-----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, K6b4CVEnAvRbkE9OC9Z9qJyKNsXyNN+zFYFuzyEuCK1mVjBeqSAePfK6booNwI3Z OpIrqOsgvTyVScPkaw+ESw== 0000736157-96-000035.txt : 19960816 0000736157-96-000035.hdr.sgml : 19960816 ACCESSION NUMBER: 0000736157-96-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: AMEX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIME WARNER INC CENTRAL INDEX KEY: 0000736157 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 131388520 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08637 FILM NUMBER: 96613985 BUSINESS ADDRESS: STREET 1: TIME & LIFE BLDG ROCKFELLER CENTER STREET 2: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2124848000 FORMER COMPANY: FORMER CONFORMED NAME: TIME INC /DE/ DATE OF NAME CHANGE: 19890801 10-Q 1 TWX 2ND QTR 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended June 30, 1996 , or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the transition period from to Commission file number 1-8637 TIME WARNER INC. (Exact name of registrant as specified in its charter) Delaware 13-1388520 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 75 Rockefeller Plaza New York, New York 10019 (212) 484-8000 (Address, including zip code, and telephone number, including area code, of each registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock - $1 par value 384,725,092 Description of Class Shares Outstanding as of July 31, 1996 TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P. INDEX TO FORM 10-Q Page Time Warner TWE PART I. FINANCIAL INFORMATION Management's discussion and analysis of results of operations and financial condition 1 34 Consolidated balance sheets at June 30, 1996 and December 31, 1995 19 42 Consolidated statements of operations for the three and six months ended June 30, 1996 and 1995 20 43 Consolidated statements of cash flows for the six months ended June 30, 1996 and 1995 21 44 Notes to consolidated financial statements 22 45 PART II. OTHER INFORMATION 51 PART I. FINANCIAL INFORMATION TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Time Warner has interests in three fundamental areas of business: Entertainment, consisting principally of interests in recorded music and music publishing, filmed entertainment, broadcasting, theme parks and cable television programming; News and Information, consisting principally of interests in magazine publishing, book publishing and direct marketing; and Telecommunications, consisting principally of interests in cable television systems. Substantially all of Time Warner's interests in filmed entertainment, broadcasting, theme parks, cable television programming and a majority of its cable television systems are held through the Entertainment Group, consisting principally of TWE, which is not consolidated for financial reporting purposes. TWE manages the telecommunications properties owned by Time Warner and the combined cable television operations are conducted under the name of Time Warner Cable. Capitalized terms are as defined and described in the accompanying consolidated financial statements, or elsewhere herein. Significant Transactions In 1996, Time Warner and the Entertainment Group have announced or completed a number of transactions that have had or are expected to have a significant effect on their results of operations and financial condition. Such transactions include: * The announcement by Time Warner in July 1996 that it had reached an agreement in principle with the staff of the Federal Trade Commission (the "FTC"), Turner Broadcasting System, Inc. ("TBS") and Liberty Media Corporation ("LMC"), a subsidiary of Tele-Communications Inc. ("TCI") and a shareholder of TBS, to make certain modifications to the previously-announced merger agreement and related documents which will allow Time Warner and TBS to proceed with their merger. Accordingly, the merger is expected to close early in the fourth quarter of 1996. * The implementation by Time Warner in April 1996 of a program to repurchase, from time to time, up to 15 million shares of its common stock. The common stock repurchase program is supported by a new five-year, $750 million revolving credit facility which is expected to be repaid principally from the cash proceeds to be received by Time Warner from the future exercise of employee stock options. As of June 30, 1996, Time Warner had acquired approximately 8.8 million shares of its common stock for an aggregate cost of approximately $360 million. * The issuance in April 1996 of 1.6 million shares of a new series of exchangeable preferred stock ("Series K Preferred Stock"), which pays cumulative dividends at the rate of 10-1/4% per annum. The approximate $1.55 billion of net proceeds raised from this transaction were used to reduce debt and, together with other actions since the initiation of a $2-$3 billion debt reduction program in February 1995, Time Warner and the Entertainment Group have raised approximately $3.2 billion for debt reduction. * The redemption in February 1996 of approximately $1.2 billion of convertible debt using proceeds from 1995 and 1996 financings, the effect of which was to lower interest rates, stagger debt maturities and eliminate the potential dilution from the conversion of such securities into 25.7 million shares of common stock. * The acquisition by Time Warner of Cablevision Industries Corporation ("CVI") and related companies on January 4, 1996, which strengthened Time Warner Cable's geographic clusters of cable television systems and substantially increased the number of cable subscribers managed by Time Warner Cable. Time Warner Cable now serves approximately 11.8 million subscribers in neighborhoods passing nearly 20% of the television homes in the U.S. In connection with the acquisition, Time Warner issued 2.9 million shares of common stock and 6.3 million shares of new convertible preferred stock, as adjusted, and assumed or incurred approximately $2 billion of indebtedness. The nature of these transactions and their impact on the results of operations and financial condition of Time Warner and the Entertainment Group are further discussed below. TBS Transaction On July 17, 1996, Time Warner announced that it had reached an agreement in principle with the staff of the FTC, TBS and LMC to make certain modifications to the previously-announced merger agreement and related documents which will allow Time Warner and TBS to proceed with their merger. Such changes include, but are not limited to, (i) changes in the consideration to be received by LMC from voting LMC Class Common Stock (as defined below) to reduced-voting LMC Class Common Stock (having 1/100th of a vote per share), (ii) limitations on the level and voting power of TCI's and its affiliates' ownership in Time Warner, (iii) termination of a related proposed, long-term agreement between TBS and a subsidiary of TCI concerning carriage of TBS programming services by TCI-affiliated cable systems, and the agreement by TBS and TCI to enter into a new five-year, mandatory carriage agreement covering Headline News and WTBS, a broadcast television station owned by TBS, in the event that WTBS is converted to a copyright-paid cable television programming service (the "WTBS Conversion") and (iv) an increase in the consideration to be paid to LMC and its affiliates, payable at Time Warner's election in stock or cash, in connection with obtaining a related option and non-competition agreement (the "SSSI Agreement") that will provide, if Time Warner exercises its option, for Southern Satellite Systems, Inc., a subsidiary of LMC, to provide certain satellite uplink and distribution services for WTBS in the event that the WTBS Conversion occurs. The amended merger agreement continues to provide for the merger of each of Time Warner and TBS with separate subsidiaries of a holding company ("New Time Warner"), that will combine, for financial reporting purposes, the consolidated net assets and operating results of Time Warner and TBS (the "TBS Transaction"). In connection therewith, the issued and outstanding shares of each class of the capital stock of Time Warner will be converted into shares of a substantially identical class of capital stock of New Time Warner. The amended merger agreement provides for the issuance by New Time Warner of approximately 173.3 million shares of common stock, par value $.01 per share (including 52 million shares of a special class of non-redeemable common stock to be received by LMC which will have 1/100th of a vote per share, the "LMC Class Common Stock"), in exchange for the outstanding TBS capital stock, the issuance of approximately 14 million stock options to replace all outstanding TBS options and the assumption of TBS's indebtedness (which approximated $2.6 billion at June 30, 1996). As part of the TBS Transaction, LMC and its affiliates will receive an additional five million shares of LMC Class Common Stock and $67 million of consideration payable, at the election of Time Warner, in cash or additional shares of LMC Class Common Stock, pursuant to the SSSI Agreement. The TBS Transaction will be accounted for by the purchase method of accounting for business combinations. Based on TBS's financial position and results of operations as of and for the six months ended June 30, 1996, and giving pro forma effect to the TBS Transaction as if it had occurred on June 30, 1996 for balance sheet purposes and at the beginning of the year for statement of operations purposes, the incremental effect on Time Warner reflected in the combined pro forma financial statements of New Time Warner would have been (i) an increase in shareholder's equity of approximately $6 billion, principally due to the issuance by New Time Warner of approximately 178.3 million shares of common stock, (ii) an increase in long-term debt of approximately $2.8 billion principally due to the