Other corporate................ 518 11 37 492 ------- ------ ---- ------- Total yen-denominated..... 11,408 1,947 298 13,057 ------- ------ ---- ------- U.S. dollar-denominated: U.S. government................ 221 14 -- 235 Municipalities................. 10 1 -- 11 Mortgage-backed securities..... 95 4 -- 99 Sovereign and Supranational.... 161 14 -- 175 Banks/financial institutions... 1,922 159 3 2,078 Other corporate................ 1,882 145 22 2,005 ------- ------ ---- ------- Total dollar-denominated...... 4,291 337 25 4,603 ------- ------ ---- ------- Total fixed-maturity securities.............. 15,699 2,284 323 17,660 ------- ------ ---- ------- Perpetual debentures: Yen-denominated: Banks/financial institutions... 1,216 1 98 1,119 Dollar-denominated: Banks/financial institutions... 198 6 -- 204 ------- ------ ---- ------- Total perpetual debentures.............. 1,414 7 98 1,323 ------- ------ ---- ------- Equity securities........................ 101 82 6 177 ------- ------ ---- ------- Total securities available for sale................ $17,214 $2,373 $427 $19,160 ======= ====== ==== ======= Held to maturity, carried at amortized cost: Fixed-maturity securities: Yen-denominated: Government..................... $ 769 $-- $ 51 $ 718 Municipalities................. 334 -- 24 310 Public utilities............... 598 -- 62 536 Banks/financial institutions... 1,148 2 66 1,084 Other corporate................ 1,098 7 62 1,043 ------- ------ ---- ------- Total fixed-maturity securities.............. 3,947 9 265 3,691 ------- ------ ---- ------- Perpetual debentures: Yen-denominated: Banks/financial institutions... 3,494 12 375 3,131 ------- ------ ---- ------- Total perpetual debentures.............. 3,494 12 375 3,131 ------- ------ ---- ------- Total securities held to maturity................ $ 7,441 $ 21 $640 $ 6,822 ======= ====== ==== =======
F-26 112 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 --------------------------------------------- COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- (IN MILLIONS) Available for sale, carried at fair value: Fixed-maturity securities: Yen-denominated: Government and guaranteed...... $ 6,031 $1,696 $ 3 $ 7,724 Municipalities................. 759 124 -- 883 Public utilities............... 2,538 469 -- 3,007 Banks/financial institutions... 1,941 248 5 2,184 Other corporate................ 962 146 -- 1,108 ------- ------ --- ------- Total yen-denominated..... 12,231 2,683 8 14,906 ------- ------ --- ------- U.S. dollar-denominated: U.S. government................ 314 16 -- 330 Municipalities................. 13 1 -- 14 Mortgage-backed securities..... 312 11 -- 323 Sovereign and Supranational.... 150 11 -- 161 Banks/financial institutions... 1,505 115 -- 1,620 Other corporate................ 1,548 112 7 1,653 ------- ------ --- ------- Total dollar-denominated...... 3,842 266 7 4,101 ------- ------ --- ------- Total fixed-maturity securities.............. 16,073 2,949 15 19,007 ------- ------ --- ------- Perpetual debentures: Yen-denominated: Banks/financial institutions... 2,911 376 1 3,286 Dollar-denominated: Banks/financial institutions... 137 8 -- 145 ------- ------ --- ------- Total perpetual debentures.............. 3,048 384 1 3,431 ------- ------ --- ------- Equity securities........................ 80 68 2 146 ------- ------ --- ------- Total securities available for sale................ $19,201 $3,401 $18 $22,584 ======= ====== === =======
Fair values for debt securities were provided by outside securities consultants using market quotations, prices provided by market makers or estimates of fair values obtained from yield data relating to investment securities with similar characteristics. The fair values for equity securities were determined using market quotations on the principal public exchange markets. F-27 113 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amortized cost and fair values of our investments in fixed-maturity securities at December 31, 1998, by contractual maturity are shown below:
AFLAC JAPAN AFLAC U.S. ------------------- ------------------ AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- ------- --------- ------ (IN MILLIONS) Available for sale: Due in one year or less.................... $ 197 $ 202 $ 63 $ 63 Due after one year through five years...... 2,265 2,578 221 234 Due after five years through 10 years...... 1,532 1,761 238 256 Due after 10 years......................... 8,824 10,043 2,264 2,424 U.S. mortgage-backed securities............ 69 73 26 26 ------- ------- ------ ------ Total fixed-maturity securities available for sale.................. $12,887 $14,657 $2,812 $3,003 ======= ======= ====== ====== Held to maturity: Due in one year or less.................... $ 23 $ 23 $ -- $ -- Due after one year through five years...... 417 413 -- -- Due after five years through 10 years...... 399 385 -- -- Due after 10 years......................... 3,108 2,870 -- -- ------- ------- ------ ------ Total fixed-maturity securities held to maturity......................... $ 3,947 $ 3,691 $ -- $ -- ======= ======= ====== ======
Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties. In recent years, AFLAC Japan has purchased subordinated perpetual debenture securities issued primarily by European and Japanese banks. These securities are subordinated to other debt obligations of the issuer, but rank higher than equity securities. Although these securities have no contractual maturity, the issue-date fixed-rate interest coupons subsequently increase to a market- interest rate plus 150 to 300 basis points and change to a variable-interest rate basis, generally by the 25th year after issuance, creating an economic maturity date. The economic maturities of the perpetual debentures owned at December 31, 1998, were as follows:
AFLAC JAPAN AFLAC U.S. ------------------ ----------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- ------ --------- ----- (IN MILLIONS) Available for sale: Due after five years through 10 years........ $ 160 $ 162 $ 70 $ 73 Due after 15 years........................... 1,184 1,088 -- -- ------ ------ ---- ---- Total perpetual debentures available for sale.................................. $1,344 $1,250 $ 70 $ 73 ====== ====== ==== ==== Held to maturity: Due after one year through five years........ $ 160 $ 155 $-- $-- Due after five years through 10 years........ 578 548 -- -- Due after 10 years through 15 years.......... 1,117 1,033 -- -- Due after 15 years........................... 1,639 1,395 -- -- ------ ------ ---- ---- Total perpetual debentures held to maturity.............................. $3,494 $3,131 $-- $-- ====== ====== ==== ====
For AFLAC Japan, the duration of policy benefit liabilities is longer than that of the related investment assets. Therefore, there is a risk that the reinvestment of the proceeds at the maturity of F-28 114 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) such investments will be at a yield below that of the interest required for the accretion of policy liabilities. At December 31, 1998, the average duration of the yen-denominated policy liabilities was approximately 13 years, unchanged from 1997. The average duration of the yen-denominated debt securities was approximately nine years at both December 31, 1998 and 1997. The weighted-average period to maturity of debt securities of AFLAC Japan at December 31, 1998, was 13.9 years, compared with 13.5 years at December 31, 1997. Realized and unrealized gains and losses from investments for the years ended December 31 were as follows:
1998 1997 1996 ------- ------- ------- (IN MILLIONS) Realized gains (losses) on sale or redemption of securities available for sale: Debt securities: Gross gains from sales......................... $ 16 $ 24 $ 21 Gross losses from sales........................ (35) (32) (17) Net gains from redemptions..................... 1 -- -- ------- ------- ------- (18) (8) 4 Equity securities: Gross gains from sales......................... 20 16 2 Gross losses from sales........................ (5) (12) (1) Other long-term assets, net......................... 1 (1) (3) ------- ------- ------- Net realized gains (losses).................... $ (2) $ (5) $ 2 ======= ======= ======= Changes in unrealized gains (losses): Debt securities: Available for sale............................. $(1,447) $ 930 $ (184) Unamortized unrealized gains on securities transferred to held to maturity.............. 1,224 -- -- Equity securities................................... 10 16 23 ------- ------- ------- Net unrealized gains (losses).................. $ (213) $ 946 $ (161) ======= ======= =======
The net effect on shareholders' equity of unrealized gains and losses from investment securities at December 31 was:
1998 1997 ------ ------ (IN MILLIONS) Unrealized gains on securities available for sale........... $1,946 $3,383 Unamortized unrealized gains on securities transferred to held to maturity.......................................... 1,224 -- Less: Policy liabilities..................................... 885 1,272 Deferred income taxes.................................. 953 826 ------ ------ Shareholders' equity, net unrealized gains on investment securities................................................ $1,332 $1,285 ====== ======
F-29 115 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following debt securities individually exceeded 10% of shareholders' equity at December 31:
1998 1997 ------------------ ------------------ AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- ------ --------- ------ (IN MILLIONS) Japan National Government........................ $5,675 $7,157 $5,178 $6,715 The Tokyo Electric Power Co., Inc................ 811 927 742 885 Chubu Electric Power Co., Inc.................... 698 714 444 518 Dai-Ichi Kangyo Bank............................. 454 420 * * Sumitomo Bank.................................... 404 348 * * Credit Suisse First Boston....................... 393 394 * *
- --------------- * Less than 10% AFLAC Japan's investments in Japanese government bonds (at amortized cost) constituted 23.9% and 28.3% of total debt securities at December 31, 1998 and 1997, respectively. Private placement investments held by AFLAC Japan at amortized cost accounted for 41.2% and 34.2% of total debt securities at December 31, 1998 and 1997, respectively. Most of the securities classified as held to maturity and perpetual debentures classified as available for sale constitute private placement investments. In January 1999, the credit ratings of several major Japanese financial institutions were downgraded. We owned debt securities issued by a Japanese bank in the amount of $454 million, or 1.8% of total debt securities at December 31, 1998. Following the downgrade, these securities were rated "Ba1" by Moody's and "BB+" by Standard & Poor's. The components of net investment income for the years ended December 31 were as follows:
1998 1997 1996 ------ ------ ------ (IN MILLIONS) Fixed-maturity securities................................... $ 985 $ 942 $ 918 Perpetual debentures........................................ 158 134 109 Equity securities........................................... 2 2 2 Mortgage loans and other.................................... 1 2 2 Short-term investments and cash equivalents................. 8 15 9 ------ ------ ------ Gross investment income................................ 1,154 1,095 1,040 Less investment expenses.................................... 16 17 18 ------ ------ ------ Net investment income.................................. $1,138 $1,078 $1,022 ====== ====== ======
At December 31, 1998, debt securities with a fair value of $12 million were on deposit with regulatory authorities. As of December 31, 1998, $54 million, at fair value, of AFLAC Japan's investment securities had been pledged to the Japan policyholder protection fund. The Company retains ownership of all securities on deposit and receives the related investment income. (4) FINANCIAL INSTRUMENTS Nonderivatives: The carrying amounts for cash and cash equivalents, receivables, accrued investment income, accounts payable and payables for security transactions approximated their fair values due to the short-term nature of these instruments. Consequently, such instruments are not included in the table presented in this note. F-30 116 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The methods of determining the fair values of our investments in debt and equity securities are described in Note 3. The fair values for mortgage loans and notes payable with fixed interest rates were estimated using discounted cash flow analyses based on current rates for similar loans and borrowings. We use short-term security lending arrangements in AFLAC Japan to increase investment income with minimal risk. At December 31, 1998 and 1997, AFLAC Japan had security loans outstanding of $3.0 billion at fair value. At December 31, 1998 and 1997, we held Japanese government bonds as collateral for these loaned securities. Prior to 1998, securities received as collateral for such loans were 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 are no longer included on the balance sheet under the accounting provisions of SFAS No. 125 (Note 1). The Company's security lending policy requires that the fair value of the securities received as collateral be 105% or more of the fair value of the loaned securities as of the date the securities are loaned and not less than 100% thereafter. Derivatives: We have only limited activity with derivative financial instruments and do not use them for trading purposes nor engage in leveraged derivative transactions. In addition, we do not use derivatives to hedge the foreign-currency-denominated net assets of our foreign insurance operations, except for short-term hedges of annual profit repatriations (none were outstanding at December 31, 1998 or 1997). See Note 1 for a description of our accounting policies for derivative financial instruments. See Note 2 for additional information on our yen-denominated net assets. We have outstanding interest rate swaps on 49.6 billion yen ($428 million) of our variable-interest-rate yen-denominated borrowings (Note 7). These swaps reduce the impact of changes in interest rates on our borrowing costs and effectively change our interest rate from variable to fixed. The interest rate swaps have notional principal amounts that equal the anticipated unpaid principal amounts on a portion of these loans. Under these agreements, the Company makes fixed-rate payments at 2.29% on one loan and 1.24% on another loan and receives floating-rate payments (.75% at December 31, 1998, plus loan costs of 25 or 20 basis points, respectively) based on the three-month Tokyo Interbank Offered Rate. The fair value of interest rate swaps is the estimated amount that we would receive or pay to terminate the swap agreements at the reporting date. We are exposed to nominal credit risk in the event of nonperformance by counterparties to these interest rate swap agreements. The counterparties are primarily Japanese banks with the following credit ratings as of December 31, 1998.
COUNTERPARTY CREDIT RATING NOTIONAL AMOUNT ------------- --------------- (IN MILLIONS) AA...................................... $ 39 A....................................... 106 BBB..................................... 283 ---- Total......................... $428 ====
F-31 117 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The carrying values and estimated fair values of the Company's financial instruments as of December 31 were as follows:
1998 1997 ------------------ ------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------- (IN MILLIONS) ASSETS: Fixed-maturity securities.......................... $21,607 $21,351 $19,007 $19,007 Perpetual debentures............................... 4,817 4,454 3,431 3,431 Equity securities.................................. 177 177 146 146 Mortgage loans..................................... 6 8 14 17 Policy loans....................................... 1 1 1 1 Securities held as collateral for loaned securities....................................... * 3,101 3,034 3,034 LIABILITIES: Notes payable (excluding capitalized leases)....... 578 578 505 505 Derivatives -- interest rate swaps................. * 7 * 8 Payables for return of collateral on loaned securities....................................... * 3,101 3,034 3,034
- --------------- * Off-balance sheet financial instrument (5) PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31:
1998 1997 ---- ---- (IN MILLIONS) Land..................................................... $131 $111 Buildings................................................ 335 290 Equipment................................................ 159 147 ---- ---- 625 548 Less accumulated depreciation............................ 198 162 ---- ---- Net property and equipment.......................... $427 $386 ==== ====
F-32 118 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) POLICY LIABILITIES The liability for future policy benefits at December 31 consisted of the following:
LIABILITY AMOUNTS INTEREST RATES -------------------- ---------------------- POLICY YEAR ISSUE OF IN 20 YEAR 1998 1997 ISSUE YEARS ------- ------- ------- -------- -------- (IN MILLIONS) Health insurance: Japan........................ 1997-98 $ 409 $ 97 3.5% 3.5% 1995-96 111 67 4.0 4.0 1994-96 1,763 1,226 4.5 4.5 1990-94 9,392 7,595 5.5 5.5 1988-91 711 597 5.25 5.25 1987-88 1,238 1,043 5.5 5.5 1985-86 1,051 893 6.75 5.5 1978-84 2,757 2,391 6.5 5.5 1974-79 698 616 7.0 5.0 U.S.......................... 1988-98 705 590 8.0 6.0 1986-98 542 489 6.0 6.0 1985-86 26 26 6.5 6.5 1981-86 258 261 7.0 5.5 Other 156 158 Other foreign................ -- 41 Life insurance: Japan........................ 1997-98 114 28 3.5 3.5 1994-96 373 215 4.0 4.0 1988-93 652 489 5.25 5.25 1987-88 136 104 5.5 5.5 1985-87 210 172 5.65 5.65 U.S.......................... 1956-98 31 29 4.0-6.0 4.0-6.0 Adjustment for unrealized gains on investments (Note 3)............ 885 1,272 ------- ------- Total................... $22,218 $18,399 ======= =======
The weighted-average interest rates reflected in the Consolidated Statements of Earnings for future policy benefits for Japanese policies were 5.4% in 1998, and 5.5% in both 1997 and 1996; and for U.S. policies, 6.4% for each year in the three-year period ended December 31, 1998. Changes in the liability for unpaid policy claims are summarized as follows for the years ended December 31:
1998 1997 1996 ------ ------ ------ (IN MILLIONS) Unpaid supplemental health claims -- beginning of year...... $ 987 $1,025 $1,011 ------ ------ ------ Add claims incurred during the year related to: Current year............................................ 2,460 2,346 2,366 Prior years............................................. (136) (159) (156) ------ ------ ------ Total incurred..................................... 2,324 2,187 2,210 ------ ------ ------ Less claims paid during the year: On claims incurred during current year.................. 1,579 1,507 1,471 On claims incurred during prior years................... 617 626 617 ------ ------ ------ Total paid......................................... 2,196 2,133 2,088 ------ ------ ------ Effect of foreign exchange rate changes on unpaid claims.... 107 (92) (108) ------ ------ ------ Unpaid supplemental health claims -- end of year............ 1,222 987 1,025 Unpaid life claims -- end of year........................... 41 24 14 ------ ------ ------ Total liability for unpaid policy claims........... $1,263 $1,011 $1,039 ====== ====== ======
F-33 119 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amounts shown for prior-year claims incurred during the year primarily result from actual claim settlements at less than the original estimates. (7) NOTES PAYABLE A summary of notes payable at December 31 follows:
1998 1997 ----- ----- (IN MILLIONS) Unsecured, yen-denominated notes payable to banks: Reducing, revolving credit agreement, due annually through July 2001: 2.29% fixed interest rate......................... $294 $349 Variable interest rate (.95% at December 31, 1998)........................................... 35 -- Revolving credit agreement due November 2002: 1.24% fixed interest rate......................... 134 149 Variable interest rate (.90% at December 31, 1998)........................................... 115 -- Obligations under capitalized leases, due monthly through 2003, secured by computer equipment in Japan.............. 18 18 Other....................................................... -- 7 ---- ---- Total notes payable............................... $596 $523 ==== ====
The Company has a reducing revolving credit agreement that provides for bank borrowings through July 2001 in either U.S. dollars or Japanese yen. The current borrowing limit is $325 million. Under the terms of the agreement, the borrowing limit will reduce to $250 million on July 15, 1999, and $125 million on July 15, 2000. At December 31, 1998, 34.1 billion yen ($294 million) was outstanding at a fixed interest rate and 4.0 billion yen ($35 million) was outstanding at a variable interest rate under this agreement. We also have an unsecured revolving credit agreement that provides for bank borrowings through November 2002 with a borrowing limit of $250 million, payable in either Japanese yen or U.S. dollars. At December 31, 1998, 15.5 billion yen ($134 million) was outstanding at a fixed interest rate and 13.3 billion yen ($115 million) was outstanding at a variable interest rate under this agreement. The principal amount of the loans at any date will fluctuate due to changes in the yen-to-dollar foreign currency exchange rate. Since most of these loans are with Japanese banks, we also incur the premium that Japanese banks are charged for short-term money, commonly referred to as the "Japan premium." Interest rate swaps related to the 2.29% and 1.24% (fixed rates after swaps) loans are described in Note 4. The aggregate contractual maturities of notes payable during each of the years after December 31, 1998, are: 1999, $86 million; 2000, $130 million; 2001, $128 million; and 2002, $252 million. We were in compliance with all of the covenants of the credit agreements at December 31, 1998. F-34 120 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) INCOME TAXES The income tax effects of the temporary differences that give rise to deferred income tax assets and liabilities as of December 31 were as follows:
1998 1997 ------ ------ (IN MILLIONS) Deferred income tax liabilities: Deferred acquisition costs............................. $1,023 $ 975 Unrealized gains on investment securities.............. 461 1,332 Other basis differences in investment securities....... 792 -- Difference in tax basis of investment in AFLAC Japan... -- 86 Premiums receivable.................................... 67 73 ------ ------ Total deferred income tax liabilities............. 2,343 2,466 ------ ------ Deferred income tax assets: Other basis differences in investment securities....... -- 153 Difference in tax basis of investment in AFLAC Japan... 61 -- Foreign tax credit carryforwards....................... -- 64 Policy benefit reserves................................ 440 498 Policyholder protection fund........................... 49 18 Unfunded retirement benefits........................... 71 72 Other accrued expenses................................. 33 63 Other.................................................. 223 119 ------ ------ Total gross deferred tax assets................... 877 987 Less valuation allowance............................... 79 123 ------ ------ Total deferred income tax assets.................. 798 864 ------ ------ Net deferred income tax liability............ 1,545 1,602 Current income tax liability................. 320 225 ------ ------ Total income tax liability................... $1,865 $1,827 ====== ======
A valuation allowance is provided when it is more likely than not that deferred tax assets will not be realized. We have established valuation allowances primarily for foreign tax credit and non-insurance loss carryforwards that exceed projected future offsets. Only 35% of non-insurance losses can be offset against life insurance taxable income each year. During 1998, the valuation allowance for deferred tax assets decreased by $44 million (decreased by $40 million in 1997) due to changes in carryforwards of foreign tax credits and non-insurance losses for U.S. federal income tax purposes. No foreign tax credit carryforwards remained at December 31, 1998. Alternative minimum tax credit carryforwards of approximately $10 million are available at December 31, 1998. F-35 121 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of income tax expense (benefit) applicable to pretax earnings for the years ended December 31 were as follows:
JAPAN U.S. TOTAL ----- ----- ----- (IN MILLIONS) 1998: Current................................................ $ 252 $ 25 $ 277 Deferred -- operations................................. (88) (4) (92) Deferred tax benefit from Japanese tax rate reduction............................................ (121) -- (121) ----- ----- ----- Total............................................. $ 43 $ 21 $ 64 ===== ===== ===== 1997: Current................................................ $ 203 $ 89 $ 292 Deferred -- operations................................. (6) (6) (12) ----- ----- ----- Total............................................. $ 197 $ 83 $ 280 ===== ===== ===== 1996: Current................................................ $ 207 $ 33 $ 240 Deferred -- operations................................. 14 2 16 ----- ----- ----- Total............................................. $ 221 $ 35 $ 256 ===== ===== =====
Income tax expense in the accompanying consolidated financial statements varies from the amount computed by applying the expected U.S. tax rate of 35% to pretax earnings. The principal reasons for the differences and the related tax effects for the years ended December 31 are summarized as follows:
1998 1997 1996 ----- ----- ----- (IN MILLIONS) Income taxes based on U.S statutory rates................... $ 193 $ 303 $ 228 Deferred tax benefit from Japanese tax rate reduction....... (121) -- -- U.S. alternative minimum tax................................ 12 50 26 Utilization of foreign tax credits.......................... (47) (91) (11) Non-insurance losses generating no current tax benefit...... 9 -- 12 Other, net.................................................. 18 18 1 ----- ----- ----- Income tax expense..................................... $ 64 $ 280 $ 256 ===== ===== =====
Income taxes are recorded in the Statements of Earnings and directly in certain shareholders' equity accounts. Income tax expense (benefit) for the years ended December 31 was allocated as follows:
1998 1997 1996 ----- ----- ----- (IN MILLIONS) Statements of Earnings...................................... $ 64 $ 280 $ 256 ----- ----- ----- Other comprehensive income: Change in unrealized foreign currency translation gains on AFLAC Japan's dollar-denominated securities....... (29) -- -- Unrealized gains on investment securities: Unrealized holding gains (losses) arising during the year........................................ 129 688 (113) Reclassification adjustment for realized (gains) losses included in net earnings................. (2) 4 (4) ----- ----- ----- Total income taxes allocated to other comprehensive income....................... 98 692 (117) ----- ----- ----- Additional paid-in capital (exercise of stock options)...... (1) (1) -- ----- ----- ----- Total income taxes........................... $ 161 $ 971 $ 139 ===== ===== =====
F-36 122 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Effective January 1, 1998, the Japanese government changed the income tax provisions for foreign companies operating in Japan, increasing income taxes on investment income and realized gains/losses from securities issued by entities located in their home country. This change increases Japanese income taxes on the income from most of AFLAC Japan's dollar-denominated securities. In addition, in March 1998, the Japanese government enacted a reduction in the Japanese corporate income tax rate. The statutory rate for AFLAC Japan declined from 45.3% to 41.7% beginning May 1, 1998. The net effect of these two Japanese tax changes increased income tax expense on consolidated operating earnings by approximately $10 million for the year ended December 31, 1998 (an increase of approximately $22 million from increased taxes on AFLAC Japan's dollar- denominated investment income, less approximately $12 million from the benefit of the statutory tax rate reduction). The Japanese tax rate reduction also increased 1998 net earnings by $121 million ($.46 per basic share, $.44 per diluted share) from the reduction of AFLAC Japan's deferred tax liability as of March 31, 1998, the date of enactment of the reduced tax rate. The deferred tax reduction represented the effect of recalculating Japanese deferred income taxes at the new 41.7% rate on the temporary differences between the financial reporting basis and the Japanese income tax basis of AFLAC Japan's assets and liabilities. The Japanese income tax change in 1998, relating to the income on AFLAC Japan's dollar-denominated securities issued by U.S. entities, also impacted income tax expense for the two other-comprehensive-income components for the year ended December 31, 1998. Deferred income tax expense on unrealized gains (losses) for 1998 on debt securities includes $76 million for AFLAC Japan's dollar-denominated securities, of which $59 million related to accumulated unrealized gains existing as of January 1, 1998, the effective date of the tax law change. The deferred income tax benefits of $29 million on changes in unrealized foreign currency translation gains for 1998 represents Japanese income taxes on currency translation gains that arise for Japanese tax purposes from conversion of AFLAC Japan's dollar-denominated investments into yen. This tax benefit is net of a deferred income tax expense of $51 million on accumulated currency translation gains existing as of January 1, 1998. In late 1998, the Japanese government proposed a further reduction in the Japanese income tax rate. The proposal would reduce AFLAC Japan's income tax rate from 41.7% to 36.2% effective April 1, 1999. The proposal is expected to be finalized in early 1999. Such tax rate reduction is not expected to reduce AFLAC's future consolidated income tax expense. Instead, it will largely result in a shift of income tax expense from Japan to the United States as a result of the U.S. foreign tax credit provisions. (9) SHAREHOLDERS' EQUITY On May 4, 1998, the board of directors declared a two-for-one stock split. This split was payable to shareholders of record as of May 22, 1998, and the additional shares were issued on June 8, 1998. All share and per-share amounts in the accompanying financial statements have been restated for this split. F-37 123 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a reconciliation of the number of shares of the Company's common stock for the years ended December 31:
1998 1997 1996 ------- ------- ------- (IN THOUSANDS OF SHARES) Common stock -- issued: Balance at beginning of year........................ 316,380 314,478 312,716 Exercise of stock options........................... 1,591 1,902 1,762 ------- ------- ------- Balance at end of year.............................. 317,971 316,380 314,478 ------- ------- ------- Treasury stock: Balance at beginning of year........................ 49,944 38,708 28,767 Purchases of treasury stock: Open market.................................... 3,806 12,737 11,849 Received from employees for taxes on stock option exercises............................. 212 390 280 Shares issued to sales associates stock bonus plan and dividend reinvestment plan.................... (1,218) (1,526) (1,874) Exercise of stock options........................... (457) (365) (314) ------- ------- ------- Balance at end of year.............................. 52,287 49,944 38,708 ------- ------- ------- Shares outstanding at end of year........................ 265,684 266,436 275,770 ======= ======= =======
Share Repurchase Program: Since the inception of the share repurchase program in February 1994, we have purchased 57.4 million shares. Approximately 7.4 million shares are still available for purchase under current authorizations. Stock Options: The Company's stock option plan allows grants for both incentive stock options (ISO) and non-qualifying stock options (NQSO) to employees and NQSO to members of the board of directors. The option period runs for a maximum of 10 years. The exercise price must be equal to 100% of the fair market value at the date of grant; therefore, no compensation expense is recognized. The options are exercisable immediately unless they are placed under a vesting schedule that is determined by the compensation committee of the board of directors at the time of the grant. At December 31, 1998, 10.6 million shares were available for future grants. F-38 124 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes stock option activity:
WEIGHTED-AVERAGE OPTION EXERCISE PRICE SHARES PER SHARE ------ ---------------- (IN THOUSANDS OF SHARES) Outstanding at December 31, 1995............................ 16,403 $ 7.31 Granted................................................ 3,660 16.40 Canceled............................................... (128) 12.60 Exercised.............................................. (2,333) 5.28 ------ Outstanding at December 31, 1996............................ 17,602 9.43 Granted................................................ 1,451 26.73 Canceled............................................... (40) 15.44 Exercised.............................................. (2,542) 5.78 ------ Outstanding at December 31, 1997............................ 16,471 11.50 Granted................................................ 1,953 30.18 Canceled............................................... (31) 23.74 Exercised.............................................. (2,148) 6.92 ------ Outstanding at December 31, 1998............................ 16,245 14.33 ======
1998 1997 1996 ------ ------ ------ (IN THOUSANDS OF SHARES) Shares exercisable at end of year........................... 12,946 13,256 13,551 ====== ====== ======
The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- ----------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE - --------------- ----------- ----------- --------- ----------- --------- (IN THOUSANDS OF SHARES) $ 1.87 - $ 3.67 912 1.3 $ 2.21 912 $ 2.21 3.73 - 8.07 1,823 2.1 5.34 1,823 5.34 9.42 5,188 4.5 9.42 5,188 9.42 9.60 - 14.10 1,518 5.9 12.57 1,512 12.56 15.83 2,586 7.1 15.83 1,691 15.83 16.97 - 27.69 2,280 8.3 23.54 1,532 23.53 30.09 - 38.00 1,938 9.5 30.18 288 30.12 ------ ------ 1.87 - 38.00 16,245 5.7 14.33 12,946 11.67 ====== ======
As permitted by SFAS No. 123, we do not recognize compensation cost in the Consolidated Statements of Earnings for employee stock options. Had compensation cost for stock options granted after 1994 been determined using the fair-value-based method, as described in SFAS No. 123, the F-39 125 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) effect on our net earnings and net earnings per share would approximate the following pro forma amounts:
1998 1997 1996 ---- ---- ---- Decrease to: Net earnings (in millions)........................... $ 13 $ 12 $ 8 Net earnings per share -- basic...................... .05 .04 .03 Net earnings per share -- diluted.................... .05 .04 .03
The fair value of each option granted after 1994 was estimated on the date of grant using the Black-Scholes multiple option approach with the following assumptions for options granted during the three-year period ended December 31, 1998:
1998 1997 1996 ------- ------- ------- Expected life from vesting date (years)........... 3.5-4.4 3.4-6.1 3.7-6.1 Dividend yield.................................... .6% 1.0% 1.0% Expected volatility............................... 27.3% 20.2% 19.3% Risk-free interest rate........................... 5.5% 6.0% 7.0%
The pro forma information presented above is not indicative of future amounts. The provisions of SFAS No. 123 were applicable prospectively, and the above pro forma disclosures therefore do not include amortization of the fair value of awards prior to 1995. Also, we expect that additional options will be granted in future years. Voting Rights: In accordance with the Parent Company's Articles of Incorporation, shares of common stock are generally entitled to one vote per share until they have been held by the same beneficial owner for a continuous period of 48 months, at which time they become entitled to 10 votes per share. (10) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS Net assets of the insurance subsidiaries aggregated $4.6 billion at December 31, 1998, on a GAAP basis. AFLAC Japan accounted for $2.7 billion, or 59.4%, of these net assets. Our insurance subsidiaries are required to report their results of operations and financial position to state insurance regulatory authorities, and in the case of AFLAC Japan, to the Japanese Financial Supervisory Agency, on the basis of statutory accounting practices prescribed or permitted by such authorities. As determined on a U.S. statutory accounting basis, AFLAC's net income was $231 million in 1998, $335 million in 1997 and $257 million in 1996, and capital and surplus was $1.6 billion and $1.8 billion at December 31, 1998 and 1997, respectively. F-40 126 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reconciliations of AFLAC's net assets on a GAAP basis to net assets determined on a U.S. statutory accounting basis as of December 31 were as follows:
1998 1997 ------ ------ (IN MILLIONS) Net assets on GAAP basis.................................... $4,591 $4,175 Adjustment of debt securities from fair value to amortized cost...................................................... (3,094) (3,316) Elimination of deferred policy acquisition costs............ (3,059) (2,577) Adjustment to policy liabilities............................ 1,788 2,111 Elimination of deferred income taxes........................ 1,578 1,642 Reduction in premiums receivable............................ (77) (84) Establishment of asset valuation reserve.................... (147) (117) Elimination of statutory non-admitted assets................ (110) (84) Difference in foreign currency translation adjustment....... (73) 68 Difference in accrued expenses.............................. 139 24 Other, net.................................................. 112 (71) ------ ------ Net assets on U.S. statutory accounting basis.......... $1,648 $1,771 ====== ======
The Parent Company depends on its subsidiaries for cash flow, primarily in the form of dividends and management fees. Consolidated retained earnings in the accompanying financial statements largely represent undistributed earnings of the insurance subsidiaries. Dividends, management fees (see Note 2) and other payments to the Parent Company by its insurance subsidiary are subject to various regulatory restrictions and approvals related to safeguarding the interests of insurance policyholders. One of the primary considerations is that the insurance subsidiary must maintain adequate risk-based capital. Also, the maximum amount of dividends that can be paid to shareholders by insurance companies domiciled in the State of Georgia without prior approval of the Commissioner of Insurance is the greater of the net gain from operations for the previous year determined under statutory accounting principles or 10% of statutory equity as of the previous year-end. Dividend payments by AFLAC during 1999 in excess of $213 million would require such approval. Dividends paid by AFLAC during 1998 were $172 million. A portion of AFLAC Japan annual earnings, as determined on a Japanese statutory accounting basis, can be remitted each year to AFLAC U.S. after complying with risk-based capital provisions and satisfying various conditions imposed by Japanese regulatory authorities for protecting policyholders. Profit remittances to the United States can fluctuate due to changes in the amounts of Japanese regulatory earnings. Among other items, factors affecting regulatory earnings include Japanese regulatory accounting practices and fluctuations in currency translations of AFLAC Japan's U.S. dollar-denominated investments into yen. Earnings were remitted from AFLAC Japan to AFLAC U.S. in the amount of $154 million in 1998, $347 million in 1997 and $217 million in 1996. Net assets (unaudited) of AFLAC Japan, based on Japanese statutory accounting practices, aggregated $397 million and $400 million at December 31, 1998 and 1997, respectively. Japanese statutory accounting practices differ in many respects from U.S. GAAP. Under Japanese statutory accounting practices, policy acquisition costs are charged off immediately, policy benefit and claim reserving methods are different, deferred income tax liabilities are not recognized, and investment securities are carried at cost less certain market value adjustments. F-41 127 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (11) BENEFIT PLANS Reconciliations of the funded status of the basic employee defined benefit pension plans with amounts recognized in the accompanying consolidated balance sheets as of December 31 were as follows:
1998 1997 ------------------- ----------------- JAPAN U.S. JAPAN U.S. -------- -------- ------- ------- (IN THOUSANDS) Projected benefit obligation: Benefit obligation at beginning of year................................... $ 25,627 $ 50,465 $24,651 $45,492 Service cost............................. 2,188 2,362 2,224 2,450 Interest cost............................ 973 3,491 982 3,132 Actuarial loss........................... 10,190 5,559 1,233 3,652 Benefits paid............................ (439) (1,457) (540) (800) Effect of foreign exchange rate changes................................ 4,884 -- (2,923) -- Other: termination of subsidiary plan.... -- -- -- (3,461) -------- -------- ------- ------- Benefit obligation at end of year... 43,423 60,420 25,627 50,465 -------- -------- ------- ------- Plan assets: Fair value of plan assets at beginning of year................................... 18,547 45,530 18,445 37,574 Actual return on plan assets............. 465 2,878 301 7,166 Employer contribution.................... 2,260 1,590 2,480 1,590 Benefits paid............................ (439) (1,457) (540) (800) Effect of foreign exchange rate changes................................ 2,608 -- (2,139) -- -------- -------- ------- ------- Fair value of plan assets at end of year.............................. 23,441 48,541 18,547 45,530 -------- -------- ------- ------- Funded status....................... (19,982) (11,879) (7,080) (4,935) Unrecognized net actuarial loss............... 12,144 10,308 1,160 3,539 Unrecognized transition obligation (asset).... 502 (840) 523 (961) Unrecognized prior service cost............... 972 165 932 182 -------- -------- ------- ------- (Accrued) prepaid benefit cost...... $ (6,364) $ (2,246) $(4,465) $(2,175) ======== ======== ======= =======
The components of retirement expense and actuarial assumptions for the years ended December 31 are as follows:
1998 1997 1996 --------------- --------------- --------------- JAPAN U.S. JAPAN U.S. JAPAN U.S. ------ ------ ------ ------ ------ ------ (IN THOUSANDS) Components of net periodic benefit cost: Service cost................... $2,188 $2,362 $2,224 $2,450 $2,169 $2,591 Interest cost.................. 973 3,491 982 3,132 1,031 3,142 Expected return on plan assets....................... (450) (4,086) (429) (3,366) (587) (2,911) Recognized net actuarial loss......................... -- -- -- 405 -- 491 Amortization of transition obligation (asset)........... 77 (122) 83 (122) 92 (122) Amortization of prior service cost......................... 67 16 72 (26) 80 (26) Net curtailment gain........... -- -- -- (377) -- -- ------ ------ ------ ------ ------ ------ Net periodic benefit cost...... $2,855 $1,661 $2,932 $2,096 $2,785 $3,165 ====== ====== ====== ====== ====== ====== Weighted-average actuarial assumptions as of fiscal year-end: Discount rate-net periodic benefit cost................. 4.0% 7.0% 4.0% 7.0% 4.0% 7.0% Discount rate-benefit obligations.................. 3.0 6.5 4.0 7.0 4.0 7.0 Expected return on plan assets....................... 2.5 9.0 2.5 9.0 2.5 9.0 Rate of compensation increase..................... 3.5 4.0 3.5 4.0 3.5 5.0
F-42 128 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition to the benefit obligations for funded employee plans, we also maintain unfunded supplemental retirement plans for certain officers and beneficiaries. The expense recognized for these plans was $31 million in 1998, $29 million in 1997 and $37 million in 1996. The accrued retirement liability for the unfunded supplemental retirement plans at December 31, 1998 and 1997, was $223 million and $195 million, respectively. The actuarial present value of projected benefit obligations was $226 million and $199 million at December 31, 1998 and 1997, respectively. The discount rates used were the same as for the funded plans. Such supplemental retirement plans include a lifetime obligation to the surviving spouse of the Company's former chairman of the board. Benefits are payable at .5% of the Company's pretax earnings, as defined in the agreement, for the previous year. Reconciliation of the benefit obligation of the unfunded retiree medical program and other postretirement benefits with amounts recognized in the accompanying consolidated balance sheets as of December 31 were as follows:
1998 1997 ------- ------- (IN THOUSANDS) Benefit obligation: Benefit obligation at beginning of year................ $10,062 $ 9,353 Service cost........................................... 320 313 Interest cost.......................................... 684 674 Actuarial loss......................................... 95 275 Benefits paid.......................................... (339) (553) ------- ------- Unfunded benefit obligation at end of year.................. 10,822 10,062 Unrecognized net actuarial gain............................. 1,032 1,157 ------- ------- Accrued (prepaid) benefit cost......................... $11,854 $11,219 ======= =======
The components of expenses for the retiree medical program and actuarial assumptions are as follows:
1998 1997 1996 ----- ----- ----- (IN THOUSANDS) Service cost................................................ $ 320 $ 313 $ 296 Interest cost............................................... 684 674 630 Recognized net actuarial loss (gain)........................ (30) (34) (41) ----- ----- ----- Net periodic benefit cost.............................. $ 974 $ 953 $ 885 ===== ===== ===== Discount rate: Net periodic cost...................................... 7.0% 7.0% 7.0% Benefit obligations.................................... 6.5 7.0 7.0 Effect of 1-percentage point increase in health care cost trend rate: On total of service and interest cost components....... $ 102 $ 93 $ 86 On postretirement benefit obligation................... 791 704 466 Effect of 1-percentage point decrease in health care cost trend rate: On total of service and interest cost components....... (97) (80) (75) On postretirement benefit obligation................... (743) (650) (425)
The projected health care cost trend rate used in 1998 was 10%, graded to 7% over three years. F-43 129 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock Bonus Plan: AFLAC U.S. maintains a stock bonus plan for eligible U.S. sales associates. Contributions to the plan, which are determined based on sales of insurance policies, are made by AFLAC U.S. to a trust and are used to purchase the Parent Company's common stock for later distribution to the participants. The vesting requirements are based on years of service. Any shares forfeited reduce future contributions of AFLAC U.S. The net costs of this plan, which are included in deferred policy acquisition costs, amounted to $10 million in both 1998 and 1997, and $9 million in 1996. (12) COMMITMENTS AND CONTINGENCIES Litigation: We are 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, we believe the outcome of the litigation still pending will not have a material adverse effect on our financial position. F-44 130 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $450,000,000 [AFIAC LOGO] EXCHANGE OFFER 6 1/2% SENIOR NOTES DUE 2009 ------------------------------------------------ PROSPECTUS ------------------------------------------------ __________, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 131 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Sections 14-2-850 through 14-2-859 of the Official Code of Georgia Annotated (the "OCGA") contain detailed provisions concerning the indemnification of directors, officers, employees, and agents against judgments, penalties, fines and amounts paid in settlement of litigation that they may incur in their capacity as such. Sections 14-2-850 through 14-2-859 of the OCGA, which are filed as Exhibit 99.1 to this Registration Statement, are incorporated herein by reference. Article VII of the Bylaws of the Registrant provides that the Registrant shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (including, but not limited to, any action, suit or proceeding by or in the right of the Registrant), whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, advisory director, officer, employee or agent of the Registrant as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and shall advance expenses to such person reasonably incurred in connection therewith, to the fullest extent permitted by the relevant provisions of the Georgia Business Corporation Code, as such law presently exists or hereafter may be amended. Furthermore, the Board of Directors may authorize the Registrant to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Registrant, or is or was serving at the request of the Registrant as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the Registrant would have the power to indemnify him against such liability under the provisions of Article VII of the Bylaws or the Georgia Business Corporation Code. The Articles of Incorporation of the Registrant provide that no director shall be personally liable to the Registrant 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 Registrant; (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 OCGA, or any amendment thereto or successor provision thereto; and (iv) for any transaction from which the director derived an improper personal benefit. The Company maintains a director's and officer's liability insurance policy that covers its directors and officers for certain claims and actions incurred in the course of their duties, including, under certain circumstances, alleged violations of the Securities Act. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES a. Exhibits
EXHIBIT NO. DOCUMENTS - ------- --------- 1.1 Purchase Agreement, dated April 16, 1999, among the Registrant, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette, First Union Capital Markets Corp., NationsBanc Montgomery Securities LLC and Salomon Smith Barney Inc.
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EXHIBIT NO. DOCUMENTS - ------- --------- 3.0 Articles of Incorporation, as amended -- incorporated by reference from Form 10-Q for March 31, 1997, Commission file number 1-7434, Accession No. 0000004977-97-000011, Exhibit 3.0; and Bylaws of the Company, as amended -- incorporated by reference from Form 10-Q for June 30, 1996, Commission file number 1-7434, Accession No. 0000004977-96-000012, Exhibit 3.0. 4.1 Registration Rights Agreement, dated April 21, 1999, among the Registrant, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette, First Union Capital Markets Corp., NationsBanc Montgomery Securities LLC and Salomon Smith Barney Inc. 4.2 Indenture, dated April 21, 1999, between the Registrant and The Bank of New York, as Trustee for the 6 1/2% Senior Notes due 2009. 5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP. 10.0 American Family Corporation Incentive Stock Option Plan (1982) -- incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1 American Family Corporation Stock Option Plan (1985) -- incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1.1 AFLAC Incorporated Amended 1985 Stock Option Plan -- incorporated by reference from 1994 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-94-000003, Exhibit A. 10.1.2 AFLAC Incorporated Amended 1985 Stock Option Plan, as amended August 8, 1995 -- incorporated by reference from Form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10. 10.2 American Family Corporation Retirement Plan for Senior Officers, as amended and restated October 1, 1989 -- incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.2. 10.3 AFLAC Incorporated Supplemental Executive Retirement Plan, as amended, effective January 1, 1998 -- incorporated by reference from 1998 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-99-000010, Exhibit 10.3. 10.4 AFLAC Incorporated Employment Agreement with Daniel P. Amos, dated August 1, 1993 -- incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.4. 10.5 American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995 -- incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.5. 10.6 AFLAC Incorporated Employment Agreement with Kriss Cloninger, III, dated February 14, 1992, and as amended November 12, 1993 -- incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.6. 10.7 American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995 -- incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.8. 10.8 American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994 -- incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.9.