assumption of TBS's debt, (iii) an increase in goodwill of approximately $6.7 billion as a result of a preliminary allocation of the excess cost over the net book value of assets acquired, (iv) an increase in revenues of $1.7 billion, (v) an increase in EBITDA (as defined below) of $174 million, (vi) an increase in depreciation and amortization of $171 million, including approximately $80 million of noncash amortization of goodwill, (vii) an increase in operating income of $3 million, (viii) an increase in net loss of $80 million and (ix) a reduction in net loss per common share of $.07 per common share resulting from the dilutive effect of issuing 178.3 million shares of common stock. The TBS Transaction is expected to close early in the fourth quarter of 1996, but is still subject to customary closing conditions, including the approval of the shareholders of TBS and of Time Warner, and all necessary approvals of the Federal Communications Commission (the "FCC"). In addition, a formal agreement reflecting the agreement in principle with the FTC staff must be submitted to the full Commission for its consideration and is subject to approval by the FTC Commissioners. Use of EBITDA The following comparative discussion of the results of operations and financial condition of Time Warner and the Entertainment Group includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the music, filmed entertainment and cable businesses of significant amounts of amortization of intangible assets recognized in the $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992, the $2.3 billion acquisitions of Summit, KBLCOM and CVI and related companies in 1995 and early 1996 and other business combinations accounted for by the purchase method, including the proposed TBS Transaction with respect to certain discussions on a pro forma basis. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for the businesses of Time Warner and the Entertainment Group, and when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. RESULTS OF OPERATIONS EBITDA and operating income for Time Warner and the Entertainment Group for the three and six months ended June 30, 1996 and 1995 are as follows: Three Months Ended June 30, Six Months Ended June 30, EBITDA Operating Income EBITDA Operating Income 1996 1995 1996 1995 1996 1995 1996 1995 Time Warner: (millions) Publishing $156 $138 $125 $114 $ 236 $215 $181 $169 Music 165 165 70 70 311 338 125 153 Cable 118 - 20 - 230 - 19 - Total $439 $303 $215 $184 $ 777 $553 $325 $322 Entertainment Group: Filmed Entertainment $141 $117 $ 79 $ 59 $ 277 $240 $152 $126 Six Flags Theme Parks - 58 - 31 - 60 - 29 Broadcasting - The WB Network (12) (12) (12) (12) (36) (33) (36) (33) Programming - HBO 87 75 83 70 168 146 159 137 Cable 376 319 147 126 744 575 293 216 Total $592 $557 $297 $274 $1,153 $988 $568 $475 Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995 Time Warner had revenues of $2.139 billion, a loss of $31 million ($.26 per common share) before an extraordinary loss on the retirement of debt and a net loss of $40 million ($.28 per common share) for the three months ended June 30, 1996, compared to revenues of $1.907 billion and a net loss of $8 million ($.03 per common share) for the three months ended June 30, 1995. Time Warner's equity in the pretax income of the Entertainment Group was $93 million for the three months ended June 30, 1996, compared to $84 million for the three months ended June 30, 1995. On a pro forma basis, giving effect to (i) the 1995 and early 1996 acquisitions by Time Warner of Summit, KBLCOM and CVI and related companies, and the 1995 formation by TWE of the TWE-Advance/Newhouse Partnership, (ii) the 1995 exchange of ITOCHU Corporation's and Toshiba Corporation's interests in TWE for equity interests in Time Warner, (iii) the 1995 and early 1996 refinancing of approximately $4 billion of public debt by Time Warner and the 1995 execution of a new $8.3 billion credit agreement, under which approximately $2.7 billion of debt assumed in the cable acquisitions was refinanced by subsidiaries of Time Warner and $2.6 billion of pre-existing bank debt was refinanced by TWE, (iv) the issuance in April 1996 of 1.6 million shares of Series K Preferred Stock and the use of approximately $1.55 billion of net proceeds therefrom to reduce debt, (v) the 1995 sale of 51% of TWE's interest in Six Flags and (vi) the sale or expected sale or transfer of certain unclustered cable television systems owned by TWE, as if each of such transactions had occurred at the beginning of 1995, Time Warner would have reported for the three months ended June 30, 1996 and 1995, respectively, revenues of $2.139 billion and $2.113 billion, depreciation and amortization of $224 million and $237 million, operating income of $215 million and $171 million, equity in the pretax income of the Entertainment Group of $93 million and $73 million, a loss before extraordinary item of $29 million and $50 million ($0.27 and $0.33 per common share) and a net loss of $38 million and $50 million ($0.29 and $0.33 per common share). As discussed more fully below, the improvement in Time Warner's pro forma operating results in 1996 as compared to 1995 principally relates to an overall increase in the operating income of Time Warner's business segments and increased income from its equity in the pretax income of the Entertainment Group, offset in part by a $9 million extraordinary loss on the retirement of debt ($.02 per common share) and a reduction in interest income related to the resolution of a corporate tax matter in 1995. However, on a historical basis, the positive effect from such underlying operating trends was more than offset by an increase in interest expense relating to approximately $3.3 billion of debt assumed or incurred in the cable acquisitions and, with respect to Time Warner's 1996 net loss per common share, by an increase in preferred dividend requirements as a result of the preferred stock issued in connection with the Series K Refinancing, the cable acquisitions and the ITOCHU/Toshiba Transaction. The Entertainment Group had revenues of $2.610 billion and net income of $72 million for the three months ended June 30, 1996, compared to revenues of $2.435 billion and net income of $59 million for the three months ended June 30, 1995. On a pro forma basis, giving effect to (i) the 1995 formation of the TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of approximately $2.6 billion of pre-existing bank debt, (iii) the 1995 consolidation of Paragon, (iv) the 1995 sale of 51% of TWE's interest in Six Flags and (v) the sale or expected sale or transfer of certain unclustered cable television systems owned by TWE, as if each of such transactions had occurred at the beginning of 1995, the Entertainment Group would have reported for the three months ended June 30, 1995, revenues of $2.321 billion, depreciation and amortization of $263 million, operating income of $249 million and net income of $55 million. No pro forma financial information has been presented for the Entertainment Group for the three months ended June 30, 1996 because all of such transactions are already reflected, in all material respects, in the historical financial statements of the Entertainment Group. As discussed more fully below, the Entertainment Group's historical operating results in 1996 as compared to pro forma results in 1995 reflect an overall increase in operating income generated by its business segments, offset in part by a decrease in investment-related income and an increase in minority interest expense related to the TWE-Advance/Newhouse Partnership. On a historical basis, the positive effect from such underlying operating trends was slightly mitigated by the lack of contribution of Six Flags's operating results in 1996 which exceeded interest savings on lower average debt levels related to management's debt reduction program. The relationship between income before income taxes and income tax expense of Time Warner is principally affected by the amortization of goodwill and certain other financial statement expenses that are not deductible for income tax purposes. Income tax expense of Time Warner includes all income taxes related to its allocable share of partnership income and its equity in the income tax expense of corporate subsidiaries of the Entertainment Group. Time Warner Publishing. Revenues increased to $1.038 billion, compared to $928 million in the second quarter of 1995. EBITDA increased to $156 million from $138 million. Depreciation and amortization amounted to $31 million in 1996 and $24 million in 1995. Operating income increased to $125 million from $114 million. Revenues benefited from across-the-board increases in magazine circulation, advertising and book revenues. Contributing to the revenue gain were increases achieved by People, Sports Illustrated, Time, Entertainment Weekly, Southern Living and the direct marketing book businesses. EBITDA and operating income increased as a result of the revenue gains. Music. Revenues decreased to $876 million, compared to $986 million in the second quarter of 1995. EBITDA was $165 million for both periods. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $95 million for both periods, and operating income was $70 million for both periods. Revenues decreased principally due to a decline in international recorded music sales, as well as the absence of revenues from certain start-up businesses which are no longer being operated by the Music Division. In addition, the industry-wide softness experienced in the first quarter in the overexpanded U.S. retail marketplace did not deteriorate further which, together with a number of popular releases, contributed to an increase in domestic recorded music revenues. EBITDA and operating income were unchanged principally because the improved domestic recorded music results, higher music publishing results and the absence of losses from certain start-up businesses, were offset by lower international recorded music and direct marketing results. Cable. The 1996 Cable operating results reflect the acquisitions of Summit effective as of May 2, 1995, KBLCOM effective as of July 6, 1995 and CVI and related companies effective as of January 4, 1996 and are not comparative to the corresponding period in the prior year. Cable operating results for the second quarter of 1996 consisted of revenues of $230 million, EBITDA of $118 million, depreciation and amortization of $98 million and operating income of $20 million. Interest and Other, Net. Interest and other, net, increased to $282 million in the second quarter of 1996, compared to $201 million in the second quarter of 1995. Interest expense increased to $224 million, compared to $219 million. The increase in interest expense was principally due to the assumption or incurrence of approximately $3.3 billion of debt in the cable acquisitions, offset in part by the favorable effect from Time Warner's redemption of the 8.75% Convertible Debentures. There was other expense, net, of $58 million in the second quarter of 1996, compared to other income, net, of $18 million in 1995, principally because of a reduction in interest income related to the resolution of a corporate tax matter in 1995, a decrease in investment-related income and an increase in dividend requirements on preferred securities of subsidiaries issued in 1995 in connection with the redemption of the 8.75% Convertible Debentures. Entertainment Group Filmed Entertainment. Revenues increased to $1.272 billion, compared to $1.154 billion in the second quarter of 1995. EBITDA increased to $141 million from $117 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $62 million in 1996 and $58 million in 1995. Operating income increased to $79 million from $59 million. Revenues benefited from increases in worldwide theatrical, home video and television distribution operations. Domestic theatrical revenues in 1996 were led by the success of Twister and exceeded the prior year's performance despite difficult comparisons to successful films such as Batman Forever. EBITDA and operating income benefited from the revenue gains. Six Flags Theme Parks. As a result of TWE's sale of 51% of its interest in Six Flags, the operating results of Six Flags have been deconsolidated effective as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is accounted for under the equity method of accounting. Broadcasting - The WB Network. The WB Network recorded an operating loss of $12 million on $18 million of revenues in the second quarter of 1996, compared to an operating loss of $12 million on $3 million of revenues in the second quarter of 1995. The increase in revenues, as well as a corresponding increase in costs, primarily resulted from the expansion of programming in September 1995 to two nights of primetime scheduling, and the unveiling of Kids' WB!, the network's animated programming lineup on Saturday mornings and weekdays. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. Programming - HBO. Revenues increased to $456 million, compared to $396 million in the second quarter of 1995. EBITDA increased to $87 million from $75 million. Depreciation and amortization amounted to $4 million in 1996 and $5 million in 1995. Operating income increased to $83 million from $70 million. Revenues benefited primarily from a significant increase in subscriptions. EBITDA and operating income improved principally as a result of the revenue gains. Cable. Revenues increased to $961 million, compared to $760 million in the second quarter of 1995. EBITDA increased to $376 million from $319 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $229 million in 1996 and $193 million in 1995. Operating income increased to $147 million from $126 million. Revenues and operating results benefited from the consolidation of Paragon effective as of July 6, 1995. Excluding such effect, revenues benefited from an aggregate increase of 5% in basic cable and Primestar-related, direct broadcast satellite subscribers, increases in regulated cable rates as permitted under Time Warner Cable's "social contract" with the FCC and increases in pay-per-view and advertising revenues. Excluding the effect of consolidating Paragon, EBITDA and operating income increased as a result of the revenue gains, offset in part, with respect to operating income only, by higher depreciation and amortization relating to increased capital spending. Interest and Other, Net. Interest and other, net, decreased to $134 million in the second quarter of 1996, compared to $140 million in the second quarter of 1995. Interest expense decreased to $119 million, compared to $148 million in the second quarter of 1995, principally as a result of interest savings on lower average debt levels related to management's debt reduction program and lower short-term, floating-rates of interest paid on borrowings under TWE's former and existing bank credit agreements. There was other expense, net, of $15 million in the second quarter of 1996, compared to other income, net, of $8 million in 1995, principally due to a decrease in investment-related income, including a reduction in interest income resulting from lower average cash balances and lower average principal amounts due under the note receivable from U S WEST. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Time Warner had revenues of $4.207 billion, a loss of $124 million ($.58 per common share) before an extraordinary loss on the retirement of debt and a net loss of $159 million ($.67 per common share) for the six months ended June 30, 1996, compared to revenues of $3.724 billion and a net loss of $55 million ($.17 per common share) for the six months ended June 30, 1995. Time Warner's equity in the pretax income of the Entertainment Group was $209 million for the six months ended June 30, 1996 compared to $106 million for the six months ended June 30, 1995. On a pro forma basis, giving effect to (i) the 1995 and early 1996 acquisitions by Time Warner of Summit, KBLCOM and CVI and related companies, and the 1995 formation by TWE of the TWE-Advance/Newhouse Partnership, (ii) the 1995 exchange of ITOCHU Corporation's and Toshiba Corporation's interests in TWE for equity interests in Time Warner, (iii) the 1995 and early 1996 refinancing of approximately $4 billion of public debt by Time Warner and the 1995 execution of a new $8.3 billion credit agreement, under which approximately $2.7 billion of debt assumed in the cable acquisitions was refinanced by subsidiaries of Time Warner and $2.6 billion of pre-existing bank debt was refinanced by TWE, (iv) the issuance in April 1996 of 1.6 million shares of Series K Preferred Stock and the use of approximately $1.55 billion of net proceeds therefrom to reduce debt, (v) the 1995 sale of 51% of TWE's interest in Six Flags and (vi) the sale or expected sale or transfer of certain unclustered cable television systems owned by TWE, as if each of such transactions had occurred at the beginning of 1995, Time Warner would have reported for the six months ended June 30, 1996 and 1995, respectively, revenues of $4.207 billion and $4.138 billion, depreciation and amortization of $452 million and $467 million, operating income of $325 million and $290 million, equity in the pretax income of the Entertainment Group of $209 million and $128 million, a loss before extraordinary item of $102 million and $94 million ($0.66 and $0.65 per common share) and a net loss of $137 million and $94 million ($0.75 and $0.65 per common share). As discussed more fully below, the increase in Time Warner's pro forma net loss in 1996 as compared to 1995 principally relates to a $35 million extraordinary loss on the retirement of debt ($.09 per common share) and a decrease in investment-related income primarily resulting from gains on the sale of certain assets recognized in 1995, which more than offset an overall increase in the operating income of Time Warner's business segments and increased income from its equity in the pretax income of the Entertainment Group. On a historical basis, such underlying operating trends were further affected by an increase in interest expense relating to approximately $3.3 billion of debt assumed or incurred in the cable acquisitions, and with respect to Time Warner's 1996 net loss per common share, by an increase in preferred dividend requirements as a result of the preferred stock issued in connection with the Series K Refinancing, the cable acquisitions and the ITOCHU/Toshiba Transaction. The Entertainment Group had revenues of $5.097 billion and net income of $170 million for the six months ended June 30, 1996, compared to revenues of $4.508 billion and net income of $70 million for the six months ended June 30, 1995. On a pro forma basis, giving effect to (i) the 1995 formation of the TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of approximately $2.6 billion of pre-existing bank debt, (iii) the 1995 consolidation of Paragon, (iv) the 1995 sale of 51% of TWE's interest in Six Flags and (v) the sale or expected sale or transfer of certain unclustered cable television systems owned by TWE, as if each of such transactions had occurred at the beginning of 1995, the Entertainment Group would have reported for the six months ended June 30, 1995, revenues of $4.582 billion, depreciation and amortization of $533 million, operating income of $478 million and net income of $95 million. No pro forma financial information has been presented for the Entertainment Group for the six months ended June 30, 1996 because all of such transactions are already reflected, in all material respects, in the historical financial statements of the Entertainment Group. As discussed