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EXHIBIT NO. DOCUMENTS - ------- --------- 10.9 AFLAC Incorporated Employment Agreement with Paul S. Amos, dated August 1, 1995 -- incorporated by reference from Form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10.1. 10.10 AFLAC Incorporated Deferred Compensation Agreement with Paul S. Amos, dated July 15, 1997 -- incorporated by reference from 1997 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-98-000006, Exhibit 10.11. 10.11 AFLAC Incorporated 1997 Stock Option Plan, incorporated by reference from the 1997 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-97-000007, Appendix B. 10.12 AFLAC Incorporated Executive Deferred Compensation Plan, effective January 1, 1999 -- incorporated by reference from Form S-8 Registration Statement No. 333-69333, Accession No. 0000004977-98-00024, Exhibit 4. 10.13 AFLAC Incorporated Amended and Restated Management Incentive Plan, effective January 1, 1999 -- incorporated by reference from the 1999 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-99-000007, Exhibit A. 12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Registrant. 21.0 Subsidiaries -- incorporated by reference from 1998 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-99-000010, Exhibit 21.0. 23.1 Consent of KPMG LLP. 23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1). 24.1 Powers of Attorney (included in signature page to Registration Statement). 25.1 Statement of Eligibility and Qualification of Form T-1 of The Bank of New York, as Trustee under the Indenture relating to the Registrant's 6 1/2% Senior Notes due 2009. 99.1 Sections 14-2-850 through 14-2-859 of the Official Code of Georgia Annotated. 99.2 Form of Letter of Transmittal. 99.3 Form of Notice of Guaranteed Delivery. 99.4 Form of Letter to Brokers. 99.5 Form of Letter to Clients. 99.6 Guidelines for certification of taxpayer identification number on substitute Form W-9.
ITEM 22. UNDERTAKINGS (a) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 or this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (b) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (c) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 134 (d) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (e) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-4 135 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF COLUMBUS, STATE OF GEORGIA, ON MAY 13, 1999. AFLAC INCORPORATED By: /s/ PAUL S. AMOS ------------------------------------ Paul S. Amos Chairman of the Board of Directors POWER OF ATTORNEY EACH PERSON WHOSE SIGNATURE APPEARS BELOW ON THIS REGISTRATION STATEMENT HEREBY CONSTITUTES AND APPOINTS DANIEL P. AMOS AND E. STEPHEN PURDOM, AND EACH OF THEM, WITH FULL POWER TO ACT WITHOUT THE OTHER, HIS OR HER TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM OR HER AND IN HIS OR HER NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES (UNLESS REVOKED IN WRITING) TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS THERETO) TO THIS REGISTRATION STATEMENT TO WHICH THIS POWER OF ATTORNEY IS ATTACHED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING TO SUCH ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN CONNECTION THEREWITH, AS FULLY AS TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SUCH ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE THEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DANIEL P. AMOS Chief Executive Officer, President May 13, 1999 - --------------------------------------------------- and Vice Chairman of the Daniel P. Amos Board of Directors /s/ KRISS CLONINGER III Executive Vice President, Chief May 13, 1999 - --------------------------------------------------- Financial Officer and Treasurer Kriss Cloninger III /s/ NORMAN P. FOSTER Executive Vice President, May 13, 1999 - --------------------------------------------------- Corporate Finance Norman P. Foster Director May 13, 1999 - --------------------------------------------------- J. Shelby Amos, II /s/ MICHAEL H. ARMACOST Director May 13, 1999 - --------------------------------------------------- Michael H. Armacost Director May 13, 1999 - --------------------------------------------------- M. Delmar Edwards, M.D. /s/ JOE FRANK HARRIS Director May 13, 1999 - --------------------------------------------------- Joe Frank Harris /s/ ELIZABETH J. HUDSON Director May 13, 1999 - --------------------------------------------------- Elizabeth J. Hudson
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SIGNATURE TITLE DATE --------- ----- ---- /s/ KENNETH S. JANKE, SR. Director May 13, 1999 - --------------------------------------------------- Kenneth S. Janke, Sr. /s/ CHARLES B. KNAPP Director May 13, 1999 - --------------------------------------------------- Charles B. Knapp /s/ HISAO KOBAYASHI Director May 13, 1999 - --------------------------------------------------- Hisao Kobayashi /s/ YOSHIKI OTAKE Director May 13, 1999 - --------------------------------------------------- Yoshiki Otake Director May 13, 1999 - --------------------------------------------------- E. Stephen Purdom /s/ BARBARA K. RIMER Director May 13, 1999 - --------------------------------------------------- Barbara K. Rimer /s/ HENRY C. SCHWOB Director May 13, 1999 - --------------------------------------------------- Henry C. Schwob /s/ J. KYLE SPENCER Director May 13, 1999 - --------------------------------------------------- J. Kyle Spencer Director May 13, 1999 - --------------------------------------------------- Glenn Vaughn, Jr. Director May 13, 1999 - --------------------------------------------------- Robert L. Wright
II-6 137 EXHIBIT INDEX
EXHIBIT NO. DOCUMENTS - ------- --------- 1.1 Purchase Agreement, dated April 16, 1999, among the Registrant, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette, First Union Capital Markets Corp., NationsBanc Montgomery Securities LLC and Salomon Smith Barney Inc. 3.0 Articles of Incorporation, as amended -- incorporated by reference from Form 10-Q for March 31, 1997, Commission file number 1-7434, Accession No. 0000004977-97-000011, Exhibit 3.0; and Bylaws of the Company, as amended -- incorporated by reference from Form 10-Q for June 30, 1996, Commission file number 1-7434, Accession No. 0000004977-96-000012, Exhibit 3.0. 4.1 Registration Rights Agreement, dated April 21, 1999, among the Registrant, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette, First Union Capital Markets Corp., NationsBanc Montgomery Securities LLC and Salomon Smith Barney Inc. 4.2 Indenture, dated April 21, 1999, between the Registrant and The Bank of New York, as Trustee for the 6 1/2% Senior Notes due 2009. 5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP. 10.0 American Family Corporation Incentive Stock Option Plan (1982) -- incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1 American Family Corporation Stock Option Plan (1985) -- incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1.1 AFLAC Incorporated Amended 1985 Stock Option Plan -- incorporated by reference from 1994 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-94-000003, Exhibit A. 10.1.2 AFLAC Incorporated Amended 1985 Stock Option Plan, as amended August 8, 1995 -- incorporated by reference from Form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10. 10.2 American Family Corporation Retirement Plan for Senior Officers, as amended and restated October 1, 1989 -- incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.2. 10.3 AFLAC Incorporated Supplemental Executive Retirement Plan, as amended, effective January 1, 1998 -- incorporated by reference from 1998 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-99-000010, Exhibit 10.3. 10.4 AFLAC Incorporated Employment Agreement with Daniel P. Amos, dated August 1, 1993 -- incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.4. 10.5 American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995 -- incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.5. 10.6 AFLAC Incorporated Employment Agreement with Kriss Cloninger, III, dated February 14, 1992, and as amended November 12, 1993 -- incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.6. 10.7 American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995 -- incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.8.
138
EXHIBIT NO. DOCUMENTS - ------- --------- 10.8 American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994 -- incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.9. 10.9 AFLAC Incorporated Employment Agreement with Paul S. Amos, dated August 1, 1995 -- incorporated by reference from Form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10.1. 10.10 AFLAC Incorporated Deferred Compensation Agreement with Paul S. Amos, dated July 15, 1997 -- incorporated by reference from 1997 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-98-000006, Exhibit 10.11. 10.11 AFLAC Incorporated 1997 Stock Option Plan, incorporated by reference from the 1997 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-97-000007, Appendix B. 10.12 AFLAC Incorporated Executive Deferred Compensation Plan, effective January 1, 1999 -- incorporated by reference from Form S-8 Registration Statement No. 333-69333, Accession No. 0000004977-98-00024, Exhibit 4. 10.13 AFLAC Incorporated Amended and Restated Management Incentive Plan, effective January 1, 1999 -- incorporated by reference from the 1999 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-99-000007, Exhibit A. 12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Registrant. 21.0 Subsidiaries -- incorporated by reference from 1998 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-99-000010, Exhibit 21.0. 23.1 Consent of KPMG LLP. 23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1). 24.1 Powers of Attorney (included in signature page to Registration Statement). 25.1 Statement of Eligibility and Qualification of Form T-1 of The Bank of New York, as Trustee under the Indenture relating to the Registrant's 6 1/2% Senior Notes due 2009. 99.1 Sections 14-2-850 through 14-2-859 of the Official Code of Georgia Annotated. 99.2 Form of Letter of Transmittal. 99.3 Form of Notice of Guaranteed Delivery. 99.4 Form of Letter to Brokers. 99.5 Form of Letter to Clients. 99.6 Guidelines for certification of taxpayer identification number on substitute Form W-9.
EX-1.1 2 PURCHASE AGREEMENT AMONG REGISTRANT 1 EXHIBIT 1.1 $450,000,000 AFLAC INCORPORATED (a Georgia corporation) PURCHASE AGREEMENT April 16, 1999 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated as Representative of the several Initial Purchasers North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: AFLAC Incorporated, a Georgia corporation (the "Company") confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other Initial Purchasers named in Schedule A hereto (collectively, the "Initial Purchasers," which term shall also include any initial purchaser substituted as hereinafter provided in Section 11 hereof), for whom Merrill Lynch is acting as representative (in such capacity, the "Representative"), with respect to the issue and sale by the Company and the purchase by the Initial Purchasers, acting severally and not jointly, of the respective principal amounts set forth in said Schedule A of $450,000,000.00 aggregate principal amount of the Company's Senior Notes due 2009 (the "Securities"). The Securities are to be issued pursuant to an indenture dated as of April 21, 1999 (the "Indenture") between the Company and The Bank of New York, as trustee (the "Trustee"). Securities issued in book-entry form will be issued to Cede & Co. as nominee of The Depository Trust Company ("DTC") pursuant to a letter agreement, to be dated as of the Closing Time (as defined in Section 2(b)) (the "DTC Agreement"), among the Company, the Trustee and DTC. The Company and the Initial Purchasers will also enter into a registration rights agreement, dated as of April 21, 1999 (the "Registration Rights Agreement"). The Company understands that the Initial Purchasers propose to make an offering of the Securities on the terms and in the manner set forth herein and agrees that the Initial Purchasers may resell, subject to the conditions set forth herein, all or a portion of the Securities to purchasers 2 ("Subsequent Purchasers") at any time after the date of this Agreement. The Securities are to be offered and sold through the Initial Purchasers without being registered under the Securities Act of 1933, as amended (the "1933 Act"), in reliance upon exemptions therefrom. Pursuant to the terms of the Securities and the Indenture, investors that acquire Securities may only resell or otherwise transfer such Securities if such Securities are hereafter registered under the 1933 Act or if an exemption from the registration requirements of the 1933 Act is available (including the exemption afforded by Rule 144A ("Rule 144A") or Regulation S ("Regulation S") of the rules and regulations promulgated under the 1933 Act by the Securities and Exchange Commission (the "Commission")). The Company has prepared and delivered to each Initial Purchaser copies of a preliminary offering memorandum dated April 9, 1999 (the "Preliminary Offering Memorandum") and has prepared and will deliver to each Initial Purchaser, on the date hereof or the next succeeding day, copies of a final offering memorandum dated April 16, 1999 (the "Final Offering Memorandum"), each for use by such Initial Purchaser in connection with its solicitation of purchases of, or offering of, the Securities. "Offering Memorandum" means, with respect to any date or time referred to in this Agreement, the most recent offering memorandum (whether the Preliminary Offering Memorandum or the Final Offering Memorandum, or any amendment or supplement to either such document), including exhibits thereto and any documents incorporated therein by reference, which has been prepared and delivered by the Company to the Initial Purchasers in connection with their solicitation of purchases of, or offering of, the Securities. All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Offering Memorandum (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which are incorporated by reference in the Offering Memorandum; and all references in this Agreement to amendments or supplements to the Offering Memorandum shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934, as amended (the "1934 Act"), which is incorporated by reference in the Offering Memorandum. SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company. The Company represents and warrants to each Initial Purchaser as of the date hereof and as of the Closing Time referred to in Section 2(b) hereof, and agrees with each Initial Purchaser, as follows: (i) Similar Offerings. The Company has not, directly or indirectly, solicited any offer to buy or offered to sell, and will not, directly or indirectly, solicit any offer to buy or offer to sell, in the United States or to any United States citizen or resident, any security which is or would be integrated with the sale of the Securities in a manner that would require the Securities to be registered under the 1933 Act. (ii) Offering Memorandum. The Offering Memorandum does not, and at the Closing Time will not, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the 2 3 circumstances under which they were made, not misleading; provided, that this representation, warranty and agreement shall not apply to statements in or omissions from the Offering Memorandum, or any amendment or supplement thereto, made in reliance upon and in conformity with information furnished to the Company in writing by any Initial Purchaser through the Representative expressly for use in the Offering Memorandum. (iii) Incorporated Documents. The Offering Memorandum as delivered from time to time shall incorporate by reference the most recent Annual Report of the Company on Form 10-K filed with the Commission and each Quarterly Report of the Company on Form 10-Q and each Current Report of the Company on Form 8-K filed with the Commission since the filing of the end of the fiscal year to which such Annual Report relates. The documents incorporated or deemed to be incorporated by reference in the Offering Memorandum at the time they were or hereafter are filed with the Commission complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, when read together with the other information in the Offering Memorandum, at the date of the Offering Memorandum and at the Closing Time, do not and will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (iv) Independent Accountants. The accountants who certified the financial statements and supporting schedules included in the Offering Memorandum are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of Regulation S-X under the 1933 Act. (v) Financial Statements. The financial statements, together with the related schedules and notes, included in the Offering Memorandum present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis, except for changes in accounting methods required by FASB, AICPA or the Commission, throughout the periods involved. The supporting schedules, if any, included in the Offering Memorandum present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Offering Memorandum present fairly, in all material respects, the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Offering Memorandum. (vi) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Offering Memorandum, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries 3 4 considered as one enterprise (a "Material Adverse Effect"), whether or not arising in the ordinary course of business, (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) except for regular quarterly dividends on the common stock, par value $.10 per share, of the Company in amounts per share that are consistent with past practice, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (vii) Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Georgia and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (viii) Good Standing of Designated Subsidiaries. Each "significant subsidiary" of the Company (as such term is defined in Rule 1-02 of Regulation S-X) (each a "Designated Subsidiary" and, collectively, the "Designated Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Offering Memorandum, all of the issued and outstanding capital stock of each Designated Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of the Designated Subsidiaries was issued in violation of any preemptive or similar rights arising by operation of law, or under the charter or by-laws of any Designated Subsidiary or under any agreement to which the Company or any Designated Subsidiary is a party. The subsidiaries of the Company other than Designated Subsidiaries, considered in the aggregate as a single subsidiary, do not constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X. (ix) Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth in the Offering Memorandum in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this 4 5 Agreement, pursuant to employee benefit plans referred to in the Offering Memorandum or pursuant to the exercise of convertible securities or options referred to in the Offering Memorandum). (x) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by the Company. (xi) Authorization of the Indenture and the Registration Rights Agreement. The Indenture and the Registration Rights Agreement have been duly authorized by the Company and, at the Closing Time, will have been duly executed and delivered by the Company and will constitute valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except as rights to indemnification and contribution may be limited under applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xii) Authorization of the Securities. The Securities have been duly authorized and, at the Closing Time, will have been duly executed by the Company and, when authenticated in the manner provided for in the Indenture and delivered against payment of the purchase price therefor (and assuming the due authorization, execution and delivery of the Indenture by the Trustee) will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be in the form contemplated by, and entitled to the benefits of, the Indenture. (xiii) Description of the Securities, the Indenture and the Registration Rights Agreement. The Securities, the Indenture and the Registration Rights Agreement will conform in all material respects to the respective statements relating thereto contained in the Offering Memorandum and will be in substantially the respective forms previously delivered to the Initial Purchasers. (xiv) Absence of Defaults and Conflicts. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject (collectively, "Agreements and Instruments") except for such defaults 5 6 that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the Indenture, the Registration Rights Agreement and the Securities and any other agreement or instrument entered into or issued or to be entered into or issued by the Company in connection with the transactions contemplated hereby or thereby or in the Offering Memorandum and the consummation of the transactions contemplated herein and in the Offering Memorandum (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Offering Memorandum under the caption "Use of Proceeds") and compliance by the Company with its obligations hereunder has been duly authorized by all necessary corporate action and does not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or a Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, the Agreements and Instruments except for such conflicts, breaches or defaults or liens, charges or encumbrances that, singly or in the aggregate, would not result in a Material Adverse Effect, nor will such action result in any violation of the provisions of any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or any of their assets or properties, except for such violations that would not result in a Material Adverse Effect, or in any violation of the charter or by-laws of the Company or any of its subsidiaries. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its subsidiaries. (xv) Absence of Proceedings. Except as disclosed in the Offering Memorandum, there is no action, suit, proceeding, inquiry or investigation before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary thereof which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets of the Company or any of its subsidiaries or the consummation of this Agreement or the performance by the Company of its obligations hereunder. (xvi) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement. (xvii) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (including, without limitation, insurance licenses from the insurance regulatory agencies of the various states and 6 7 countries where they conduct insurance-related businesses (collectively, "Governmental Licenses")) issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect; and no insurance regulatory agency or body has issued any order or decree impairing, restricting or prohibiting the payment of dividends by the Company's insurance company subsidiaries to the Company. (xviii) Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Offering Memorandum or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Offering Memorandum, are in full force and effect, and neither the Company nor any of its subsidiaries has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any of its subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or any subsidiary thereof to the continued possession of the leased or subleased premises under any such lease or sublease which would have a Material Adverse Effect. (xix) Tax Returns. The Company and its subsidiaries have filed all federal, state, local and foreign tax returns that are required to be filed or have duly requested extensions thereof and have paid all taxes required to be paid by any of them and any related assessments, fines or penalties, except for any such tax, assessment, fine or penalty that is being contested in good faith and by appropriate proceedings; and adequate charges, accruals and reserves have been provided for in the financial statements referred to in Section 1(a)(v) above in respect of all federal, state, local and foreign taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined or remains open to examination by applicable taxing authorities. (xx) Environmental Laws. Except as described in the Offering Memorandum and except such matters as would not, singly or in the aggregate, result in a Material Adverse 7 8 Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or, to the knowledge of the Company or any of its subsidiaries, threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries, and (D) there are no events or circumstances of which the Company or any of its subsidiaries are aware that would form the basis of any liability or obligation of the Company or any of its subsidiaries, including, without limitation, any order, decree, plan or agreement requiring clean-up or remediation, or any action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or Environmental Laws. (xxi) Investment Company Act. The Company is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Offering Memorandum will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (xxii) Rule 144A Eligibility. The Securities are eligible for resale pursuant to Rule 144A and will not be, at the Closing Time, of the same class as securities listed on a national securities exchange registered under Section 6 of the 1934 Act, or quoted in a U.S. automated interdealer quotation system. (xxiii) No General Solicitation. None of the Company, its affiliates, as such term is defined in Rule 501(b) under the 1933 Act ("Affiliates"), or any person acting on its or any of their behalf (other than the Initial Purchasers, as to whom the Company makes no representation) has engaged or will engage, in connection with the offering of the Securities, in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the 1933 Act. (xxiv) No Registration Required. Subject to compliance by the Initial Purchasers with the representations and warranties set forth in Section 2 and the procedures set forth in Section 6 hereof, it is not necessary in connection with the offer, sale and delivery of the 8 9 Securities to the Initial Purchasers by the Company and to each Subsequent Purchaser by the Initial Purchasers in the manner contemplated by this Agreement and the Offering Memorandum to register the Securities under the 1933 Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended. (xxv) No Directed Selling Efforts. With respect to those Securities sold in reliance on Regulation S, (A) none of the Company, its Affiliates or any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company makes no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S and (B) each of the Company and its Affiliates and any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company makes no representation) has complied and will comply with the offering restrictions requirement of Regulation S. (xxvi) Statutory Financial Statements. The statutory financial statements of each of the Company's insurance company subsidiaries from which certain ratios and other statistical data included or incorporated or deemed to be incorporated by reference in the Offering Memorandum have been derived and have been prepared for each relevant period in conformity with accounting practices prescribed or permitted by the National Association of Insurance Commissioners and the insurance department of the state of domicile of each such subsidiary in effect at such time of preparation ("SAP"), except as otherwise stated therein. (xxvii) Reinsurance Agreements. All ceded reinsurance agreements to which the Company's insurance company subsidiaries are a party are in full force and effect and such subsidiaries are not in violation of, or in default in the performance, observance or fulfillment of, any obligation, agreement, covenant or condition contained therein, except for such violations or defaults which could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. Such subsidiaries have not received any notice from any of the other parties to such agreements that such other party intends not to perform in any material respect such agreement, and none of such subsidiaries has any reason to believe that any of the other parties to such agreements will be unable to perform such agreements, except to the extent that (i) such subsidiary has established appropriate reserves on its financial statements or (ii) such nonperformance could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect; and each of the Company's insurance company subsidiaries is entitled to give effect in its underwriting results in its most recently filed statutory financial statements in conformity with SAP for reinsurance ceded pursuant to such agreements. (xxviii) Compliance with Insurance Laws. Each insurance company subsidiary of the Company is in compliance with the requirements of the insurance laws of the jurisdiction of its incorporation or domicile and of each other jurisdiction that is applicable to such subsidiary, except where the failure to comply would not have a Material Adverse Effect. 9 10 (b) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Representative or to counsel for the Initial Purchasers shall be deemed a representation and warranty by the Company to each Initial Purchaser as to the matters covered thereby. SECTION 2. Sale and Delivery to Initial Purchasers; Closing. (a) Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each Initial Purchaser, severally and not jointly, and each Initial Purchaser, severally and not jointly, agrees to purchase from the Company, at the price set forth in Schedule B, the aggregate principal amount of Securities set forth in Schedule A opposite the name of such Initial Purchaser, plus any additional principal amount of Securities which such Initial Purchaser may become obligated to purchase pursuant to the provisions of Section 11 hereof. (b) Payment. Payment of the purchase price for, and delivery of certificates for, the Securities shall be made at the office of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York, or at such other place as shall be agreed upon by the Representative and the Company, at 10:00 A.M. on the third business day after the date hereof (unless postponed in accordance with the provisions of Section 11), or such other time not later than ten business days after such date as shall be agreed upon by the Representative and the Company (such time and date of payment and delivery being herein called the "Closing Time"). Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the Representative for the respective accounts of the Initial Purchasers of certificates for the Securities to be purchased by them. It is understood that each Initial Purchaser has authorized the Representative, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Securities which it has agreed to purchase. Merrill Lynch, individually and not as the Representative of the Initial Purchasers, may (but shall not be obligated to) make payment of the purchase price for the Securities to be purchased by any Initial Purchaser whose funds have not been received by the Closing Time, but such payment shall not relieve such Initial Purchaser from its obligations hereunder. The certificates representing the Securities shall be registered in the name of Cede & Co. pursuant to the DTC Agreement and shall be made available for examination and packaging by the Initial Purchasers in the City of New York not later than 10:00 A.M. on the last business day prior to the Closing Time. (c) Qualified Institutional Buyer. Each Initial Purchaser severally and not jointly represents and warrants to, and agrees with, the Company that it is a "qualified institutional buyer" within the meaning of Rule 144A under the 1933 Act (a "Qualified Institutional Buyer") and an "accredited investor" within the meaning of Rule 501(a) under the 1933 Act (an "Accredited Investor"). 10 11 (d) Denominations; Registration. Certificates for the Securities shall be in such denominations ($1,000 or integral multiples thereof) and registered in such names as the Representative may request in writing at least one full business day before the Closing Time. SECTION 3. Covenants of the Company. The Company covenants with each Initial Purchaser as follows: (a) Offering Memorandum. The Company, as promptly as possible, will furnish to each Initial Purchaser, without charge, such number of copies of the Preliminary Offering Memorandum, the Final Offering Memorandum and any amendments and supplements thereto and documents incorporated by reference therein as such Initial Purchaser may reasonably request. (b) Notice and Effect of Material Events. The Company will immediately notify each Initial Purchaser, and confirm such notice in writing, of (x) any filing made by the Company of information relating to the offering of the Securities with any securities exchange or any other regulatory body in the United States or any other jurisdiction, and (y) prior to the completion of the placement of the Securities by the Initial Purchasers as evidenced by a notice in writing from the Initial Purchasers to the Company, any material changes in or affecting the earnings, business affairs or business prospects of the Company and its subsidiaries which (i) make any statement in the Offering Memorandum false or misleading or (ii) are not disclosed in the Offering Memorandum. In such event or if during such time any event shall occur as a result of which it is necessary, in the reasonable opinion of the Company, its counsel, the Initial Purchasers or counsel for the Initial Purchasers, to amend or supplement the Final Offering Memorandum in order that the Final Offering Memorandum not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances then existing, the Company will forthwith amend or supplement the Final Offering Memorandum by preparing and furnishing to each Initial Purchaser an amendment or amendments of, or a supplement or supplements to, the Final Offering Memorandum (in form and substance satisfactory in the reasonable opinion of counsel for the Initial Purchasers) so that, as so amended or supplemented, the Final Offering Memorandum will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a Subsequent Purchaser, not misleading. (c) Amendment to Offering Memorandum and Supplements. The Company will advise each Initial Purchaser promptly of any proposal to amend or supplement the Offering Memorandum, but will not effect any such amendment or supplement to which the Initial Purchasers shall reasonably object in writing within a reasonable time after the receipt thereof. Neither the consent of the Initial Purchasers, nor the Initial Purchasers' delivery of any such amendment or supplement, shall constitute a waiver of any of the conditions set forth in Section 5 hereof. (d) Qualification of Securities for Offer and Sale. The Company will use its reasonable efforts, in cooperation with the Initial Purchasers, to qualify the Securities for offering and sale under the applicable securities laws of such jurisdictions as the Representative may reasonably request and 11 12 will maintain such qualifications in effect as long as required for the sale of the Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified as of the date hereof or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject as of the date hereof. (e) Rating of Securities. The Company shall take all reasonable action necessary to enable Standard & Poor's Ratings Services ("S&P"), and Moody's Investors Service, Inc. ("Moody's") to provide their respective credit ratings of the Securities. (f) DTC. The Company will cooperate with the Representative and use its best efforts to permit the Securities to be eligible for clearance and settlement through the facilities of DTC. (g) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Offering Memorandum under "Use of Proceeds". (h) Restriction on Sale of Securities. During the period from the date of the Offering Memorandum to the Closing Time, the Company will not, without the prior written consent of Merrill Lynch, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale of, or otherwise dispose of, any other debt securities of the Company or securities of the Company that are convertible into, or exchangeable for, the Securities or such other debt securities. (i) Termination of Obligations. Notwithstanding any provisions of paragraphs (a), (b) or (c) of this Section 3 to the contrary, the Company's obligations under paragraphs (a), (b) and (c) shall terminate on the date upon which the Initial Purchasers cease to hold Securities acquired as part of their initial distribution, but in any event not later than nine months from the Closing Time. SECTION 4. Payment of Expenses. (a) Expenses. The Company agrees to pay all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and any filing of the Offering Memorandum (including financial statements and any schedules or exhibits and any document incorporated therein by reference) and of each amendment or supplement thereto, (ii) the preparation, printing and delivery to the Initial Purchasers of this Agreement, any Agreement among Initial Purchasers, the Indenture, the Registration Rights Agreement and such other documents as may be required in connection with the offering, purchase, sale and delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Initial Purchasers, including any charges of DTC in connection therewith, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Initial Purchasers in connection therewith and in connection with the preparation of the Blue Sky Survey, any supplement thereto and any Legal Investment Survey; provided, that the Company shall not pay any other expenses of counsel for the 12 13 Initial Purchasers, (vi) the fees and expenses of the Trustee, including the fees and disbursements of counsel for the Trustee in connection with the Indenture and the Securities and (vii) any fees payable in connection with the rating of the Securities. (b) Termination of Agreement. If this Agreement is terminated by the Representative in accordance with the provisions of Section 5 or Section 10(a)(i) hereof, the Company agrees to reimburse the Initial Purchasers for all of their reasonable out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Initial Purchasers. SECTION 5. Conditions of Initial Purchasers' Obligations. The obligations of the several Initial Purchasers hereunder are subject to the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer of the Company or any of its subsidiaries delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Opinion of Counsel for Company. At the Closing Time, the Representative shall have received the opinion, dated as of the Closing Time, of Joey M. Loudermilk, Esq., Senior Vice President and General Counsel of the Company, and of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel for the Company, in the form set forth in Exhibits A and B hereto, respectively, together with signed or reproduced copies of each of such letter for each of the other Initial Purchasers. (b) Opinion of Counsel for Initial Purchasers. At the Closing Time, the Representative shall have received the favorable opinion, dated as of the Closing Time, of Simpson Thacher & Bartlett, counsel for the Initial Purchasers, together with signed or reproduced copies of such letter for each of the other Initial Purchasers, in the form set forth in Exhibit C hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States, upon the opinions of counsel satisfactory to the Representative. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (c) Officers' Certificate. At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Offering Memorandum, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Representative shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer or the assistant financial or assistant accounting officer of the Company, dated as of the Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1 hereof are true and correct with the same force and effect as though expressly made at and as of the Closing Time, and (iii) the Company has complied with all 13 14 agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time. (d) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Representative shall have received from KPMG LLP a letter dated such date, in form and substance reasonably satisfactory to the Representative, together with signed or reproduced copies of such letter for each of the other Initial Purchasers, containing statements and information of the type ordinarily included in accountants' "comfort letters" to initial purchasers with respect to the financial statements and certain financial information contained in the Offering Memorandum. (e) Bring-down Comfort Letter. At the Closing Time, the Representative shall have received from KPMG LLP a letter, dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (d) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time. (f) Maintenance of Rating. At the Closing Time, the Securities shall be rated at least "A2" by Moody's and "A" by S&P, and the Company shall have delivered to the Representative a letter dated the Closing Time, from each such rating agency, or other evidence satisfactory to the Representative, confirming that the Securities have such ratings; and since the date of this Agreement, there shall not have occurred a downgrading in the rating assigned to the Securities or any of the Company's other debt securities or the financial strength or claims paying ability of American Family Life Assurance Company of Columbus, a Georgia corporation ("AFLAC"), by any nationally recognized securities rating agency, and no such securities rating agency shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of the Securities or any of the Company's other debt securities or the financial strength or claims paying ability of AFLAC. (g) Additional Documents. At the Closing Time, counsel for the Initial Purchasers shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Representative and counsel for the Initial Purchasers. (h) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Representative by written notice to the Company at any time at or prior to the Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 7 and 8 shall survive any such termination and remain in full force and effect. 14 15 SECTION 6. Subsequent Offers and Resales of the Securities. (a) Offer and Sale Procedures. Each of the Initial Purchasers, severally and not jointly, and the Company hereby represents, warrants and agrees to observe the following procedures in connection with the offer and sale of the Securities: (i) Offers and Sales Only to Qualified Institutional Buyers or Non-U.S. Persons Outside the United States. Offers and sales of the Securities will be made only by the Initial Purchasers or Affiliates thereof qualified to do so in the jurisdictions in which such offers or sales are made. Each such offer or sale shall only be made (A) to persons whom the offeror or seller reasonably believes to be Qualified Institutional Buyers or (B) to non-U.S. persons outside the United States to whom the offeror or seller reasonably believes offers and sales of the Securities may be made in reliance upon Regulation S. (ii) No General Solicitation. No general solicitation or general advertising (within the meaning of Rule 502(c) under the 1933 Act) will be used in the United States in connection with the offering of the Securities, nor will any directed selling efforts (within the meaning of Rule 903 under the 1933 Act) be conducted. (iii) Purchases by Non-Bank Fiduciaries. In the case of a non-bank Subsequent Purchaser of a Security acting as a fiduciary for one or more third parties, in connection with an offer and sale to such purchaser pursuant to clause (i) above, each third party shall, in the judgment of the applicable Initial Purchaser, be a Qualified Institutional Buyer or a non-U.S. person outside the United States. (iv) Subsequent Purchaser Notification. Each Initial Purchaser will take reasonable steps to inform, and cause each of its Affiliates to take reasonable steps to inform, persons acquiring Securities from such Initial Purchaser or Affiliate, as the case may be, in the United States that the Securities (A) have not been and will not be registered under the 1933 Act, (B) are being sold to them without registration under the 1933 Act in reliance on Rule 144A or in accordance with another exemption from registration under the 1933 Act, as the case may be, and (C) may not be offered, sold or otherwise transferred except (1) to the Company, (2) outside the United States in accordance with Rule 904 of Regulation S, or (3) inside the United States in accordance with (x) Rule 144A to a person whom the seller reasonably believes is a Qualified Institutional Buyer that is purchasing such Securities for its own account or for the account of a Qualified Institutional Buyer to whom notice is given that the offer, sale or transfer is being made in reliance on Rule 144A or (y) the exemption from registration under the 1933 Act provided by Rule 144, if available. (v) Minimum Principal Amount. No sale of the Securities to any one Subsequent Purchaser will be for less than U.S. $1,000 principal amount and no Security will be issued in a smaller principal amount. If the Subsequent Purchaser is a non-bank fiduciary acting on 15 16 behalf of others, each person for whom it is acting must purchase at least U.S. $1,000 principal amount of the Securities. (vi) Restrictions on Transfer. The transfer restrictions and the other provisions set forth in Section 2.13 of the Indenture, including the legend required thereby, shall apply to the Securities except as otherwise agreed by the Company and the Initial Purchasers. Following the sale of the Securities by the Initial Purchasers to Subsequent Purchasers pursuant to the terms hereof, the Initial Purchasers shall not be liable or responsible to the Company for any losses, damages or liabilities suffered or incurred by the Company, including any losses, damages or liabilities under the 1933 Act, arising from or relating to any resale or transfer of any Security. (vii) Delivery of Offering Memorandum. Each Initial Purchaser will deliver to each purchaser of the Securities from such Initial Purchaser, in connection with its original distribution of the Securities, a copy of the Offering Memorandum, as amended and supplemented at the date of such delivery. (b) Covenants of the Company. The Company covenants with each Initial Purchaser as follows: (i) Due Diligence. In connection with the original distribution of the Securities, the Company agrees that, prior to any offer or resale of the Securities by the Initial Purchasers, the Initial Purchasers and counsel for the Initial Purchasers shall have the right to make reasonable inquiries into the business of the Company and its subsidiaries. The Company also agrees to provide answers to each prospective Subsequent Purchaser of Securities who so requests concerning the Company and its subsidiaries (to the extent that such information is available or can be acquired and made available to prospective Subsequent Purchasers without unreasonable effort or expense and to the extent the provision thereof is not prohibited by applicable law or contractual obligation) and the terms and conditions of the offering of the Securities, as provided in the Offering Memorandum. (ii) Integration. The Company agrees that it will not and will cause its Affiliates not to make any offer or sale of securities of the Company of any class if, as a result of the doctrine of "integration" referred to in Rule 502 under the 1933 Act, such offer or sale would render invalid (for the purpose of (i) the sale of the Securities by the Company to the Initial Purchasers, (ii) the resale of the Securities by the Initial Purchasers to Subsequent Purchasers or (iii) the resale of the Securities by such Subsequent Purchasers to others) the exemption from the registration requirements of the 1933 Act provided by Section 4(2) thereof or by Rule 144A or by Regulation S thereunder or otherwise. (iii) Rule 144A Information. The Company agrees that, in order to render the Securities eligible for resale pursuant to Rule 144A under the 1933 Act, while any of the Securities are "restricted securities" (as such term is defined under Rule 144(a)(3) under the 16 17 1933 Act), it will make available, upon request, to any holder of Securities or prospective purchasers of Securities the information specified in Rule 144A(d)(4), unless the Company furnishes information to the Commission pursuant to Section 13 or 15(d) of the 1934 Act (such information, whether made available to holders or prospective purchasers or furnished to the Commission, is herein referred to as "Additional Information"). (iv) Restriction on Repurchases. Until the expiration of two years after the original issuance of the Securities, the Company will not, and will cause its Affiliates not to, purchase or agree to purchase or otherwise acquire any Securities which are "restricted securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act), whether as beneficial owner or otherwise (except as agent acting as a securities broker on behalf of and for the account of customers in the ordinary course of business in unsolicited brokers' transactions) unless, immediately upon any such purchase, the Company or any Affiliate shall submit such Securities to the Trustee for cancellation. (c) Resale Pursuant to Rule 903 of Regulation S or Rule 144A. Each Initial Purchaser understands that the Securities have not been and will not be registered under the 1933 Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S under the 1933 Act or pursuant to an exemption from the registration requirements of the 1933 Act. Each Initial Purchaser represents and agrees that, except as permitted by Section 6(a) above, it has offered and sold Securities and will offer and sell Securities (i) as part of their distribution at any time and (ii) otherwise until forty days after the later of the date upon which the offering of the Securities commences and the Closing Time, only in accordance with Rule 903 of Regulation S or Rule 144A. Accordingly, neither the Initial Purchasers, their Affiliates nor any persons acting on their behalf have engaged or will engage in any directed selling efforts with respect to Securities, and the Initial Purchasers, their Affiliates and any person acting on their behalf have complied and will comply with the offering restriction requirements of Regulation S. Each Initial Purchaser agrees that at or prior to confirmation of a sale of Securities (other than a sale of Securities pursuant to Rule 144A), it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Securities from it or through it during the restricted period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the United States Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold within the United States or to or for the account or benefit of U.S. persons (i) as part of their distribution at any time and (ii) otherwise until forty days after the later of the date upon which the offering of the Securities commenced and the date of closing, except in either case in accordance with Regulation S or Rule 144A under the Securities Act. Terms used above have the meaning given to them by Regulation S." 17 18 Each Initial Purchaser severally represents and agrees that it has not entered and will not enter into any contractual arrangements with respect to the distribution of the Securities, except with its Affiliates or with the prior written consent of the Company. SECTION 7. Indemnification. (a) Indemnification of Initial Purchasers. The Company agrees to indemnify and hold harmless each Initial Purchaser and each person, if any, who controls any Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Offering Memorandum or the Final Offering Memorandum (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided, that (subject to Section 7(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch, except to the extent otherwise expressly provided in Section 7(c) hereof), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum (or any amendment thereto); provided further, that the foregoing indemnity with respect to the Preliminary Offering Memorandum shall not inure to the benefit of any Initial Purchaser (or to the benefit of any person controlling such Initial Purchaser) from whom the person asserting any such losses, claims, damages or liabilities purchased Securities if (i) such untrue statement or omission made in the Preliminary Offering Memorandum was eliminated or remedied in the Final Offering Memorandum (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto to such Initial Purchaser prior to confirmation of the sale of such 18 19 Securities to such person by such Initial Purchaser) and (ii) a copy of the Final Offering Memorandum (as so amended and supplemented) was not furnished to such person at or prior to the written confirmation of the sale of such Securities to such person, unless such failure to deliver was a result of non-compliance by the Company with Sections 3(a) or 3(b), and the claims asserted by such person do not include allegations of other untrue statements or omissions of material facts made in the Final Offering Memorandum which allegations are upheld in a final judgment. (b) Indemnification of Company, Directors and Officers. Each Initial Purchaser severally agrees to indemnify and hold harmless the Company, its directors, its officers and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Offering Memorandum in reliance upon and in conformity with written information furnished to the Company by such Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum. (c) Actions Against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 7(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 7(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 7 or Section 8 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement Without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the 19 20 nature contemplated by Section 7(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into, and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. Notwithstanding the immediately preceding sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party shall not be liable for any settlement of the nature contemplated by Section 7(a)(ii) effected without its prior written consent if such indemnifying party (i) reimburses such indemnified party in accordance with such request to the extent it considers such request to be reasonable and (ii) provides written notice to the indemnified party substantiating the unpaid balance as unreasonable, in each case prior to the date of such settlement. SECTION 8. Contribution. If the indemnification provided for in Section 7 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Initial Purchasers on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Initial Purchasers on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Initial Purchasers on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the Initial Purchasers bear to the aggregate initial offering price of the Securities. The relative fault of the Company on the one hand and the Initial Purchasers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8. The 20 21 aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation or any investigation or proceeding by any governmental agency or body commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 8, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Initial Purchaser, and each director of the Company, each officer of the Company who signed the Offering Memorandum, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The Initial Purchasers' respective obligations to contribute pursuant to this Section 8 are several in proportion to the principal amount of Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 9. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement, or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Initial Purchaser or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the Initial Purchasers. SECTION 10. Termination of Agreement. (a) Termination; General. The Representative may terminate this Agreement, by notice to the Company, at any time at or prior to the Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Offering Memorandum, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or 21 22 development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representative, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or limited by the Commission or the New York Stock Exchange, Inc., or if trading generally on the American Stock Exchange or the New York Stock Exchange, Inc. or in the NASDAQ National Market System has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal, New York or Georgia authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof; and provided further, that Sections 1, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 11. Default by One or More of the Initial Purchasers. If one or more of the Initial Purchasers shall fail at the Closing Time to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representative shall have the right, but not the obligation, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Initial Purchasers, or any other Initial Purchasers, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; provided, however, that if the Representative shall not have completed such arrangements within such 24-hour period, then this Agreement shall terminate without liability on the part of any non-defaulting Initial Purchaser. No action pursuant to this Section shall relieve any defaulting Initial Purchaser from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement, either the Representative or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Offering Memorandum or in any other documents or arrangement. As used herein, the term "Initial Purchaser" includes any person substituted for an Initial Purchaser under this Section 11. SECTION 12. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Initial Purchasers shall be directed to the Representative at North Tower, World Financial Center, New York, New York 10281-1201, attention of Joseph E. Consolino; notices to the Company shall be directed to it at 1932 Wynnton Road, Columbus, Georgia 31999, attention of Gary L. Stegman. 22 23 SECTION 13. Parties. This Agreement shall each inure to the benefit of and be binding upon the Initial Purchasers and the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Initial Purchasers and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 7 and 8 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Initial Purchasers and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Initial Purchaser shall be deemed to be a successor by reason merely of such purchase. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. [Rest of page intentionally left blank.] 23 24 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Initial Purchasers and the Company in accordance with its terms. Very truly yours, AFLAC INCORPORATED By: ------------------------- Name: Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ---------------------- Authorized Signatory For itself and as Representative of the other Initial Purchasers named in Schedule A hereto. 24 25 SCHEDULE A
Principal Amount of Name of Initial Purchaser Securities - ------------------------- ---------- Merrill Lynch, Pierce, Fenner & Smith Incorporated........... $247,500,000 Donaldson, Lufkin & Jenrette................................. 50,625,000 First Union Capital Markets Corp............................. 50,625,000 NationsBanc Montgomery Securities LLC........................ 50,625,000 Salomon Smith Barney Inc. ................................... 50,625,000 ------------ Total ............................................. $450,000,000 - ----- ============
Sch A - 1 26 SCHEDULE B AFLAC INCORPORATED $450,000,000 Senior Notes due 2009 1. The initial offering price of the Securities shall be 99.733% of the principal amount thereof, plus accrued interest, if any, from the date of issuance. 2. The purchase price to be paid by the Initial Purchasers for the Securities shall be 99.083% of the principal amount thereof at maturity. 3. The interest rate on the Securities shall be 6 1/2% per annum and will be payable semi-annually on April 15 and October 15 of each year commencing October 15, 1999. 4. The Securities will mature on April 15, 2009. 5. The Securities will be redeemable at the option of the Company, in whole or in part, at any time and from time to time, upon not less than 30 nor more than 60 days' notice, at a redemption price equal to (i) 100% of the principal amount of the Securities being redeemed, plus accrued and unpaid interest thereon and Additional Interest, if any, to the redemption date, and (ii) a make-whole amount, if any. Sch B - 1 27 Exhibit A FORM OF OPINION OF JOEY M. LOUDERMILK, ESQ. TO BE DELIVERED PURSUANT TO SECTION 5(a) April 21, 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated NationsBanc Montgomery Securities LLC Donaldson, Lufkin & Jenrette First Union Capital Markets Corp. Salomon Smith Barney Inc. c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, NY 10281-1209 Re: AFLAC Incorporated 6 1/2% Senior Notes Due 2009 Ladies and Gentlemen: I am the Senior Vice President, Secretary & General Counsel of AFLAC Incorporated, a Georgia corporation (the "Company"). This opinion is delivered in connection with the issuance and sale by the Company of $450,000,000 aggregate principal amount of the Company's 6 1/2% Senior Notes Due 2009 (the "Senior Notes") pursuant to the Purchase Agreement, dated as of April 16, 1999, between you and the Company (the "Purchase Agreement"). This opinion is being furnished pursuant to Section 5(a) of the Purchase Agreement. Capitalized terms not otherwise defined herein have the respective meanings set forth in the Purchase Agreement or, if not therein defined, the Indenture, dated as of April 21, 1999 (the "Indenture"), between the Company and The Bank of New York, as Trustee (the "Trustee"). In connection with this opinion I have examined and am familiar with originals or copies, certified or otherwise identified to my satisfaction, of (a) the Offering Memorandum, A - 1 28 dated April 16, 1999, relating to the Senior Notes (the "Offering Memorandum"); (b) an executed copy of the Purchase Agreement; (c) an executed copy of the Indenture (including the form set forth therein of certificates evidencing the Senior Notes); (d) an executed copy of the Registration Rights Agreement dated April 21, 1999, between you and the Company (the "Registration Rights Agreement"); (e) the Certificate of Incorporation of the Company and each of its subsidiaries, as amended to date; (f) the By-laws of the Company and each of its subsidiaries, as amended to date; (g) certain resolutions of the Board of Directors of the Company and the Note Pricing Committee of the Board of Directors of the Company relating to the issuance and sale of the Senior Notes and (h) such other documents as I have deemed necessary or appropriate as a basis for the opinions set forth below. I have also examined the originals or copies, certified or otherwise identified to my satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other statements, documents, certificates and corporate or other records as I have deemed necessary or appropriate as a basis for the opinions set forth below. In my examination, I have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as certified or photostatic copies and the authenticity of the originals of such copies. In making my examination of documents executed by parties other than the Company, I have assumed that such parties had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect of such documents on such parties thereof. As to any facts material to the opinions expressed herein which were not independently established or verified, I have relied upon oral or written statements and representations of officers and other representatives of the Company, you and others. For purposes of the foregoing, I note that the Offering Memorandum has been prepared in the context of an offering of the Senior Notes pursuant to Rule 144A promulgated under the Securities Act of 1933, as amended (the "Securities Act") and not as part of a registration statement under the Securities Act. I am admitted to the Bar in the State of Georgia and I do not express any opinion as to the laws of any other jurisdiction other than the laws of the United States of America to the extent referred to specifically herein. In rendering the opinions expressed herein, I express no opinion as to the application or effect of any fraudulent transfer or similar law on the Purchase Agreement, the Senior Notes, the Registration Rights Agreement or the Indenture or any of the transactions contemplated thereby. Based upon and subject to the foregoing, I am of the opinion that: A - 2 29 1. The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. 2. Each subsidiary of the Company listed on Schedule I hereto (each, a "Material Subsidiary") has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. All of the issued shares of capital stock of each Material Subsidiary have been duly and validly authorized and issued, and are fully paid and non-assessable, and is owned by the Company, directly or through subsidiaries. 3. The Purchase Agreement has been duly authorized, executed and delivered by the Company. 4. The Senior Notes have been duly authorized, executed and delivered by the Company. 5. Each of the Registration Rights Agreement and the Indenture has been duly authorized, executed and delivered by the Company. 6. Except as set forth in the Offering Memorandum, I know of no legal or governmental actions, suits or proceedings pending or, to my knowledge, threatened against the Company or any of its subsidiaries wherein an unfavorable ruling, decision or finding would have a material adverse effect on the Company and its subsidiaries, taken as a whole, or on the ability of the Company to perform its obligations under the Purchase Agreement, the Indenture, the Registration Rights Agreement or the Senior Notes or to consummate the transactions contemplated by the Offering Memorandum. 7. The statements contained in the Offering Memorandum under the heading "Description of Certain Indebtedness", insofar as such statements purport to summarize certain provisions of agreements, fairly summarize such provisions in all material respects. To my knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments that would be required to be described in the Offering Memorandum A - 3 30 that are not described or referred to in the Offering Memorandum other than those described or referred to therein or incorporated by reference thereto. 8. Neither the issue and sale of the Senior Notes by the Company, the execution and delivery by the Company of the Purchase Agreement, the Registration Rights Agreement and the Indenture (together, the "Documents"), nor the consummation of any other of the transactions contemplated by the Documents, each in accordance with its terms, will conflict with, result in a breach or violation of, or constitute a default under the Certificate of Incorporation or By-laws of the Company or any subsidiary or to the best of my knowledge, any agreement or other instrument binding upon the Company or any subsidiary that is described or referred to in the Offering Memorandum or incorporated by reference into the Offering Memorandum. 9. No authorization, approval, consent or order of any Georgia court or Georgia governmental authority or agency (other than such as may be required under applicable Georgia securities laws, as to which I express no opinion) is required in connection with the due authorization, execution and delivery of the Purchase Agreement or the due execution, delivery or performance of the Indenture or the Registration Rights Agreement by the Company or for the offering, issuance, sale or delivery of the Senior Notes to the Initial Purchasers or the resale by the Initial Purchasers in accordance with the Purchase Agreement. 10. The execution, delivery and performance of the Purchase Agreement, the Indenture, the Registration Rights Agreement and the Senior Notes and the consummation of the transactions contemplated in the Purchase Agreement and in the Offering Memorandum (including the use of the proceeds from the sale of the Senior Notes as described in the Offering Memorandum under the caption "Use of Proceeds") and compliance by the Company with its obligations under the Purchase Agreement, the Indenture, the Registration Rights Agreement and the Senior Notes will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary thereof pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary thereof is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a material adverse effect on the Company and its subsidiaries, taken as a whole), nor will such action result in any violation of any applicable Georgia law, statute, rule or regulation or any judgment, order, writ or decree of any court or governmental authority or agency binding upon the Company. In addition, I have participated in conferences with officers and other representatives of the Company, representatives of the independent accountants of the Company, you and your counsel at which the contents of the Offering Memorandum and related matters were discussed and, although I am not passing upon, and do not assume any responsibility for, the A - 4 31 accuracy, completeness or fairness of the statements contained in the Offering Memorandum and have made no independent check or verification thereof (except to the extent referred to in paragraph 7 above), on the basis of the foregoing, no facts have come to my attention that have led me to believe that the Offering Memorandum, as of its date or as of the date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that I express no opinion or belief with respect to the financial statements and related notes, the pro forma financial information and other financial and accounting data included therein or excluded therefrom. This opinion is furnished to you solely for your benefit in connection with the closing under the Purchase Agreement occurring today and is not to be used, circulated, quoted or otherwise referred to for any other purpose without my express written permission. Very truly yours, Joey M. Loudermilk A - 5 32 Schedule I American Family Life Assurance Company of Columbus (AFLAC) A - 6 33 Exhibit B FORM OF OPINION OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP TO BE DELIVERED PURSUANT TO SECTION 5(a) April 21, 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated Donaldson, Lufkin & Jenrette First Union Capital Markets NationsBanc Montgomery Securities LLC Salomon Smith Barney c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, NY 10281-1209 Re: AFLAC Incorporated 6 1/2% Senior Notes Due 2009 Ladies and Gentlemen: We have acted as special counsel to AFLAC Incorporated, a Georgia corporation (the "Company"), in connection with the issuance and sale by the Company of $450,000,000 aggregate principal amount of the Company's 6 1/2% Senior Notes Due 2009 (the "Senior Notes") pursuant to the Purchase Agreement, dated as of April 16, 1999, between you and the Company (the "Purchase Agreement"). This opinion is being furnished pursuant to Section 5(a) of the Purchase Agreement. Capitalized terms not otherwise defined herein have the respective meanings set forth in the Purchase Agreement or, if not therein defined, the Indenture, dated as of April 21, 1999 (the "Indenture"), between the Company and The Bank of New York, as Trustee. In connection with this opinion we have examined and are familiar with originals or copies, certified or otherwise identified to our satisfaction, of (a) the Offering Memorandum, dated April 16, 1999, relating to the Senior Notes (the "Offering Memorandum"); (b) an executed copy of B - 1 34 the Purchase Agreement; (c) an executed copy of the Indenture (including the form set forth therein of certificates evidencing the Senior Notes); (d) an executed copy of the Registration Rights Agreement, dated April 21, 1999, between you and the Company (the "Registration Rights Agreement"); (e) the Certificate of Incorporation of the Company, as amended to date; (f) the By-laws of the Company, as amended to date; (g) certain resolutions of the Board of Directors of the Company and the Note Pricing Committee of the Board of Directors of the Company relating to the issuance and sale of the Senior Notes; (h) an Officer's Certificate with respect to compliance with financial ratios and tests under certain of the Applicable contracts (as defined below), including supporting calculations (the "Calculation Certificate") and (i) such other documents as we have deemed necessary or appropriate as a basis for the opinions set forth below. We have also examined the originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other statements, documents, certificates and corporate or other records as we have deemed necessary or appropriate as a basis for the opinions set forth below. In our examination, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such copies. In making our examination of documents, we have assumed that the parties thereto (including the Company) had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and the execution and delivery by such parties of such documents and (except as set forth below) the validity and binding effect of such documents on such parties. We have also assumed, and relied upon without independent investigation, the accuracy of the information contained in the Calculation Certificate. In rendering the opinions set forth in paragraphs 1 and 2, we have also assumed that the execution and delivery by the Company of the Indenture, the Senior Notes and the Registration Rights Agreement and the performance of its obligations thereunder do not and will not violate, conflict with or constitute a default under (i) any agreement or instrument to which the Company or its properties is subject (except that we do not make the assumption set forth in this clause (i) with respect to Applicable Contracts), (ii) any law, rule, or regulation to which the Company is subject (except that we do not make the assumption set forth in this clause (ii) with respect to Applicable Laws (as defined below), the United States securities laws, antifraud laws or the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD")), (iii) any judicial or regulatory order or decree of any governmental authority (except that we do not make the assumption set forth in this clause (iii) with respect to Applicable Orders (as defined below)) or (iv) any consent, approval, license, authorization or validation of, or filing, recording or registration with any governmental authority (except that we do not make the assumption set forth in this clause (iv) with respect to Governmental Approvals (as defined below)). As to any facts material to the opinions expressed herein which were not independently established or verified, we have relied upon oral or written statements and representations of officers and other representatives of the Company, you and others. B - 2 35 As used herein, (a) the term "Applicable Laws" means those laws, rules and regulations of the State of New York and the United States of America that, in our experience, are normally applicable to transactions of the type contemplated by the Purchase Agreement (other than securities, blue sky and antifraud laws of any jurisdiction and the rules and regulations of the NASD), but without our having made any special investigation concerning any other laws, rules or regulations; (b) the term "Governmental Authorities" means any New York or federal executive, legislative, judicial, administrative or regulatory body established under Applicable Laws; (c) the term "Applicable Orders" means those orders or decrees of Governmental Authorities identified on Schedule I hereto; (d) the term "Governmental Approval" means any consent, approval, license, authorization or validation of, or filing, recording or registration with, any Governmental Authority pursuant to Applicable Laws or with the Securities and Exchange Commission under the United States securities laws, other than Section 5 of the Securities Act of 1933, as amended (the "Securities Act"), which is addressed in paragraph 8 below; and (e) the term "Applicable Contracts" means the agreements listed on Schedule II hereto. We understand that you are separately receiving an opinion with respect to certain of the foregoing matters from Joey M. Loudermilk, Senior Vice President and General Counsel of the Company, and we are advised that such opinion contains certain assumptions and qualifications. In rendering our opinion to you, we express no opinion as to the effect on our opinion of the qualifications, assumptions, or conclusions set forth in the opinion referred to in the preceding sentence. In rendering our opinion to you, we have relied with your consent and without independent investigation or verification of any kind upon the following assumptions: (i) The Company has been duly incorporated and is in good standing under the laws of the State of Georgia. (ii) The Company has the corporate power and corporate authority to execute and deliver the Senior Notes, the Indenture, the Registration Rights Agreement and the Purchase Agreement and to perform all of its obligations thereunder, and the execution and delivery of the Senior Notes, the Indenture, the Registration Rights Agreement and the Purchase Agreement and consummation by the Company of the transactions contemplated thereby have been duly authorized by all requisite corporate action on the part of the Company. (iii) The Indenture, the Registration Rights Agreement and the Purchase Agreement have been duly executed and delivered by the Company and the Senior Notes have been duly executed by the Company. (iv) The Company has complied with all provisions of Georgia law in connection with consummation of the transactions contemplated by the Senior Notes, the Indenture, the Registration Rights Agreement and the Purchase Agreement. (v) The laws of the State of Georgia do not affect any of the opinions set forth herein. B - 3 36 Members of our firm are admitted to the Bar in the State of New York and we do not express any opinion as to the laws of any other jurisdiction other than the laws of the United States of America to the extent referred to specifically herein. In rendering our opinions expressed herein, we express no opinion as to the application or effect of any fraudulent transfer or similar law on the Purchase Agreement, the Senior Notes, the Registration Rights Agreement or the Indenture or any of the transactions contemplated thereby. Based upon and subject to the foregoing, we are of the opinion that: 1. When the Senior Notes are executed and authenticated in accordance with the terms of the Indenture and delivered to and paid for by you in accordance with the terms of the Purchase Agreement and in accordance with the terms of the Indenture, the Senior Notes will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms and entitled to the benefits of the Indenture, except that (a) enforcement thereof may be limited by (i) bankruptcy, reorganization, insolvency, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity) and (b) the waiver contained in Section 9.7 of the Indenture may be unenforceable. 2. Each of the Indenture and the Registration Rights Agreement is a valid and binding agreement of the Company enforceable against the Company in accordance with its terms except that (a) the enforcement thereof may be subject to or limited by (i) bankruptcy, reorganization, insolvency, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity), (b) the rights to indemnification and contribution contained in the Registration Rights Agreement may be limited by state or federal securities laws or the public policy underlying such laws and (c) the waiver contained in Section 9.7 of the Indenture may be unenforceable. 3. Neither the issue and sale of the Senior Notes by the Company, the execution, delivery and performance by the Company of the Purchase Agreement, the Registration Rights Agreement or the Indenture (together, the "Documents"), nor the consummation of any other of the transactions contemplated by the Documents, each in accordance with its terms, will conflict with, result in a breach or violation of, or constitute a default under (i) any Applicable Law; (ii) any Applicable Order; or (iii) any Applicable Contract. We call to your attention that certain of the Applicable Contracts are governed by laws other than Applicable Laws. We express no opinion as to the effect of such other laws on the opinion stated in this paragraph 3. 4. Assuming the accuracy of the representations and warranties of the Company in Sections 1 and 6(a) of the Purchase Agreement and of you in Section 6(a) of the Purchase Agreement and compliance by the Company with the covenants in Sections 3 and 6(b) of the B - 4 37 Purchase Agreement, no Governmental Approval is required for the consummation of the transactions contemplated by the Documents, other than such approvals as have been, or as are not required to be, obtained by the date hereof. 5. The Company is not required to be registered as an "investment company" under the Investment Company Act of 1940, as amended. 6. The statements contained in the Offering Memorandum under the heading "Description of the Senior Notes", insofar as such statements purport to summarize certain provisions of the Senior Notes, the Registration Rights Agreement and the Indenture, fairly summarize such provisions in all material respects. 7. Although the discussion set forth in the Offering Memorandum under the heading "Certain U.S. Federal Tax Considerations" does not purport to discuss all possible United States federal income tax considerations of the purchase, ownership, and disposition of the Senior Notes, such discussion constitutes, in all material respects, a fair and accurate summary of the matters referred to therein. 8. Assuming (i) the accuracy of the representations and warranties of the Company in Sections 1 and 6(a) and of you in Section 6(a) of the Purchase Agreement and compliance with the agreements of the Company and you contained in the Purchase Agreement, (ii) the compliance by you with the offering and transfer procedures and restrictions described in the Purchase Agreement and the Offering Memorandum, (iii) the accuracy of, and compliance with, the representations, warranties and covenants of each of the purchasers to whom you initially resell the Senior Notes as specified in the Offering Memorandum and the Purchase Agreement and (iv) that purchasers to whom you initially resell the Senior Notes receive a copy of the Offering Memorandum prior to such sale, no registration of the Senior Notes under the Securities Act is required, and no qualification of the Indenture under the Trust Indenture Act of 1939, as amended, is necessary, for the offer and sale to you of the Senior Notes in the manner contemplated by the Purchase Agreement or the initial resale of the Senior Notes by you in the manner contemplated by the Purchase Agreement; provided, however, we express no opinion as to any subsequent resale of the Senior Notes. 9. The documents incorporated by reference in the Offering Memorandum (other than the financial statements and supporting schedules therein, as to which we express no opinion), when they were filed with the Securities and Exchange Commission, complied as to form in all material respects with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. In addition, we have participated in conferences with officers and other representatives of the Company, in-house counsel for the Company, representatives of the independent accountants of the Company, you and your counsel at which the contents of the Offering Memorandum and related matters were discussed. We did not participate in the preparation of the documents B - 5 38 incorporated by reference in the Offering Memorandum, but have, however, reviewed such documents and discussed the business and affairs of the Company with representatives of the Company. Although we are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Offering Memorandum and have made no independent check or verification thereof (except to the extent referred to in paragraphs 6 and 7 above), on the basis of the foregoing, no facts have come to our attention that have led us to believe that the Offering Memorandum, as of its date or as of the date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that we express no opinion or belief with respect to the financial statements and related notes, the pro forma financial information and other financial and accounting data included therein or excluded therefrom. For purposes of the foregoing, we note that the Offering Memorandum has been prepared in the context of an offering of the Senior Notes pursuant to Rule 144A promulgated under the Securities Act and not as part of a registration statement under the Securities Act. This opinion is furnished to you solely for your benefit in connection with the closing under the Purchase Agreement occurring today and is not to be used, circulated, quoted or otherwise referred to for any other purpose without our express written permission. Very truly yours, B - 6 39 Exhibit C FORM OF OPINION OF SIMPSON THACHER & BARTLETT TO BE DELIVERED PURSUANT TO SECTION 5(b) April 21, 1999 MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED DONALDSON, LUFKIN & JENRETTE FIRST UNION CAPITAL MARKETS CORP. NATIONSBANC MONTGOMERY SECURITIES LLC SALOMON SMITH BARNEY INC. c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: We have acted as your counsel in connection with the purchase by you of $450,000,000 aggregate principal amount of 6 1/2% Senior Notes due 2009 (the "Senior Notes") of AFLAC Incorporated, a Georgia corporation (the "Company"), pursuant to the Purchase Agreement dated April 16, 1999 (the "Purchase Agreement") among Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette, First Union Capital Markets Corp., NationsBanc Montgomery Securities LLC and Salomon Smith Barney Inc., as initial purchasers (the "Initial Purchasers"), and the Company. We have examined the Offering Memorandum dated April 16, 1999, relating to the sale of the Senior Notes (the "Offering Memorandum"), which incorporates by reference the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1998 (the "Exchange Act Document"), as filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); the Indenture dated as of April 21, 1999 (the "Indenture") between the Company and The Bank of New York, as Trustee (the "Trustee"), relating to the Senior Notes; the Global Senior Notes and a specimen of the Certificated Senior Notes; the Purchase Agreement; and the Registration Rights Agreement dated as of April 21, 1999 (the "Registration Rights Agreement") among the Company and the Initial Purchasers. In addition, we have examined, and have relied as to matters of fact upon, the documents delivered to you at the C-1 40 closing, and upon originals, or duplicates or certified or conformed copies, of such corporate records, agreements, documents and other instruments and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such other investigations, as we have deemed relevant and necessary in connection with the opinions hereinafter set forth. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as duplicates or certified or conformed copies, and the authenticity of the originals of such latter documents. Based upon the foregoing, and subject to the qualifications and limitations stated herein, we are of the opinion that: 1. The Company has been duly incorporated and is validly existing and in good standing as a corporation under the laws of the State of Georgia. 2. The Indenture has been duly authorized, executed and delivered by the Company and, assuming that the Indenture is the valid and legally binding obligation of the Trustee, constitutes a valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms. 3. The Senior Notes have been duly authorized, executed and issued by the Company and, assuming due authentication thereof by the Trustee and upon payment and delivery in accordance with the Purchase Agreement, will constitute valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms and entitled to the benefits of the Indenture. 4. The Registration Rights Agreement has been duly authorized, executed and delivered by the Company and, assuming that the Registration Rights Agreement is the valid and legally binding obligation of the Initial Purchasers, constitutes a valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms. 5. The Purchase Agreement has been duly authorized, executed and delivered by the Company. 6. The statements made in the Offering Memorandum under the caption "Description of the Senior Notes," insofar as they purport to constitute summaries of certain terms of documents referred to therein, constitute accurate summaries of the terms of such documents in all material respects. C-2 41 7. No registration under the Securities Act of 1933, as amended, of the Senior Notes and no qualification of the Indenture under the Trust Indenture Act of 1939, as amended, is required for the offer and sale of the Senior Notes by the Company to the Initial Purchasers or the reoffer and resale of the Senior Notes by the Initial Purchasers to the initial purchasers therefrom solely in the manner contemplated by the Offering Memorandum, the Purchase Agreement and the Indenture. Our opinions in paragraphs 2, 3 and 4 above are subject to (i) the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, (ii) general equitable principles (whether considered in a proceeding in equity or at law) and (iii) an implied covenant of good faith and fair dealing. Our opinion in paragraph 4 is further limited by considerations of public policy. We express no opinion as to the validity, legally binding effect or enforceability of any provision of the Registration Rights Agreement or any related provisions of the Indenture that requires or relates to payment of any interest at a rate or in an amount which a court would determine in the circumstances under applicable law to be commercially unreasonable or a penalty or a forfeiture. All legal proceedings taken by the Company in connection with the offering of the Senior Notes, and the legal opinions, dated the date hereof, rendered to you by Joey M. Loudermilk, Esq., Senior Vice President, Secretary & General Counsel of the Company, and Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Company, pursuant to the Purchase Agreement, are in form satisfactory to us. Insofar as the opinions expressed herein relate to or are dependent upon matters governed by the laws of the State of Georgia, we have relied upon the opinion of Joey M. Loudermilk, Esq., Senior Vice President, Secretary & General Counsel of the Company. We have not independently verified the accuracy, completeness or fairness of the statements made or included in the Offering Memorandum or the Exchange Act Document and take no responsibility therefor, except as and to the extent set forth in paragraph 6 above. In the course of the preparation by the Company of the Offering Memorandum, we participated in conferences with certain officers and employees of the Company, with representatives of KPMG LLP and with counsel to the Company. We did not participate in the preparation of the Exchange Act Document or review the Exchange Act Document prior to its filing with the Commission. Based upon our examination of the Offering Memorandum and the Exchange Act Document, our investigations made in connection with the preparation of the Offering Memorandum (excluding the Exchange Act Document) and our participation in the conferences referred to above, we have no reason to believe that the Offering Memorandum (including the Exchange Act Document) contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that we express no belief with respect to the financial statements or C-3 42 other financial data contained or incorporated by reference in the Offering Memorandum or the Exchange Act Document. We are members of the Bar of the State of New York and we do not express any opinion herein concerning any law other than the law of the State of New York and the federal law of the United States. This opinion letter is rendered to you in connection with the above described transactions. This opinion letter may not be relied upon by you for any other purpose, or relied upon by, or furnished to, any other person, firm or corporation without our prior written consent. Very truly yours, SIMPSON THACHER & BARTLETT C-4 EX-4.1 3 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.1 AFLAC INCORPORATED $450,000,000 6 1/2% SENIOR NOTES DUE 2009 REGISTRATION RIGHTS AGREEMENT April 21, 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated Donaldson, Lufkin & Jenrette First Union Capital Markets Corp. NationsBanc Montgomery Securities LLC Salomon Smith Barney Inc. c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1325 Ladies and Gentlemen: AFLAC Incorporated, a Georgia corporation (the "Company"), proposes to issue and sell to Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette, First Union Capital Markets Corp., NationsBanc Montgomery Securities LLC, and Salomon Smith Barney Inc. (the "Initial Purchasers") upon the terms set forth in a Purchase Agreement dated April 16, 1999 (the "Purchase Agreement") its 6 1/2% Senior Notes due 2009 (the "Senior Notes") (the "Initial Placement"). As an inducement to the Initial Purchasers to enter into the Purchase Agreement and in satisfaction of a condition to the obligations of the Initial Purchasers thereunder, the Company agrees with the Initial Purchasers, (i) for the benefit of the Initial Purchasers and (ii) for the benefit of the holders from time to time of the Transfer Restricted Securities (as defined herein) (including the Initial Purchasers) (each of the foregoing a "Holder" and together the "Holders"), as follows: 2 1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Additional Interest" shall have the meaning set forth in Section 4 of this Agreement. "Advice" shall have the meaning set forth in Section 6 of this Agreement. "Affiliate" of any specified person means any other person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" means this Registration Rights Agreement, dated April 21, 1999, between the Company and the Initial Purchasers. "Commission" means the Securities and Exchange Commission. "Company" means AFLAC Incorporated, a Georgia corporation. "Consummate" or "Consummated," with respect to a registered Exchange Offer, means that (i) the Exchange Offer Registration Statement relating to the Exchange Notes to be issued in the Exchange Offer has been filed and is effective; (ii) such Registration Statement has been kept continuously effective, and the Exchange Offer has been kept open, for a period not less than the minimum period required pursuant to paragraphs 2(c)(ii) and 2(e)(ii) hereof; and (iii) the Company has delivered Exchange Notes in the same aggregate principal amount as the aggregate principal amount of Transfer Restricted Securities that were validly tendered by Holders thereof pursuant to the Exchange Offer. 2 3 "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Exchange Notes" means an issue of securities of the Company with terms identical to the Senior Notes (except that the Exchange Notes will not bear the Private Placement Legend or the Regulation S Legend (each as defined in the Indenture) or any other legends restricting the transfer thereof, will contain the alternative paragraph 1(b) appearing on the reverse of the Senior Notes and except that interest thereon shall accrue from the last date on which interest was paid on the Senior Notes or, if no such interest has been paid, from the date of issuance of the Senior Notes) to be exchanged for the Senior Notes pursuant to the Exchange Offer. "Exchange Offer" means the registered offer by the Company to exchange the Senior Notes for the Exchange Notes. "Exchange Offer Registration Period" means the 30-day period following the commencement of the Exchange Offer, exclusive of any period during which any stop order shall be in effect suspending the effectiveness of the Exchange Offer Registration Statement. "Exchange Offer Registration Statement" means a registration statement of the Company on an appropriate form under the Act with respect to the Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchanging Dealer" means any Holder (which may include the Initial Purchasers) which is a broker-dealer, electing to exchange Senior Notes acquired for its own account as a result of market-making activities or other trading activities, for Exchange Notes. "Final Offering Memorandum" has the meaning set forth in the Purchase Agreement. "Holder" has the meaning set forth in the preamble hereto. "Indenture" means the Indenture relating to the Senior Notes dated as of April 21, 1999, between the Company and The Bank of New York, as trustee, as the same may be amended from time to time in accordance with the terms thereof. 3 4 "Initial Placement" has the meaning set forth in the preamble hereto. "Issue Date" means the date on which Senior Notes are originally issued under the Indenture. "Losses" shall have the meaning set forth in Section 8(d) of this Agreement. "Majority Holders" means the Holders of a majority of the aggregate principal amount of Senior Notes registered under a Registration Statement. "Managing Underwriters" means the investment banker or investment bankers and manager or managers that shall administer an Underwritten Offering. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Senior Notes or the Exchange Notes, covered by such Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all Commission, stock exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel for any Underwriters or Holders in connection with blue sky qualification of any of the Exchange Notes or Senior Notes), (iii) all expenses of any persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, and amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) all fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (vi) the fees and disbursements of the Trustee and its counsel, (vii) the fees and disbursements of counsel for the Company and, in the case of a Shelf Registration Statement, the fees and disbursements of one counsel for the Holders (which counsel shall be selected by 4 5 the Majority Holders and which counsel may also be counsel for the Underwriters) and (viii) the fees and disbursements of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, but excluding fees and expenses of counsel to the Underwriters (other than fees and expenses set forth in clauses (ii) or (vii) above) or the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Senior Notes by a Holder. "Registration Statement" means any Exchange Offer Registration Statement or Shelf Registration Statement that covers any of the Senior Notes or the Exchange Notes pursuant to the provisions of this Agreement, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Representative" means Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Representative of the Initial Purchasers. "Senior Notes" has the meaning set forth in the preamble hereto. "Shelf Registration" means a registration effected pursuant to Section 3 hereof. "Shelf Registration Period" has the meaning set forth in Section 3(b) hereof. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of Section 3 hereof which covers some or all of the Senior Notes or Exchange Notes, as applicable, on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the Commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 7aaa-77bbbb) as amended. 5 6 "Transfer Restricted Security" means each Senior Note or Exchange Note until (i) the date on which such Transfer Restricted Security has been exchanged by a person other than a broker-dealer for an Exchange Note in the Exchange Offer that is freely transferable under the Act, (ii) following the exchange by a broker-dealer in the Exchange Offer of a Transfer Restricted Security for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the Prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Transfer Restricted Security has been effectively registered under the Act and disposed of in accordance with the Shelf Registration Statement, or (iv) the date on which such Transfer Restricted Security is distributed to the public pursuant to Rule 144 under the Act or is saleable pursuant to Rule 144 (k) under the Act. "Trustee" means the trustee with respect to the Senior Notes under the Indenture. "Underwriter" means any underwriter of Senior Notes in connection with an offering thereof under a Shelf Registration Statement. "Underwritten Offering" means a registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2. Exchange Offer; Resales of Exchange Notes by Exchanging Dealers; Private Exchange. (a) The Company shall prepare and, not later than 90 days following the Issue Date (or if the 90th day is not a business day, the first business day thereafter), shall file with the Commission the Exchange Offer Registration Statement with respect to the Exchange Offer. The Company shall use its best efforts to cause the Exchange Offer Registration Statement to become effective under the Act within 180 days of the Issue Date (or if the 180th day is not a business day, the first business day thereafter). In connection with the foregoing, the Company shall use its best efforts to (A) file all pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause such Registration Statement to become effective, (B) file if applicable, a post-effective amendment to such Registration Statement pursuant to Rule 430A under the Act, and (C) cause all necessary filings in connection with the registration and qualification of the Exchange Notes to be made under the blue sky laws of such jurisdictions as are necessary to permit the Exchange Offer to be Consummated. 6 7 (b) Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder electing to exchange Senior Notes for Exchange Notes (assuming that such Holder is not an affiliate of the Company within the meaning of the Act, acquires the Exchange Notes in the ordinary course of such Holder's business and has no arrangements with any person to participate in the distribution of the Exchange Notes) to trade such Exchange Notes from and after their receipt without any limitations or restrictions under the Act and without material restrictions under the securities laws of a substantial proportion of the several states of the United States. (c) In connection with the Exchange Offer, the Company shall: (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (ii) keep the Exchange Offer open for not less than 30 days after the date notice thereof is mailed to the Holders (or longer if required by applicable law); (iii) utilize the services of a depositary for the Exchange Offer with an address in the Borough of Manhattan, the City of New York; (iv) not include any other securities other than the Exchange Notes in the Exchange Offer Registration Statement; (v) use its reasonable best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective; and (vi) comply in all respects with all applicable laws. (d) As soon as practicable after the close of the Exchange Offer, the Company shall: (i) accept for exchange all Senior Notes tendered and not validly withdrawn pursuant to the Exchange Offer; 7 8 (ii) deliver to the Trustee for cancellation all Senior Notes so accepted for exchange; and (iii) cause the Trustee promptly to authenticate and deliver to each Holder of Senior Notes, Exchange Notes equal in principal amount to the Senior Notes of such Holder so accepted for exchange. (e) The Initial Purchasers and the Company acknowledge that, pursuant to interpretations by the Commission's staff of Section 5 of the Act, and in the absence of an applicable exemption therefrom, each Exchanging Dealer is required to deliver a Prospectus in connection with a sale of any Exchange Notes received by such Exchanging Dealer pursuant to the Exchange Offer in exchange for Senior Notes acquired for its own account as a result of market-making activities or other trading activities. Accordingly, the Company shall: (i) include the information set forth in Annex A hereto on the cover of the Exchange Offer Registration Statement, in Annex B hereto in the forepart of the Exchange Offer Registration Statement in a section setting forth details of the Exchange Offer, and in Annex C hereto in the underwriting or plan of distribution section of the Prospectus forming a part of the Exchange Offer Registration Statement, and include the information set forth in Annex D hereto in the letter of transmittal delivered pursuant to the Exchange Offer; and (ii) use its best efforts to keep the Exchange Offer Registration Statement continuously effective under the Act during the Exchange Offer Registration Period for delivery by Exchanging Dealers in connection with sales of Exchange Notes received pursuant to the Exchange Offer, as contemplated by Section 5(j) below. (f) In the event that any Initial Purchaser determines that it is not eligible to participate in the Exchange Offer with respect to the exchange of Senior Notes constituting any portion of an unsold allotment, at the request of such Initial Purchaser, the Company shall issue and deliver to such Initial Purchaser or the party purchasing Exchange Notes registered under a Shelf Registration Statement as contemplated by Section 3 hereof from such Initial Purchaser, in exchange for such Senior Notes, a like principal amount of Exchange Notes. The Company shall seek 8 9 to cause the CUSIP Service Bureau to issue the same CUSIP number for such Exchange Notes issued pursuant to the Exchange Offer. 3. Shelf Registration. If, (i) because of any change in law or applicable interpretations thereof by the Commission's staff, the Company determines upon advice of its outside counsel that it is not permitted to effect the Exchange Offer as contemplated by Section 2 hereof, (ii) for any other reason the Exchange Offer Registration Statement is not declared effective within 180 days following the Issue Date (or if the 180th day is not a business day, the first business day thereafter), (iii) any Initial Purchaser so requests with respect to Senior Notes held by it following consummation of the Exchange Offer, (iv) any Holder (other than an Initial Purchaser) is not eligible to participate in the Exchange Offer because of any change in law or applicable interpretations of the staff of the Commission or otherwise, or (v) in the case of any Initial Purchaser that participates in the Exchange Offer or acquires Exchange Notes pursuant to Section 2(f) hereof, such Initial Purchaser does not receive freely tradeable Exchange Notes in exchange for Senior Notes (it being understood that, for purposes of this Section 3, (x) the requirement that an Initial Purchaser deliver a Prospectus containing the information required by Items 507 and/or 508 of Regulation S-K under the Act in connection with sales of Exchange Notes acquired in exchange for such Senior Notes shall result in such Exchange Notes not being "freely tradeable" but (y) the requirement that an Exchanging Dealer deliver a Prospectus in connection with sales of Exchange Notes acquired in the Exchange Offer in exchange for Senior Notes acquired as a result of market-making activities or other trading activities shall not result in such Exchange Notes being not "freely tradeable"), the following provisions shall apply: (a) The Company shall as promptly as practicable after so required or requested pursuant to this Section 3, file with the Commission and thereafter shall use its best efforts to cause to be declared effective under the Act by the 210th day (or if the 210th day is not a business day, the first business day thereafter) after the original issuance of the Senior Notes, a Shelf Registration Statement relating to the offer and sale of the Senior Notes or the Exchange Notes, as applicable, by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement; provided, that with respect to Exchange Notes received by an Initial Purchaser in exchange for Senior Notes constituting any portion of an unsold allotment, the Company may, if permitted by current interpretations by the Commission's staff, file a post-effective amendment to the Exchange Offer Registration Statement containing the information required by Regulation S-K Items 507 and/or 508, as applicable, in satisfaction of its 9 10 obligations under this paragraph (a) with respect thereto, and any such Exchange Offer Registration Statement, as so amended, shall be referred to herein as, and governed by the provisions herein applicable to, a Shelf Registration Statement. (b) The Company shall use its best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming a part thereof to be usable by Holders for a period of two years from the date the Shelf Registration Statement is declared effective by the Commission or until one year after such effective date if such Shelf Registration Statement is filed at the request of an Initial Purchaser or such shorter period that will terminate when all the Senior Notes or Exchange Notes, as applicable, covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period"). The Company shall be deemed not to have used its best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of securities covered thereby not being able to offer and sell such securities during that period, unless (i) such action is required by applicable law, or (ii) such action is taken by the Company in good faith and for valid business reasons (not including avoidance of the Company's obligations hereunder), including the acquisition or divestiture of assets. 4. Additional Interest. In the event that the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 90th day following the Issue Date, the Exchange Offer Registration Statement is not declared effective on or prior to the 180th day following the Issue Date or the Exchange Offer is not Consummated and a Shelf Registration Statement is not declared effective on or prior to the 210th day following the Issue Date (or if the 90th, 180th or 210th day is not a business day, the first business day thereafter), interest will accrue (in addition to stated interest on the Senior Notes) from and including the next day following such 90- 180- or 210-day period. Such additional interest (the "Additional Interest") will be payable in cash semiannually in arrears each April 15 and October 15, at a rate per annum equal to 0.25% of the principal amount of the Senior Notes, for each event described in the preceding sentence; provided, however, that the aggregate amount of Additional Interest payable pursuant to the above provisions shall in no event exceed 0.75% per annum of the principal amount of the Senior Notes. Upon the filing of the Exchange Offer Registration Statement, the effectiveness of the Exchange Offer Registration Statement, the Consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, after such 90- 180- or 210-day period, the Additional Interest payable on the Senior Notes from the 10 11 date of such filing, effectiveness or consummation, as the case may be, will cease to accrue and all accrued and unpaid Additional Interest as of such occurrence shall be paid to the holders of the Senior Notes. Notwithstanding the fact that any securities for which Additional Interest is due cease to be Transfer Restricted Securities, all obligations of the Company to pay Additional Interest with respect to such securities shall survive until such time as such obligations with respect to such securities shall have been satisfied in full. In the event that a Shelf Registration Statement is declared effective pursuant to Section 3 hereof, if the Company fails to keep such Registration Statement continuously effective for the period required by this Agreement, or if the Shelf Registration Statement fails to be usable for its intended purpose without being succeeded by a post-effective amendment to such Shelf Registration Statement that cures such failure and that is itself declared effective within 10 days of filing such post-effective amendment to such Shelf Registration Statement, then from such time as the Shelf Registration Statement is no longer effective or usable, as the case may be, until the earlier of (i) the date that the Shelf Registration Statement is again deemed effective or usable, as the case may be, (ii) the date that is the second anniversary of the Issue Date, or (iii) the date as of which all of the Senior Notes are sold pursuant to the Shelf Registration Statement, Additional Interest shall accrue at a rate per annum equal to 0.25% of the principal amount of the Senior Notes and shall be payable in cash semiannually in arrears each April 15 and October 15. All accrued Additional Interest shall be paid to Holders by the Company in the same manner as interest is paid pursuant to the Indenture. The aggregate amount of Additional Interest payable pursuant to this Agreement shall in no event exceed 0.75% per annum of the principal amount of Senior Notes. 5. Registration Procedures. In connection with any Shelf Registration Statement and, to the extent applicable, any Exchange Offer Registration Statement, the following provisions shall apply: (a) The Company shall use its best efforts to keep any Registration Statement required by this Agreement continuously effective and provide all requisite financial statements for the period specified in Section 2 or 3 of this Agreement, as applicable; upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein to be either not 11 12 effective or not usable for resale of Transfer Restricted Securities during the period required by this Agreement, the Company shall use its best efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purpose(s) as soon as practicable thereafter. (b) The Company shall prepare and file with the Commission such amendments and post-effective amendments to any Registration Statement required by this Agreement as may be necessary to keep such Registration Statement effective for the applicable period set forth in Section 2 or 3 hereof, as applicable; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply with the applicable provisions of Rules 424 and 430A under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus. (c) The Company shall furnish to the Representative and to each Holder named therein, a reasonable period of time prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement and any Exchange Offer Registration Statement, and each amendment thereof and each amendment or supplement, if any, to the Prospectus included therein and shall use its reasonable best efforts to reflect in each such document, when so filed with the Commission, such comments as the Representative or any Holder may propose. (d) The Company shall use its best efforts to ensure that (i) any Registration Statement and any amendment thereto and any Prospectus forming a part thereof and any amendment or supplement thereto complies in all material respects with the Act and the rules and regulations thereunder, (ii) any Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. 12 13 (e) (1) The Company shall advise the Representative and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, if requested by the Representative or any such Holder, confirm such advice in writing: (i) when a Registration Statement and any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus included therein or for additional information. (2) The Company shall advise the Representative and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, in the case of any Exchange Offer Registration Statement, any Exchanging Dealer which has provided in writing to the Company a telephone or facsimile number and address for notices, and, if requested by the Representative or any such Holder or Exchanging Dealer, confirm such advice in writing: (i) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (ii) of the receipt by the Company of any notification with respect to the suspension of the qualification of the securities included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (iii) of the existence of any fact or the happening of any event that requires the making of any changes in the Registration Statement, Prospectus or any amendment or supplement thereto, so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not mislead- 13 14 ing (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (f) The Company shall use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement, or of any other suspension of the qualification of the securities, at the earliest possible time. (g) The Company shall furnish to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, any documents incorporated by reference therein and all exhibits (including those incorporated by reference). (h) The Company shall, during the Shelf Registration Period, deliver to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of securities in connection with the offering and sale of the securities covered by such Prospectus or any amendment or supplement thereto. (i) The Company shall furnish to each Exchanging Dealer which so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, any documents incorporated by reference therein, and, if the Exchanging Dealer so requests in writing, any documents incorporated by reference therein and all exhibits (including those incorporated by reference). (j) The Company shall, during the Exchange Offer Registration Period, promptly deliver to each Exchanging Dealer, without charge, as many copies of the Prospectus included in such Exchange Offer Registration Statement and any amendment or supplement thereto as such Exchanging Dealer may reasonably request for delivery by such Exchanging Dealer in connection with a sale of Exchange Notes received by it pursuant to the Exchange Offer; and the Company 14 15 consents to the use of the Prospectus or any amendment or supplement thereto by any such Exchanging Dealer, as aforesaid. (k) In connection with any Shelf Registration Statement, the Company shall register or qualify or cooperate with any of the Holders of securities named therein and such Holders' counsel in connection with the registration or qualification of such securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holder reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the securities covered by such Registration Statement; provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject. (l) Unless the applicable Senior Notes shall be in book-entry only form, the Company shall cooperate with the Holders of Senior Notes to facilitate the timely preparation and delivery of certificates representing Senior Notes to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as Holders may request prior to sales of securities pursuant to such Registration Statement. (m) The Company shall use its reasonable best efforts to cause the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller(s) or the Underwriter(s), if any, to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in paragraph 5(k) hereof. (n) Upon the occurrence of any event contemplated by paragraph 5(e) (2) (iii) above, the Company shall promptly prepare a post-effective amendment to any Registration Statement or an amendment or supplement to the related Prospectus or file any other required document so that, as thereafter delivered to purchasers of the securities included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 15 16 (o) Not later than the effective date of any such Registration Statement hereunder, the Company shall provide a CUSIP number for the Senior Notes or Exchange Notes, as the case may be, registered under such Registration Statement, and provide the applicable trustee with printed certificates for such Senior Notes or Exchange Notes, in a form eligible for deposit with The Depository Trust Company. (p) The Company shall use its reasonable best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to its security holders as soon as practicable after the effective date of the applicable Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Act. (q) The Company shall cause the Indenture to be qualified under the TIA in a timely manner, and, in connection therewith, cooperate with the Trustee and the Holders of the Senior Notes and the Exchange Notes to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA, and execute and use their reasonable best efforts to cause the Trustee to execute all documents that may be required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner. (r) The Company may require each Holder of securities to be sold pursuant to any Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of such securities as the Company may from time to time reasonably require for inclusion in such Registration Statement, and the Company may exclude from such registration the Senior Notes of any Holder that fails to furnish such information within a reasonable time after receiving such request. (s) The Company shall provide promptly to each Holder upon request each document which has been filed with the Commission pursuant to the requirements of Section 13 and Section 15 of the Exchange Act. (t) The Company shall, if requested, promptly incorporate in any Registration Statement or Prospectus, pursuant to a Prospectus supplement or post-effective amendment, if necessary, such information as the Managing Underwriters and Majority Holders agree should be included therein and to which the Company does not unreasonably object and shall make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment. 16 17 (u) In the case of any Shelf Registration Statement, the Company shall enter into such customary agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or facilitate the registration or the disposition of the Senior Notes, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 8 (or such other provisions and procedures reasonably acceptable to the Company, the Majority Holders and the Managing Underwriters, if any) with respect to all parties to be indemnified pursuant to Section 8 hereof from Holders of Senior Notes to the Company. (v) In the case of any Shelf Registration Statement, the Company shall (i) make reasonably available for inspection by the Holders of securities to be registered thereunder, any Underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by the Holders or any such Underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by the Holders or any such Underwriter, attorney, accountant or agent in connection with any such Registration Statement prior to its effectiveness as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Holders or any such Underwriter, attorney, accountant or other agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) make such representations and warranties to the Holders of securities registered thereunder and the Underwriters, if any, in form, substance and scope as are customarily made by issuers to Underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the Underwriters, if any, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders and Underwriters; (v) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to 17 18 be, included in the Registration Statement), addressed to each selling Holder of securities registered thereunder and the Underwriters, if any, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings; and (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders and the Managing Underwriters, if any, including those to evidence compliance with Section 5(n) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 5(v) shall be performed at (A) the effective date of such Registration Statement and each post-effective amendment thereto and (B) each closing under any underwriting or similar agreement as and to the extent required thereunder. 6. Restriction on Holders. Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt of any notice from the Company of the existence of any fact of the kind described in paragraph 5(e)(2)(iii) hereof, such Holder will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by paragraph 5(n) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus. If so directed by the Company, each Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of such notice. In the event the Company shall give any such notice, the time period regarding the effectiveness of such Registration Statement set forth in Section 2 or 3 hereof, as applicable, shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to paragraph 5(c)(2)(iii) hereof to and including the date when each selling Holder covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by paragraph 5(n) hereof or shall have received the Advice. 7. Registration Expenses. The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2 or Section 3. Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Senior Notes pursuant to the Shelf Registration Statement. 18 19 8. Indemnification and Contribution. (a) In connection with any Registration Statement, the Company agrees to indemnify and hold harmless each Holder of securities covered thereby (including each Initial Purchaser and, with respect to any Prospectus delivery as contemplated in Section 5(j) hereof, each Exchanging Dealer), the directors, officers, employees and agents of each such Holder and each person who controls any such Holder within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof, or in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such Holder specifically for inclusion therein; provided further, that with respect to any untrue statement or omission of material fact made in the Registration Statement, any amendment thereto or the preliminary Prospectus, the indemnity agreement contained in this Section 8(a) shall not inure to the benefit of any Holder from whom the person asserting any such loss, claim, damage or liability purchased the securities concerned, to the extent that any such loss, claim, damage or liability of such Holder occurs under the circumstance where it shall have been determined by a court of competent jurisdiction by final and nonappealable judgment that (w) the Company had previously furnished copies of the preliminary Prospectus to the Holder, (x) delivery of the Prospectus was required to be made to such person, (y) the untrue statement or omission of a material fact contained in the preliminary Prospectus was corrected in the Prospectus and (z) there was not sent or given to such person, at or prior to the written confirmation of the sale of such securities to such person, a copy of the Prospectus unless such failure resulted solely from non-compliance by the Company with any of its obligations under Section 5 of this Agreement. This indemnity 19 20 agreement will be in addition to any liability which the Company may otherwise have. The Company also agrees to indemnify or contribute to Losses of, as provided in Section 8(d), any underwriters of Senior Notes registered under a Shelf Registration Statement, their officers and directors and each person who controls such underwriters on substantially the same basis as that of the indemnification of the Initial Purchaser and the selling Holders provided in this Section 8(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 5(u) hereof. (b) Each Holder of securities covered by a Registration Statement (including each Initial Purchaser and, with respect to any Prospectus delivery as contemplated in Section 5(j) hereof, each Exchanging Dealer) severally and not jointly agrees to indemnify and hold harmless (i) the Company, (ii) each of its directors, (iii) each of its officers who signs such Registration Statement, and (iv) each person who controls the Company within the meaning of either the Act or the Exchange Act to the same extent as the foregoing indemnity from the Company to each such Holder, but only with reference to written information relating to such Holder furnished to the Company by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. In no event shall any Holder, its directors, officers or any Person who controls such Holder be liable or responsible for any amount in excess of the amount by which the total amount received by such Holder with respect to its sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds the amount of any damages that such Holder, its directors, officers or any Person who controls such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. This indemnity agreement will be in addition to any liability which any such Holder may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification 20 21 obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint as counsel one firm of attorneys of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party (together with one local counsel in each jurisdiction) in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action, or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party, it being understood that the indemnifying party shall not be liable for more than one separate firm (in addition to one local counsel in each jurisdiction) for all indemnified parties in each jurisdiction in which any claim or action arising out of the same general allegations or circumstances is brought. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. An indemnifying party will not, without its prior written consent, be liable for any settlement or compromise or consent to the entry of any judgment, but if settled with its written consent, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement. 21 22 (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 8 is unavailable to or insufficient to hold harmless an indemnified party for any reason, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses incurred in connection with investigating or defending same) (collectively "Losses") to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Initial Placement and the Registration Statement which resulted in such Losses; provided, however, that in no case shall any Initial Purchaser or any subsequent Holder of any Senior Note or Exchange Note be responsible, in the aggregate, for any amount in excess of the purchase discount or commission applicable to such Senior Note, or in the case of an Exchange Note, applicable to the Senior Note which was exchangeable into such Exchange Note, as set forth on the cover page of the Final Offering Memorandum, nor shall any under writer be responsible for any amount in excess of the underwriting discount or commission applicable to the Senior Notes purchased by such underwriter under the Registration Statement which resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the total net proceeds from the Initial Placement (before deducting expenses) as set forth on the cover page of the Final Offering Memorandum. Benefits received by the Initial Purchasers shall be deemed to be equal to the total purchase discounts and commissions as set forth on the cover page of the Final Offering Memorandum, and benefits received by any other Holders shall be deemed to be equal to the value of receiving Senior Notes or Exchange Notes, as applicable, registered under the Act. Benefits received by any underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Registration Statement which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand, the intent of the parties and their relative knowledge and access to information and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just and equitable if contribution were determined by pro rata 22 23 allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation and no Holder, nor its directors, its officers or any Person, if any, who controls such Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total received by such Holder with respect to the sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. For purposes of this Section 8, each person who controls a Holder within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The provisions of this Section 8 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any of the officers, directors or controlling persons referred to in Section 8 hereof, and will survive the sale by a Holder of securities covered by a Registration Statement. 9. Rules 144 and 144A The Company agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding and during any period in which the Company (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder, to such Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A, and (ii) is subject to Section 13 or 15(d) of the Exchange Act, to make all filings required thereby in a timely manner in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144. 23 24 10. Underwritten Offerings The Holders of Transfer Restricted Securities covered by the Shelf Registration Statement who desire to do so may sell such Transfer Restricted Securities in an Underwritten Offering. In any such Underwritten Offering, the investment banker(s) and manager(s) that will administer the offering will be selected by the Holders of a majority in aggregate principal amount of the Transfer Restricted Securities included in such offering; provided, that such investment bankers and managers must be reasonably satisfactory to the Company. No Holder may participate in any Underwritten Offering hereunder unless such Holder (a) agrees to sell such Holder's Transfer Restricted Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (b) completes and executes all reasonable questionnaires, powers of attorney, indemnities, underwriting agreements, lock-up letters and other documents required under the terms of such underwriting arrangements. 11. Miscellaneous. (a) Remedies. The Company acknowledges and agrees that any failure by the Company to comply with their respective obligations under Sections 2 and 3 hereof may result in material, irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Sections 2 and 3 hereof. The Company further agrees to waive the defense in any action for specific performance that a remedy in law would be adequate. (b) No Inconsistent Agreements. The Company has not, as of the date hereof, entered into, nor shall it, on or after the date hereof, enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Holders of 24 25 at least a majority of the then outstanding aggregate principal amount of Senior Notes (or, after the consummation of any Exchange Offer in accordance with Section 2 hereof, of Exchange Notes); provided that, with respect to any matter that directly or indirectly affects the rights of any Initial Purchaser hereunder, the Company shall obtain the written consent of each such Initial Purchaser against which such amendment, qualification, supplement, waiver or consent is to be effective. Notwithstanding the foregoing (except the foregoing proviso), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of securities being sold rather than registered under such Registration Statement. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier or air courier guaranteeing overnight delivery: (i) if to a Holder, at the most current address given by such holder to the Company in accordance with the provisions of this Section 11(d), which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar under the Indenture, with a copy in like manner to Merrill Lynch, Pierce, Fenner & Smith Incorporated; (ii) if to any of the Initial Purchasers at the address of the Representative set forth on Page 1 of this Agreement; and (iii) if to the Company, initially at its address set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given when received. The Initial Purchasers or the Company by notice to the other may designate additional or different addresses for subsequent notices or communications. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without the need for an express assignment or any consent by the Company 25 26 thereto, subsequent Holders of Senior Notes and/or Exchange Notes. The Company hereby agrees to extend the benefits of this Agreement to any Holder of Senior Notes and/or Exchange Notes and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all of the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law. (j) Securities Held by the Company, etc. Whenever the consent or approval of Holders of a specified percentage of principal amount of Senior Notes or Exchange Notes is required hereunder, Senior Notes or Exchange Notes, as applicable, held by the Company or its Affiliates (other than subsequent Holders of Senior Notes or Exchange Notes if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Senior Notes or Exchange Notes) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 26 27 Please confirm that the foregoing correctly sets forth the agreement between the Company and you. AFLAC INCORPORATED By: /s/ GARY L. STEGMAN ------------------------------ Name: Gary L. Stegman Title: Senior Vice President and Assistant Chief Financial Officer The foregoing Agreement is hereby accepted as of the date first above written. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED DONALDSON, LUFKIN & JENRETTE FIRST UNION CAPITAL MARKETS CORP. NATIONSBANC MONTGOMERY SECURITIES LLC SALOMON SMITH BARNEY INC. By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, AS REPRESENTATIVE By: /s/ RICHARD BONAVENTURA -------------------------------- Name: Richard Bonaventura Title: Managing Director 28 ANNEX A Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Senior Notes where such Exchange Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date (as defined herein) and ending on the close of business on the 90th day following the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." 29 ANNEX B Each broker-dealer that receives Exchange Notes for its own account in exchange for Senior Notes, where such Senior Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." 30 ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Senior Notes where such Senior Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business on the 90th day following the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until ________, 199__, all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus.(1) The Company will not receive any proceeds from any sale of Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "under writer" within the meaning of the Securities Act and any profit of any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. - ------------------- (1) In addition, the legend required by Item 502(e) of Regulation S-K will appear on the back cover page of the Exchange Offer prospectus. 31 For a period of 90 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the holders of the Senior Notes) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Senior Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. [If applicable, add information required by Regulation S-K Items 507 and/or 508.] 2 32 ANNEX D Rider A [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: --------------------------------------------- Address: ------------------------------------------ -------------------------------------------------- Rider B If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Senior Notes that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Notes; provided, however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. EX-4.2 4 INDENTURE 1 EXHIBIT 4.2 AFLAC Incorporated, as Issuer and The Bank of New York, as Trustee ------------------ INDENTURE Dated as of April 21, 1999 $450,000,000 6 1/2% Senior Notes due 2009 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION...............................1 SECTION 1.1. Definitions.........................................................1 SECTION 1.2. Other Definitions..................................................16 SECTION 1.3. Incorporation by Reference of Trust Indenture Act..................17 SECTION 1.4. Compliance Certificates and Opinions...............................17 SECTION 1.5. Form of Documents Delivered to Trustee.............................18 SECTION 1.6. Acts of Holders....................................................18 SECTION 1.7. Notices, Etc., to Trustee and the Issuer...........................20 SECTION 1.8. Notice to Holders; Waiver..........................................20 SECTION 1.9. Conflict of any Provision of Indenture with Trust Indenture Act....................................................21 SECTION 1.10. Effect of Headings and Table of Contents..........................21 SECTION 1.11. Successors and Assigns............................................21 SECTION 1.12. Severability Clause...............................................21 SECTION 1.13. Benefits of Indenture.............................................21 SECTION 1.14. Governing Law.....................................................21 SECTION 1.15. Legal Holidays....................................................22 SECTION 1.16. No Recourse Against Others........................................22 SECTION 1.17. Submission of Jurisdiction. .....................................22 SECTION 1.18. Currency Indemnity................................................22 ARTICLE II THE SENIOR NOTES.....................................................................23 SECTION 2.1. Form and Dating....................................................23 SECTION 2.2. Denominations......................................................29 SECTION 2.3. Execution and Authentication.......................................29 SECTION 2.4. Registrar and Paying Agent.........................................30 SECTION 2.5. Paying Agent to Hold Money in Trust................................31 SECTION 2.6. Senior Note Holder Lists...........................................33 SECTION 2.7. Transfer and Exchange..............................................33 SECTION 2.8. Replacement Senior Notes...........................................35 SECTION 2.9. Outstanding Senior Notes...........................................35 SECTION 2.10. Temporary Senior Notes............................................36 SECTION 2.11. Cancellation......................................................36 SECTION 2.12. Defaulted Interest................................................36 SECTION 2.13. Special Transfer Provisions.......................................37 SECTION 2.14. CUSIP and ISIN Numbers............................................40
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ARTICLE III SATISFACTION AND DISCHARGE...........................................................40 SECTION 3.1. Satisfaction and Discharge of Indenture.............................40 SECTION 3.2. Application of Trust Money..........................................42 ARTICLE IV DEFAULTS AND REMEDIES................................................................42 SECTION 4.1. Events of Default...................................................42 SECTION 4.2. Acceleration of Maturity; Rescission................................44 SECTION 4.3. Collection of Indebtedness and Suits for Enforcement by Trustee............................................. SECTION 4.4. Trustee May File Proofs of Claim....................................46 SECTION 4.5. Trustee May Enforce Claims Without Possession of Senior Notes...................................................47 SECTION 4.6. Application of Money Collected......................................47 SECTION 4.7. Limitation on Suits.................................................48 SECTION 4.8. Unconditional Right of Holders to Receive Principal, Premium and Interest............................................... SECTION 4.9. Restoration of Rights and Remedies..................................49 SECTION 4.10. Rights and Remedies Cumulative......................................49 SECTION 4.11. Delay or Omission Not Waiver........................................49 SECTION 4.12. Control by Holders..................................................49 SECTION 4.13. Waiver of Defaults..................................................50 SECTION 4.14. Undertaking for Costs...............................................50 ARTICLE V THE TRUSTEE..........................................................................51 SECTION 5.1. Notice of Events of Default.........................................51 SECTION 5.2. Certain Rights of Trustee...........................................51 SECTION 5.3. Not Responsible for Recitals or Issuance of Senior Notes............54 SECTION 5.4. Trustee and Agents May Hold Senior Notes; Collections; Etc..................................................54 SECTION 5.5. Money Held in Trust.................................................54 SECTION 5.6. Compensation and Reimbursement......................................54 SECTION 5.7. Conflicting Interests...............................................55 SECTION 5.8. Corporate Trustee Required; Eligibility.............................55 SECTION 5.9. Resignation and Removal; Appointment of Successor...................56 SECTION 5.10. Acceptance of Appointment of Successor..............................58 SECTION 5.11. Merger, Conversion, Consolidation or Succession to Business............................................58 SECTION 5.12. Preferential Collection of Claims Against the Issuer................59 SECTION 5.13. Trustee's Application for Instructions from the Company.............59
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ARTICLE VI HOLDERS' LISTS AND REPORTS BY TRUSTEE................................................59 SECTION 6.1. Disclosure of Names and Addresses of Holders........................59 SECTION 6.2. Reports by Trustee..................................................59 ARTICLE VII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE.................................60 SECTION 7.1. Issuer May Consolidate, Etc., Only on Certain Terms.................60 SECTION 7.2. Successor Substituted...............................................61 ARTICLE VIII SUPPLEMENTAL INDENTURES..............................................................61 SECTION 8.1. Supplemental Indentures Without Consent of Holders..................61 SECTION 8.2. Supplemental Indentures with Consent of Holders.....................62 SECTION 8.3. Execution of Supplemental Indentures................................63 SECTION 8.4. Effect of Supplemental Indentures...................................63 SECTION 8.5. Conformity with Trust Indenture Act.................................63 SECTION 8.6. Reference in Senior Notes to Supplemental Indentures................63 ARTICLE IX COVENANTS............................................................................64 SECTION 9.1. Payment of Principal, Premium and Interest..........................64 SECTION 9.2. Corporate Existence.................................................64 SECTION 9.3. Payment of Taxes and Other Claims...................................65 SECTION 9.4. Maintenance of Properties; Insurance; Books and Records; Compliance with Law......................................65 SECTION 9.5. Liens...............................................................66 SECTION 9.6. Statement as to Compliance; Notice of Default; Provision of Financial Statements.................................66 SECTION 9.7. Waiver of Stay; Extension of Usury Law..............................67 SECTION 9.8. Waiver of Certain Covenants.........................................67 ARTICLE X REDEMPTION OF SENIOR NOTES...........................................................68 SECTION 10.1. Right of Redemption................................................68 SECTION 10.2. Applicability of Article. .........................................68 SECTION 10.3. Election to Redeem; Notice to Trustee..............................68 SECTION 10.4. Selection by Trustee of Senior Notes to Be Redeemed................68 SECTION 10.5. Notice of Redemption...............................................69 SECTION 10.6. Deposit of Redemption Price........................................70
iii 5 SECTION 10.7. Senior Notes Payable on Redemption Date............................70 SECTION 10.8. Senior Notes Redeemed in Part......................................71 SECTION 10.9. Optional Redemption................................................71 ARTICLE XI DEFEASANCE AND COVENANT DEFEASANCE...................................................72 SECTION 11.1. Option to Effect Defeasance or Covenant Defeasance.................72 SECTION 11.2. Defeasance and Discharge...........................................72 SECTION 11.3. Covenant Defeasance................................................72 SECTION 11.4. Conditions to Defeasance or Covenant Defeasance....................73 SECTION 11.5. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions.................75 SECTION 11.6. Reinstatement......................................................75
EXHIBITS Exhibit A Form of U.S. Global Senior Note Exhibit B Form of Reg S Global Senior Note Exhibit C Form of Certificated Senior Note Exhibit D Form of Institutional Accredited Investor Transfer Certificate Exhibit E Form of Regulation S Transfer Certificate iv 6 INDENTURE, dated as of April 21, 1999, between AFLAC Incorporated, a Georgia corporation (hereinafter called the "ISSUER"), and The Bank of New York, a New York banking corporation, as trustee (hereinafter called the "TRUSTEE"). RECITALS WHEREAS, the Issuer has duly authorized the issue of its 6 1/2% Senior Notes due 2009 in an aggregate principal amount not to exceed $450,000,000, and to provide the terms and conditions upon which the Senior Notes (as defined herein) are to be authenticated, issued and delivered; and the Issuer has duly authorized the execution and delivery of this Indenture; WHEREAS, upon issuance of the Exchange Notes (as defined herein), if any, or upon the effectiveness of the Shelf Registration Statement (as defined herein) filed with respect to the Senior Notes, this Indenture will be subject to, and shall be governed by, the provisions of the Trust Indenture Act (as defined herein) that are required to be part of and govern indentures qualified under the Trust Indenture Act; and WHEREAS, all acts and things necessary have been done to make the Senior Notes, when executed by the Issuer and authenticated and delivered hereunder and duly issued by the Issuer, the valid, binding and legal obligations of the Issuer, and to make this Indenture a valid agreement of the Issuer in accordance with its terms; NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Senior Notes by the Holders (as defined herein) thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders, as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.1 For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: 7 (a) the terms defined in this Article I have the meanings assigned to them in this Article I and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (d) the words "HEREIN," "HEREOF" and "HEREUNDER" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (e) all references to "$" or "DOLLARS" shall refer to the lawful currency of the United States of America; (f) the words "INCLUDE," "INCLUDED" and "INCLUDING" as used herein shall be deemed in each case to be followed by the phrase "WITHOUT LIMITATION", if not expressly followed by such phrase or the phrase "BUT NOT LIMITED TO"; and (g) any reference to a Section or Article refers to such Section or Article of this Indenture unless otherwise indicated. Certain terms used principally in Articles II, IX, and XI are defined in those Articles. "ADDITIONAL INTEREST" means, as of any date of determination, all additional interest then owing pursuant to the Registration Rights Agreement. "ADJUSTED TREASURY RATE" means, with respect to any Redemption Date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date, calculated on the third Business Day preceding the Redemption Date, plus in each case 25 basis points. "AFFILIATE" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common 2 8 control with such specified Person (except in cases where substantially all of the control that would ordinarily be exercisable by virtue of ownership of stock, other than the election of directors, has been eliminated by applicable regulatory authorities). For the purposes of this definition, "CONTROL" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of Voting Stock, by contract or otherwise; and the terms "CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing. "BOARD OF DIRECTORS" means the board of directors of the Issuer or any duly authorized committee of such board. "BOARD RESOLUTION" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Issuer to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. "BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in the City of New York are authorized or obligated by law, regulation or executive order to close. "CAPITAL LEASE OBLIGATION" means, as to any Person, any obligation of such Person and its subsidiaries on a consolidated basis under any capital lease of real or personal property which, in accordance with GAAP, has been recorded as a capitalized lease obligation. "CAPITAL STOCK" of any Person means any and all shares, interests, participation or other equivalent (however designated) of such Person's capital stock and any rights (other than debt securities convertible into or exchangeable for capital stock), warrants or options to purchase the foregoing whether now outstanding or issued after the date hereof. "CEDEL" means Cedel Bank, societe anonyme. "CERTIFICATED SENIOR NOTE" means any Senior Note substantially in the form of Exhibit C to this Indenture issued in accordance with this Indenture. "COMMISSION" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act; or if at any time after the 3 9 execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "COMPARABLE TREASURY ISSUE" means the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the remaining term from the Redemption Date to the Stated Maturity of the Senior Notes that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Senior Notes. "COMPARABLE TREASURY PRICE" means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "COMPOSITE 3:30 P.M. QUOTATIONS FOR U.S. GOVERNMENT SECURITIES" or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (A) the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Quotation Agent obtains fewer than three such Reference Treasury Dealer Quotations, the average of all such quotations. "CONSOLIDATED NET WORTH" of any Person means the consolidated stockholders' equity of such Person and its subsidiaries as determined in accordance with GAAP. "CORPORATE TRUST OFFICE" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at 101 Barclay Street, 21 West, New York, New York 10286, Attn: Corporate Trust Administration. "CORPORATION" includes corporations, associations, partnerships, companies and business trusts. "CURRENCY AGREEMENT" means any currency swap agreements, forward exchange rate agreements, foreign currency futures or options, exchange rate collar agreements, exchange rate insurance or other similar agreements or arrangements, or 4 10 combinations thereof, principally designed to protect a Person or any of its subsidiaries against fluctuations in currency values. A Currency Agreement may also include an Interest Swap Obligation. "DEFAULT" means any event which is, or after notice or passage of time or both would be, an Event of Default. "DTC" means The Depository Trust Company, its nominees and their respective successors. "EUROCLEAR" means Morgan Guaranty Trust Company of New York, Brussels Office, as operator of the Euroclear System. "EVENT OF DEFAULT" has the meaning specified in Article IV. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXCHANGE NOTES" means an issue of senior notes of the Issuer with terms identical to the Global Senior Notes (except that the Exchange Notes will not bear the Private Placement Legend or any other legends restricting the transfer thereof, will contain the alternative paragraph 1(b) appearing on the reverse of the Global Senior Notes and except that interest thereon shall accrue from the last date on which interest was paid on the Global Senior Notes or, if no such interest has been paid, from the date of issuance of the Global Senior Notes) to be exchanged for the Global Senior Notes and the Certificated Senior Notes pursuant to the Exchange Offer. "EXCHANGE OFFER" means the registered offer by the Issuer to exchange the Global Senior Notes and the Certificated Senior Notes for the Exchange Notes pursuant to the Registration Rights Agreement. "EXCHANGE OFFER REGISTRATION STATEMENT" means the registration statement relating to an Exchange Offer on an appropriate form and all amendments and supplements to such registration statement, in each case including the prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. 5 11 "EXCHANGE REGISTRATION" means a registration of the Exchange Notes by the Issuer under the Securities Act pursuant to and in accordance with the terms of the Registration Rights Agreement. "FAIR MARKET VALUE" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy. "FEDERAL BANKRUPTCY CODE" means the Bankruptcy Act of Title 11 of the United States Code, as amended from time to time. "GAAP" means generally accepted accounting principles in the United States, set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants ("AICPA") and statements and pronouncements of the Financial Accounting Standards Board ("FASB") or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, consistently applied except for accounting changes required by the AICPA, FASB or the Commission, as in effect from time to time. "GLOBAL SENIOR NOTES" means, collectively, the U.S. Global Senior Note and the Reg S Global Senior Note substantially in the forms of Exhibit A and Exhibit B to this Indenture. "GUARANTEED DEBT" of any Person means, without duplication, all Indebtedness of any other Person guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement: (1) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (2) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling such other Person to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (3) to supply funds to, or in any other manner invest in, such other Person (including any agreement to pay for property or services to be acquired by such other Person irrespective of whether such property is received or such services are rendered), (4) to maintain working capital or equity capital of such other Person, or otherwise to maintain the net worth, solvency or other financial condition of the debtor, or (5) otherwise to assure a creditor of such other Person against loss; provided that the term "GUARANTEE" shall not include 6 12 endorsements for collection or deposit, in either case in the ordinary course of business, or any obligation or liability of such other Person in respect of leasehold interests assigned by such other Person to any other Person. "HOLDER" means the Person in whose name a Senior Note is registered. "INDEBTEDNESS" means, with respect to any Person, without duplication, (1) all obligations of such Person for borrowed money or for the deferred purchase price of property or services, excluding any trade payables and other accrued current liabilities incurred in the ordinary course of business, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, (2) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, (3) all obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), but excluding trade accounts payable arising in the ordinary course of business, (4) all Capital Lease Obligations of such Person, (5) all obligations referred to in (but not excluded from) clause (1), (2), (3) or (4) above of other Persons and all dividends of other Persons, the payment of which is secured by (or for which the holder of such obligations has an existing right, contingent or otherwise, to be secured by) any Lien, upon or in property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (6) all Guaranteed Debt of such Person, (7) all Redeemable Capital Stock issued by such Person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends, (8) all obligations under Currency Agreements or Interest Swap Obligations of such Person, (9) all obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing insurance obligations entered into in the ordinary course of business of such Person to the extent that such letters of credit are not drawn upon, or if and to the extent drawn upon, such drawing is reimbursed not later than the 30th Business Day following a demand for reimbursement following payment on the letter of credit), and (10) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of the types referred to in clauses (1) through (9) above. Indebtedness shall not include obligations under insurance, reinsurance or retrocession contracts entered 7 13 into in the ordinary course of business. For purposes hereof, the "MAXIMUM FIXED REPURCHASE PRICE" of any Redeemable Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair Market Value shall be determined in good faith by the board of directors of the issuer of such Redeemable Capital Stock. "INDENTURE" means this instrument as originally executed (including all exhibits and schedules hereto) and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "INSTITUTIONAL ACCREDITED INVESTOR" means an institutional "accredited investor" as defined in Rule 501(a)(1), (2), (3) and (7) under the Securities Act. "INTEREST PAYMENT DATE" means the Stated Maturity of an installment of interest on the Senior Notes. "INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement principally designed to protect such Person or any of its subsidiaries against fluctuations in interest rates. "ISSUE DATE" means the date on which Senior Notes are originally issued under this Indenture. "ISSUER" means the Person named as the "ISSUER" in the first paragraph of this instrument, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "ISSUER" shall mean such successor Person. To the extent necessary to comply with the requirements of the provisions of Sections 310 through 317 of the Trust Indenture Act as they are applicable to the Issuer, the term "ISSUER" shall include any other obligor with respect to the Senior Notes for the purposes of complying with such provisions. "LIEN" means any mortgage, charge, pledge, security interest, lien or other encumbrance of any kind. 8 14 "MAKE-WHOLE AMOUNT" means, in connection with any optional redemption of any Senior Notes, the excess, if any, of (i) the sum, as determined by a Quotation Agent of the present values of the principal amount of such Senior Notes, together with scheduled payments of interest from the Redemption Date to the Stated Maturity of the Senior Notes, in each case discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, over (ii) 100% of the principal amount of the Senior Notes to be redeemed. "MATURITY" when used with respect to any Senior Note means the date on which the principal of, and premium and Additional Interest, if any, and interest on such Senior Note becomes due and payable as therein provided, whether at Stated Maturity or Redemption Date and whether by declaration of acceleration, call for redemption or otherwise. "MERRILL LYNCH" means Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated. "NON-U.S. PERSON" means a person who is not a "U.S. person" (as defined in Regulation S). "OFFICERS' CERTIFICATE" means a certificate signed by: (1) the Chairman, a Vice Chairman, the President, a Vice President, the Treasurer or a director (or equivalent officers) of the Issuer, and (2) the Secretary or an Assistant Secretary of the Issuer and delivered to the Trustee; provided, however, that such certificate may be signed by two of the officers or directors listed in clause (1) above in lieu of being signed by one of such officers or directors listed in such clause (1) and one of the officers listed in clause (2) above. "OPINION OF COUNSEL" means a written opinion of counsel, who may be counsel for the Issuer. Such opinion shall include the statements provided for in Section 314(e) of the Trust Indenture Act to the extent applicable. "ORDER" means a written order signed in the name of the Issuer: (1) by its Chairman, a Vice Chairman, its President, a Vice President, its Treasurer or a director (or equivalent officers), and (2) by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary and delivered to the Trustee; provided, however, that such written request or order may be signed by any two of the officers or 9 15 directors listed in clause (1) above in lieu of being signed by one of such officers or directors listed in such clause (1) and one of the officers listed in clause (2) above. "OUTSTANDING" when used with respect to the Senior Notes means, as of the date of determination, all Senior Notes theretofore authenticated and delivered under this Indenture, except: (i) Senior Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Senior Notes, or portions thereof, for which payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Issuer) in trust or set aside and segregated in trust by the Issuer (if the Issuer shall act as its own Paying Agent) for the Holders of such Senior Notes; provided that, if such Senior Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii) Senior Notes, except to the extent provided in Section 11.2 and Section 11.3, with respect to which the Issuer has effected defeasance or covenant defeasance as provided in Article XI; and (iv) Senior Notes in exchange for or in lieu of which other Senior Notes have been authenticated and delivered pursuant to this Indenture, other than any such Senior Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Senior Notes are held by a bona fide purchaser in whose hands the Senior Notes are valid obligations of the Issuer whose determination shall be conclusive; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Senior Notes have given any request, demand, authorization, notice, direction, consent or waiver hereunder, Senior Notes owned by the Issuer, any other obligor upon the Senior Notes or any Affiliate of the Issuer or such other obligor shall be disregarded and deemed not to be Outstanding solely for purposes of such determination, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, notice, direction, consent or waiver, only Senior Notes which a Responsible Officer of the Trustee 10 16 actually knows to be so owned shall be so disregarded. Senior Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Senior Notes and that the pledgee is not the Issuer or any other obligor upon the Senior Notes or any Affiliate of the Issuer or such other obligor. "PERMITTED LIENS" means: (1) Liens securing Indebtedness pursuant to any senior credit agreement or senior credit facility of the Issuer or any Subsidiary existing on the date of the Indenture as such agreement may be supplemented, extended, renewed, replaced or otherwise modified from time to time, and any refinancing, replacement or substitution thereof; (2) Liens in favor of the Issuer or any Subsidiary; (3) Liens on property of a Person existing at the time such Person is merged into or consolidated with the Issuer or any Subsidiary; provided that such Liens were not incurred in connection with, or in contemplation of, such merger or consolidation and such Liens do not extend to any assets of the Issuer or any Subsidiary other than the assets of the Person so merged into or consolidated with the Issuer or such Subsidiary; (4) Liens on property existing at the time of acquisition thereof by the Issuer or any Subsidiary; provided that such Liens were not incurred in connection with, or in contemplation of, such acquisition and do not extend to any assets of the Issuer or any of the Subsidiaries other than the property so acquired; (5) Liens incurred or deposits required to secure the performance of United States or foreign statutory obligations (including insurance regulations), tenders, surety or appeal bonds or performance or return of money bonds or similar obligations, or landlords', carriers', warehousemen's, mechanics', suppliers', materialmen's or other like Liens, in any case incurred in the ordinary course of business; (6) Liens required by any United States, state or foreign authority pursuant to applicable insurance regulations; (7) Liens existing on the date of the Indenture; (8) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (9) Liens to secure Capital Lease Obligations or operating leases; (10) judgment and attachment Liens not giving rise to an Event of Default; (11) Liens with respect to obligations under Currency Agreements or Interest Swap Obligations of the Issuer or any Subsidiary; (12) Liens incurred in the ordinary course of business of the Issuer or any Subsidiary other than in connection with Indebtedness for borrowed money; (13) purchase money Liens to finance property or assets of the Issuer or any Subsidiary acquired in the ordinary course of business; provided, however, that (a) the related purchase money Indebtedness shall not be secured by any property or assets of the 11 17 Issuer or any Subsidiary other than the property and assets so acquired, and (b) the Lien securing such Indebtedness shall be created within 90 days of such acquisition; (14) Liens on assets of the Subsidiaries to secure obligations of such Subsidiaries to the Issuer; (15) Liens in favor of collecting or payor banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of the Issuer or any Subsidiary on deposit with or in possession of such bank; (16) Liens attributable to sale and leaseback transactions that collectively do not exceed 30% of the total assets of the Issuer; (17) easements, covenants, zoning restrictions, rights-of-way or other similar changes or encumbrances not interfering in any material respect with the ordinary conduct of the business of the Issuer or any Subsidiary; (18) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit; (19) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Issuer or any Subsidiary, including rights of offset and set-off; (20) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Issuer and the Subsidiaries; and (21) any Lien extending, renewing or replacing, in whole or in part, any Permitted Lien; provided that any such Lien is limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or, under the written arrangements under which the original Lien arose, could secure) the Indebtedness being refinanced or is in respect of property that is the security for a Permitted Lien hereunder. "PERSON" means any individual, corporation, limited or general partnership, limited liability company, joint venture, association, joint stock company, trust, fund, unincorporated organization or government or any agency or political subdivision thereof. "PRINCIPAL SUBSIDIARY" means: (i) the insurance company Subsidiaries in existence on the Issue Date; (ii) any other insurance company Subsidiary that becomes a "SIGNIFICANT SUBSIDIARY" as defined in Regulation S-X as promulgated by the Commission; and (iii) any other insurance company Subsidiary that may succeed, by merger, consolidation or otherwise, to all or substantially all of the business of one or more of such Persons as specified in (i) and (ii) above. "QUALIFIED INSTITUTIONAL BUYER" OR "QIB" means a "qualified institutional buyer" as defined in Rule 144A. 12 18 "QUOTATION AGENT" means the Reference Treasury Dealer appointed by the Issuer. "REDEEMABLE CAPITAL STOCK" means any Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or otherwise, is, or upon the happening of an event or passage of time would be required to be, redeemed on or prior to the final Stated Maturity of the Senior Notes or is redeemable at the option of the holder thereof at any time prior to such final Stated Maturity, or is convertible into or exchangeable for debt securities at any time prior to such final Stated Maturity. "REDEMPTION DATE", when used with respect to any Senior Notes to be redeemed, means the date fixed for such redemption pursuant to this Indenture. "REDEMPTION PRICE", when used with respect to any Senior Notes to be redeemed, means the price at which they are to be redeemed pursuant to this Indenture. "REFERENCE TREASURY DEALER" means, at any time, (i) Merrill Lynch and its respective successors and two additional Primary Treasury Dealers selected by the Issuer; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "PRIMARY TREASURY DEALER"), the Issuer will substitute therefor another Primary Treasury Dealer; and (ii) any other Primary Treasury Dealer selected by the Trustee after consultation with the Issuer. "REFERENCE TREASURY DEALER QUOTATIONS" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Quotation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Quotation Agent at 5:00 p.m., New York City time, on the third Business Day preceding such Redemption Date. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement, dated as of the date hereof, between the Issuer, Merrill Lynch, Donaldson, Lufkin & Jenrette, First Union Capital Markets Corp., NationsBanc Montgomery Securities LLC and Salomon Smith Barney Inc. 13 19 "REGISTRATION STATEMENT" means the Registration Statement as defined and described in the Registration Rights Agreement. "REGULAR RECORD DATE" for the interest payable on any Interest Payment Date means the April 1 or October 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "REGULATION S" means Regulation S under the Securities Act. "REG S CERTIFICATED SENIOR NOTE" means a Certificated Senior Note issued in exchange for an interest in the Reg S Global Senior Note. "REG S GLOBAL SENIOR NOTE" means the Reg S Global Senior Note substantially in the form of Exhibit B to this Indenture. "REQUEST" means a written request signed in the name of the Issuer (1) by its Chairman, a Vice Chairman, its President, a Vice President, its Treasurer or a director (or equivalent officers), and (2) by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary and delivered to the Trustee; provided, however, that such written request or order may be signed by any two of the officers or directors listed in clause (1) above in lieu of being signed by one of such officers or directors listed in such clause (1) and one of the officers listed in clause (2) above. "RESPONSIBLE OFFICER" when used with respect to the Trustee, means any officer assigned to the Corporate Trust Office of the Trustee or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers or assigned by the Trustee to administer corporate trust matters at its Corporate Trust Office and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "RULE 144A" means Rule 144A under the Securities Act. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SENIOR NOTES" means (a) the Global Senior Notes, substantially in the form of Exhibit A and Exhibit B to this Indenture, (b) the Certificated Senior Notes, substantially in the form of Exhibit C to this Indenture, issued in accordance with this Indenture and (c) any Exchange Notes to be issued and exchanged for (a) or 14 20 (b) above pursuant to the Registration Rights Agreement and this Indenture. For purposes of this Indenture, all Senior Notes shall vote together as one series of Senior Notes under this Indenture. "SHELF REGISTRATION STATEMENT" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "SPECIAL RECORD DATE" means a date fixed by the Trustee for the payment of any Defaulted Interest. "STATED MATURITY" means, when used with respect to any Indebtedness or any installment of principal or of interest thereon, the date specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of principal or of interest is due and payable. "SUBSIDIARY" means any Person, a majority of the equity ownership or the Voting Stock of which is at the time owned, directly or indirectly, by the Issuer or by one or more other Subsidiaries, or by the Issuer and one or more other Subsidiaries. "TRUST INDENTURE ACT" means the Trust Indenture Act of 1939, as amended, and as in force at the date as of which this Indenture was executed, except as provided in Section 8.5. "TRUSTEE" means the Person named as the "TRUSTEE" in the first paragraph of this Indenture, until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "TRUSTEE" shall mean such successor Trustee. "U.S. CERTIFICATED SENIOR NOTE" means a Certificated Senior Note issued in exchange for an interest in the U.S. Global Senior Note. "U.S. GLOBAL SENIOR NOTE" means the U.S. Global Senior Note substantially in the form of Exhibit A to this Indenture. "U.S. GOVERNMENT OBLIGATIONS" means securities that are (i) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America, the 15 21 timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. "VOTING STOCK" means stock of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). SECTION 1.2. Other Definitions
Defined in Term Section - ----------------------------------------------------------------------- "ACT" .................................................... 1.6 "COVENANT DEFEASANCE" .................................... 11.3 "DEFAULTED INTEREST" ..................................... 2.12 "DEFEASANCE" ............................................. 11.2 "DIRECT PARTICIPANT"...................................... 2.1 "DISTRIBUTION COMPLIANCE PERIOD".......................... 2.1 "INCORPORATED PROVISION" ................................. 1.9 "INDIRECT PARTICIPANTS"................................... 2.1 "NOTICE OF DEFAULT" ...................................... 4.1
16 22 "PAYING AGENT" ........................................ 2.4 "PRIVATE PLACEMENT LEGEND" ............................ 2.1 "REGISTER" ............................................ 2.6 "REGISTRAR" ........................................... 2.4 "RESALE RESTRICTION TERMINATION DATE".................. 2.13 "RESTRICTIVE LEGEND"................................... 2.13 "SURVIVING ENTITY" .................................... 7.1
SECTION 1.3. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the Trust Indenture Act, the provision is incorporation by reference in and made a part of this Indenture. All Trust Indenture Act terms used in this Indenture that are defined by the Trust Indenture Act, defined by reference in the Trust Indenture Act to another statute or defined by a rule of the Commission and not otherwise defined herein shall have the meanings assigned to them therein. SECTION 1.4. Compliance Certificates and Opinions. Upon any application or request by the Issuer to the Trustee to take any action under any provision of this Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion (other than the certificates required by Section 9.6(a)) with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; 17 23 (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 1.5. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which the certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Issuer stating that the information with respect to such factual matters is in the possession of the Issuer, unless such counsel knows that the certificate or opinion or representations with respect to such matters are erroneous. When any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.6. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this 18 24 Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such request, demand, authorization, direction, notice, consent, waiver or other action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Issuer. Such instrument or instruments (and the request, demand, authorization, direction, notice, consent, waiver or other action embodied therein and evidenced thereby) are herein sometimes referred to as the "ACT" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 315 of the Trust Indenture Act) conclusive in favor of the Trustee and the Issuer, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved in any reasonable manner which the Trustee deems sufficient. (c) The ownership of Certificated Senior Notes shall be proved by the Register. (d) If the Issuer shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Issuer may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of such Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Issuer shall have no obligation to do so. Notwithstanding Section 316(c) of the Trust Indenture Act, any such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not more than 30 days prior to the first solicitation of Holders generally in connection therewith and no later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Senior Notes then outstanding have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for this purpose the Senior Notes then outstanding 19 25 shall be computed as of such record date; provided that no such request, demand, authorization, direction, notice, consent, waiver or other Act by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act by the Holder of any Senior Notes shall bind every future Holder of the same Senior Notes or the Holder of every Senior Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done, suffered or omitted to be done by the Trustee, any Paying Agent or the Issuer in reliance thereon, whether or not notation of such action is made upon such Senior Notes. SECTION 1.7. Notices, Etc., to Trustee and the Issuer. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: (a) the Trustee by any Holders or any representative of the Issuer shall be sufficient for every purpose hereunder if made, given, furnished or delivered in writing or mailed, first-class postage prepaid, or by facsimile, to or with the Trustee at its Corporate Trust Office; or (b) the Issuer by the Trustee or any representative of any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if made, given, furnished or delivered in writing or mailed, first-class postage prepaid, or by facsimile, to the Issuer at 1932 Wynnton Road, Columbus, Georgia 31999, Attention: Corporate Secretary, facsimile number (706) 323-1448; or at any other address or facsimile number furnished in writing to the Trustee by the Issuer. SECTION 1.8. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event at his address as it appears in the Register or at the address provided by such Holder in writing to the Trustee not later than the latest date and not earlier than the earliest date prescribed for the giving of such notice. When notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall 20 26 affect the sufficiency of such notice with respect to other Holders. Any notice when mailed to a Holder in the aforesaid manner shall be conclusively deemed to have been received by such Holder whether or not actually received by such Holder. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event as required by any provisions of this Indenture, then any method of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice for every purpose hereunder. SECTION 1.9. Conflict of any Provision of Indenture with Trust Indenture Act. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by Sections 310 to 318 of the Trust Indenture Act, inclusive, or conflicts with any provision (an "INCORPORATED PROVISION") required by or deemed to be included in this Indenture by operation of such Trust Indenture Act sections, such imposed duties or incorporated provision of the Trust Indenture Act shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, such provision of the Trust Indenture Act shall be deemed to apply to this Indenture as so modified or excluded, as the case may be, if this Indenture shall then be qualified under the Trust Indenture Act. SECTION 1.10. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.11. Successors and Assigns. All covenants and agreements in this Indenture by the Issuer and the Trustee shall bind each of their respective successors and assigns, whether so expressed or not. SECTION 1.12. Severability Clause. In case any provision in this Indenture or in the Senior Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 21 27 SECTION 1.13. Benefits of Indenture. Nothing in this Indenture or in the Senior Notes, express or implied, shall give to any Person (other than the parties hereto and their successors hereunder, any Paying Agent or Registrar and their successors hereunder, and the Holders) any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 1.14. Governing Law. This Indenture and the Senior Notes shall be governed by and construed in accordance with the laws of the State of New York. Upon the issuance of Exchange Notes, if any, or the effectiveness of the Shelf Registration Statement, this Indenture will be subject to the provisions of the Trust Indenture Act that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. SECTION 1.15. Legal Holidays. In any case where any Interest Payment Date, any date established for payment of Defaulted Interest pursuant to Section 2.12 or any Maturity with respect to any Senior Note shall not be a Business Day, then (notwithstanding any other provisions of this Indenture or of the Senior Notes) payment of the principal of, premium and Additional Interest, if any, or interest on the Senior Notes need not be made on such date but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or date established for payment of Defaulted Interest pursuant to Section 2.12 or Maturity, and no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date or date established for payment of Defaulted Interest pursuant to Section 2.12 or Maturity, as the case may be, to the next succeeding Business Day. SECTION 1.16. No Recourse Against Others. No director, officer, employee or stockholder, as such, of the Issuer or any Subsidiary shall have any liability for any payment of the principal of, premium or Additional Interest, if any, or interest on, any of the Senior Notes, or any other obligations of the Issuer under the Senior Notes or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting any of the Senior Notes waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Senior Notes. SECTION 1.17. Submission of Jurisdiction. Each of the parties hereby irrevocably submits to the non-exclusive jurisdiction of any federal or state court in the Borough of Manhattan, the City of New York, in respect of any legal 22 28 action or proceeding against it with respect to its obligations under this Indenture and/or the Senior Notes. SECTION 1.18. Currency Indemnity. U.S. dollars are the sole currency of account and payment for all sums payable by the Issuer under or in connection with the Senior Notes, including damages. Any amount received or recovered in a currency other than dollars (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction, in the winding-up or dissolution of the Issuer or otherwise) by any Holder in respect of any sum expressed to be due to it from the Issuer shall only constitute a discharge to the Issuer to the extent of the dollar amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery (or, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so). If that dollar amount is less than the dollar amount expressed to be due to the recipient under any Senior Note, the Issuer shall indemnify the recipient against any loss sustained by it as a result. In any event, the Issuer shall indemnify the recipient against the cost of making any such purchase. For the purposes of this Section 1.18, it will be sufficient for the Holder to certify in a satisfactory manner (indicating the sources of information used) that it would have suffered a loss had an actual purchase of dollars been made with the amount so received in that other currency on the date of receipt or recovery (or, if a purchase of dollars on such date had not been practicable, on the first date on which it would have been practicable, it being required that the need for a change of date be certified in the manner mentioned above). These indemnities constitute a separate and independent obligation from the Issuer's other obligations, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by any Holder and shall continue in full force and effect despite any other judgment, order, claim or proof for a liquidated amount in respect of any sum due under any Senior Note. ARTICLE II THE SENIOR NOTES SECTION 2.1. Form and Dating. (a)(i) The Global Senior Notes shall be substantially in the form of Exhibit A and Exhibit B, and the Trustee's certificate of authentication shall be substantially in the form set forth in such 23 29 exhibits, which are hereby incorporated in and expressly made a part of this Indenture and (ii) the Certificated Senior Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit C, which is hereby incorporated in and expressly made a part of this Indenture; provided that with respect to clauses (i) and (ii) above, Exchange Notes (A) shall contain the alternative Paragraph 1(b) appearing on the reverse of the Senior Notes, and (B) shall not contain the Private Placement Legend or any other legends restricting the transfer thereof. The Global Senior Notes and the Certificated Senior Notes may have notations, legends or endorsements required by law, governmental rule or regulation, stock or other securities exchange rule, depositary rule or usage agreements to which the Issuer is subject, if any, or usage (provided that any such notation, legend or endorsement is approved by the Issuer). The Issuer shall furnish any such legend not contained in Exhibit A, Exhibit B or Exhibit C to the Trustee in writing. Each Senior Note shall be dated the date of its authentication. The terms and provisions contained in the Senior Notes shall constitute, and are hereby expressly made, a part of this Indenture, and the Issuer and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. The Senior Notes sold to QIBs in the United States initially will be in the form of one or more registered global notes without interest coupons substantially in the form set forth in Exhibit A (collectively, the "U.S. GLOBAL SENIOR NOTE"). Upon issuance, the U.S. Global Senior Note will be deposited with the Trustee, as custodian for DTC, in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to the accounts of DTC's participating organizations (the "DIRECT PARTICIPANTS") and other entities that clear through or maintain a direct or indirect relationship with a Direct Participant (the "INDIRECT PARTICIPANTS"). The Senior Notes being offered and sold in offshore transactions in reliance on Regulation S, if any, initially will be in the form of one or more registered, global notes without interest coupons substantially in the form set forth in Exhibit B (collectively, the "REG S GLOBAL SENIOR NOTE"). The Reg S Global Senior Note will be deposited with the Trustee, as custodian for DTC, in New York, New York, and registered in the name of a nominee of DTC for credit to the accounts of Indirect Participants at Euroclear and Cedel. During the 40-day period commencing on the day after the later of the offering date and the original Issue Date of the Senior Notes (the "DISTRIBUTION COMPLIANCE PERIOD"), beneficial interests in 24 30 the Reg S Global Senior Note may be held only through the DTC participants for Euroclear or Cedel. The Global Senior Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee in certain limited circumstances provided for in this Indenture. Beneficial interests in the Global Senior Notes may be exchanged for Senior Notes in certificated form in certain limited circumstances provided for in this Indenture. (b) Restrictive Legends. (i) Private Placement Legend. Unless and until a Global Senior Note or a Certificated Senior Note is exchanged for an Exchange Note in an Exchange Offer in connection with an effective Exchange Registration or is registered in accordance with the Shelf Registration Statement, each pursuant to the Registration Rights Agreement, the U.S. Global Senior Note, and each U.S. Certificated Senior Note, unless the Issuer determines otherwise in compliance with applicable law, shall bear the following legend (the "PRIVATE PLACEMENT LEGEND") on the face thereof: THIS SENIOR NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SENIOR NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SENIOR NOTE BY ITS ACCEPTANCE HEREOF AGREES, ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SENIOR NOTES, TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SENIOR NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON 25 31 WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SENIOR NOTE (OR ANY PREDECESSOR OF SUCH SENIOR NOTE), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SENIOR NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SENIOR NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SENIOR NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE ISSUER'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (ii) PURSUANT TO CLAUSE (E), TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUSTEE A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF APPENDIX A TO THE OFFERING MEMORANDUM DATED APRIL 16, 1999. THIS LEGEND WILL BE REMOVED 26 32 UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. (ii) Regulation S Legend. The Reg S Global Senior Note and the Reg S Certificated Senior Note shall bear the following legend on the face thereof until the end of the Distribution Compliance Period (the "Regulation S Legend"): THIS SENIOR NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A U.S. PERSON NOR IS IT PURCHASING FOR THE ACCOUNT OF A U.S. PERSON AND IS ACQUIRING THIS SENIOR NOTE IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), (2) BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SENIOR NOTE, PRIOR TO THE DATE WHICH IS 40 DAYS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SENIOR NOTE (OR ANY PREDECESSOR OF SUCH SENIOR NOTE), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SENIOR NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED 27 33 STATES WITHIN THE MEANING OF REGULATION S, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SENIOR NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SENIOR NOTES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE ISSUER'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (ii) PURSUANT TO CLAUSE (E), TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUSTEE A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF APPENDIX A TO THE OFFERING MEMORANDUM DATED APRIL 16, 1999. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE DAY ON WHICH THE SENIOR NOTES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S. (iii) Global Senior Note Legend. Each Global Senior Note shall bear a legend in substantially the following form: UNLESS THIS SENIOR NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE ISSUER OR ITS AGENT FOR 28 34 REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SENIOR NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS SENIOR NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS SENIOR NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. SECTION 2.2. Denominations. The Senior Notes shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof; provided that Senior Notes transferred to an Institutional Accredited Investor that delivers a letter from the transferee substantially in the form of Exhibit D pursuant to Section 2.13 shall be issuable only in registered form without coupons and only in denominations of $250,000 and any integral multiple of $1,000 in excess thereof. SECTION 2.3. Execution and Authentication. Two directors, or a director and the Secretary or Assistant Secretary, shall sign the Senior Notes for the Issuer by manual or facsimile signature. The signatures required hereby may in each case be the manual signature of any person duly delegated by a director or the Secretary or Assistant Secretary, as the case may be. The Issuer's seal shall be reproduced on the Senior Notes and may be in facsimile form. If an officer (including a director, Secretary or Assistant Secretary) whose signature is on a Senior Note no longer holds that office at the time the Trustee authenticates the Senior Note, such Senior Note shall be valid nevertheless. 29 35 A Senior Note shall not be valid until an authorized officer of the Trustee manually signs the certificate of authentication on the Senior Note. The signature shall be conclusive evidence that such Senior Note has been authenticated under this Indenture. The Trustee shall authenticate and deliver the (a) Global Senior Notes for original issue in an aggregate principal amount at maturity not in excess of $450,000,000, and (b) Exchange Notes for issue only in an Exchange Offer pursuant to the Registration Rights Agreement, for a like principal amount of Global Senior Notes exchanged pursuant thereto, in each case upon a written order signed by a director or Secretary or Assistant Secretary of the Issuer. Such order shall specify the principal amount of the Global Senior Notes to be authenticated and the date on which the original issue of the Global Senior Notes are to be authenticated and shall further provide instructions concerning delivery of the Global Senior Notes. The aggregate principal amount of Senior Notes outstanding at any time may not exceed $450,000,000, except as provided in Section 2.8 hereof. Each Global Senior Note shall be dated the date of its authentication, shall bear interest from the applicable date and shall be payable on the dates specified on the face of the form of Global Senior Notes set forth as Exhibit A and Exhibit B hereto. Each Certificated Senior Note shall be dated the date of its authentication, shall bear interest from the applicable date and shall be payable on the dates specified on the face of the form of Certificated Senior Note set forth in Exhibit C hereto. The Trustee may appoint an authenticating agent reasonably acceptable to the Issuer to authenticate the Senior Notes. Unless limited by the terms of such appointment, an authenticating agent may authenticate Senior Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Registrar or Paying Agent. SECTION 2.4. Registrar and Paying Agent. The Issuer will maintain in the City of New York an office or agency where Senior Notes may be presented or surrendered for payment (the "PAYING AGENT"), where Senior Notes may be surrendered for registration of transfer or exchange (the "REGISTRAR") and where notices and demands to or upon the Issuer in respect of the Senior Notes and this Indenture may be served. The Registrar shall keep a Register of the Senior Notes and of their transfer and exchange. Until otherwise designated by the Issuer, such office or agency in the City of New York shall be the office maintained by the Trustee for such purpose. The Issuer will give prompt written notice to the Trustee 30 36 of any change in the location of any such office or agency. If at any time the Issuer shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office, and the Issuer hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Issuer may from time to time designate one or more other offices or agencies (in or outside the City of New York) where the Senior Notes may be presented or surrendered for any or all such purposes, and may from time to time rescind such designation; provided, however, that no such designation or rescission shall in any manner relieve the Issuer of its obligation to maintain an office or agency in the City of New York for such purposes. The Issuer will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such office or agency. The Issuer shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the Trust Indenture Act. The agreement shall implement the provisions of this Indenture that relate to such agent. The Issuer shall promptly notify the Trustee of the name and address of any such agent. The Issuer may change any Paying Agent, Registrar, co-registrar or transfer agent without prior notice to any Holder. If the Issuer fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 5.6. The Issuer initially appoints the Trustee as Registrar and Paying Agent in connection with the Senior Notes. SECTION 2.5. Paying Agent to Hold Money in Trust. If the Issuer shall at any time act as its own Paying Agent, it will, by 10:00 a.m. (New York City time) on each due date of the principal of, premium and Additional Interest, if any, and interest on the Senior Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal of, premium and Additional Interest, if any, and interest on the Senior Notes so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. 31 37 Whenever the Issuer shall have one or more Paying Agents for the Senior Notes, it will, at least one Business Day before such due date of the principal of, premium and Additional Interest, if any, and interest on the Senior Notes, deposit with such Paying Agent(s) a sum in same day funds (or New York Clearing House funds if such deposit is made prior to the date on which such deposit is required to be made) sufficient to pay the principal, premium and Additional Interest, if any, and interest to become due on the Senior Notes, such sum to be held in trust for the benefit of the Persons entitled to such principal of, premium and Additional Interest, if any, or interest on the Senior Notes, and (unless such Paying Agent is the Trustee) the Issuer will promptly notify the Trustee of such action or any failure so to act. The Issuer will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of, premium and Additional Interest, if any, and interest on the Senior Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (b) give the Trustee notice of any default by the Issuer (or any other obligor upon the Senior Notes) in the making of any payment of principal of, premium and Additional Interest, if any, and interest on the Senior Notes; (c) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and (d) acknowledge, accept and agree to comply in all respects with the provisions of this Indenture relating to the duties, rights and obligations of such Paying Agent. The Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by an order of the Issuer direct any Paying Agent to pay, to the Trustee all sums held in trust by the Issuer or such Paying Agent, such sums to be held by the Trustee upon the same terms as those upon which such sums were held by the Issuer or such 32 38 Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Issuer, in trust for the payment of the principal of, premium and Additional Interest, if any, and interest on the Senior Notes and remaining unclaimed for two years after such principal of, premium and Additional Interest, if any, and interest on the Senior Notes have become due and payable shall be paid to the Issuer upon Request by the Issuer; and the Holder of such Senior Note shall thereafter, as an unsecured general creditor, look only to the Issuer for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Issuer as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Issuer cause to be published once, in The New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Issuer. SECTION 2.6. Senior Note Holder Lists. The Trustee, or such other person designated by the Issuer, shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders (the "REGISTER"). If the Trustee is not the Registrar, the Issuer shall furnish to the Trustee, in writing at least seven Business Days before each Interest Payment Date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of all Holders. SECTION 2.7. Transfer and Exchange. An entire Global Senior Note may be exchanged for definitive Senior Notes in registered, certificated form without interest coupons ("CERTIFICATED SENIOR NOTES") if (i) DTC (A) notifies the Issuer that it is unwilling or unable to continue as depositary for the Global Senior Notes and the Issuer thereupon fails to appoint a successor depositary within 90 days or (B) has ceased to be a clearing agency registered under the Exchange Act, (ii) the Issuer, at its option, notifies the Trustee in writing that it elects to cause the issuance of Certificated Senior Notes, or (iii) there shall have occurred and be continuing a Default or an Event of Default with respect to the Senior Notes. In any such case, the Issuer will notify the Trustee in writing that, upon surrender by the Direct Participants and Indirect Participants of their interest in such Global Senior Note, 33 39 Certificated Senior Notes will be issued to each person that such Direct Participants and Indirect Participants and DTC identify as being the beneficial owner of the related Senior Notes. Whenever all of a Global Senior Note is exchanged for one or more Certificated Senior Notes, such Global Senior Note shall be surrendered by the Holder thereof to the Trustee for cancellation. Whenever a part of a Global Senior Note is exchanged for one or more Certificated Senior Notes (which shall be in denominations of $1,000 or integral multiples thereof), such Global Senior Note shall be surrendered by the Holder thereof to the Trustee who shall cause an adjustment to be made to such Global Senior Note such that the principal amount of such Global Senior Note will be equal to the portion of such Global Senior Note not exchanged and shall thereafter return such Global Senior Note to such Holder. Certificated Senior Notes issued in exchange for a Global Senior Note or any portion thereof shall be registered in such names as DTC shall instruct the Trustee, as requested by the Issuer. The Global Senior Notes may not be exchanged other than as provided in this Section 2.7. Beneficial interests in Global Senior Notes held by any Direct Participant or Indirect Participant may be exchanged for Certificated Senior Notes upon request to DTC, by such Direct Participant (for itself or on behalf of an Indirect Participant), by the Trustee in accordance with customary DTC procedures. Certificated Senior Notes delivered in exchange for any beneficial interest in any Global Senior Note will be registered in the names, and issued in any approved denominations, requested by DTC on behalf of such Direct Participant or Indirect Participant (in accordance with DTC's customary procedures). Certificated Senior Notes shall be transferable only upon the surrender of such Certificated Senior Notes for registration of transfer. When a Certificated Senior Note is presented to the Registrar or a co-registrar with a request to register a transfer, the Registrar shall register the transfer as requested if its requirements for such transfers are met. When Certificated Senior Notes are presented to the Registrar or a co-registrar with a request to exchange them for an equal principal amount of Certificated Senior Notes of other denominations (including an exchange of Certificated Senior Notes for Exchange Notes), the Registrar shall make the exchange as requested if the same requirements are met; provided that no exchange of Certificated Senior Notes shall occur until a Registration Statement shall have been declared effective by the Commission and that any Certificated Senior Notes that are exchanged for Exchange Notes shall be cancelled by the Trustee. To permit 34 40 registration of transfers and exchanges, the Issuer shall execute and the Trustee shall authenticate Certificated Senior Notes at the Registrar's or co-registrar's request. The Holder of a Global Senior Note may increase the principal amount of such Global Senior Note held by it by surrendering any Certificated Senior Notes registered in its name to the Registrar for cancellation; provided that no Certificated Senior Note shall be so surrendered during the period beginning on the Record Date and ending on the corresponding Interest Payment Date. Upon surrender of such Certificated Senior Note, the Registrar shall forward such Certificated Senior Note to the Trustee for cancellation and the Trustee shall cause an adjustment to be made to such Global Senior Note to increase the principal amount at maturity of such Global Senior Note by an amount equal to the principal amount at maturity of the Certificated Senior Note surrendered for cancellation. The Issuer shall not be required to make and the Registrar need not register transfers or exchanges of Certificated Senior Notes selected for redemption (except, in the case of Certificated Senior Notes to be redeemed in part, the portion thereof not to be redeemed) or any Certificated Senior Notes for a period of 15 days before a selection of Certificated Senior Notes to be redeemed. Prior to the due presentation for registration of transfer of any Certificated Senior Note, the Issuer, the Trustee, the Paying Agent, the Registrar or any co-registrar shall deem and treat the Person in whose name a Certificated Senior Note is registered as the absolute owner of such Certificated Senior Note for the purpose of receiving payment of principal of, premium and Additional Interest, if any, and interest on such Certificated Senior Note and for all other purposes whatsoever, whether or not such Certificated Senior Note is overdue, and none of the Issuer, the Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected by notice to the contrary. The Issuer may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges in connection with any transfer or exchange pursuant to this Section 2.7. All Senior Notes issued upon any transfer or exchange pursuant to the terms of this Indenture will evidence the same debt and will be entitled to the same benefits under this Indenture as the Senior Notes surrendered upon such transfer or exchange. 35 41 SECTION 2.8. Replacement Senior Notes. If a mutilated Certificated Senior Note is surrendered to the Registrar, or if a mutilated Global Senior Note is surrendered to the Issuer, or if a Holder claims that a Senior Note has been lost, destroyed or wrongfully taken, the Issuer shall issue, and the Trustee shall authenticate, a replacement Senior Note in such form as the Senior Note mutilated, lost, destroyed or wrongfully taken, if the Holder satisfies all reasonable requirements of the Trustee, the Registrar or the Issuer. If required by the Trustee, the Registrar or the Issuer, such Holder shall furnish an indemnity bond sufficient in the judgment of the Issuer, the Registrar and the Trustee to protect the Issuer, the Trustee, the Paying Agent, the Registrar and any co-registrar from any loss which any of them may suffer if a Senior Note is replaced. The Issuer, the Registrar and the Trustee may charge the Holder for their expenses in replacing a Senior Note. Every replacement Senior Note is an additional obligation of the Issuer and every Holder of such Senior Note shall be entitled to all of the benefits of this Indenture equally and proportionately with Holders of all other Senior Notes duly issued hereunder. SECTION 2.9. Outstanding Senior Notes. If a Senior Note is replaced pursuant to Section 2.8 hereof, it ceases to be Outstanding unless the Trustee and the Issuer receive proof satisfactory to them that the replaced Senior Note is held by a bona fide purchaser. If the Paying Agent (other than the Issuer or any of its subsidiaries or affiliates) segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date, money sufficient to pay all principal of, premium and Additional Interest, if any, and interest payable on that date with respect to the Senior Notes (or portions thereof) to be redeemed or maturing, as the case may be, then on and after that date such Senior Notes (or portions thereof) shall cease to be Outstanding and interest on them shall cease to accrue, as the case may be. SECTION 2.10. Temporary Senior Notes. Until Certificated Senior Notes are ready for delivery, the Issuer may prepare and the Trustee shall authenticate temporary Senior Notes. Temporary Senior Notes shall be substantially in the form of Certificated Senior Notes but may have variations that the Issuer considers appropriate for temporary Senior Notes. Without unreasonable delay, the Issuer shall prepare and the Trustee shall authenticate corresponding Certificated Senior Notes and deliver them in exchange for temporary Senior Notes. 36 42 Holders of temporary Senior Notes shall be entitled to all of the benefits of this Indenture. SECTION 2.11. Cancellation. The Issuer at any time may deliver Senior Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Senior Notes surrendered to them for registration of transfer, exchange, purchase or payment. The Trustee (and no one else) shall cancel all Senior Notes surrendered for registration of transfer, exchange, purchase, payment or cancellation and shall dispose of cancelled Senior Notes in its customary manner. The Issuer may not issue new Senior Notes to replace Senior Notes it has redeemed, paid or delivered to the Trustee for cancellation. The Trustee shall not authenticate Senior Notes in place of cancelled Senior Notes other than pursuant to the terms of this Indenture. SECTION 2.12. Defaulted Interest. If the Issuer defaults in a payment of interest on the Senior Notes, the Issuer shall pay defaulted interest ("DEFAULTED INTEREST") (plus interest on such Defaulted Interest to the extent lawful) in any lawful manner to the Persons who are Holders on a subsequent Special Record Date. The Issuer shall fix or cause to be fixed any such Special Record Date and payment date and shall promptly mail to each Holder and the Trustee a notice that states the Special Record Date, if any, the payment date and the amount of Defaulted Interest to be paid. The Issuer may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements (if applicable) of any securities exchange on which the Senior Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Issuer to the Trustee of the proposed payment pursuant to this paragraph, such manner of payment shall be deemed practicable by the Trustee. SECTION 2.13. Special Transfer Provisions. Unless and until a Global Senior Note or a Certificated Senior Note is exchanged for an Exchange Note in connection with an effective Exchange Registration or is registered in accordance with the Shelf Registration Statement, each pursuant to the Registration Rights Agreement, the following provisions shall apply: (a) The following provisions shall apply with respect to any proposed transfer of a U.S. Certificated Senior Note or an interest in the U.S. Global Senior Note prior to the date which is two years after the later of the date of original 37 43 issue and the last date on which the Issuer or any Affiliate of the Issuer was the owner of such Senior Note (or any predecessor thereto) (the "RESALE RESTRICTION TERMINATION DATE"): (i) a transfer of a U.S. Certificated Senior Note or a beneficial interest in the U.S. Global Senior Note to a QIB shall be made upon the representation of the transferee that it is purchasing the Senior Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Issuer as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; (ii) a transfer of a U.S. Certificated Senior Note or a beneficial interest in the U.S. Global Senior Note to an Institutional Accredited Investor shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form of Exhibit D from the proposed transferee and, if requested by the Issuer or the Trustee, the delivery of an Opinion of Counsel that such transfer is in compliance with the Securities Act; and (iii) a transfer of a U.S. Certificated Senior Note or a beneficial interest in the U.S. Global Senior Note to a Non-U.S. Person shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form of Exhibit E from the proposed transferee and, if requested by the Issuer or the Trustee, the delivery of an Opinion of Counsel that such transfer is in compliance with the Securities Act. After the Resale Restriction Termination Date, interests in a U.S. Certificated Senior Note or a beneficial interest in the U.S. Global Senior Note may be transferred without requiring the certification set forth in Exhibit D or Exhibit E or any additional certification. (b) The following provisions shall apply with respect to any proposed transfer of a Reg S Certificated Senior Note or a beneficial interest in the Reg S Global Senior Note prior to the expiration of the Distribution Compliance Period: 38 44 (i) a transfer of a Reg S Certificated Senior Note or a beneficial interest in the Reg S Global Senior Note to a QIB shall be made upon the representation of the transferee that it is purchasing the Senior Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Issuer as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; (ii) a transfer of a Reg S Certificated Senior Note or a beneficial interest in the Reg S Global Senior Note to an Institutional Accredited Investor shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form of Exhibit D from the proposed transferee and, if requested by the Issuer or the Trustee, the delivery of an Opinion of Counsel that such transfer is in compliance with the Securities Act; and (iii) a transfer of a Reg S Certificated Senior Note or a beneficial interest in the Reg S Global Senior Note to a Non-U.S. Person shall be made upon receipt by the Trustee or its agent of a certificate substantially in the of Exhibit E from the proposed transferee and, if requested by the Issuer or the Trustee, the delivery of an Opinion of Counsel that such transfer is in compliance with the Securities Act. After the expiration of the Distribution Compliance Period, interests in a Reg S Certificated Senior Note or a beneficial interest in the Reg S Global Senior Note may be transferred without requiring the certifications set forth in Exhibit D or Exhibit E or any additional certification. (c) Restrictive Legends. All Senior Notes originally issued shall bear the Private Placement Legend or the Regulation S Legend (each a "RESTRICTIVE LEGEND"). Upon the transfer, exchange or replacement of Senior Notes not bearing a Restrictive Legend, the Registrar shall deliver Senior Notes that do not bear a Restrictive Legend. Upon the transfer, exchange or replacement of Senior Notes bearing a Restrictive Legend, other than in connection with the exchange of Exchange Notes for Global Senior Notes or Certificated Senior Notes, the Registrar shall deliver only Senior Notes that bear a Restrictive Legend unless there is 39 45 delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Issuer and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (d) General. By its acceptance of any Senior Note bearing a Restrictive Legend, each Holder acknowledges the restrictions on transfer of such Senior Note set forth in this Indenture and in such Restrictive Legend and agrees that it will transfer such Senior Note only as provided in this Indenture. The Registrar shall not register a transfer of any Senior Note unless such transfer complies with the restrictions on transfer of such Senior Note set forth in this Indenture. In connection with any transfer of Senior Notes, each Holder agrees by its acceptance of the Senior Notes to furnish the Registrar or the Issuer such certifications, Opinion of Counsel or other information as the Issuer may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or a transaction not subject to, the registration requirements of the Securities Act; provided that the Registrar shall not be required to determine (but may rely on a determination made by the Issuer with respect to) the sufficiency of any such certifications, Opinion of Counsel or other information. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 2.7 or this Section 2.13 in accordance with its customary procedures. The Issuer shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable prior written notice to the Registrar. In connection with any transfer of Senior Notes, the Trustee, the Registrar and the Issuer shall be entitled to receive, shall be under no duty to inquire into, may conclusively presume the correctness of, and shall be fully protected in relying upon the certificate, opinions and other information referred to herein (or in the forms provided herein, attached hereto or to the Senior Notes, or otherwise) received from any Holder and any transferee of any Senior Notes regarding the validity, legality and due authorization of any such transfer, the eligibility of the transferee to receive such Senior Notes and any other facts and circumstances related to such transfer. SECTION 2.14. CUSIP and ISIN Numbers. The Issuer in issuing the Senior Notes may use "CUSIP" and "ISIN" numbers (if then generally in use), and the Trustee shall use CUSIP and ISIN numbers in notices of redemption or exchange 40 46 as a convenience to Holders; provided that any such notice shall state that no representation is made as the correctness of such numbers either as printed on the Senior Notes or as contained in any notice of redemption or exchange and that reliance may be placed only on the other identification numbers printed on the Senior Notes. The Issuer shall promptly notify the Trustee of any change in the CUSIP or ISIN numbers. ARTICLE III SATISFACTION AND DISCHARGE SECTION 3.1. Satisfaction and Discharge of Indenture. This Indenture shall, upon request of the Issuer, cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Senior Notes herein expressly provided for) and the Trustee, on demand of and at the expense of the Issuer, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when: (a) either: (i) all Senior Notes theretofore authenticated and delivered (other than (A) Senior Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.8 and (B) Senior Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust, as provided in Section 2.5) have been delivered to the Trustee for cancellation; or (ii) all such Senior Notes not theretofore delivered to the Trustee for cancellation, (A) have become due and payable, or (B) will become due and payable at their Stated Maturity within one year, or (C) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of 41 47 redemption by the Trustee in the name, and at the expense, of the Issuer, and the Issuer, in the case of Section 3.1(a)(ii) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose an amount of money or U.S. Government Obligations sufficient to pay and discharge the entire indebtedness on such Senior Notes, not theretofore delivered to the Trustee for cancellation, for principal, premium and Additional Interest, if any, and interest to the date of such deposit (in the case of Senior Notes which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (b) the Issuer has paid or caused to be paid all other sums payable hereunder by the Issuer; (c) such satisfaction and discharge shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Issuer is a party or by which the Issuer is bound; and (d) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel stating that (1) all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with and (2) such satisfaction and discharge will not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Issuer is a party or by which the Issuer is bound. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Issuer to the Trustee under Section 5.6 and, if money shall have been deposited with the Trustee pursuant to this Section 3.1, the obligations of the Trustee under Sections 2.5 and 3.2 shall survive such satisfaction and discharge. SECTION 3.2. Application of Trust Money. Subject to the provisions of Section 2.5, all money deposited with the Trustee pursuant to Section 3.1 shall be held in trust and applied by it, in accordance with the provisions of the Senior Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Issuer acting as Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal of, premium and Additional Interest, if any, and interest on the Senior Notes for whose payment such money has been deposited with the Trustee. 42 48 If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 3.1 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Issuer's obligations under this Indenture and the Senior Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 3.1; provided that if the Issuer has made any payment of principal of, premium or Additional Interest, if any, or interest on any Senior Notes because of the reinstatement of its obligations, the Issuer shall be subrogated to the rights of the Holders of such Senior Notes to receive such payment for the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE IV DEFAULTS AND REMEDIES SECTION 4.1. Events of Default. "EVENT OF DEFAULT," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether or not it shall be voluntary or involuntary or be effected by the operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of interest on or Additional Interest with respect to any Senior Note when the same becomes due and payable and the continuance of such default for a period of 30 days; or (b) default in the payment of the principal of and any premium on any Senior Note when the same becomes due and payable at its Maturity upon acceleration, optional redemption or otherwise; or (c) default in the performance, or breach, of any covenant or agreement of the Issuer hereunder (other than a default in the performance, or breach, of a covenant or agreement that is specifically dealt with in clauses (a), (b) and (h) in this Section 4.1), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Issuer by the Trustee or to the Issuer and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Senior Notes, a written notice specifying such default or breach and stating that such notice is a "NOTICE OF DEFAULT" hereunder; or 43 49 (d) (1) an event of default shall have occurred under any mortgage, bond, indenture, loan agreement or other document evidencing any issue of Indebtedness of the Issuer or any Subsidiary for money borrowed (or the payment of which is guaranteed by the Issuer or any Subsidiary), which issue has an aggregate outstanding principal amount of not less than $25,000,000, and such default shall have resulted in such Indebtedness becoming, whether by declaration or otherwise, due and payable prior to the date on which it would otherwise become due and payable or (2) a default in any payment when due at final Stated Maturity of any such Indebtedness outstanding in an aggregate principal amount of not less than $25,000,000 and, in each case, ten Business Days shall have elapsed after such event during which period such event shall not have been cured or rescinded or such Indebtedness shall not have been satisfied; or (e) final judgments or orders are rendered against the Issuer or any Subsidiary by a court or regulatory agency of competent jurisdiction which require the payment in money, either individually or in an aggregate amount, that is more than $25,000,000 (other than any judgment to the extent a reputable non-affiliated insurance company has accepted liability) and such judgment or order shall not be discharged and either (1) any creditor shall have commenced an enforcement proceeding upon such judgment or order, which enforcement proceeding shall have remained unstayed for a period of ten days, or (2) a period of 60 days during which a stay of enforcement shall not be in effect shall have elapsed following the date on which any period for appeal has expired; or (f) a decree or order is entered by a court having jurisdiction (1) for relief in respect of the Issuer or any Principal Subsidiary in an involuntary case or proceeding under the Federal Bankruptcy Code or any other federal or state bankruptcy, insolvency, reorganization or similar law or (2) adjudging the Issuer or any Principal Subsidiary bankrupt or insolvent, or seeking reorganization, arrangement, adjustment or composition of or in respect of the Issuer or any Principal Subsidiary under the Federal Bankruptcy Code or any other applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Issuer or any Principal Subsidiary or of any substantial part of any of their properties, or ordering the winding up or liquidation of any of their affairs, and any such decree or order remains unstayed and in effect for a period of 60 consecutive days; or (g) the Issuer or any Principal Subsidiary institutes a voluntary case or proceeding under the Federal Bankruptcy Code or any other applicable 44 50 federal or state law or any other case or proceedings to be adjudicated bankrupt or insolvent, or the Issuer or any Principal Subsidiary consents to the entry of a decree or order for relief in respect of the Issuer or any Principal Subsidiary in any involuntary case or proceeding under the Federal Bankruptcy Code or any other applicable federal or state law or to the institution of bankruptcy or insolvency proceedings against the Issuer or any Principal Subsidiary, or the Issuer or any Principal Subsidiary files a petition or answer or consent seeking reorganization or relief under the Federal Bankruptcy Code or any other applicable federal or state law, or consents to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of any of the Issuer or any Principal Subsidiary or of any substantial part of its property, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts generally as they become due or takes corporate action in furtherance of any such action; or (h) default in the performance or breach of the provisions of Article VII hereof. SECTION 4.2. Acceleration of Maturity; Rescission. If an Event of Default (other than an Event of Default specified in Section 4.1(f) or Section 4.1(g)) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Outstanding Senior Notes, by written notice to the Issuer (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the request of such Holders shall, declare all unpaid principal of, premium and Additional Interest, if any, and accrued interest on, all the Senior Notes to be due and payable immediately. Notwithstanding the foregoing, in the event of an Event of Default specified in Section 4.1(f) or 4.1(g), the amounts described above shall by such fact itself become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. After a declaration of acceleration, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the Holders of at least a majority in aggregate principal amount of the Outstanding Senior Notes, by written notice to the Issuer and the Trustee, may annul such declaration if (a) the Issuer has paid or deposited with the Trustee a sum sufficient to pay (1) all sums paid or advanced by the Trustee under this Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, (2) all overdue interest on all Senior Notes, (3) the principal of, and premium and Additional Interest, if any, on any Senior Notes which have become due otherwise 45 51 than by such declaration of acceleration and interest thereon at the rate borne by the Senior Notes, and (4) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Senior Notes; and (b) all Events of Default, other than the non-payment of principal of the Senior Notes which have become due solely by such declaration of acceleration, have been waived as provided in Section 4.13 or cured. No such rescission shall affect any subsequent default or impair any right consequent thereon. Notwithstanding the preceding paragraph, in the event of a declaration of acceleration in respect of the Senior Notes because of an Event of Default specified in Section 4.1a(d) shall have occurred and be continuing, such declaration of acceleration shall be automatically rescinded and annulled if the Indebtedness that is the subject of such Event of Default has been discharged or the holders thereof have rescinded their declaration of acceleration in respect of such Indebtedness, and written notice of such discharge or rescission, as the case may be, shall have been given to the Trustee by the Issuer and countersigned by the holders of such Indebtedness or a trustee, fiduciary or agent for such holders, within 60 days after such declaration of acceleration in respect of the Senior Notes, and no other Event of Default has occurred during such 60-day period which has not been cured or waived during such period. SECTION 4.3. Collection of Indebtedness and Suits for Enforcement by Trustee. The Issuer covenants that if: (a) default is made in the payment of any interest on or Additional Interest with respect to any Senior Note when the same becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of and any premium on any Senior Note at the Maturity thereof, the Issuer will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Senior Notes, the whole amount then due and payable on such Senior Notes for principal, premium and Additional Interest, if any, and interest and, to the extent that payment of such interest shall be legally enforceable, interest on overdue installments of interest and Additional Interest, if any, at the rate borne by the Senior Notes; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. 46 52 If the Issuer fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Issuer or any other obligor upon the Senior Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Issuer or any other obligor upon the Senior Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders under this Indenture by such appropriate private or judicial proceedings as are necessary or as the Trustee shall deem necessary to protect and enforce such rights. SECTION 4.4. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Issuer or any other obligor upon the Senior Notes or the property of the Issuer or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Senior Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Issuer for the payment of overdue principal, premium and Additional Interest, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal, premium and Additional Interest, if any, and interest owing and unpaid in respect of the Senior Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 5.6. 47 53 Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any proposal, plan of reorganization, arrangement, adjustment or composition or other similar arrangement affecting the Senior Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 4.5. Trustee May Enforce Claims Without Possession of Senior Notes. All rights of action and claims under this Indenture or the Senior Notes may be prosecuted and enforced by the Trustee without the possession of any of the Senior Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Senior Notes in respect of which such judgment has been recovered. SECTION 4.6. Application of Money Collected. Any money, securities or other property collected by the Trustee pursuant to this Article IV shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, premium and Additional Interest, if any, and interest, upon presentation of the Senior Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 5.6; SECOND: To the payment of the amounts then due and unpaid upon the Senior Notes for principal, premium and Additional Interest, if any, and interest, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Senior Notes for principal, premium and Additional Interest, if any, and interest; and THIRD: The balance, if any, to the Issuer. 48 54 SECTION 4.7. Limitation on Suits. No Holder shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture or the Senior Notes, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in principal amount of the Outstanding Senior Notes shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in the Trustee's own name; (c) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Senior Notes; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture except in the manner provided in this Indenture and for the equal and ratable benefit of all the Holders. SECTION 4.8. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture or any provision of the Senior Notes, any Holder shall have the right, which is absolute and unconditional, to receive payment of the principal of, premium and Additional Interest, if any, and (subject to Section 2.12) interest on such Senior Note on the respective due dates expressed in such Senior Note (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired or affected without the consent of such Holder. 49 55 SECTION 4.9. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Issuer, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 4.10. Rights and Remedies Cumulative. Except as provided in Section 2.8, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 4.11. Delay of Omission Not Waiver. No delay or omission of the Trustee or of any Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article IV or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 4.12. Control by Holders. The Holders of not less than a majority in principal amount of the Outstanding Senior Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided that: (a) such direction shall not be in conflict with any rule of law or with this Indenture or expose the Trustee to personal liability, and (b) subject to the provisions of Section 315 of the Trust Indenture Act, the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. 50 56 SECTION 4.13. Waiver of Defaults. The Holders of not less than a majority in aggregate principal amount of the Outstanding Senior Notes by notice to the Trustee may on behalf of all Holders waive any existing or past Default or Event of Default hereunder and its consequences, except a Default or Event of Default: (a) in the payment of the principal of, premium or Additional Interest, if any, or interest on any Senior Note when the same becomes due and payable, (b) in respect of a covenant or provision hereof which under Article VIII cannot be modified or amended without the consent of the Holder of each Outstanding Senior Note affected, or (c) in respect of a covenant or provision hereof which under Article VIII cannot be modified or amended without the consent of the Holders of a greater percentage in principal amount of, or all of, the Outstanding Senior Notes. The Holders of not less than the percentage in principal amount of Outstanding Senior Notes specified in Article VIII may on behalf of the Holders of all the Senior Notes waive any past Default or Event of Default hereunder and its consequences arising under a covenant or provision specified in Section 4.13(b). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 4.14. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Senior Note by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 4.14 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Senior Notes, or to 51 57 any suit instituted by any Holder for the enforcement of the payment of the principal of, premium or Additional Interest, if any, or interest on any Senior Note on or after the respective Stated Maturities expressed in such Senior Note (or, in the case of redemption, on or after the Redemption Date). ARTICLE V THE TRUSTEE SECTION 5.1. Notice of Events of Default. Within 60 days after the occurrence of any Event of Default, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Register or at the addresses provided by Holders in writing to the Trustee, notice of such Event of Default hereunder actually known to a Responsible Officer of the Trustee, unless such Event of Default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of, premium or Additional Interest, if any, or interest on any Senior Note, the Trustee shall be protected in withholding such notice if and so long as a trust committee of Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders. SECTION 5.2. Certain Rights of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the period when an Event of Default is continuing: (i) the Trustee is required to perform only those duties as are specifically set forth in this Indenture and no covenants or obligations shall be implied in this Indenture that are adverse to the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein and, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. 52 58 (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this Section 5.2(c) does not limit the effect of Section 5.2(b); (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 4.12; and (iv) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to this Section 5.2. (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense, including such reasonable advances as may be requested by the Trustee. (f) Subject to the foregoing Sections 5.2(a), 5.2(b), 5.2(c), 5.2(d) and 5.2(e): (i) The Trustee may conclusively rely and shall be fully protected in acting or in refraining from acting upon any document (whether in its original or facsimile form) believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. Any request or direction of the Issuer mentioned herein shall be sufficiently evidenced by a Request or Order of the Issuer and any resolution by 53 59 the Board of Directors may be sufficiently evidenced by a Board Resolution. (ii) Before the Trustee acts or refrains form acting, it may require an Officers' Certificate and/or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. In addition, in determining the compliance of the Issuer with the financial covenants set forth herein, the Trustee may rely on the certificate delivered to the Trustee pursuant to Section 9.6(a). (iii) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (iv) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within its rights or powers. (v) The Trustee may consult with counsel, accountants or other experts of its own selection, and any advice of such counsel, accountants or other experts shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in accordance with such advice. (vi) The Trustee shall not be deemed to have notice of any Default hereunder, except for Events of Default described in Paragraphs (a), (b) or (c) of Section 4.1 (only to the extent that the Trustee acts as the Paying Agent), unless a Responsible Officer of the Trustee shall be specifically notified by a writing delivered to it of such Default by the Issuer, the Paying Agent (to the extent the Trustee is not acting as the Paying Agent) or by the Holders of at least 25% in aggregate principal amount of the Outstanding Senior Notes, and in the absence of such notice so delivered, the Trustee may conclusively assume that there is no Default except as aforesaid. SECTION 5.3. Not Responsible for Recitals or Issuance of Senior Notes. The recitals contained herein and in the Senior Notes, except the Trustee's 54 60 certificates of authentication, shall be taken as the statements of the Issuer, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or the Senior Notes. The Trustee shall not be accountable for the use or application by the Issuer of Senior Notes or the proceeds thereof, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Senior Notes and perform its obligations hereunder. SECTION 5.4. Trustee and Agents May Hold Senior Notes; Collections; Etc. The Trustee and any Paying Agent, Registrar or other agent of the Issuer, in its individual or any other capacity, may become the owner or pledgee of Senior Notes with the same rights it would have if it were not the Trustee, Paying Agent, Registrar or such other agent and, subject to Sections 310(b) and 311 of the Trust Indenture Act, may otherwise deal with the Issuer and receive, collect, hold and retain collections from the Issuer with the same rights it would have if it were not Trustee, Paying Agent, Registrar or such other agent. SECTION 5.5. Money Held in Trust. All moneys received by the Trustee shall, until used or applied as herein provided, be held in trust hereunder for the purposes for which they were received and need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Issuer. SECTION 5.6. Compensation and Reimbursement. The Issuer covenants and agrees: (a) to pay to the Trustee as agreed upon from time to time in writing compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and 55 61 (c) to fully indemnify the Trustee and each of its officers, directors, employees, agents and counsel and any predecessor Trustee for, and to hold them harmless against, any and all loss, liability, claim, damage or expense (including taxes other than taxes based on the income of the Trustee) incurred without negligence or bad faith on their part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation of the Issuer under this Section 5.6 to compensate the Trustee and to pay and reimburse the Trustee for such expenses, disbursements and advances shall constitute additional Indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. As security for the performance of the obligation of the Issuer under this Section 5.6, the Trustee shall have a claim prior to the Senior Notes upon all money, securities or other property held or collected by the Trustee as such, except funds held in trust for the payment of principal of, premium and Additional Interest, if any, or interest on particular Senior Notes. If the Trustee incurs expenses or renders services after an Event of Default specified in Section 4.1(f) or 4.1(g) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under the Federal Bankruptcy Code and any other applicable federal or state bankruptcy law. The provisions of this Section 5.6 shall survive the resignation or removal of the Trustee or the termination of this Indenture. SECTION 5.7. Conflicting Interests. The Trustee shall comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 5.8. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee under Section 310(a)(1) of the Trust Indenture Act and which shall have a combined capital and surplus of at least $50,000,000 and have its Corporate Trust Office located in the City of New York (or if its Corporate Trust Office shall not be located in the City of New York, the Issuer shall, pursuant to Section 2.4, maintain an office or agency in the City of New York where the Senior Notes may be presented or surrendered and notices and demands hereunder may be made or served) to the extent there is such an institution eligible and willing to serve. If such corporation publishes reports of 56 62 condition at least annually pursuant to law or to the requirements of federal, state, territorial or the District of Columbia supervising or examining authority, then, for the purposes of this Section 5.8, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 5.8, it shall resign immediately in the manner and with the effect hereinafter specified in this Article V. SECTION 5.9. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article V shall become effective until the acceptance of appointment by the successor Trustee under Section 5.10, at which time the retiring Trustee shall be fully discharged from its obligations hereunder. (b) The Trustee may resign at any time by giving written notice thereof to the Issuer. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition at the expense of the Issuer any court of competent jurisdiction for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper, appoint a successor Trustee. (c) The Trustee may be removed at any time by an Act of the Holders of a majority in principal amount of the Outstanding Senior Notes, delivered to the Trustee and the Issuer. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of removal, the removed Trustee may petition at the expense of the Issuer any court of competent jurisdiction for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper, appoint a successor Trustee. (d) If at any time: (i) the Trustee shall fail to comply with the provisions of Section 310(b) of the Trust Indenture Act after written request therefor by the Issuer or by any Holder who has been a bona fide Holder for at least six months, or 57 63 (ii) the Trustee shall cease to be eligible under Section 5.8 and shall fail to resign after written request therefor by the Issuer or by any Holder who has been a bona fide Holder for at least six months, or (iii) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Issuer, by a Board Resolution, may remove the Trustee, or (ii) subject to Section 4.14, any Holder who has been a bona fide Holder for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Issuer, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Senior Notes delivered to the Issuer and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with Section 5.10, become the successor Trustee and supersede the successor Trustee appointed by the Issuer. If no successor Trustee shall have been so appointed by the Issuer or the Holders and so accepted appointment, any Holder who has been a bona fide Holder for at least six months may on behalf of himself and all others similarly situated petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Issuer shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first class mail, postage prepaid, to the Holders as their names and addresses appear in the Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 5.10. Acceptance of Appointment of Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the 58 64 Issuer and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; provided, however, that the retiring Trustee shall continue to be entitled to the benefit of Section 5.6(c); but, on request of the Issuer or the successor Trustee, such retiring Trustee shall, upon payment of its charges and the charges of its agents and counsel, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee, and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Issuer shall execute any and all instruments in order to fully vest in such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article V. Upon acceptance of appointment by any successor Trustee as provided in this Section 5.10, the Issuer shall give notice thereof to the Holders by mailing such notice to the Holders as their names and addresses appear on the Register. If the acceptance of appointment is substantially contemporaneous with the resignation, then the notice called for by the preceding sentence may be combined with the notice called for by Section 5.9. If the Issuer fails to give such notice within ten days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be given at the expense of the Issuer. SECTION 5.11. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article V, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Senior Notes shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Senior Notes so authenticated 59 65 with the same effect as if such successor Trustee had itself authenticated such Senior Notes. SECTION 5.12. Preferential Collection of Claims Against the Issuer. If and when the Trustee shall be or become a creditor of the Issuer (or any other obligor under the Senior Notes), the Trustee shall be subject to the provisions of Section 311(b) of the Trust Indenture Act regarding the collection of claims against the Issuer (or any such other obligor). SECTION 5.13. Trustee's Application for Instructions from the Company. Any application by the Trustee for written instructions from the Issuer may, at the option of the Trustee, set forth in writing any action proposed to be taken or omitted by the Trustee under this Indenture and the date on and/or after which such action shall be taken or such omission shall be effective. The Trustee shall not be liable for any action taken by, or omission of, the Trustee in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than three Business Days after the date any officer of the Issuer actually receives such application, unless any such officer shall have consented in writing to any earlier date) unless prior to taking any such action (or the effective date in the case of an omission), the Trustee shall have received written instructions in response to such application specifying the action to be taken or omitted. ARTICLE VI HOLDERS' LISTS AND REPORTS BY TRUSTEE SECTION 6.1. Disclosure of Names and Addresses of Holders. Every Holder, by receiving and holding the same, agrees with the Issuer and the Trustee that neither the Issuer nor the Trustee or any agent of either of them shall be held accountable by reason of the disclosure of any information as to the names and addresses of the Holders in accordance with Section 312 of the Trust Indenture Act, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 312 of the Trust Indenture Act. SECTION 6.2. Reports by Trustee. Within 60 days after May 15 of each year commencing with the first May 15 after the first issuance of Senior Notes, 60 66 the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Register, as provided in Trust Indenture Act Section 313(c), a brief report dated as of such May 15 if required by Trust Indenture Act Section 313(a). ARTICLE VII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 7.1. Issuer May Consolidate, Etc., Only on Certain Terms. After the Issue Date, the Issuer shall not consolidate with or merge with or into any other Person, or, directly or indirectly, sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its assets in one or more related transactions to any Person or group of affiliated Persons unless, at the time and after giving effect thereto: (a) (i) the Issuer shall be the continuing corporation, or (ii) the Person (if other than the Issuer) formed by such consolidation, or into which the Issuer is merged, or the Person that acquires by sale, assignment, transfer, lease, conveyance or other disposition the assets of the Issuer, substantially as an entirety (the "SURVIVING ENTITY"), is a corporation duly organized and validly existing under the laws of the United States or any other jurisdiction that is not materially adverse to the holders of the Senior Notes and shall, in the case of clause (ii), expressly assume, by supplemental indenture hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, all the obligations of the Issuer under this Indenture; (b) immediately before and after such transaction, giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (c) immediately after giving effect to such transaction on a pro forma basis, the Consolidated Net Worth (after giving pro forma effect to such transaction but not including the effect of any purchase accounting adjustments or the accrual of deferred tax liabilities resulting from the transaction) of the Issuer (or the Surviving Entity) is at least equal to the Consolidated Net Worth of the Issuer immediately before such transaction; 61 67 (d) if any of the property or assets of the Issuer would thereupon become subject to any Lien, the outstanding Senior Notes shall be secured equally and ratably with (or prior to) the obligation or liability secured by such Lien, unless the Issuer could create such Lien hereunder without equally and ratably securing the Senior Notes; and (e) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, transfer or lease and such supplemental indenture, if one is required by this Section 7.1, comply with this Section 7.1 and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 7.2. Successor Substituted. Upon any consolidation or merger or any sale, assignment, transfer, lease or conveyance or other disposition of all or substantially all of the assets of the Issuer in accordance with Section 7.1, the successor Person formed by such consolidation or into which the Issuer is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Issuer under this Indenture with the same effect as if such successor Person had been named as the Issuer herein. When a successor assumes all the obligations of its predecessor under this Indenture and the Senior Notes, the predecessor will be released from those obligations; provided that in the case of a transfer by lease, the predecessor corporation shall not be released from the payment of principal of, premium and Additional Interest, if any, and interest on the Senior Notes. ARTICLE VIII SUPPLEMENTAL INDENTURES SECTION 8.1. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Issuer, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto in form satisfactory to the Trustee, for any of the following purposes: (a) to cure any ambiguity or to correct any provision herein which may be defective or inconsistent with any other provision herein; 62 68 (b) to provide for the assumption of the Issuer's obligations to Holders in the case of a merger or consolidation; (c) to secure the Senior Notes pursuant to the requirements of Section 7.1 or 9.5 or otherwise; (d) to comply with the requirements of the Commission in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act, as contemplated by this Indenture or otherwise; (e) to evidence and provide the acceptance of the appointment of a successor Trustee hereunder; or (f) to make any other change that would provide any additional rights or benefits to the Holders or that does not adversely affect the legal rights of any Holder under this Indenture or the Senior Notes. SECTION 8.2. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Senior Notes (including consents obtained in connection with a tender offer or exchange offer for the Senior Notes), by Act of such Holders delivered to the Issuer and the Trustee, the Issuer, when authorized by a Board Resolution, and the Trustee may enter into one or more indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of waiving or modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture, amendment or waiver shall without the consent of the Holder of each Outstanding Senior Note affected thereby: (i) change the Stated Maturity or the principal of, or any installment of interest on, or change the obligation of the Issuer to pay any Additional Interest with respect to, any Senior Note or reduce the principal amount thereof or the rate of interest thereon or any provision relating to the Redemption Price of Senior Notes or the periods during which redemption may be effected, or change the coin or currency in which the principal of any Senior Note or premium or Additional Interest, if any, or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment 63 69 after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); or (ii) reduce the percentage in principal amount of the Outstanding Senior Notes, the consent of whose Holders is required for any such supplemental indenture or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture; or (iii) modify any of the provisions of this Section 8.2, Section 4.13 or Section 9.8, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Senior Note affected thereby. It shall not be necessary for any Act of Holders under this Section 8.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 8.3. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article VIII or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 315(a) through 315(d) of the Trust Indenture Act and Section 5.2 hereof) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which adversely affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 8.4. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article VIII, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Senior Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. 64 70 SECTION 8.5. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article VIII shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 8.6. Reference in Senior Notes to Supplemental Indentures. Senior Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article VIII may, and shall if required by the Issuer, bear a notation in form approved by the Issuer as to any matter provided for in such supplemental indenture. If the Issuer shall so determine, new Senior Notes so modified as to conform, in the opinion of the Issuer, to any such supplemental indenture may be prepared and executed by the Issuer and shall be authenticated and delivered by the Trustee in exchange for Outstanding Senior Notes. ARTICLE IX COVENANTS SECTION 9.1. Payment of Principal, Premium and Interest. The Issuer will duly and punctually pay the principal of and any premium and interest on the Senior Notes in accordance with the terms of the Senior Notes and this Indenture. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent (other than the Issuer) holds as of 10:00 a.m. (New York City time) on that date money sufficient to pay all principal, premium, if any, and interest then due. The Issuer shall pay all Additional Interest, if any, in the same manner on the dates and in the amounts set forth in the Registration Rights Agreement. The Issuer will promptly notify the Trustee of an obligation to pay Additional Interest under the Registration Rights Agreement and any cure thereof. The Issuer shall pay interest on overdue principal and premium, if any, and to the extent lawful, interest on overdue installments of interest and Additional Interest, at the rate per annum set forth in the Senior Notes. SECTION 9.2. Corporate Existence. The Issuer shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and that of each Subsidiary and the corporate rights (charter and statutory), corporate licenses and corporate franchises of the Issuer and each Subsidiary, except where a failure to do so, singly or in the aggregate, would not have a material adverse effect upon the business, prospects, assets, conditions (financial or otherwise) or 65 71 results of operations of the Issuer and the Subsidiaries taken as a whole determined on a consolidated basis in accordance with GAAP; provided that the Issuer shall not be required to preserve any such existence (except of the Issuer), right, license or franchise if the Board of Directors or the board of directors of the Subsidiary concerned, shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Issuer or such Subsidiary and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 9.3. Payment of Taxes and Other Claims. The Issuer will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges levied or imposed upon it or any of the Subsidiaries or upon the income, profits or property of the Issuer or any of the Subsidiaries and (b) all material lawful claims for labor, materials and supplies, which, if unpaid, might by law become a Lien upon the property of the Issuer or any of the Subsidiaries that could produce a material adverse effect on the consolidated financial condition of the Issuer (in the good faith judgment of management of the Issuer); provided, however, that the Issuer shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and in respect of which appropriate reserves (in the good faith judgment of management of the Issuer) are being maintained in accordance with GAAP. SECTION 9.4. Maintenance of Properties; Insurance; Books and Records; Compliance with Law. (a) The Issuer shall cause all properties owned by or leased to it or any Subsidiary and used or useful in the conduct of its business or the business of such Subsidiary to be maintained and kept in normal condition, repair and working order, ordinary wear and tear excepted; provided that nothing in this Section 9.4 shall prevent the Issuer or any Subsidiary from discontinuing the use, operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Board of Directors or the board of directors of the Subsidiaries concerned, or of any officer (or other agent employed by the Issuer or any Subsidiary) of the Issuer or such Subsidiary having managerial responsibility for any such property, desirable in the conduct of the business of the Issuer or any Subsidiary and if such discontinuance or disposal is not adverse in any material respect to the Holders. (b) The Issuer shall provide or cause to be provided, for itself and any Subsidiary, insurance (including appropriate self-insurance) against loss or 66 72 damage of the kinds customarily insured against by corporations similarly situated and owning like properties in the same general areas in which the Issuer or such Subsidiaries operate. (c) The Issuer shall and shall cause each Subsidiary to keep proper and true books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Issuer and each Subsidiary, and reflect on its financial statements adequate accruals and appropriations to reserves, all in accordance with GAAP consistently applied except for accounting changes required by the AICPA, FASB or the Commission to the Issuer and the Subsidiaries taken as a whole. (d) The Issuer shall and shall cause each Subsidiary to comply with all statutes, laws, ordinances or government rules and regulations to which it is subject, except where a failure to do so, singly or in the aggregate, is not likely to have a materially adverse effect upon the business, prospects, assets or condition (financial or otherwise) or results of operations of the Issuer and the Subsidiaries taken as a whole. SECTION 9.5. Liens. The Issuer will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Indebtedness (other than Permitted Liens) on any property or asset now owned or hereafter acquired, or on any income or profits therefrom or assign or convey any right to receive income therefrom, unless all payments due under the Senior Notes and hereunder are secured on an equal and ratable basis with (or prior to in the case of Liens with respect to subordinated obligations) the obligations so secured until such time as such obligations are no longer secured by a Lien. SECTION 9.6. Statement as to Compliance; Notice of Default; Provision of Financial Statements. (a) The Issuer will deliver to the Trustee, within 120 days after the end of each fiscal year ending after the date hereof, a certificate of its principal executive officer, principal financial officer or principal accounting officer stating whether, to such officer's knowledge, the Issuer is in compliance with all covenants and conditions to be complied with by it under this Indenture. For purposes of this Section 9.6, such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. (b) If the Issuer becomes aware of a Default or if the Trustee, any Holder or the trustee for or the holder of any other evidence of Indebtedness of the 67 73 Issuer (other than Indebtedness in the aggregate principal amount of less than $25,000,000) gives any notice or takes any other action with respect to a claimed Default, the Issuer shall deliver to the Trustee an Officers' Certificate specifying such Default, notice or other action within five Business Days of its occurrence. (c) The Issuer shall supply without cost to each Holder, and file with the Trustee within 15 days after the Issuer is required to file the same with the Commission, copies of the annual reports and quarterly reports and of the information, documents and other reports which the Issuer may be required to file with the Commission pursuant to Sections 13(a), 13(c) or 15(d) of the Exchange Act; and (d) Whether or not the Issuer is required to file with the Commission such reports and other information referred to in Section 9.6(c), the Issuer shall file with the Commission and the Trustee such reports and information and furnish without cost to each Holder all financial information that would be required to be contained in a filing referred to in Section 9.6(c). The Issuer shall also make such reports available to prospective purchasers of the Senior Notes, securities analysts and broker-dealers upon their written request. The Issuer shall also file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Issuer with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Issuer's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 9.7. Waiver of Stay; Extension of Usury Law. The Issuer covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Issuer (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. 68 74 SECTION 9.8. Waiver of Certain Covenants. The Issuer may omit in any particular instance to comply with any covenant or condition set forth in Sections 9.4 and 9.5 if, before or after the time for such compliance, the Holders of not less than a majority in aggregate principal amount of the Senior Notes at the time Outstanding shall, by Act of such Holders, waive such compliance in such instance with such covenant or condition. No such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Issuer and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. ARTICLE X REDEMPTION OF SENIOR NOTES SECTION 10.1. Right of Redemption. The Issuer shall have the right to redeem the Senior Notes, in whole or in part, at any time and from time to time, subject to the receipt of any consent required under the terms of any Indebtedness of the Issuer which may be outstanding from time to time. SECTION 10.2. Applicability of Article. Redemption of Senior Notes at the election of the Issuer or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article X. SECTION 10.3. Election to Redeem; Notice to Trustee. The election of the Issuer to redeem any Senior Notes pursuant to Section 10.1 shall be evidenced by a Board Resolution. In case of such redemption, the Issuer shall, at least 60 days prior to the Redemption Date fixed by it (unless a shorter notice period shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Senior Notes to be redeemed. SECTION 10.4. Selection by Trustee of Senior Notes to Be Redeemed. If less than all of the Senior Notes are to be redeemed, the particular Senior Notes or portions thereof to be redeemed shall be selected not more than 60 days and not less than 30 days prior to the Redemption Date by the Trustee, from the Outstanding Senior Notes not previously called for redemption on a pro rata basis, by lot or by any other method the Trustee shall deem fair and appropriate and in compliance with the requirements of such principal national securities exchange, if 69 75 any, on which the Senior Notes are listed or, if the Senior Notes are not so listed, on a pro rata basis, by lot or by any other method the Trustee shall deem fair and appropriate; provided that the amounts to be redeemed shall be equal to at least $1,000 or any integral multiple thereof. The Trustee shall promptly notify the Issuer, DTC and the Registrar in writing of the Senior Notes selected for redemption and, in the case of any Senior Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Senior Notes shall relate, in the case of any Senior Note redeemed or to be redeemed only in part, to the portion of the principal amount of such Senior Note which has been or is to be redeemed. SECTION 10.5. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Senior Notes to be redeemed at the Redemption Price specified in Section 10.9. All notices of redemption shall state: (a) the Redemption Date; (b) the Redemption Price including, in connection with an optional redemption pursuant to Section 10.9, the estimated Make-Whole Amount due in connection with such redemption (calculated as if the date of such notice were the date of the prepayment) and setting forth the details of such calculation of Make-Whole Amount; (c) if less than all Outstanding Senior Notes are to be redeemed, the identification (and, if the case of a Senior Note to be redeemed in part, the principal amount) of the particular Senior Notes to be redeemed; (d) that on the Redemption Date the Redemption Price will become due and payable upon each such Senior Note or portion thereof, and that (unless the Issuer shall default in payment of the Redemption Price) interest thereon shall cease to accrue on and after said date; 70 76 (e) the place or places where such Senior Notes are to be surrendered for payment of the Redemption Price; (f) that Senior Notes called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (g) the CUSIP or ISIN number or numbers, if any, relating to such Senior Notes, but that no representation is made as to the correctness or accuracy of the CUSIP or ISIN number listed in such notice or printed on the Senior Notes and that reliance may be placed only on the other identification numbers printed on the Senior Notes; (h) in the case of a Certificated Senior Note to be redeemed in part, the principal amount of such Certificated Senior Note to be redeemed and that after the Redemption Date upon surrender of such Certificated Senior Note, a new Certificated Senior Note or Certificated Senior Notes in the aggregate principal amount equal to the unredeemed portion thereof will be issued; and (i) in the case of a Global Senior Note to be redeemed in part, the principal amount of such Global Senior Note to be redeemed and that after the Redemption Date upon surrender of such Global Senior Note a new Global Senior Note in principal amount equal to the unredeemed portion will be issued or an adjustment will be made to the existing Global Senior Note such that the aggregate principal amount of the Global Senior Note will equal the unredeemed portion of the Global Senior Note. Notice of redemption of Senior Notes to be redeemed at the election of the Issuer shall be given by the Issuer or, at its request, by the Trustee in the name and at the expense of the Issuer. Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. SECTION 10.6. Deposit of Redemption Price. On or prior to any Redemption Date, the Issuer shall deposit with the Trustee or with a Paying Agent (or, if the Issuer is acting as its own Paying Agent, segregate and hold in trust as provided in Section 2.5) an amount of money in same-day funds (or New York Clearing House funds if such deposit is made prior to the applicable Redemption Date) sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) Additional Interest, if any, and accrued interest on, all the Senior Notes or portions thereof which are to be redeemed on that date. 71 77 SECTION 10.7. Senior Notes Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Senior Notes to be redeemed shall, subject to the provisions of Section 10.3, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date (unless the Issuer shall default in the payment of the Redemption Price and accrued interest) such Senior Notes shall cease to bear interest. Upon surrender of any such Senior Note for redemption in accordance with said notice, such Senior Note shall be paid by the Issuer at the Redemption Price together with accrued interest to the Redemption Date; provided, however, that installments of interest on any Certificated Senior Notes whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Certificated Senior Notes, or one or more predecessor Certificated Senior Notes, registered as such on the relevant Regular Record Dates according to the terms and the provisions of Section 2.6. If any Senior Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal thereof (and premium, if any, thereon) shall, until paid, bear interest from the Redemption Date at the rate borne by such Senior Note. SECTION 10.8. Senior Notes Redeemed in Part. Any Senior Note which is to be redeemed only in part shall be surrendered at the office or agency of the Issuer maintained for such purpose pursuant to Section 2.4 (with, if the Issuer, the Registrar or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Issuer, the Registrar or the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing). Upon surrender of a Certificated Senior Note that is redeemed in part, the Issuer shall execute, and the Trustee shall authenticate and deliver to the Holder of such Certificated Senior Note without service charge, a new Certificated Senior Note or Certificated Senior Notes, of any authorized denomination as requested by such Holder in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Certificated Senior Note so surrendered. Upon surrender of a Global Senior Note that is redeemed in part, the Paying Agent shall forward the Global Senior Note to the Trustee who shall reduce the principal amount of such Global Senior Note to an amount equal to the unredeemed portion of the Global Senior Note surrendered. SECTION 10.9. Optional Redemption. (a) The Senior Notes are subject to optional redemption by the Issuer at a Redemption Price equal to 100% of the principal amount, together with accrued and unpaid interest and Additional Interest, if any, thereon to the Redemption Date (subject to the right of Holders of 72 78 record on relevant Regular Record Dates to receive interest due on an Interest Payment Date), plus the Make-Whole Amount, if any, with respect to such Senior Notes. Three Business Days prior to such redemption, the Issuer shall give notice to the Quotation Agent requesting the Quotation Agent to provide a quote of the Comparable Treasury Price, and the Quotation Agent shall provide such quotation to the Issuer on or before one Business Day prior to such redemption. One Business Day prior to such redemption, the Quotation Agent or the Issuer shall give notice to the Trustee specifying the calculation of the Make-Whole Amount as of the Redemption Date. (b) The Senior Notes are not subject to redemption through operation of a sinking fund. ARTICLE XI DEFEASANCE AND COVENANT DEFEASANCE SECTION 11.1. Option to Effect Defeasance or Covenant Defeasance. The Issuer may, at its option by Board Resolution, at any time, elect to have either Section 11.2 or Section 11.3 be applied to all Outstanding Senior Notes upon compliance with the conditions set forth below in this Article XI. SECTION 11.2. Defeasance and Discharge. Upon the Issuer's exercise under Section 11.1 of the option applicable to this Section 11.2, the Issuer shall be deemed to have been discharged from its obligations with respect to all Outstanding Senior Notes on the date the conditions set forth below are satisfied (hereinafter, "DEFEASANCE"). For this purpose, such defeasance means that the Issuer shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Senior Notes, which shall thereafter be deemed to be "OUTSTANDING" only for the purposes of Section 11.5 and the other sections of this Indenture referred to in Section 11.2(a) and Section 11.2(b) below, and to have satisfied all other obligations under such Senior Notes and this Indenture (and the Trustee, on demand of and at the expense of the Issuer, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of Outstanding Senior Notes to receive solely from the trust fund described in Section 73 79 11.5 and as more fully set forth in such Section, payments in respect of the principal of, premium and Additional Interest, if any, and interest on such Senior Notes when such payments are due, or on the Redemption Date, as the case may be, (b) the Issuer's obligations with respect to such Senior Notes under Section 2.4, Section 2.5, Section 2.6, Section 2.7, Section 2.8, Section 2.10 and Section 2.13, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Issuer's obligations in connection therewith, and (d) this Article XI. Subject to compliance with this Article XI the Issuer may exercise its option under this Section 11.2 notwithstanding the prior exercise of its option under Section 11.3 with respect to the Senior Notes. SECTION 11.3. Covenant Defeasance. Upon the Issuer's exercise under Section 11.1 of the option applicable to this Section 11.3, the Issuer and, if applicable, the Trustee and each Holder, shall be released from its obligations under the covenants contained in Article VII, Sections 9.2 through Section 9.5 inclusive and Section 9.6, with respect to the Outstanding Senior Notes on and after the date the conditions set forth below are satisfied (hereinafter, "COVENANT DEFEASANCE"), and the Senior Notes shall thereafter be deemed to be not "OUTSTANDING" for the purposes of any request, demand, authorization, direction, notice, consent, waiver or other Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "OUTSTANDING" for all other purposes hereunder (it being understood that such Senior Notes shall not be deemed Outstanding for financial accounting purposes). For this purpose, such covenant defeasance means that, with respect to the Outstanding Senior Notes, the Issuer may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 4.1(b) or 4.1(h), but, except as specified above, the remainder of this Indenture and such Senior Notes shall be unaffected thereby. SECTION 11.4. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 11.2 or Section 11.3 to the Outstanding Senior Notes: (a) The Issuer shall irrevocably have deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the 74 80 benefit of the Holders of such Senior Notes, (1) cash in U.S. Dollars in an amount, or (2) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, cash in U.S. Dollars in an amount, or (3) a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge the principal of, premium and Additional Interest, if any, and interest on the Outstanding Senior Notes on the Stated Maturity or on the applicable optional Redemption Date, as the case may be, of such principal or installment of principal of, premium and Additional Interest, if any, and interest on the Senior Notes; provided that the Trustee shall have been irrevocably instructed by the Issuer in writing to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Senior Notes; (b) In the case of an election under Section 11.2, the Issuer shall have delivered to the Trustee an Opinion of Counsel in the United States confirming that (1) the Issuer has received from, or there has been published by, the Internal Revenue Service a ruling or (2) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Senior Notes will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (c) In the case of an election under Section 11.3, the Issuer shall have delivered to the Trustee an Opinion of Counsel in the United States confirming that the Holders of the Outstanding Senior Notes will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (d) No Default or Event of Default with respect to the Senior Notes shall have occurred and be continuing on the date of such deposit or, insofar as Section 4.1(f) or Section 4.1(g) is concerned, at any time in the period ending on the 91st day after the date of such deposit; 75 81 (e) Such election under Section 11.2 or 11.3 shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Issuer is a party or by which the Issuer is bound; (f) In the case of an election under either Section 11.2 or 11.3, the Issuer shall have delivered to the Trustee an Opinion of Counsel to the effect that after the 91st day following deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (g) In the case of an election under either Section 11.2 or 11.3, the Issuer shall have delivered to the Trustee an Officers' Certificate stating that the deposit made by the Issuer pursuant to its election under Section 11.2 or 11.3 was not made by the Issuer with the intent of preferring the Holders over other creditors of the Issuer or with the intent of defeating, hindering, delaying or defrauding creditors of the Issuer or others; and (h) The Issuer shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel in the United States, each stating that all conditions precedent provided for relating to either the defeasance under Section 11.2 or the covenant defeasance under Section 11.3 (as the case may be) have been complied with as contemplated by this Section 11.4. SECTION 11.5. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of Section 2.5, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 11.5, the "Trustee") pursuant to Section 11.4 in respect of the Outstanding Senior Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Senior Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Issuer acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Senior Notes of all sums due and to become due thereon in respect of principal, premium and Additional Interest, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or U.S. Government 76 82 Obligations deposited pursuant to Section 11.4 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Senior Notes. Anything in this Article XI to the contrary notwithstanding, the Trustee shall deliver or pay to the Issuer from time to time upon the Issuer's Request any money or U.S. Government Obligations held by it as provided in Section 11.4 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 11.4) are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance. SECTION 11.6. Reinstatement. If the Trustee or Paying Agent is unable to apply any United States dollars or U.S. Government Obligations in accordance with Section 11.2 or 11.3 as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Issuer's obligations under this Indenture and the Senior Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 11.2 or 11.3 as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 11.2 or 11.3, as the case may be; provided, however, that, if the Issuer makes any payment of principal of, premium and Additional Interest, if any, or interest on any Senior Note following the reinstatement of its obligations, the Issuer shall be subrogated to the rights of the Holders of such Senior Notes to receive such payment from the money held by the Trustee or Paying Agent. 77 83 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the date first above written. AFLAC Incorporated By: /s/ GARY L. STEGMAN --------------------------------- Name: Gary L. Stegman Title: Senior Vice President and Assistant Chief Financial Officer The Bank of New York, as Trustee By: /s/ MARIE E. TRIMBOLI --------------------------------- Name: Marie E. Trimboli Title: Assistant Treasurer 84 EXHIBIT A [FORM OF FACE OF U.S. GLOBAL SENIOR NOTE] THIS SENIOR NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SENIOR NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SENIOR NOTE BY ITS ACCEPTANCE HEREOF AGREES, ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SENIOR NOTES, TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SENIOR NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SENIOR NOTE (OR ANY PREDECESSOR OF SUCH SENIOR NOTE), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SENIOR NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SENIOR NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SENIOR NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE 1 85 SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE ISSUER'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (ii) PURSUANT TO CLAUSE (E), TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUSTEE A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF APPENDIX A TO THE OFFERING MEMORANDUM DATED APRIL 16, 1999. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. UNLESS THIS SENIOR NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SENIOR NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS SENIOR NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS SENIOR NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. 2 86 CUSIP No. ____________ Note No. ____________ Original Principal Amount U.S. $_______ THIS SENIOR NOTE IS A U.S. GLOBAL SENIOR NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO. AFLAC INCORPORATED 6 1/2% Senior Notes due 2009 AFLAC Incorporated, a corporation organized under the laws of Georgia, promises to pay to the registered holder of this Senior Note, or its registered assigns, the principal sum of U.S. $____ (or such other amount as reflected in the records of the Trustee), on April 15, 2009. Interest Payment Dates: April 15 and October 15, commencing October 15, 1999. 3 87 Additional provisions of this U.S. Global Senior Note are set forth on the other side of this Senior Note. Dated: April ___, 1999 AFLAC INCORPORATED By:____________________ By:____________________ TRUSTEE'S CERTIFICATE OF AUTHENTICATION The Bank of New York, as Trustee, certifies that this is the U.S. Global Senior Note referred to in the Indenture. - ------------------------ Authorized Officer 88 [FORM OF REVERSE OF U.S. GLOBAL SENIOR NOTE] AFLAC INCORPORATED 6 1/2% Senior Notes due 2009 1. Interest a. AFLAC Incorporated, a corporation organized under the laws of Georgia (such company, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "ISSUER"), promises to pay interest on the principal amount of this Senior Note to the registered holder hereof at the rate per annum shown above. [b. Interest on this Senior Note shall accrue at the rate of 6 1/2% per annum and is payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 1999. In the event that the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 90th day following the Issue Date, the Exchange Offer Registration Statement is not declared effective on or prior to the 180th day following the Issue Date or the Exchange Offer is not consummated and a Shelf Registration Statement is not declared effective on or prior to the 210th day following the Issue Date (or if the 90th, 180th or 210th day is not a Business Day, the first Business Day thereafter), interest will accrue (in addition to stated interest on the Senior Notes) from and including the next day following such 90- 180- or 210-day period. Such additional interest (the "ADDITIONAL INTEREST") will be payable in cash semiannually in arrears each April 15 and October 15, at a rate per annum equal to 0.25% of the principal amount of the Senior Notes, for each event described in the preceding sentence; provided, however, that the aggregate amount of Additional Interest payable pursuant to the above provisions shall in no event exceed 0.75% per annum of the principal amount of the Senior Notes. Upon the filing of the Exchange Offer Registration Statement, the effectiveness of the Exchange Offer Registration Statement, the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, after such 90- 180- or 210-day period, the Additional Interest payable on the Senior Notes from the date of such filing, effectiveness or consummation, as the case may be, will cease to accrue and all accrued and unpaid Additional Interest as of such occurrence shall be paid to the Holders. Notwithstanding the fact that any Senior Notes for which Additional Interest is due cease to be Transfer Restricted Securities (as defined in the Registration Rights Agreement), 5 89 all obligations of the Issuer to pay Additional Interest with respect to such Senior Notes shall survive until such time as such obligations with respect to such Senior Notes shall have been satisfied in full. In the event that a Shelf Registration Statement is declared effective pursuant to the preceding paragraph, if the Issuer fails to keep such Registration Statement continuously effective for the period required by the Registration Rights Agreement, or if the Shelf Registration Statement fails to be usable for its intended purpose without being succeeded by a post-effective amendment to such Shelf Registration Statement that cures such failure and that is itself declared effective within 10 days of filing such post-effective amendment to such Shelf Registration Statement, then from such time as the Shelf Registration Statement is no longer effective or usable, as the case may be, until the earlier of (i) the date that the Shelf Registration Statement is again deemed effective or usable, as the case may be, (ii) the date that is the second anniversary of the Issue Date or (iii) the date as of which all of the Senior Notes are sold pursuant to the Shelf Registration Statement, Additional Interest shall accrue at a rate per annum equal to 0.25% of the principal amount of the Senior Notes and shall be payable in cash semiannually in arrears each April 15 and October 15. All accrued Additional Interest shall be paid to Holders by the Issuer in the same manner as interest is paid pursuant to the Indenture. The aggregate amount of Additional Interest payable pursuant to this Section 1(b) shall in no event exceed 0.75% per annum of the principal amount of Senior Notes.](1) b. Interest on this Senior Note shall accrue from the most recent date to which interest has been paid on the Senior Note for which this Senior Note was exchanged or, if no interest has been paid on such Senior Note, from the Issue Date, at the rate of 6 1/2% per annum and shall be payable in cash semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 1999. There shall also be payable in respect of this Senior Note all Additional Interest that may have accrued on the Senior Note for which this Senior Note was exchanged (as calculated in accordance with the terms of such Senior Note) pursuant to the Exchange Offer or otherwise pursuant to a registration of such Senior Note under the Securities Act, such Additional Interest to be payable at the same time and in the same manner as the periodic interest on this Senior Note.](2) - -------------- 1. To be included in Senior Notes which are not Exchange Notes. 2. To be included in Exchange Notes. 6 90 c. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Issuer shall pay interest at the applicable interest rate on the Senior Notes on overdue principal, interest (to the extent lawful) or premium or Additional Interest, if any, on demand. 2. Method of Payment The Issuer through the Paying Agent shall pay interest on this Senior Note to the registered holder of this Senior Note or as instructed in writing by such Holder. The Holder must surrender this Senior Note to the Paying Agent to collect principal payments. The Issuer shall pay principal and interest in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. 3. Paying Agent and Registrar Initially, The Bank of New York, a New York banking corporation (the "TRUSTEE"), will act as Paying Agent and Registrar. The Issuer may appoint and change any Paying Agent, Registrar, co-registrar or transfer agent without prior notice. The Issuer may act as Paying Agent, Registrar, co-registrar or transfer agent to the Holder. 4. Indenture The Issuer issued this Senior Note under an Indenture, dated as of April 21, 1999 (the "INDENTURE"), between the Issuer and the Trustee. The terms of this Senior Note include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "ACT"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. This Senior Note is subject to all such terms, and Holders are referred to the Indenture and the Act for a statement of those terms. This Senior Note is a senior unsecured obligation of the Issuer limited to $450,000,000 aggregate principal amount at maturity (subject to Section 2.8 of the Indenture). 5. Optional Redemption a. This Senior Note is subject to redemption in whole or in part, at any time and from time to time, upon not less than 30 nor more than 60 days' notice, in an amount of $1,000 or an integral multiple of $1,000, at a Redemption Price equal to the sum of (i) 100% 7 91 of the principal amount, together with accrued and unpaid interest and Additional Interest, if any, to the Redemption Date, and (ii) the Make-Whole Amount, if any, as provided in the Indenture. b. This Senior Note is not subject to redemption through operation of a sinking fund. 6. Notice of Redemption Notice of redemption shall be mailed not less than 30 nor more than 60 days prior to the Redemption Date to the registered holder of this Senior Note at The Bank of New York, 101 Barclay Street, Floor 11 East, New York, New York 10286, or at any other address provided to the Trustee in writing by the registered holder of this Senior Note. Senior Notes in denominations larger than $1,000 of principal amount at maturity may be redeemed in part but only in whole multiples of $1,000 at maturity. In the event of a redemption of less than all of the Senior Notes, the Senior Notes for redemption will be chosen by the Trustee in accordance with the Indenture. If any Senior Note is redeemed subsequent to a record date with respect to any Interest Payment Date specified above and/or prior to such Interest Payment Date, then any accrued interest will be paid to the Holder at the close of business on such record date. If money sufficient to pay the Redemption Price of and accrued interest on all Senior Notes (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent on or before the Redemption Date and certain other conditions are satisfied, on and after such date interest will cease to accrue on such Senior Notes (or such portions thereof) called for redemption. 7. Denominations; Transfer; Exchange This Senior Note is in registered form without coupons. This Senior Note is in an aggregate principal amount of $_________ (or such other amount as reflected in the records of the Trustee) (subject to adjustment as provided in the Indenture). The Holder may only transfer or exchange this Senior Note in accordance with the Indenture. 8. Persons Deemed Owners The registered holder of this Senior Note will be treated as the owner of it for all purposes. 8 92 9. Defeasance and Covenant Defeasance The Indenture contains provisions for defeasance at any time, upon compliance by the Issuer with certain conditions set forth in the Indenture, of (a) the entire indebtedness of the Issuer with respect to this Senior Note and (b) certain restrictive covenants and the related Defaults and Events of Default. 10. Amendment; Waiver The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Senior Notes outstanding at the time of amendment or modification. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Senior Notes at any time outstanding, on behalf of the Holders of all the Senior Notes, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of the holder of this Senior Note shall be conclusive and binding upon such Holder and upon all future holders of this Senior Note and of any Senior Note issued in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Senior Note. 11. Defaults and Remedies This Senior Note has the Events of Default as set forth in Section 4.1 of the Indenture. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Senior Notes, subject to certain limitations, may declare all the Senior Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default and shall result in the Senior Notes being due and payable immediately upon the occurrence of such Events of Default. Holders may not enforce the Indenture or the Senior Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Senior Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Senior Notes may direct the Trustee in its exercise of any trust or power. The Holders of a majority in principal amount of the Senior Notes then outstanding by written notice to the Trustee may rescind a declaration of acceleration if the rescission is prior to a judgment or decree for payment and if all Events of Default have been cured or waived except nonpayment of principal and interest that has been due solely 9 93 because of the acceleration. The Trustee may withhold from Holders notice of any continuing Default (except a default in payment of principal or interest) if it determines that withholding notice is in the interest of the Holders. The above description of Events of Default and remedies is qualified by reference, and subject in its entirety, to the more complete description thereof contained in the Indenture. 12. Trustee Dealings with the Issuer Subject to certain limitations imposed by the Act, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of this Senior Note and may otherwise deal with and collect obligations owed to it by the Issuer or its Affiliates and may otherwise deal with the Issuer or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar or such other agent may do the same with like rights. 13. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Issuer, shall not have any liability for any payment of the principal of, or premium or Additional Interest, if any, or interest on, any of the Senior Notes or any other obligations of the Issuer under this Senior Note or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting this Senior Note, the registered holder of this Senior Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of this Senior Note. 14. Authentication This Senior Note shall not be valid until an authorized officer of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Senior Note. 15. Governing Law The internal laws of the State of New York shall govern the Indenture and this Senior Note. 10 94 The Issuer will furnish to the Holder of this Senior Note upon written request and without charge to the Holder a copy of the Indenture. Requests may be made to: AFLAC Incorporated 1932 Wynnton Road Columbus, Georgia 31999 Attention: Investor Relations Department Telephone: (706) 323-3431 11 95 [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered Holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. - ------------------------------------------------------------------------------- Please print or typewrite name and address including zip code of assignee - ------------------------------------------------------------------------------- the within Senior Note and all rights thereunder, hereby irrevocably constituting and appointing _______________________ attorney to transfer said Senior Note on the books of the Issuer with full power of substitution in the premises. In connection with any transfer of this Senior Note occurring (i) in the case of a U.S. Certificated Senior Note or U.S. Global Senior Note, prior to the Resale Restriction Termination Date, (ii) in the case of a Reg S Certificated Senior Note or Reg S Global Senior Note, prior to the expiration of the Distribution Compliance Period, or (iii) prior to the date of an effective registration under the Securities Act, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] [ ](a) This Senior Note is being transferred in compliance with the exemption from registration under the Securities Act, provided by Rule 144A thereunder. or [ ](b) This Senior Note is being transferred in an offshore transaction in compliance with Rule 904 of the Securities Act. or [ ](c) This Senior Note is being transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act), that has furnished to the Trustee a signed letter containing certain representations and agreements. 12 96 or [ ](d) This Senior Note is being transferred other than in accordance with (a), (b) or (c) above and documents are being furnished which comply with the conditions for transfer set forth in this Senior Note and the Indenture. If none of the foregoing boxes is checked the Trustee or other Registrar shall refuse to register this Senior Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer or registration set forth herein and in Section 2.13 of the Indenture shall have been satisfied. Date: ______________________ ________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Senior Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "QUALIFIED INSTITUTIONAL BUYER" within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance an Rule 144A and acknowledges that it has received such information regarding the Issuer as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Date: ______________________ __________________________ NOTICE: To be executed by an executive officer of the transferee. 97 SCHEDULE OF INCREASE OR DECREASE IN GLOBAL SENIOR NOTE The following increases or decreases in this Global Senior Note have been made:
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14 98 EXHIBIT B [FORM OF FACE OF REG S GLOBAL SENIOR NOTE] THIS SENIOR NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A U.S. PERSON NOR IS IT PURCHASING FOR THE ACCOUNT OF A U.S. PERSON AND IS ACQUIRING THIS SENIOR NOTE IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), (2) BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SENIOR NOTE, PRIOR TO THE DATE WHICH IS 40 DAYS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SENIOR NOTE (OR ANY PREDECESSOR OF SUCH SENIOR NOTE), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SENIOR NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SENIOR NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SENIOR NOTES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE ISSUER'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE 1 99 DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (ii) PURSUANT TO CLAUSE (E), TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUSTEE A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF APPENDIX A TO THE OFFERING MEMORANDUM DATED APRIL 16, 1999. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE DAY ON WHICH THE SENIOR NOTES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S. UNLESS THIS SENIOR NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SENIOR NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS SENIOR NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS SENIOR NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. 2 100 ISIN No. Note No. _____________ Original Principal Amount U.S. $_______ THIS SENIOR NOTE IS A REG S GLOBAL SENIOR NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO. AFLAC INCORPORATED 6 1/2% Senior Notes due 2009 AFLAC Incorporated, a corporation organized under the laws of Georgia, promises to pay to the registered holder of this Senior Note, or its registered assigns, the principal sum of U.S. $____ (or such other amount as reflected in the records of the Trustee), on April 15, 2009. Interest Payment Dates: April 15 and October 15, commencing October 15, 1999. 3 101 Additional provisions of this Reg S Global Senior Note are set forth on the other side of this Senior Note. Dated: April ___, 1999. AFLAC INCORPORATED By:____________________ By:____________________ TRUSTEE'S CERTIFICATE OF AUTHENTICATION The Bank of New York, as Trustee, certifies that this is the Reg S Global Senior Note referred to in the Indenture. - ------------------------ Authorized Officer 102 [FORM OF REVERSE OF REG S GLOBAL SENIOR NOTE] AFLAC INCORPORATED 6 1/2% Senior Notes due 2009 1. Interest a. AFLAC Incorporated, a corporation organized under the laws of Georgia (such company, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "ISSUER"), promises to pay interest on the principal amount of this Senior Note to the registered holder hereof at the rate per annum shown above. [b. Interest on this Senior Note shall accrue at the rate of 6 1/2% per annum and is payable semiannually on April 15 and October 15 of each year, commencing on October 15, 1999. In the event that the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 90th day following the Issue Date, the Exchange Offer Registration Statement is not declared effective on or prior to the 180th day following the Issue Date or the Exchange Offer is not consummated and a Shelf Registration Statement is not declared effective on or prior to the 210th day following the Issue Date (or if the 90th, 180th or 210th day is not a Business Day, the first Business Day thereafter), interest will accrue (in addition to stated interest on the Senior Notes) from and including the next day following such 90- 180- or 210-day period. Such additional interest (the "ADDITIONAL INTEREST") will be payable in cash semiannually in arrears each April 15 and October 15, at a rate per annum equal to 0.25% of the principal amount of the Senior Notes, for each event described in the preceding sentence; provided, however, that the aggregate amount of Additional Interest payable pursuant to the above provisions shall in no event exceed 0.75% per annum of the principal amount of the Senior Notes. Upon the filing of the Exchange Offer Registration Statement, the effectiveness of the Exchange Offer Registration Statement, the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, after such 90- 180- or 210-day period, the Additional Interest payable on the Senior Notes from the date of such filing, effectiveness or consummation, as the case may be, will cease to accrue and all accrued and unpaid Additional Interest as of such occurrence shall be paid to the Holders. Notwithstanding the fact that any Senior Notes for which Additional Interest is due cease to be Transfer Restricted Securities (as defined in the Registration Rights Agreement), 5 103 all obligations of the Issuer to pay Additional Interest with respect to such Senior Notes shall survive until such time as such obligations with respect to such Senior Notes shall have been satisfied in full. In the event that a Shelf Registration Statement is declared effective pursuant to the preceding paragraph, if the Issuer fails to keep such Registration Statement continuously effective for the period required by the Registration Rights Agreement, or if the Shelf Registration Statement fails to be usable for its intended purpose without being succeeded by a post-effective amendment to such Shelf Registration Statement that cures such failure and that is itself declared effective within 10 days of filing such post-effective amendment to such Shelf Registration Statement, then from such time as the Shelf Registration Statement is no longer effective or usable, as the case may be, until the earlier of (i) the date that the Shelf Registration Statement is again deemed effective or usable, as the case may be, (ii) the date that is the second anniversary of the Issue Date or (iii) the date as of which all of the Senior Notes are sold pursuant to the Shelf Registration Statement, Additional Interest shall accrue at a rate per annum equal to 0.25% of the principal amount of the Senior Notes and shall be payable in cash semiannually in arrears each April 15 and October 15. All accrued Additional Interest shall be paid to Holders by the Issuer in the same manner as interest is paid pursuant to the Indenture. The aggregate amount of Additional Interest payable pursuant to this Section 1(b) shall in no event exceed 0.75% per annum of the principal amount of Senior Notes.](1) [b. Interest on this Senior Note shall accrue from the most recent date to which interest has been paid on the Senior Note for which this Senior Note was exchanged or, if no interest has been paid on such Senior Note, from the Issue Date, at the rate of 6 1/2% per annum and shall be payable in cash semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 1999. There shall also be payable in respect of this Senior Note all Additional Interest that may have accrued on the Senior Note for which this Senior Note was exchanged (as calculated in accordance with the terms of such Senior Note) pursuant to the Exchange Offer or otherwise pursuant to a registration of such Senior Note under the Securities Act, such Additional Interest to be payable at the same time and in the same manner as the periodic interest on this Senior Note.](2) - -------------------- 1. To be included in Senior Notes which are not Exchange Notes. 2. To be included in Exchange Notes. 6 104 c. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Issuer shall pay interest at the applicable interest rate on the Senior Notes on overdue principal, interest (to the extent lawful) or premium or Additional Interest, if any, on demand. 2. Method of Payment The Issuer through the Paying Agent shall pay interest on this Senior Note to the registered Holder of this Senior Note or as instructed in writing by such Holder. The Holder must surrender this Senior Note to the Paying Agent to collect principal payments. The Issuer shall pay principal and interest in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. 3. Paying Agent and Registrar Initially, The Bank of New York, a New York banking corporation (the "TRUSTEE"), will act as Paying Agent and Registrar. The Issuer may appoint and change any Paying Agent, Registrar, co-registrar or transfer agent without prior notice. The Issuer may act as Paying Agent, Registrar, co-registrar or transfer agent to the Holder. 4. Indenture The Issuer issued this Senior Note under an Indenture, dated as of April 21, 1999, (the "INDENTURE"), between the Issuer and the Trustee. The terms of this Senior Note include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "ACT"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. This Senior Note is subject to all such terms, and Holders are referred to the Indenture and the Act for a statement of those terms. This Senior Note is a senior unsecured obligation of the Issuer limited to $450,000,000 aggregate principal amount at maturity (subject to Section 2.8 of the Indenture). 5. Optional Redemption a. This Senior Note is subject to redemption in whole or in part, at any time and from time to time, upon not less than 30 nor more than 60 days' notice, in an amount of $1,000 or an integral multiple of $1,000, at a Redemption Price equal to the sum of (i) 100% 7 105 of the principal amount, together with accrued and unpaid interest and Additional Interest, if any, to the Redemption Date and (ii) the Make-Whole Amount, if any, as provided in the Indenture. b. This Senior Note is not subject to redemption through operation of a sinking fund. 6. Notice of Redemption Notice of redemption shall be mailed not less than 30 nor more than 60 days prior to the Redemption Date to the registered holder of this Senior Note at The Bank of New York, 101 Barclay Street, Floor 11 East, New York, New York 10286, or at any other address provided to the Trustee in writing by the registered holder of this Senior Note. Senior Notes in denominations larger than $1,000 of principal amount at maturity may be redeemed in part but only in whole multiples of $1,000 at maturity. In the event of a redemption of less than all of the Senior Notes, the Senior Notes for redemption will be chosen by the Trustee in accordance with the Indenture. If any Senior Note is redeemed subsequent to a record date with respect to any Interest Payment Date specified above and/or prior to such Interest Payment Date, then any accrued interest will be paid to the Holder at the close of business on such record date. If money sufficient to pay the Redemption Price of and accrued interest on all Senior Notes (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent on or before the Redemption Date and certain other conditions are satisfied, on and after such date interest will cease to accrue on such Senior Notes (or such portions thereof) called for redemption. 7. Denominations; Transfer; Exchange This Senior Note is in registered form without coupons. This Senior Note is in an aggregate principal amount of $__ (or such other amount as reflected in the records of the Trustee) (subject to adjustment as provided in the Indenture). The Holder may only transfer or exchange this Senior Note in accordance with the Indenture. 8. Persons Deemed Owners The registered holder of this Senior Note will be treated as the owner of it for all purposes. 8 106 9. Defeasance and Covenant Defeasance The Indenture contains provisions for defeasance at any time, upon compliance by the Issuer with certain conditions set forth in the Indenture, of (a) the entire indebtedness of the Issuer with respect to this Senior Note and (b) certain restrictive covenants and the related Defaults and Events of Default. 10. Amendment; Waiver The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Senior Notes outstanding at the time of amendment or modification. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Senior Notes at any time outstanding, on behalf of the Holders of all the Senior Notes, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of the Holder shall be conclusive and binding upon such Holder and upon all future Holders and of any Senior Note issued in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Senior Note. 11. Defaults and Remedies This Senior Note has the Events of Default as set forth in Section 4.1 of the Indenture. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Senior Notes, subject to certain limitations, may declare all the Senior Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default and shall result in the Senior Notes being due and payable immediately upon the occurrence of such Events of Default. Holders may not enforce the Indenture or the Senior Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Senior Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Senior Notes may direct the Trustee in its exercise of any trust or power. The Holders of a majority in principal amount of the Senior Notes then outstanding by written notice to the Trustee may rescind a declaration of acceleration if the rescission is prior to a judgment or decree for payment and if all Events of Default have been cured or waived except nonpayment of principal and interest that has been due solely 9 107 because of the acceleration. The Trustee may withhold from Holders notice of any continuing Default (except a default in payment of principal or interest) if it determines that withholding notice is in the interest of the Holders. The above description of Events of Default and remedies is qualified by reference, and subject in its entirety, to the more complete description thereof contained in the Indenture. 12. Trustee Dealings with the Issuer Subject to certain limitations imposed by the Act, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of this Senior Note and may otherwise deal with and collect obligations owed to it by the Issuer or its Affiliates and may otherwise deal with the Issuer or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar or such other agent may do the same with like rights. 13. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Issuer, shall not have any liability for any payment of the principal of, or premium or Additional Interest, if any, or interest on, any of the Senior Notes or any other obligations of the Issuer under this Senior Note or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting this Senior Note, the registered holder of this Senior Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of this Senior Note. 14. Authentication This Senior Note shall not be valid until an authorized officer of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Senior Note. 15. Governing Law The internal laws of the State of New York shall govern the Indenture and this Senior Note. 10 108 The Issuer will furnish to the Holder upon written request and without charge to the Holder a copy of the Indenture. Requests may be made to: AFLAC Incorporated 1932 Wynnton Road Columbus, Georgia 31999 Attention: Investor Relations Department Telephone: (706) 323-3431 11 109 [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered Holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. - ------------------------------------------------------------------------------- Please print or typewrite name and address including zip code of assignee - ------------------------------------------------------------------------------- the within Senior Note and all rights thereunder, hereby irrevocably constituting and appointing _______________________ attorney to transfer said Senior Note on the books of the Issuer with full power of substitution in the premises. In connection with any transfer of this Senior Note occurring (i) in the case of a U.S. Certificated Senior Note or U.S. Global Senior Note, prior to the Resale Restriction Termination Date, (ii) in the case of a Reg S Certificated Senior Note or Reg S Global Senior Note, prior to the expiration of the Distribution Compliance Period, or (iii) prior to the date of an effective registration under the Securities Act, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] [ ](a) This Senior Note is being transferred in compliance with the exemption from registration under the Securities Act, provided by Rule 144A thereunder. or [ ](b) This Senior Note is being transferred in an offshore transaction in compliance with Rule 904 of the Securities Act. or [ ](c) This Senior Note is being transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act), that has furnished to the Trustee a signed letter containing certain representations and agreements. 12 110 or [ ](d) This Senior Note is being transferred other than in accordance with (a), (b) or (c) above and documents are being furnished which comply with the conditions for transfer set forth in this Senior Note and the Indenture. If none of the foregoing boxes is checked the Trustee or other Registrar shall refuse to register this Senior Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer or registration set forth herein and in Section 2.13 of the Indenture shall have been satisfied. Date: ______________________ ________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Senior Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "QUALIFIED INSTITUTIONAL BUYER" within the meaning of Rule 144A and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Issuer as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Date: ______________________ __________________________ NOTICE: To be executed by an executive officer of the transferee. 111 SCHEDULE OF INCREASE OR DECREASE IN REG S GLOBAL SENIOR NOTE The following increases or decreases in this Reg S Global Senior Note have been made:
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14 112 EXHIBIT C [FORM OF FACE OF CERTIFICATED SENIOR NOTE] [THIS SENIOR NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SENIOR NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SENIOR NOTE BY ITS ACCEPTANCE HEREOF AGREES, ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SENIOR NOTES, TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SENIOR NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SENIOR NOTE (OR ANY PREDECESSOR OF SUCH SENIOR NOTE), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SENIOR NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SENIOR NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SENIOR NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT 1 113 TO THE ISSUER'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (ii) PURSUANT TO CLAUSE (E), TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUSTEE A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF APPENDIX A TO THE OFFERING MEMORANDUM DATED APRIL 16, 1999. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.](1) [THIS SENIOR NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A U.S. PERSON NOR IS IT PURCHASING FOR THE ACCOUNT OF A U.S. PERSON AND IS ACQUIRING THIS SENIOR NOTE IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), (2) BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SENIOR NOTE, PRIOR TO THE DATE WHICH IS 40 DAYS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SENIOR NOTE (OR ANY PREDECESSOR OF SUCH SENIOR NOTE), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SENIOR NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SENIOR NOTE FOR ITS OWN ACCOUNT, OR FOR THE - ----------------- 1. To be included in U.S. Certificated Senior Notes. 2 114 ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SENIOR NOTES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE ISSUER'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (ii) PURSUANT TO CLAUSE (E), TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUSTEE A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF APPENDIX A TO THE OFFERING MEMORANDUM DATED APRIL 16, 1999. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE DAY ON WHICH THE SENIOR NOTES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S.](2) - ----------------- 2. To be included in Reg S Certificated Senior Notes. 3 115 [CUSIP][ISIN] No.___________ Note No. _____________ Original Principal Amount U.S. $_______ THIS SENIOR NOTE IS A CERTIFICATED SENIOR NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO. AFLAC INCORPORATED 6 1/2% Senior Notes due 2009 AFLAC Incorporated, a corporation organized under the laws of Georgia, promises to pay to the registered holder of this Senior Note, or its registered assigns, the principal sum of U.S. $__________ (or such other amount as reflected in the records of the Trustee), on April 15, 2009. Interest Payment Dates: April 15 and October 15, commencing October 15, 1999. 4 116 Additional provisions of this Senior Note are set forth on the other side of this Senior Note. Dated: ______________ AFLAC INCORPORATED By: ---------------- By: ---------------- TRUSTEE'S CERTIFICATE OF AUTHENTICATION The Bank of New York, as Trustee, certifies that this is one of the Certificated Senior Notes referred to in the Indenture. - ----------------------------- Authorized Officer 117 [FORM OF REVERSE OF CERTIFICATED SENIOR NOTE] AFLAC INCORPORATED 6 1/2% Senior Notes due 2009 1. Interest a. AFLAC Incorporated, a corporation organized under the laws of Georgia (such company, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "ISSUER"), promises to pay interest on the principal amount of this Senior Note to the registered holder hereof at the rate per annum shown above. [b. Interest on this Senior Note shall accrue at the rate of 6 1/2% per annum and is payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 1999. In the event that the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 90th day following the Issue Date, the Exchange Offer Registration Statement is not declared effective on or prior to the 180th day following the Issue Date or the Exchange Offer is not consummated and a Shelf Registration Statement is not declared effective on or prior to the 210th day following the Issue Date (or if the 90th, 180th or 210th day is not a Business Day, the first Business Day thereafter), interest will accrue (in addition to stated interest on the Senior Notes) from and including the next day following such 90- 180- or 210-day period. Such additional interest (the "ADDITIONAL INTEREST") will be payable in cash semiannually in arrears each April 15 and October 15, at a rate per annum equal to 0.25% of the principal amount of the Senior Notes, for each event described in the preceding sentence; provided, however, that the aggregate amount of Additional Interest payable pursuant to the above provisions shall in no event exceed 0.75% per annum of the principal amount of the Senior Notes. Upon the filing of the Exchange Offer Registration Statement, the effectiveness of the Exchange Offer Registration Statement, the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, after such 90- 180- or 210-day period, the Additional Interest payable on the Senior Notes from the date of such filing, effectiveness or consummation, as the case may be, will cease to accrue and all accrued and unpaid Additional Interest as of such occurrence shall be paid to the Holders. Notwithstanding the fact that any Senior Notes for which Additional Interest is due cease to be Transfer Restricted Securities (as defined in the Registration Rights Agreement), all obligations of the Issuer to pay Additional Interest with respect to such Senior Notes shall 6 118 survive until such time as such obligations with respect to such Senior Notes shall have been satisfied in full. In the event that a Shelf Registration Statement is declared effective pursuant to the preceding paragraph, if the Issuer fails to keep such Registration Statement continuously effective for the period required by the Registration Rights Agreement, or if the Shelf Registration Statement fails to be usable for its intended purpose without being succeeded by a post-effective amendment to such Shelf Registration Statement that cures such failure and that is itself declared effective within 10 days of filing such post-effective amendment to such Shelf Registration Statement, then from such time as the Shelf Registration Statement is no longer effective or usable, as the case may be, until the earlier of (i) the date that the Shelf Registration Statement is again deemed effective or usable, as the case may be, (ii) the date that is the second anniversary of the Issue Date or (iii) the date as of which all of the Senior Notes are sold pursuant to the Shelf Registration Statement, Additional Interest shall accrue at a rate per annum equal to 0.25% of the principal amount of the Senior Notes and shall be payable in cash semiannually in arrears each April 15 and October 15. All accrued Additional Interest shall be paid to Holders by the Issuer in the same manner as interest is paid pursuant to the Indenture. The aggregate amount of Additional Interest payable pursuant to this Section 1(b) shall in no event exceed 0.75% per annum of the principal amount of Senior Notes.](3) [b. Interest on this Senior Note shall accrue from the most recent date to which interest has been paid on the Senior Note for which this Senior Note was exchanged or, if no interest has been paid on such Senior Note, from the Issue Date, at the rate of 6 1/2% per annum and shall be payable in cash semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 1999. There shall also be payable in respect of this Senior Note all Additional Interest that may have accrued on the Senior Note for which this Senior Note was exchanged (as calculated in accordance with the terms of such Senior Note) pursuant to the Exchange Offer or otherwise pursuant to a registration of such Senior Note under the Securities Act, such Additional Interest to be payable at the same time and in the same manner as the periodic interest on this Senior Note.](4) - --------------- 3. To be included in Senior Notes which are not Exchange Notes. 4. To be included in Exchange Notes. 7 119 c. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Issuer shall pay interest at the applicable interest rate on the Senior Notes on overdue principal, interest (to the extent lawful) or premium or Additional Interest, if any, on demand. 2. Method of Payment The Issuer through the Paying Agent shall pay interest on this Senior Note to the registered holder of this Senior Note or as instructed in writing by such Holder. The Holder must surrender this Senior Note to the Paying Agent to collect principal payments. The Issuer shall pay principal and interest in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. 3. Paying Agent and Registrar Initially, The Bank of New York, a New York banking corporation (the "TRUSTEE"), will act as Paying Agent and Registrar. The Issuer may appoint and change any Paying Agent, Registrar, co-registrar or transfer agent without prior notice. The Issuer may act as Paying Agent, Registrar, co-registrar or transfer agent to the Holder. 4. Indenture The Issuer issued this Senior Note under an Indenture, dated as of April 21, 1999 (the "INDENTURE"), between the Issuer and the Trustee. The terms of this Senior Note include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "ACT"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. This Senior Note is subject to all such terms, and Holders are referred to the Indenture and the Act for a statement of those terms. The Senior Notes are senior unsecured obligations of the Issuer limited to $450,000,000 aggregate principal amount at maturity (subject to Section 2.8 of the Indenture). 5. Optional Redemption a. This Senior Note is subject to redemption in whole or in part, at any time and from time to time, upon not less than 30 nor more than 60 days' notice, in an amount of $1,000 or an integral multiple of $1,000, at a Redemption Price equal to the sum of (i) 100% 8 120 of the principal amount, together with accrued and unpaid interest and Additional Interest, if any, to the Redemption Date, and (ii) the Make-Whole Amount, if any, as provided in the Indenture. b. This Senior Note is not subject to redemption through operation of a sinking fund. 6. Notice of Redemption Notice of redemption shall be mailed not less than 30 nor more than 60 days prior to the Redemption Date to the registered holders of the Senior Notes at the addresses provided to the Trustee in writing by the Holders on the date of issuance of such Senior Notes or on the dates of any subsequent transfers of such Senior Notes or at any address provided to the Trustee in writing by such Holders. Senior Notes in denominations larger than $1,000 of principal amount at maturity may be redeemed in part but only in whole multiples of $1,000 at maturity. In the event of a redemption of less than all of the Senior Notes, the Senior Notes for redemption will be chosen by the Trustee in accordance with the Indenture. If any Senior Note is redeemed subsequent to a record date with respect to any Interest Payment Date specified above and/or prior to such Interest Payment Date, then any accrued interest will be paid to the Holder at the close of business on such record date. If money sufficient to pay the Redemption Price of and accrued interest on all Senior Notes (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent on or before the Redemption Date and certain other conditions are satisfied, on and after such date interest will cease to accrue on such Senior Notes (or such portions thereof) called for redemption. 7. Denominations; Transfer; Exchange This Senior Note is in registered form without coupons. The Holder may only transfer or exchange this Senior Note in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Senior Notes selected for redemption (except, in the case of a Senior Note to be redeemed in part, the portion of the Senior Notes need not be redeemed) or any Senior Notes for a period of 15 days before a selection of Senior Notes to be redeemed. 9 121 8. Persons Deemed Owners The registered holder of this Senior Note will be treated as the owner of it for all purposes. 9. Defeasance and Covenant Defeasance The Indenture contains provisions for defeasance at any time, upon compliance by the Issuer with certain conditions set forth in the Indenture, of (a) the entire indebtedness of the Issuer with respect to this Senior Note and (b) certain restrictive covenants and the related Defaults and Events of Default. 10. Amendment; Waiver The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Senior Notes outstanding at the time of amendment or modification. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Senior Notes at any time outstanding, on behalf of the Holders of all the Senior Notes, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of the Holder shall be conclusive and binding upon such Holder and upon all future Holders and of any Senior Note issued in exchange therefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Senior Note. 11. Defaults and Remedies This Senior Note has the Events of Default as set forth in Section 4.1 of the Indenture. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Senior Notes, subject to certain limitations, may declare all the Senior Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default and shall result in the Senior Notes being due and payable immediately upon the occurrence of such Events of Default. Holders may not enforce the Indenture or the Senior Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Senior Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Senior Notes may direct the Trustee in its exercise of any 10 122 trust or power. The Holders of a majority in principal amount of the Senior Notes then outstanding by written notice to the Trustee may rescind a declaration of acceleration if the rescission is prior to a judgment or decree for payment and if all Events of Default have been cured or waived except nonpayment of principal and interest that has been due solely because of the acceleration. The Trustee may withhold from Holders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in the interest of the Holders. The above description of Events of Default and remedies is qualified by reference, and subject in its entirety, to the more complete description thereof contained in the Indenture. 12. Trustee Dealings with the Issuer Subject to certain limitations imposed by the Act, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of this Senior Note and may otherwise deal with and collect obligations owed to it by the Issuer or its Affiliates and may otherwise deal with the Issuer or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar or such other agent may do the same with like rights. 13. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Issuer, shall not have any liability for any payment of the principal of, or premium or Additional Interest, if any, or interest on, any of the Senior Notes or any other obligations of the Issuer under this Senior Note or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting this Senior Note, the registered holder of this Senior Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of this Senior Note. 14. Authentication This Senior Note shall not be valid until an authorized officer of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Senior Note. 15. Governing Law The internal laws of the State of New York shall govern the Indenture and this Senior Note. 11 123 The Issuer will furnish to the Holder upon written request and without charge to the Holder a copy of the Indenture. Requests may be made to: AFLAC Incorporated 1932 Wynnton Road Columbus, Georgia 31999 Attention: Investor Relations Department Telephone: (706) 323-3431 12 124 [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered Holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. - ------------------------------------------------------------------------------- Please print or typewrite name and address including zip code of assignee - ------------------------------------------------------------------------------- the within Senior Note and all rights thereunder, hereby irrevocably constituting and appointing _______________________ attorney to transfer said Senior Note on the books of the Issuer with full power of substitution in the premises. In connection with any transfer of this Senior Note occurring (i) in the case of a U.S. Certificated Senior Note or U.S. Global Senior Note, prior to the Resale Restriction Termination Date, (ii) in the case of a Reg S Certificated Senior Note or Reg S Global Senior Note, prior to the expiration of the Distribution Compliance Period, or (iii) prior to the date of an effective registration under the Securities Act, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] [ ](a) This Senior Note is being transferred in compliance with the exemption from registration under the Securities Act, provided by Rule 144A thereunder. or [ ](b) This Senior Note is being transferred in an offshore transaction in compliance with Rule 904 of the Securities Act. or [ ](c) This Senior Note is being transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act), that has furnished to the Trustee a signed letter containing certain representations and agreements. 13 125 or [ ](d) This Senior Note is being transferred other than in accordance with (a), (b) or (c) above and documents are being furnished which comply with the conditions for transfer set forth in this Senior Note and the Indenture. If none of the foregoing boxes is checked the Trustee or other Registrar shall refuse to register this Senior Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer or registration set forth herein and in Section 2.13 of the Indenture shall have been satisfied. Date: ______________________ ________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Senior Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "QUALIFIED INSTITUTIONAL BUYER" within the meaning of Rule 144A and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Issuer as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Date: ______________________ __________________________ NOTICE: To be executed by an executive officer of the transferee. 126 EXHIBIT D FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS TO INSTITUTIONAL ACCREDITED INVESTORS [Date] AFLAC Incorporated 1932 Wynnton Road Columbus, Georgia 31999 Ladies and Gentlemen: In connection with our proposed transfer of $ aggregate principal amount of the 6 1/2% Senior Notes due 2009 (the "Senior Notes") of AFLAC Incorporated (the "Issuer"), we represent and warrant to you that: 1. We understand that the Senor Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and, unless so registered, may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing Senior Notes to offer, sell or otherwise transfer such Senior Notes prior to (x) the date which is two years (or such shorter period of time as permitted by the Securities Act) after the later of the date of original issue of the Senior Notes and the last date on which the Issuer or any affiliate of the Issuer was the owner of the Senior Notes or any predecessor of the Senior Notes and (y) such later date, if any, as may be required by any subsequent change in applicable law (the "Resale Restriction Termination Date") only (a) to the Issuer, (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) so long as the Senior Notes are eligible for resale, pursuant to Rule 144A under the Securities Act ("Rule 144A"), to a person we reasonably believe is a "qualified institutional buyer" under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales to non-U.S. persons that occur outside the United States within the meaning of Regulation S under the Securities Act,(e) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the 1 127 Securities Act (an "Institutional Accredited Investor") that is purchasing for its own account or for the account of an Institutional Accredited Investor, in each case in a minimum principal amount of Senior Notes of $250,000, or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject, in each of the foregoing cases, to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and to compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Senior Notes is proposed to be made to an Institutional Accredited Investor pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the trustee, which shall provide, among other things, that the transferee is an Institutional Accredited Investor and that it is acquiring such Senior Notes for investment purposes and not for distribution in violation of the Securities Act. Each purchaser acknowledges that the Issuer and the trustee under the indenture governing the Senior Notes, reserve the right prior to any offer, sale or other transfer prior to the Resale Restriction Termination Date of the Senior Notes pursuant to clause (d), (e) or (f) above to require the delivery of an opinion of counsel, certification and/or other information satisfactory to the Issuer and such trustee. 2. We are an Institutional Accredited Investor purchasing at least $250,000 principal amount of Senior Notes for our own account or for the account of one of more Institutional Accredited Investors, and we are acquiring the Senior Notes for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act or the securities law of any state of the United States, and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Senior Notes, and we and any accounts for which we are acting are each able 2 128 to bear the economic risk of our or its investment in the Senior Notes for an indefinite period. Very truly yours, [Transferee] By: ________________________ Date:_______________________ Upon transfer, the Senior Notes would be registered in the name of the new beneficial owner as follows: Name: ____________________________ Address:__________________________ Taxpayer ID Number: _____________ 129 EXHIBIT E FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS PURSUANT TO REGULATIONS [Date] AFLAC Incorporated 1932 Wynnton Road Columbus, Georgia 31999 Ladies and Gentlemen: In connection with our proposed transfer of U.S. $____________ aggregate principal amount of 6 1/2% Senior Notes due 2009 (the "Senior Notes") of AFLAC Incorporated, we confirm that such transfer has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended ("Regulation S"), and, accordingly, we represent that: 1. The offer of the Senior Notes was not made to a person in the United States. 2. Either (i) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States or (ii) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States. 3. No directed selling efforts have been made by us in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable. 4. The transaction is not part of a plan or scheme to evade the registration requirements of the United States Securities Act of 1933, as amended. In addition, if the transfer is made during a restricted period and the provisions of Rule 903(c)(3) or Rule 904(c)(1) of Regulation S are applicable thereto, we confirm that 130 such transfer has been made in accordance with the applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may be. You and the trustee under the Indenture governing the Senior Notes are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Transferee] By: ________________________ Date:_______________________ Upon transfer, the Senior Notes would be registered in the name of the new beneficial owner as follows: Name: ____________________________ Address:__________________________ Taxpayer ID Number: _____________ EX-5.1 5 OPINION OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM 1 EXHIBIT 5.1 May 13, 1999 AFLAC Incorporated 1932 Wynnton Road Columbus, Georgia 31999 Re: AFLAC Incorporated - Registration Statement on Form S-4 Ladies and Gentlemen: We have acted as special counsel to AFLAC Incorporated, a Georgia corporation (the "Company"), in connection with the Company's offer to exchange (the "Exchange Offer") up to $450,000,000 aggregate principal amount of its outstanding 6 1/2% Senior Notes due 2009 (the "Old Notes") for its 6 1/2% Senior Notes due 2009 (the "New Notes"). The New Notes are to be issued pursuant to an Indenture dated as of April 21, 1999, between the Company and The Bank of New York, as Trustee (the "Indenture"). This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the "Act"). In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-4 (File No. 333- ), as filed with the Securities and Exchange Commission (the "Commission") under the Act on May 13, 1999 (the "Registration Statement"); (ii) an executed copy of the Indenture; (iii) the form of the New Notes and a specimen certificate thereof; (iv) the Articles of Incorporation of the Company (the "Charter"); (v) the By-laws of the Company (the "By-laws"); and (vi) certain resolutions of the Board of Directors of the Company relating to the Exchange Offer and related matters. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. 2 In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. In making our examination of documents, we have assumed that the parties thereto (other than the Company) had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and (except as specifically set forth below) the validity and binding effect on such parties. As to any facts material to the opinions expressed herein which we did not independently establish or verify, we have relied upon oral or written statements and representations of officers and other representatives of the Company and others. We have also assumed that the execution and delivery by the Company of the Indenture and the New Notes and the performance of its obligations thereunder do not and will not (A) violate, conflict with or constitute a default under (i) any agreement or instrument to which the Company or any of its properties is subject, (ii) any law, rule or regulation to which the Company or any of its properties is subject (except that we do not make the assumption set forth in this clause (ii) with respect to Applicable Laws (as defined below)), or (iii) any judicial or regulatory order or decree of any governmental authority, or (B) require any consent, approval, license, authorization or validation of, or filing, recording or registration with, any governmental authority, which has not been duly made or obtained. "Applicable Laws" means the laws, rules and regulations of the State of New York and the United States of America, which, in our experience, are normally applicable to transactions of the type contemplated by the Exchange Offer (other than the securities laws, blue sky laws and antifraud laws of any jurisdiction), but without our having made any special investigation with respect to any other laws, rules or regulations. We have further assumed, based on the opinion of Joey Loudermilk, Esq., a copy of which is attached as Exhibit A hereto, that (i) the Company has been duly incorporated and is validly existing as a corporation and is in good standing under the laws of the State of Georgia and has the corporate power and authority to execute, deliver and perform its obligations under the Indenture and the New Notes; (ii) the execution, delivery and performance of the Company's obligations under the Indenture and the New Notes have been duly authorized by all requisite action on the part of the Company and the Indenture has been duly executed and delivered by the Company; and (iii) the execution, delivery and performance of the Company's 2 3 obligations under the Indenture and the New Notes will not violate, conflict with or constitute a breach or default under the Charter or By-laws of the Company. Members of our firm are admitted to the practice of law in the State of New York and we do not express any opinion as to the laws of any other jurisdiction other than the federal laws of the United States of America to the extent specifically referred to herein. Based upon and subject to the limitations, qualifications, exceptions and assumptions set forth herein, we are of the opinion that when (i) the Registration Statement becomes effective and the Indenture has been qualified under the Trust Indenture Act of 1939, as amended, and (ii) the New Notes have been duly executed and authenticated in accordance with the terms of the Indenture and delivered in exchange for the Old Notes in accordance with the Exchange Offer, the New Notes will be valid and binding obligations of the Company entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that (a) the enforcement thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity) and (b) the waiver contained in Section 9.7 of the Indenture may be deemed unenforceable. We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We also consent to the reference to our firm under the caption "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission. Very truly yours, /s/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 3 4 EXHIBIT A May 13, 1999 Skadden, Arps, Slate, Meagher & Flom LLP 1440 New York Avenue, N.W. Washington, D.C. 20005 Re: AFLAC Incorporated - Registration Statement on Form S-4 Ladies and Gentlemen: I am Senior Vice President, General Counsel and Secretary of AFLAC Incorporated, a Georgia corporation (the "Company"). This opinion is delivered in connection with the Company's offer to exchange (the "Exchange Offer") up to $450,000,000 aggregate principal amount of its outstanding 6 1/2% Senior Notes due 2009 (the "Old Notes"), for its 6 1/2% Senior Notes due 2009 (the "New Notes"). The New Notes are to be issued pursuant to an Indenture, dated as of April 21, 1999, between the Company and The Bank of New York, as Trustee (the "Indenture"). In connection with this opinion, I have examined originals or copies, certified or otherwise identified to my satisfaction, of: (i) the Registration Statement on Form S-4 (File No. 333- ), as filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended, on May 13, 1999 (the "Registration Statement"); (ii) an executed copy of the Indenture; (iii) the form of the New Notes and a specimen certificate thereof; (iv) the Articles of Incorporation of the Company; (v) the By-laws of the Company; and (vi) certain resolutions of the Board of Directors of the Company and the Pricing Committee of the Company relating to the issuance and sale of the Old Notes and the New Notes. I have also examined originals or copies, certified or otherwise identified to my satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company, and others, and such other documents, certificates and corporate or other records, all as I have deemed necessary or appropriate as a basis for the opinions set forth herein. 5 In my examination, I have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as certified or photostatic copies and the authenticity of the originals of such copies. In making my examination of documents executed by parties other than the Company, I have assumed that such parties had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect of such documents on such parties thereof. As to any facts material to the opinions expressed herein which were not independently established or verified, I have relied upon oral or written statements and representations of officers and other representatives of the Company and others. Based upon the foregoing and subject to the limitations, qualifications, exceptions and assumptions set forth herein, I am of the opinion that: 1. The Company has been duly incorporated, and is validly existing as a corporation in good standing under the laws of the State of Georgia. 2. The Company has the corporate power and authority to execute, deliver and perform its obligations under the Indenture and the New Notes. 3. The execution, delivery and performance of the Company's obligations under the Indenture and the New Notes have been duly authorized by all requisite action on the part of the Company. 4. The execution, delivery and performance of the Company's obligations under the Indenture and the New Notes will not violate, conflict with or constitute a breach or default under the Charter or By-laws of the Company. 5. The Indenture has been duly executed and delivered by the Company. I am admitted to the practice of law in the State of Georgia, and I do not express any opinion as to the laws of any other jurisdictions. 2 6 This opinion is provided solely for your benefit and in connection with the transactions described herein; provided, however, that I hereby consent to your reliance on this opinion in connection with the rendering of your opinion which is being filed as an exhibit to the Registration Statement on Form S-4 as to which the New Notes relate, and the inclusion of this opinion as an exhibit to your opinion. Very truly yours, /s/ JOEY LOUDERMILK Joey Loudermilk Senior Vice President, General Counsel and Secretary 3 EX-12.1 6 COMPUTATION OF RATIO EARNINGS 1 EXHIBIT 12.1 AFLAC Incorporated Ratio of Earnings to Fixed Charges
Three Months Ended March 31, Years Ended December 31, --------------------- ---------------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (In thousands) Fixed Charges: Interest Expense $ 3,608 $ 3,273 $ 13,152 $ 13,709 $ 16,186 $ 15,611 $ 11,077 Rental Expense Deemed Interest 119 95 396 439 563 757 1,192 -------- -------- -------- -------- -------- -------- -------- TOTAL FIXED CHARGES $ 3,727 $ 3,368 $ 13,548 $ 14,148 $ 16,749 $ 16,368 $ 12,269 ======== ======== ======== ======== ======== ======== ======== Earnings Before Income Tax $202,897 $ 53,524 $550,793 $864,820 $650,001 $600,995 $504,336 Add Back: Fixed Charges 3,727 3,368 13,548 14,148 16,749 16,368 12,269 TOTAL EARNINGS BEFORE INCOME -------- -------- -------- -------- -------- -------- -------- TAX AND FIXED CHARGES 206,624 56,892 564,341 878,968 666,750 617,363 516,605 -------- -------- -------- -------- -------- -------- -------- Adjustments: Realized Gains/(Losses) (4,590) 183 (2,077) (5,400) 1,980 (270) (58) Gain on Sale of Television Business 267,223 60,264 -------- -------- -------- -------- -------- -------- -------- Total Realized Gains/(Losses) (4,590) 183 (2,077) 261,823 62,244 (270) (58) -------- -------- -------- -------- -------- -------- -------- TOTAL EARNINGS BEFORE INCOME TAX AND FIXED CHARGES AND -------- -------- -------- -------- -------- -------- -------- REALIZED GAINS/(LOSSES) $211,214 $ 56,709 $566,418 $617,145 $604,506 $617,633 $516,663 ======== ======== ======== ======== ======== ======== ======== EARNINGS EXCLUDING REALIZED GAINS/ (LOSSES) TO FIXED CHARGES 56.7x 16.8x 41.8x 43.6x 36.1x 37.7x 42.1x
2 AFLAC Incorporated Debt to Total Capitalization Ratio
Three Months Ended March 31, Years Ended December 31, --------------------- ---------------------------------------------- 1999 1998 1998 1997 1996 -------- -------- -------- -------- -------- (In thousands) Excludes: Unrealized gains on investment securities Notes payable (A) $ 573,160 $ 511,186 $ 595,791 $ 523,209 $ 353,533 Total Capitalization: Shareholders' equity 3,858,894 3,453,698 3,769,679 3,430,472 2,125,569 Plus: Notes payable 573,160 511,186 595,791 523,209 353,533 Less: Unrealized gains on investment securities 1,243,040 1,201,618 1,332,056 1,284,717 280,154 ---------- ---------- ---------- ---------- ---------- Total capitalization (B) $3,189,014 $2,763,266 $3,033,414 $2,668,964 $2,198,948 ========== ========== ========== ========== ========== Debt to Equity (A / B) 18.0% 18.5% 19.6% 19.6% 16.1% Includes: Unrealized gains on investment securities Notes payable (A) $ 573,160 $ 511,186 $ 595,791 $ 523,209 $ 353,533 Total capitalization: Shareholders' equity 3,858,894 3,453,698 3,769,679 3,430,472 2,125,569 Plus: Notes payable 573,160 511,186 595,791 523,209 353,533 ---------- ---------- ---------- ---------- ---------- Total capitalization (B) $4,432,054 $3,964,884 $4,365,470 $3,953,681 $2,479,102 ========== ========== ========== ========== ========== Debt to Equity (A / B) 12.9% 12.9% 13.6% 13.2% 14.3%
Years Ended December 31, -------------------------- 1995 1994 -------- -------- (In thousands) Excludes: Unrealized gains on investment securities Notes payable (A) $ 327,268 $ 184,901 Total capitalization: Shareholders' equity 2,134,141 1,751,767 Plus: Notes payable 327,268 184,901 Less: Unrealized gains on investment securities 482,787 228,844 ---------- ---------- Total capitalization (B) $1,978,622 $1,707,824 ========== ========== Debt to Equity (A / B) 16.5% 10.8% Includes: Unrealized gains on investment securities Notes payable (A) $ 327,268 $ 184,901 Total capitalization: Shareholders' equity 2,134,141 1,751,767 Plus: Notes payable 327,268 184,901 ---------- ---------- Total capitalization (B) $2,461,409 $1,936,668 ========== ========== Debt to Equity (A / B) 13.3% 9.5%
EX-23.1 7 CONSENT OF KPMG 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS The Board of Directors AFLAC Incorporated: We consent to the use of our report included herein and to the reference of our firm under the headings "Historical Consolidated Financial Information" and "Experts" in the prospectus. /s/ KPMG LLP May 13, 1999 EX-25.1 8 FORM T-1 1 EXHIBIT 25.1 ================================================================================ FORM T-1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) /__/ --------------------------- THE BANK OF NEW YORK (Exact name of trustee as specified in its charter) New York 13-5160382 (State of incorporation (I.R.S. employer if not a U.S. national bank) identification no.) One Wall Street, New York, N.Y 10286 (Address of principal executive offices) (Zip code)
--------------------------- AFLAC INCORPORATED (Exact name of obligor 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) (Zip code)
--------------------------- 6-1/2% Senior Notes Due 2009 (Title of the indenture securities) ================================================================================ 2 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT.
- ------------------------------------------------------------------------------------------ Name Address - ------------------------------------------------------------------------------------------ Superintendent of Banks of the State 2 Rector Street, New York, N.Y. of New York 10006, and Albany, N.Y. 12203 Federal Reserve Bank of New York 33 Liberty Plaza, New York, N.Y. 10045 Federal Deposit Insurance Corporation Washington, D.C. 20429 New York Clearing House Association New York, New York 10005
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Yes. 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. None. 16. LIST OF EXHIBITS. EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE 7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R. 229.10(d). 1. A copy of the Organization Certificate of The Bank of New York (formerly Irving Trust Company) as now in effect, which contains the authority to commence business and a grant of powers to exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration Statement No. 33-29637.) 4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1 filed with Registration Statement No. 33-31019.) 6. The consent of the Trustee required by Section 321(b) of the Act. (Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.) 7. A copy of the latest report of condition of the Trustee published pursuant to law or to the requirements of its supervising or examining authority. -2- 3 SIGNATURE Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in The City of New York, and State of New York, on the 6th day of May, 1999. THE BANK OF NEW YORK By: /s/MICHELE L. RUSSO ------------------------------- Name: MICHELE L. RUSSO Title: ASSISTANT TREASURER -3- 4 - -------------------------------------------------------------------------------- Consolidated Report of Condition of THE BANK OF NEW YORK of One Wall Street, New York, N.Y. 10286 And Foreign and Domestic Subsidiaries, a member of the Federal Reserve System, at the close of business December 31, 1998, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts ASSETS in Thousands Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin ................................... $ 3,951,273 Interest-bearing balances ............................ 4,134,162 Securities: Held-to-maturity securities .......................... 932,468 Available-for-sale securities ........................ 4,279,246 Federal funds sold and Securities purchased under agreements to resell ............................................... 3,161,626 Loans and lease financing receivables: Loans and leases, net of unearned income .............................................. 37,861,802 LESS: Allowance for loan and lease losses ........................................ 619,791 LESS: Allocated transfer risk reserve ............................................. 3,572 Loans and leases, net of unearned income, allowance, and reserve ...................... 37,238,439 Trading Assets ......................................... 1,551,556 Premises and fixed assets (including capitalized leases) .................................. 684,181 Other real estate owned ................................ 10,404 Investments in unconsolidated subsidiaries and associated companies ............................................ 196,032 Customers' liability to this bank on acceptances outstanding .............................. 895,160 Intangible assets ...................................... 1,127,375 Other assets ........................................... 1,915,742 ----------- Total assets ........................................... $60,077,664 ===========
5
LIABILITIES Deposits: In domestic offices .................................. $27,020,578 Noninterest-bearing .................................. 11,271,304 Interest-bearing ..................................... 15,749,274 In foreign offices, Edge and Agreement subsidiaries, and IBFs .................... 17,197,743 Noninterest-bearing .................................. 103,007 Interest-bearing ..................................... 17,094,736 Federal funds purchased and Securities sold under agreements to repurchase ........................................ 1,761,170 Demand notes issued to the U.S. Treasury ........................................ 125,423 Trading liabilities .................................... 1,625,632 Other borrowed money: With remaining maturity of one year or less ........................................ 1,903,700 With remaining maturity of more than one year through three years ................... 0 With remaining maturity of more than three years .................................... 31,639 Bank's liability on acceptances executed and outstanding ............................. 900,390 Subordinated notes and debentures ...................... 1,308,000 Other liabilities ...................................... 2,708,852 ----------- Total liabilities ...................................... 54,583,127 =========== EQUITY CAPITAL Common stock ........................................... 1,135,284 Surplus ................................................ 764,443 Undivided profits and capital reserves ............................................. 3,542,168 Net unrealized holding gains (losses) on available-for-sale securities ........................................... 82,367 Cumulative foreign currency translation adjustments .............................. (29,725) ----------- Total equity capital ................................... 5,494,537 ----------- Total liabilities and equity capital ................... $60,077,664 ===========
- -------------------------------------------------------------------------------- 6 I, Thomas J. Mastro, Senior Vice President and Comptroller of the above-named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Thomas J. Mastro We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. Thomas A. Reyni Gerald L. Hassell Directors Alan R. Griffith
EX-99.1 9 ANNOTATED SECTIONS OF OFFICAL CODE OF GEORGIA 1 EXHIBIT 99.1 SECTIONS 14-2-850 TO 14-2-859 OF THE OFFICIAL CODE OF GEORGIA SECTION 14-2-850. PART DEFINITIONS As used in this part, the term: (1) "Corporation" includes any domestic or foreign predecessor entity of a corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. (2) "Director" or "officer" means an individual who is or was a director or officer, respectively, of a corporation or who, while a director or officer of the corporation, is or was serving at the corporation's request as a director, officer, partner, trustee, employee, or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan, or other entity. A director or officer is considered to be serving an employee benefit plan at the corporation's request if his or her duties to the corporation also impose duties on, or otherwise involve services by, the director or officer to the plan or to participants in or beneficiaries of the plan. Director or officer includes, unless the context otherwise requires, the estate or personal representative of a director or officer. (3) "Disinterested director" means a director who at the time of a vote referred to in subsection (c) of Code Section 14-2-853 or a vote or selection referred to in subsection (b) or (c) of Code Section 14-2-855 or subsection (a) of Code Section 14-2-856 is not: (A) A party to the proceeding; or (B) An individual who is a party to a proceeding having a familial, financial, professional, or employment relationship with the director whose indemnification or advance for expenses is the subject of the decision being made with respect to the proceeding, which relationship would, in the circumstances, reasonably be expected to exert an influence on the director's judgment when voting on the decision being made. 2 (4) "Expenses" includes counsel fees. (5) "Liability" means the obligation to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan), or reasonable expenses incurred with respect to a proceeding. (6) "Official capacity" means: (A) When used with respect to a director, the office of director in a corporation; and (B) When used with respect to an officer, as contemplated in Code Section 14-2-857, the office in a corporation held by the officer. Official capacity does not include service for any other domestic or foreign corporation or any partnership, joint venture, trust, employee benefit plan, or other entity. (7) "Party" means an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding. (8) "Proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative and whether formal or informal. SECTION 14-2-851. AUTHORITY TO INDEMNIFY (a) Except as otherwise provided in this Code section, a corporation may indemnify an individual who is a party to a proceeding because he or she is or was a director against liability incurred in the proceeding if: (1) Such individual conducted himself or herself in good faith; and (2) Such individual reasonably believed: (A) In the case of conduct in his or her official capacity, that such conduct was in the best interests of the corporation; (B) In all other cases, that such conduct was at least not opposed to the best interests of the corporation; and 2 3 (C) In the case of any criminal proceeding, that the individual had no reasonable cause to believe such conduct was unlawful. (b) A director's conduct with respect to an employee benefit plan for a purpose he or she believed in good faith to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of subparagraph (a)(2)(B) of this Code section. (c) The termination of a proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director did not meet the standard of conduct described in this Code section. (d) A corporation may not indemnify a director under this Code section: (1) In connection with a proceeding by or in the right of the corporation, except for reasonable expenses incurred in connection with the proceeding if it is determined that the director has met the relevant standard of conduct under this Code section; or (2) In connection with any proceeding with respect to conduct for which he or she was adjudged liable on the basis that personal benefit was improperly received by him or her, whether or not involving action in his or her official capacity. SECTION 14-2-852. MANDATORY INDEMNIFICATION A corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he or she was a party because he or she was a director of the corporation against reasonable expenses incurred by the director in connection with the proceeding. SECTION 14-2-853. ADVANCE FOR EXPENSES (a) A corporation may, before final disposition of a proceeding, advance funds to pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding because he or she is a director if he or she delivers to the corporation: (1) A written affirmation of his or her good faith belief that he or she has met the relevant standard of conduct described in Code Section 14-2-851 or that the proceeding involves conduct for which liability has been eliminated under a provision of the 3 4 articles of incorporation as authorized by paragraph (4) of subsection (b) of Code Section 14-2-202; and (2) His or her written undertaking to repay any funds advanced if it is ultimately determined that the director is not entitled to indemnification under this part. (b) The undertaking required by paragraph (2) of subsection (a) of this Code section must be an unlimited general obligation of the director but need not be secured and may be accepted without reference to the financial ability of the director to make repayment. (c) Authorizations under this Code section shall be made: (1) By the board of directors: (A) When there are two or more disinterested directors, by a majority vote of all the disinterested directors (a majority of whom shall for such purpose constitute a quorum) or by a majority of the members of a committee of two or more disinterested directors appointed by such a vote; or (B) When there are fewer than two disinterested directors, by the vote necessary for action by the board in accordance with subsection (c) of Code Section 14-2-824, in which authorization directors who do not qualify as disinterested directors may participate; or (2) By the shareholders, but shares owned or voted under the control of a director who at the time does not qualify as a disinterested director with respect to the proceeding may not be voted on the authorization. SECTION 14-2-854. COURT-ORDERED INDEMNIFICATION AND ADVANCES FOR EXPENSES (a) A director who is a party to a proceeding because he or she is a director may apply for indemnification or advance for expenses to the court conducting the proceeding or to another court of competent jurisdiction. After receipt of an application and after giving any notice it considers necessary, the court shall: (1) Order indemnification or advance for expenses if it determines that the director is entitled to indemnification under this part; or 4 5 (2) Order indemnification or advance for expenses if it determines, in view of all the relevant circumstances, that it is fair and reasonable to indemnify the director or to advance expenses to the director, even if the director has not met the relevant standard of conduct set forth in subsections (a) and (b) of Code Section 14-2-851, failed to comply with Code Section 14-2-853, or was adjudged liable in a proceeding referred to in paragraph (1) or (2) of subsection (d) of Code Section 14-2-851, but if the director was adjudged so liable, the indemnification shall be limited to reasonable expenses incurred in connection with the proceeding. (b) If the court determines that the director is entitled to indemnification or advance for expenses under this part, it may also order the corporation to pay the director's reasonable expenses to obtain court-ordered indemnification or advance for expenses. SECTION 14-2-855. DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION (a) A corporation may not indemnify a director under Code Section 14-2-851 unless authorized thereunder and a determination has been made for a specific proceeding that indemnification of the director is permissible in the circumstances because he or she has met the relevant standard of conduct set forth in Code Section 14-2-851. (b) The determination shall be made: (1) If there are two or more disinterested directors, by the board of directors by a majority vote of all the disinterested directors (a majority of whom shall for such purpose constitute a quorum) or by a majority of the members of a committee of two or more disinterested directors appointed by such a vote; (2) By special legal counsel: (A) Selected in the manner prescribed in paragraph (1) of this subsection; or (B) If there are fewer than two disinterested directors, selected by the board of directors (in which selection directors who do not qualify as disinterested directors may participate); or 5 6 (3) By the shareholders, but shares owned by or voted under the control of a director who at the time does not qualify as a disinterested director may not be voted on the determination. (c) Authorization of indemnification or an obligation to indemnify and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if there are fewer than two disinterested directors or if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under subparagraph (b)(2)(B) of this Code section to select special legal counsel. SECTION 14-2-856. SHAREHOLDER APPROVED INDEMNIFICATION (a) If authorized by the articles of incorporation or a bylaw, contract, or resolution approved or ratified by the shareholders by a majority of the votes entitled to be cast, a corporation may indemnify or obligate itself to indemnify a director made a party to a proceeding including a proceeding brought by or in the right of the corporation, without regard to the limitations in other Code sections of this part, but shares owned or voted under the control of a director who at the time does not qualify as a disinterested director with respect to any existing or threatened proceeding that would be covered by the authorization may not be voted on the authorization. (b) The corporation shall not indemnify a director under this Code section for any liability incurred in a proceeding in which the director is adjudged liable to the corporation or is subjected to injunctive relief in favor of the corporation: (1) For any appropriation, in violation of the director's duties, of any business opportunity of the corporation; (2) For acts or omissions which involve intentional misconduct or a knowing violation of law; (3) For the types of liability set forth in Code Section 14-2-832; or (4) For any transaction from which he or she received an improper personal benefit. 6 7 (c) Where approved or authorized in the manner described in subsection (a) of this Code section, a corporation may advance or reimburse expenses incurred in advance of final disposition of the proceeding only if: (1) The director furnishes the corporation a written affirmation of his or her good faith belief that his or her conduct does not constitute behavior of the kind described in subsection (b) of this Code section; and (2) The director furnishes the corporation a written undertaking, executed personally or on his or her behalf, to repay any advances if it is ultimately determined that the director is not entitled to indemnification under this Code section. SECTION 14-2-857. INDEMNIFICATION OF OFFICERS, EMPLOYEES, AND AGENTS (a) A corporation may indemnify and advance expenses under this part to an officer of the corporation who is a party to a proceeding because he or she is an officer of the corporation: (1) To the same extent as a director; and (2) If he or she is not a director, to such further extent as may be provided by the articles of incorporation, the bylaws, a resolution of the board of directors, or contract except for liability arising out of conduct that constitutes: (A) Appropriation, in violation of his or her duties, of any business opportunity of the corporation; (B) Acts or omissions which involve intentional misconduct or a knowing violation of law; (C) The types of liability set forth in Code Section 14-2-832; or (D) Receipt of an improper personal benefit. (b) The provisions of paragraph (2) of subsection (a) of this Code section shall apply to an officer who is also a director if the sole basis on which he or she is made a party to the proceeding is an act or omission solely as an officer. 7 8 (c) An officer of a corporation who is not a director is entitled to mandatory indemnification under Code Section 14-2-852, and may apply to a court under Code Section 14-2-854 for indemnification or advances for expenses, in each case to the same extent to which a director may be entitled to indemnification or advances for expenses under those provisions. (d) A corporation may also indemnify and advance expenses to an employee or agent who is not a director to the extent, consistent with public policy, that may be provided by its articles of incorporation, bylaws, general or specific action of its board of directors, or contract. SECTION 14-2-858. INSURANCE A corporation may purchase and maintain insurance on behalf of an individual who is a director, officer, employee, or agent of the corporation or who, while a director, officer, employee, or agent of the corporation, serves at the corporation's request as a director, officer, partner, trustee, employee, or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan, or other entity against liability asserted against or incurred by him or her in that capacity or arising from his or her status as a director, officer, employee, or agent, whether or not the corporation would have power to indemnify or advance expenses to him or her against the same liability under this part. SECTION 14-2-859. APPLICATION OF PART (a) A corporation may, by a provision in its articles of incorporation or bylaws or in a resolution adopted or a contract approved by its board of directors or shareholders, obligate itself in advance of the act or omission giving rise to a proceeding to provide indemnification or advance funds to pay for or reimburse expenses consistent with this part. Any such obligatory provision shall be deemed to satisfy the requirements for authorization referred to in subsection (c) of Code Section 14-2-853 or subsection (c) of Code Section 14-2-855. Any such provision that obligates the corporation to provide indemnification to the fullest extent permitted by law shall be deemed to obligate the corporation to advance funds to pay for or reimburse expenses in accordance with Code Section 14-2-853 to the fullest extent permitted by law, unless the provision specifically provides otherwise. (b) Any provision pursuant to subsection (a) of this Code section shall not obligate the corporation to indemnify or advance expenses to a director of a predecessor of 9 the corporation, pertaining to conduct with respect to the predecessor, unless otherwise specifically provided. Any provision for indemnification or advance for expenses in the articles of incorporation, bylaws, or a resolution of the board of directors or shareholders, partners, or, in the case of limited liability companies, members or managers of a predecessor of the corporation or other entity in a merger or in a contract to which the predecessor is a party, existing at the time the merger takes effect, shall be governed by paragraph (3) of subsection (a) of Code Section 14-2-1106. (c) A corporation may, by a provision in its articles of incorporation, limit any of the rights to indemnification or advance for expenses created by or pursuant to this part. (d) This part does not limit a corporation's power to pay or reimburse expenses incurred by a director or an officer in connection with his or her appearance as a witness in a proceeding at a time when he or she is not a party. (e) Except as expressly provided in Code Section 14-2-857, this part does not limit a corporation's power to indemnify, advance expenses to, or provide or maintain insurance on behalf of an employee or agent. 9 EX-99.2 10 LETTER OF TRANSMITTAL 1 EXHIBIT 99.2 LETTER OF TRANSMITTAL AFLAC INCORPORATED OFFER FOR ALL OUTSTANDING 6 1/2% SENIOR NOTES DUE 2009 IN EXCHANGE FOR 6 1/2% SENIOR EXCHANGE NOTES DUE 2009 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO THE PROSPECTUS, DATED , 1999 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1999, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. Delivery To: THE BANK OF NEW YORK, EXCHANGE AGENT By Registered or Certified Mail: By Hand or Overnight Delivery: THE BANK OF NEW YORK THE BANK OF NEW YORK 101 Barclay Street, (7 East) 101 Barclay Street New York, New York 10286 Corporate Trust Services Window Attention: Ground Level Reorganization Section New York, New York 10286 Attention: Reorganization Section
By Facsimile for Eligible Institutions: (212) 815-6339 Confirm by Telephone: (212) 815- DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. 1 2 The undersigned acknowledges that he or she has received and reviewed the Prospectus, dated , 1999 (the "Prospectus"), of AFLAC Incorporated, a Georgia corporation (the "Company"), and this Letter of Transmittal (the "Letter"), which together constitute the Company's offer (the "Exchange Offer") to exchange an aggregate principal amount of up to $450,000,000 of the Company's 6 1/2% Senior Exchange Notes due 2009 (the "New Notes") which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), for a like principal amount of the Company's issued and outstanding 6 1/2% Senior Notes due 2009 (the "Old Notes") from the registered holders thereof (the "Holders"). For each Old Note accepted for exchange, the Holder of such Old Note will receive a New Note having a principal amount equal to that of the surrendered Old Note. The New Notes will bear interest from the most recent date to which interest has been paid on the Old Notes or, if no interest has been paid on the Old Notes, from April 21, 1999. Accordingly, registered Holders of New Notes on the relevant record date for the first interest payment date following the consummation of the Exchange Offer will receive interest accruing from the most recent date to which interest has been paid or, if no interest has been paid, from April 21, 1999. Old Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer. Holders of Old Notes whose Old Notes are accepted for exchange will not receive any payment in respect of accrued interest on such Old Notes otherwise payable on any interest payment date the record date for which occurs on or after consummation of the Exchange Offer. This Letter is to be completed by a holder of Old Notes either if certificates are to be forwarded herewith or if a tender of certificates for Old Notes, if available, is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in "The Exchange Offer -- Book-entry transfer" section of the Prospectus. Holders of Old Notes whose certificates are not immediately available, or who are unable to deliver their certificates or confirmation of the book-entry tender of their Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other documents required by this Letter to the Exchange Agent on or prior to the Expiration Date, must tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed delivery procedures" section of the Prospectus. See Instruction 1. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The undersigned has completed the appropriate boxes below and signed this Letter to indicate the action the undersigned desires to take with respect to the Exchange Offer. 2 3 List below the Old Notes to which this Letter relates. If the space provided below is inadequate, the certificate numbers and principal amount of Old Notes should be listed on a separate signed schedule affixed hereto. - -------------------------------------------------------------------------------- DESCRIPTION OF OLD NOTES
- --------------------------------------------------------------------------------------------------------------------------------- AGGREGATE PRINCIPAL PRINCIPAL AMOUNT NAME(S) AND ADDRESS(ES) OF REGISTERED CERTIFICATE AMOUNT AT MATURITY AT MATURITY HOLDER(S) (PLEASE FILL IN, IF BLANK) NUMBER(S)* OF OLD NOTE(S) TENDERED** - --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- Total - ---------------------------------------------------------------------------------------------------------------------------------
* Need not be completed if Old Notes are being tendered by book-entry transfer. ** Unless otherwise indicated in this column, a holder will be deemed to have tendered ALL of the Old Notes represented by the Old Notes indicated in column 2. See Instruction 2. Old Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. See Instruction 1. - -------------------------------------------------------------------------------- [ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution - -------------------------------------------------------------------------------- Account Number - -------------------------------------------------------------------------------- Transaction Code Number - -------------------------------------------------------------------------------- [ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s) - -------------------------------------------------------------------------------- Window Ticket Number (if any) - -------------------------------------------------------------------------------- Date of Execution of Notice of Guaranteed Delivery - -------------------------------------------------------------------------------- Name of Institution Which Guaranteed Delivery - -------------------------------------------------------------------------------- If Delivered by Book-Entry Transfer, Complete the Following: Account Number - -------------------------------------------------------------------------------- Transaction Code Number - -------------------------------------------------------------------------------- [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- ---------------------------------------------------------------------- If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes; however, by so acknowledging and by delivering such a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. If the undersigned is a broker- 3 4 dealer that will receive New Notes, it represents that the Old Notes to be exchanged for the New Notes were acquired as a result of market-making activities or other trading activities. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the aggregate principal amount of Old Notes indicated above. Subject to, and effective upon, the acceptance for exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to such Old Notes as are being tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as the undersigned's true and lawful agent and attorney-in-fact with respect to such tendered Old Notes, with full power of substitution, among other things, to cause the Old Notes to be assigned, transferred and exchanged. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Old Notes, and to acquire New Notes issuable upon the exchange of such tendered Old Notes, and that, when the same are accepted for exchange, the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim when the same are accepted by the Company. The undersigned hereby further represents that any New Notes acquired in exchange for Old Notes tendered hereby will have been acquired in the ordinary course of business of the person receiving such New Notes, whether or not such person is the undersigned, that neither the Holder of such Old Notes nor any such other person is participating in, intends to participate in or has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the Holder of such Old Notes nor any such other person is an "affiliate," as defined in Rule 405 under the Securities Act, of the Company. The undersigned acknowledges that this Exchange Offer is being made in reliance on interpretations by the staff of the Securities and Exchange Commission (the "SEC"), as set forth in no-action letters issued to third parties, that the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold and otherwise transferred by Holders thereof (other than any such Holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such Holders' business and such Holders have no arrangement with any person to participate in the distribution of such New Notes. However, the SEC has not considered the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the SEC would make a similar determination with respect to the Exchange Offer as in other circumstances. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes and has no arrangement or understanding to participate in a distribution of New Notes. If any Holder is an affiliate of the Company, is engaged in or intends to engage in or has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, such Holder (i) could not rely on the applicable interpretations of the staff of the SEC and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes, it represents that the Old Notes to be exchanged for the New Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus meeting the requirements of the Securities Act, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the 4 5 undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer -- Withdrawal Rights" section of the Prospectus. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, please deliver the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) in the name of the undersigned or, in the case of a book-entry delivery of Old Notes, please credit the account indicated above maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) to the undersigned at the address shown above in the box entitled "Description of Old Notes." THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE. SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes are to be issued in the name of and sent to someone other than the person or persons whose signature(s) appear(s) on this Letter above, or if Old Notes delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to an account maintained at the Book-Entry Transfer Facility other than the account indicated above. Issue New Notes and/or Old Notes to: Name(s) ------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) - -------------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Address ------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (ZIP CODE) (COMPLETE SUBSTITUTE FORM W-9) [ ] Credit unexchanged Old Notes delivered by book-entry transfer to the Book-Entry Transfer Facility account set forth below. - -------------------------------------------------------------------------------- (BOOK-ENTRY TRANSFER FACILITY ACCOUNT NUMBER, IF APPLICABLE) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes are to be sent to someone other than the person or persons whose signature(s) appear(s) on this Letter above or to such person or persons at an address other than shown in the box entitled "Description of Old Notes" on this Letter above. Mail New Notes and/or Old Notes to: Name(s) ------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) - -------------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Address ------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (ZIP CODE) IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. 5 6 PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX ABOVE. PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS) (COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 BELOW) X , 1999 ----------------------------------------------------------- ------------------------------------- X , 1999 ----------------------------------------------------------- ------------------------------------- (SIGNATURE(S) OF OWNER(S)) (DATE)
Area Code and Telephone Number -------------------------------------------------- If a holder is tendering any Old Notes, this Letter must be signed by the registered holder(s) as the name(s) appear(s) on the certificate(s) for the Old Notes or by any person(s) authorized to become registered holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3. Name(s): ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Capacity: ----------------------------------------------------------------------- Address: ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- (INCLUDING ZIP CODE) SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 3) Signature(s) Guaranteed by an Eligible Institution: - -------------------------------------------------------------------------------- (AUTHORIZED SIGNATURE) - -------------------------------------------------------------------------------- (TITLE) - -------------------------------------------------------------------------------- (NAME AND FIRM) Dated: --------- , 1999 6 7 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER FOR THE 6 1/2% SENIOR NOTES DUE 2009 OF AFLAC INCORPORATED IN EXCHANGE FOR THE 6 1/2% SENIOR EXCHANGE NOTES DUE 2009 OF AFLAC INCORPORATED, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1999, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. 1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES. This Letter is to be completed by holders of Old Notes either if certificates are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry transfer set forth in "The Exchange Offer -- Book-entry transfer" section of the Prospectus. Certificates for all physically tendered Old Notes, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed Letter (or manually signed facsimile hereof) and any other documents required by this Letter, must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering holder must comply with the guaranteed delivery procedures set forth below. Old Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. Holders whose certificates for Old Notes are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may tender their Old Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed delivery procedures" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made through an Eligible Institution,(ii) prior to 5:00 P.M., New York City time, on the Expiration Date, the Exchange Agent must receive from such Eligible Institution a properly completed and duly executed Letter (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Company (by facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of Old Notes and the amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange ("NYSE") trading days after the Expiration Date, the certificates for all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by this Letter will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and all other documents required by this Letter, must be received by the Exchange Agent within three NYSE trading days after the Expiration Date. The method of delivery of this Letter, the Old Notes and all other required documents is at the election and risk of the tendering holders, but the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. If Old Notes are sent by mail, it is suggested that the mailing be registered mail, properly insured, with return receipt requested, made sufficiently in advance of the Expiration Date to permit delivery to the Exchange Agent prior to 5:00 P.M., New York City time, on the Expiration Date. See "The Exchange Offer" section of the Prospectus. 2. PARTIAL TENDERS (NOT APPLICABLE TO NOTEHOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER). If less than all of the Old Notes evidenced by a submitted certificate are to be tendered, the tendering holder(s) should fill in the aggregate principal amount of Old Notes to be tendered in the box above entitled "Description of Old Notes -- Principal Amount Tendered." A reissued certificate representing the balance of nontendered Old Notes will be sent to such tendering holder, unless otherwise provided in the appropriate box on this Letter, promptly after the Expiration Date. All of the Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. 7 8 3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter is signed by the registered holder of the Old Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates without any change whatsoever. If any tendered Old Notes are owned of record by two or more joint owners, all of such owners must sign this Letter. If any tendered Old Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter as there are different registrations of certificates. When this Letter is signed by the registered holder or holders of the Old Notes specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the New Notes are to be issued, or any untendered Old Notes are to be reissued, to a person other than the registered holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. Signatures on such certificate(s) must be guaranteed by a firm which is a financial institution (including most banks, savings and loan associations and brokerage houses) that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchanges Medallion Program (each an "Eligible Institution"). If this Letter is signed by a person other than the registered holder or holders of any certificate(s) specified herein, such certificate(s) must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name or names of the registered holder or holders appear(s) on the certificate(s) and signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter or any certificates or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. Endorsements on certificates for Old Notes or signatures on bond powers required by this Instruction 3 must be guaranteed by an Eligible Institution. Signatures on this Letter need not be guaranteed by an Eligible Institution, provided the Old Notes are tendered: (i) by a registered holder of Old Notes (which term, for purposes of the Exchange Offer, includes any participant in the Book-Entry Transfer Facility system whose name appears on a security position listing as the holder of such Old Notes) who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on this Letter, or (ii) for the account of an Eligible Institution. 4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders of Old Notes should indicate in the applicable box the name and address to which New Notes issued pursuant to the Exchange Offer and/or substitute certificates evidencing Old Notes not exchanged are to be issued or sent, if different from the name or address of the person signing this Letter. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. Noteholders tendering Old Notes by book-entry transfer may request that Old Notes not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such noteholder may designate hereon. If no such instructions are given, such Old Notes not exchanged will be returned to the name and address of the person signing this Letter. 5. TAXPAYER IDENTIFICATION NUMBER. Federal income tax law generally requires that a tendering holder whose Old Notes are accepted for exchange must provide the Company (as payor) with such holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9 below, which in the case of a tendering holder who is an individual, is his or her social security number. If the Company is not provided with the current TIN or an adequate basis for an exemption from backup withholding, such tendering holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, the Exchange Agent may be required to withhold 31% of the amount of any reportable payments made after the exchange to such tendering holder of New Notes. If withholding results in an overpayment of taxes, a refund may be obtained. 8 9 Exempt holders of Old Notes (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. See the enclosed Guidelines of Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for additional instructions. To prevent backup withholding, each tendering holder of Old Notes must provide its correct TIN by completing the Substitute Form W-9 set forth below, certifying, under penalties of perjury, that the TIN provided is correct (or that such holder is awaiting a TIN) and that (i) the holder is exempt from backup withholding, or (ii) the holder has not been notified by the Internal Revenue Service that such holder is subject to backup withholding as a result of a failure to report all interest or dividends or (iii) the Internal Revenue Service has notified the holder that such holder is no longer subject to backup withholding. If the tendering holder of Old Notes is a nonresident alien or foreign entity not subject to backup withholding, such holder must give the Exchange Agent a completed Form W-8, Certificate of Foreign Status. These forms may be obtained from the Exchange Agent. If the Old Notes are in more than one name or are not in the name of the actual owner, such holder should consult the W-9 Guidelines for information on which TIN to report. If such holder does not have a TIN, such holder should consult the W-9 Guidelines for instructions on applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note: Checking this box and writing "applied for" on the form means that such holder has already applied for a TIN or that such holder intends to apply for one in the near future. If the box in Part 2 of the Substitute Form W-9 is checked, the Exchange Agent will retain 31% of reportable payments made to a holder during the sixty (60) day period following the date of the Substitute Form W-9. If the holder furnishes the Exchange Agent with his or her TIN within sixty (60) days of the Substitute Form W-9, the Exchange Agent will remit such amounts retained during such sixty (60) day period to such holder and no further amounts will be retained or withheld from payments made to the holder thereafter. If, however, such holder does not provide its TIN to the Exchange Agent within such sixty (60) day period, the Exchange Agent will remit such previously withheld amounts to the Internal Revenue Service as backup withholding and will withhold 31% of all reportable payments to the holder thereafter until such holder furnishes its TIN to the Exchange Agent. 6. TRANSFER TAXES. The Company will pay all transfer taxes, if any, applicable to the transfer of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New Notes and/or substitute Old Notes not exchanged are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Old Notes tendered hereby, or if tendered Old Notes are registered in the name of any person other than the person signing this Letter, or if a transfer tax is imposed for any reason other than the transfer of Old Notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed directly to such tendering holder. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the Old Notes specified in this Letter. 7. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. 8. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering holders of Old Notes, by execution of this Letter, shall waive any right to receive notice of the acceptance of their Old Notes for exchange. Neither the Company, the Exchange Agent nor any other person is obligated to give notice of any defect or irregularity with respect to any tender of Old Notes nor shall any of them incur any liability for failure to give any such notice. 9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 9 10 10. WITHDRAWAL RIGHTS. Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M., New York City time, on the Expiration Date. For a withdrawal of a tender of Old Notes to be effective, a written notice of withdrawal must be received by the Exchange Agent at the address set forth above prior to 5:00 P.M., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including certificate number or numbers and the principal amount of such Old Notes), (iii) contain a statement that such holder is withdrawing his election to have such Old Notes exchanged, (iv) be signed by the holder in the same manner as the original signature on the Letter by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer to have the Trustee with respect to the Old Notes register the transfer of such Old Notes in the name of the person withdrawing the tender and (v) specify the name in which such Old Notes are registered, if different from that of the Depositor. If Old Notes have been tendered pursuant to the procedure for book-entry transfer set forth in "The Exchange Offer--Book-entry transfer" section of the Prospectus, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer and no New Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes that have been tendered for exchange but which are not exchanged for any reason will be returned to the Holder thereof without cost to such Holder (or, in the case of Old Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures set forth in "The Exchange Offer -- Book-entry transfer" section of the Prospectus, such Old Notes will be credited to an account maintained with the Book-Entry Transfer Facility for the Old Notes) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following the procedures described above at any time on or prior to 5:00 P.M., New York City time, on the Expiration Date. 11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus and this Letter, and requests for Notices of Guaranteed Delivery and other related documents may be directed to the Exchange Agent, at the address and telephone number indicated above. 10 11 TO BE COMPLETED BY ALL TENDERING HOLDERS (SEE INSTRUCTION 5) - ------------------------------------------------------------------------------------------------------------------------ PAYOR'S NAME: STATE STREET BANK AND TRUST COMPANY - ------------------------------------------------------------------------------------------------------------------------ SUBSTITUTE PART I--PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND FORM W-9 CERTIFY BY SIGNING AND DATING BELOW. TIN: ----------------------- Social Security Number or Employer Identification Number ------------------------------------------------------------------------------------------- DEPARTMENT OF THE PART 2--TIN Applied For [ ] TREASURY, INTERNAL REVENUE SERVICE ------------------------------------------------------------------------------------------- PAYOR'S REQUEST FOR CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT: TAXPAYER IDENTIFICATION NUMBER ("TIN") CER- (1) the number shown on this form is my correct TIN (or I am waiting for a number TIFICATION to be issued to me), (2) I am not subject to backup withholding either because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (the "IRS") and that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding, and (3) any other information provided on this form is true and correct. ------------------------------------------------------------------------------------------- Signature ________________________________________ Date ________________ - ------------------------------------------------------------------------------------------------------------------------
You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to backup withholding because of underreporting of interest or dividends on your tax return and you have not been notified by the IRS that you are no longer subject to backup withholding. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 2 OF SUBSTITUTE FORM W-9 - -------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of the exchange, 31 percent of all reportable payments made to me thereafter will be withheld until I provide a number. Signature _________________________________________ Date _____________________ - -------------------------------------------------------------------------------- 11 EX-99.3 11 NOTICE OF GUARANTEED DELIVERY 1 EXHIBIT 99.3 NOTICE OF GUARANTEED DELIVERY FOR AFLAC INCORPORATED This form or one substantially equivalent hereto must be used to accept the Exchange Offer of AFLAC Incorporated (the "Company") made pursuant to the Prospectus, dated , 1999 (the "Prospectus"), if certificates for the outstanding 6 1/2% Senior Notes due 2009 of the Company (the "Old Notes") are not immediately available or if the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach The Bank of New York, as exchange agent (the "Exchange Agent") prior to 5:00 P.M., New York City time, on the Expiration Date of the Exchange Offer. Such form may be delivered or transmitted by facsimile transmission, mail or hand delivery to the Exchange Agent as set forth below. In addition, in order to utilize the guaranteed delivery procedure to tender Old Notes pursuant to the Exchange Offer, a completed, signed and dated Letter of Transmittal (or facsimile thereof) must also be received by the Exchange Agent prior to 5:00 P.M., New York City time, on the Expiration Date. Capitalized terms not defined herein are defined in the Prospectus. Delivery To: THE BANK OF NEW YORK, EXCHANGE AGENT By Registered or Certified Mail: By Hand or Overnight Delivery: THE BANK OF NEW YORK THE BANK OF NEW YORK 101 Barclay Street, (7 East) 101 Barclay Street New York, New York 10286 Corporate Trust Services Window Attention: Ground Level Reorganization Section New York, New York 10286 Attention: Reorganization Section
By Facsimile for Eligible Institutions (212) 815-6339 Confirm by Telephone: (212) 815- DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. 1 2 Ladies and Gentlemen: Upon the terms and conditions set forth in the Prospectus and the accompanying Letter of Transmittal, the undersigned hereby tenders to the Company the principal amount of Old Notes set forth below pursuant to the guaranteed delivery procedure described in "The Exchange Offer -- Guaranteed delivery procedures" section of the Prospectus. Principal Amount of Old Notes Tendered:* $ - ---------------------------------------------------- Certificate Nos. (if available): - ------------------------------------------------------ Total Principal Amount Represented by Old Notes Certificate(s): $ - ---------------------------------------------------- If Old Notes will be delivered by book-entry transfer to The Depository Trust Company, provide account number. Account Number - ---------------------------------------- ALL AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE DEATH OR INCAPACITY OF THE UNDERSIGNED AND EVERY OBLIGATION OF THE UNDERSIGNED HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS AND ASSIGNS OF THE UNDERSIGNED. PLEASE SIGN HERE X - ------------------------------------------------------------ ------------------------------------ X - ------------------------------------------------------------ ------------------------------------ SIGNATURE(S) OF OWNER(S) OR AUTHORIZED SIGNATORY DATE Area Code and Telephone Number: - -----------------------------------------------------------------------------------------------------
Must be signed by the holder(s) of Old Notes as their name(s) appear(s) on certificates for Old Notes or on a security position listing, or by person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below. PLEASE PRINT NAME(S) AND ADDRESS(ES) Name(s): - -------------------------------------------------------------------------------- ------------------------------------------------------------------------ Capacity: - -------------------------------------------------------------------------------- Address(es): - -------------------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- - --------------- * Must be in denominations of principal amount of $1,000 and any integral multiple thereof. 2 3 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a financial institution (including most banks, savings and loan associations and brokerage houses) that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchanges Medallion Program, hereby guarantees that the certificates representing the principal amount of Old Notes tendered hereby in proper form for transfer, or timely confirmation of the book-entry transfer of such Old Notes into the Exchange Agent's account at The Depository Trust Company pursuant to the procedures set forth in "The Exchange Offer -- Guaranteed delivery procedures" section of the Prospectus, together with any required signature guarantee and any other documents required by the Letter of Transmittal, will be received by the Exchange Agent at the address set forth above, no later than three New York Stock Exchange trading days after the Expiration Date. Name of Firm: - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Area Code and Telephone No.: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AUTHORIZED SIGNATURE Name: - -------------------------------------------------------------------------------- Title: - -------------------------------------------------------------------------------- Date: - -------------------------------------------------------------------------------- DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR OLD NOTES SHOULD BE SENT ONLY WITH A COPY OF YOUR PREVIOUSLY EXECUTED LETTER OF TRANSMITTAL. 3 EX-99.4 12 LETTER TO BROKERS 1 EXHIBIT 99.4 AFLAC INCORPORATED OFFER FOR ALL OUTSTANDING 6 1/2% SENIOR NOTES DUE 2009 IN EXCHANGE FOR 6 1/2% SENIOR EXCHANGE NOTES DUE 2009, THE SECURITIES ACT OF 1933, AS AMENDED THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. To: Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: AFLAC Incorporated (the "Company") is offering, upon and subject to the terms and conditions set forth in the Prospectus, dated , 1999 (the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter of Transmittal"), to exchange (the "Exchange Offer") its 6 1/2% Senior Notes due 2009, which have been registered under the Securities Act of 1933, as amended, for its outstanding 6 1/2% Senior Exchange Notes due 2009 (the "Old Notes"). The Exchange Offer is being made in order to satisfy certain obligations of the Company contained in the Registration Rights Agreement dated April 21, 1999, by and among the Company and the initial purchasers referred to therein. We are requesting that you contact your clients for whom you hold Old Notes regarding the Exchange Offer. For your information and for forwarding to your clients for whom you hold Old Notes registered in your name or in the name of your nominee, or who hold Old Notes registered in their own names, we are enclosing the following documents: 1. Prospectus dated , 1999; 2. The Letter of Transmittal for your use and for the information of your clients; 3. A Notice of Guaranteed Delivery to be used to accept the Exchange Offer if certificates for Old Notes are not immediately available or time will not permit all required documents to reach the Exchange Agent prior to the Expiration Date (as defined below) or if the procedure for book-entry transfer cannot be completed on a timely basis; 4. A form of letter which may be sent to your clients for whose account you hold Old Notes registered in your name or the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Exchange Offer; 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9; and 6. Return envelopes addressed to The Bank of New York, the Exchange Agent for the Exchange Offer. YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1999, UNLESS EXTENDED BY THE COMPANY (THE "EXPIRATION DATE"). OLD NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE THE EXPIRATION DATE. To participate in the Exchange Offer, a duly executed and properly completed Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, should be sent to the Exchange Agent and certificates representing the Old Notes should be delivered to the Exchange Agent, all in accordance with the instructions set forth in the Letter of Transmittal and the Prospectus. If a registered holder of Old Notes desires to tender, but such Old Notes are not immediately available, or time will not permit such holder's Old Notes or other required documents to reach the Exchange Agent before the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected by following the 1 2 guaranteed delivery procedures described in the Prospectus under the caption "The Exchange Offer-Guaranteed delivery procedures." The Company will, upon request, reimburse brokers, dealers, commercial banks and trust companies for reasonable and necessary costs and expenses incurred by them in forwarding the Prospectus and the related documents to the beneficial owners of Old Notes held by them as nominee or in a fiduciary capacity. The Company will pay or cause to be paid all stock transfer taxes applicable to the exchange of Old Notes pursuant to the Exchange Offer, except as set forth in Instruction 6 of the Letter of Transmittal. Any inquiries you may have with respect to the Exchange Offer, or requests for additional copies of the enclosed materials, should be directed to The Bank of New York, the Exchange Agent for the Exchange Offer, at its address and telephone number set forth on the front of the Letter of Transmittal. Very truly yours, AFLAC INCORPORATED NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL. 2 EX-99.5 13 LETTER TO CLIENTS 1 EXHIBIT 99.5 AFLAC INCORPORATED OFFER FOR ALL OUTSTANDING 6 1/2% SENIOR NOTES DUE 2009 IN EXCHANGE FOR 6 1/2% SENIOR EXCHANGE NOTES DUE 2009, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1999, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. To Our Clients: Enclosed for your consideration is a Prospectus, dated , 1999 (the "Prospectus"), and the related Letter of Transmittal (the "Letter of Transmittal"), relating to the offer (the "Exchange Offer") of AFLAC Incorporated (the "Company") to exchange its 6 1/2% Senior Exchange Notes due 2009, which have been registered under the Securities Act of 1933, as amended (the "New Notes"), for its outstanding 6 1/2% Senior Notes due 2009 (the "Old Notes"), upon the terms and subject to the conditions described in the Prospectus and the Letter of Transmittal. The Exchange Offer is being made in order to satisfy certain obligations of the Company contained in the Registration Rights Agreement dated April 21, 1999, by and among the Company and the initial purchasers referred to therein. This material is being forwarded to you as the beneficial owner of the Old Notes held by us for your account but not registered in your name. A tender of such Old Notes may only be made by us as the holder of record and pursuant to your instructions. Accordingly, we request instructions as to whether you wish us to tender on your behalf the Old Notes held by us for your account, pursuant to the terms and conditions set forth in the enclosed Prospectus and Letter of Transmittal. Your instructions should be forwarded to us as promptly as possible in order to permit us to tender the Old Notes on your behalf in accordance with the provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 P.M., New York City time, on , 1999, unless extended by the Company. Any Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time before the Expiration Date. Your attention is directed to the following: 1. The Exchange Offer is for any and all Old Notes. 2. The Exchange Offer is subject to certain conditions set forth in the Prospectus in the section captioned "The Exchange Offer -- Conditions to the exchange offer." 3. Any transfer taxes incident to the transfer of Old Notes from the holder to the Company will be paid by the Company, except as otherwise provided in the Instructions in the Letter of Transmittal. 4. The Exchange Offer expires at 5:00 P.M., New York City time, on , 1999, unless extended by the Company. If you wish to have us tender your Old Notes, please so instruct us by completing, executing and returning to us the instruction form on the back of this letter. The Letter of Transmittal is furnished to you for information only and may not be used directly by you to tender Old Notes. 1 2 INSTRUCTIONS WITH RESPECT TO THE EXCHANGE OFFER The undersigned acknowledge(s) receipt of your letter and the enclosed material referred to therein relating to the Exchange Offer made by AFLAC Incorporated with respect to its Old Notes. This will instruct you to tender the Old Notes held by you for the account of the undersigned, upon and subject to the terms and conditions set forth in the Prospectus and the related Letter of Transmittal. Please tender the Old Notes held by you for my account as indicated below:
AGGREGATE PRINCIPAL AMOUNT OF OLD NOTES --------------------------------------- 6 1/2% Senior Notes due 2009...................... $ ------------------------------ [ ] Please do not tender any Old Notes held by you for my account. Dated: ------------------------- , 1999 -------------------------------------------------- SIGNATURE(S) PRINT NAME(S) HERE: -------------------------------------------------- -------------------------------------------------- PRINT ADDRESS(ES): -------------------------------------------------- -------------------------------------------------- AREA CODE AND TELEPHONE NUMBER(S): -------------------------------------------------- TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER(S): --------------------------------------------------
None of the Old Notes held by us for your account will be tendered unless we receive written instructions from you to do so. Unless a specific contrary instruction is given in the space provided, your signature(s) hereon shall constitute an instruction to us to tender all the Old Notes held by us for your account. 2 EX-99.6 14 CERTIFICATION OF TAXPAYER INDENTIFICATION 1 EXHIBIT 99.6 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE PAYER--Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e. 00-0000000. The table below will help determine the number to give the payer. FOR THIS TYPE OF ACCOUNT: GIVE THE NAME AND SOCIAL SECURITY NUMBER OF: 1. An individual's account The individual 2. Two or more individuals (joint account) The actual owner of the account or, if combined funds, any one of the individuals(1) 3. Husband and wife (joint account) The actual owner of the account or, if joint funds, either person(1) 4. Custodian account of a minor (Uniform Gift to The minor(2) Minors Act) 5. Adult and minor (joint account) The adult or, if the minor is the only contributor, the minor(3) 6. Account in the name of guardian or committee The ward, minor, or incompetent person(4) for a designated ward, minor, or incompetent person 7. a. The usual revocable savings trust account The grantor-trustee(3) (grantor is also trustee) b. So-called trust account that is not a legal The actual owner(3) or valid trust under State law FOR THIS TYPE OF ACCOUNT: GIVE THE NAME AND EMPLOYER IDENTIFICATION NUMBER OF: 8. Sole proprietorship account The owner(5) 9. A valid trust, estate, or pension trust Legal entity (Do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(3) 10. Corporate account The corporation 11. Religious, charitable, or educational The organization organization account 12. Partnership account held in the name of the The partnership business 13. Association, club, or other tax-exempt The organization organization 14. A broker or registered nominee The broker or nominee 15. Account with the Department of Agriculture in The public entity the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments
- --------------- (1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) List first and circle the name of the legal trust, estate, or pension trust. (4) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (5) Show the name of the owner. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. 2 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 OBTAINING A NUMBER If you don't have a TIN or you don't know your number, obtain Internal Revenue Service Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at your local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: (1) A corporation. (2) A financial institution. (3) An organization exempt from tax under section 501(a) or an individual retirement plan. (4) The United States or any agency or instrumentality thereof. (5) A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. (6) A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. (7) An international organization or any agency, or instrumentality thereof. (8) A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. (9) A real estate investment trust. (10) A common trust fund operated by a bank under section 584(a). (11) An exempt charitable remainder trust, or a non-exempt trust described in section 4947(a)(1). (12) An entity registered at all times under the Investment Company Act of 1940. (13) A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - Payments to nonresident aliens subject to withholding under section 1441. - Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. - Payments of patronage dividends where the amount received is not paid in money. - Payments made by certain foreign organizations. - Payments made to a nominee. - Payments of interest not generally subject to backup withholding include the following: - Payments of interest on obligations issued by individuals. NOTE: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. - Payments of tax-exempt interest (including exempt-interest dividends under section 852). - Payments described in section 6049(b)(5) to nonresident aliens. - Payments on tax-free covenant bonds under section 1451. - Payments made by certain foreign organizations. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. Certain payments other than interest, dividends, and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. PRIVACY ACT NOTICE--Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER--If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS--If you fail to include any portion of an includible payment for interest, dividends, or patronage dividends in gross income, such failure will be treated as being due to negligence and will be subject to a penalty of 5% on any portion of an under-payment attributable to that failure unless there is clear and convincing evidence to the contrary. (3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING--If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION--Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. -----END PRIVACY-ENHANCED MESSAGE-----