more fully below, the Entertainment Group's historical operating results in 1996 as compared to pro forma results in 1995 reflect an overall increase in operating income generated by its business segments and an increase in investment-related income, offset in part by an increase in minority interest expense related to the TWE-Advance/Newhouse Partnership. On a historical basis, such underlying operating trends were enhanced by interest savings in 1996 on lower average debt levels related to management's debt reduction program, and were offset in part by an increase in minority interest expense related to the operations of the TWE-Advance/Newhouse Partnership for a full six-month period. The relationship between income before income taxes and income tax expense of Time Warner is principally affected by the amortization of goodwill and certain other financial statement expenses that are not deductible for income tax purposes. Income tax expense of Time Warner includes all income taxes related to its allocable share of partnership income and its equity in the income tax expense of corporate subsidiaries of the Entertainment Group. Time Warner Publishing. Revenues increased to $1.917 billion, compared to $1.759 billion in the first six months of 1995. EBITDA increased to $236 million from $215 million. Depreciation and amortization amounted to $55 million in 1996 and $46 million in 1995. Operating income increased to $181 million from $169 million. Revenues benefited from across-the-board increases in magazine circulation, advertising and book revenues. Contributing to the revenue gain were increases achieved by People, Sports Illustrated, Entertainment Weekly, Southern Living and the direct marketing book businesses. EBITDA and operating income increased as a result of the revenue gains, offset in part by higher paper costs as a result of price increases and development spending in new direct-marketing businesses. Music. Revenues decreased to $1.859 billion, compared to $1.977 billion in the first six months of 1995. EBITDA decreased to $311 million from $338 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $186 million in 1996 and $185 million in 1995. Operating income decreased to $125 million from $153 million. Despite maintaining its leading domestic market position (over 23%), the Music Division's domestic recorded music operating results in 1996 were negatively affected by the industry-wide softness in the overexpanded U.S. retail marketplace, which has resulted in a number of music retail store closings and higher returns of music product. The decline in revenues reflects (i) the effects from the current U.S. retail environment, including an increase in the Music Division's reserve for returns to provide for an anticipated higher level of returns (ii) a decline in international recorded music sales and (iii) the absence of revenues from certain start-up businesses which are no longer being operated by the Music Division. These effects were partially offset by an increase in music publishing revenues. EBITDA and operating income decreased principally as a result of the decline in the worldwide recorded music business and lower results from direct marketing activities, offset in part by improved music publishing results and the absence of losses from certain start-up businesses. Cable. The 1996 Cable operating results reflect the acquisitions of Summit effective as of May 2, 1995, KBLCOM effective as of July 6, 1995 and CVI and related companies effective as of January 4, 1996 and are not comparative to the corresponding period in the prior year. Cable operating results for the first six months of 1996 consisted of revenues of $447 million, EBITDA of $230 million, depreciation and amortization of $211 million and operating income of $19 million. Interest and Other, Net. Interest and other, net, increased to $578 million in the first six months of 1996, compared to $356 million in the first six months of 1995. Interest expense increased to $471 million, compared to $429 million. The increase in interest expense was principally due to the assumption or incurrence of approximately $3.3 billion of debt in the cable acquisitions, offset in part by the favorable effect from Time Warner's redemption of the 8.75% Convertible Debentures. There was other expense, net, of $107 million in the first six months of 1996, compared to other income, net, of $73 million in 1995, principally because of a decrease in investment-related income resulting from gains on certain asset sales recognized in 1995 in connection with management's debt reduction program and an increase in dividend requirements on preferred securities of subsidiaries issued in 1995 in connection with the redemption of the 8.75% Convertible Debentures. Entertainment Group Filmed Entertainment. Revenues increased to $2.490 billion, compared to $2.338 billion in the first six months of 1995. EBITDA increased to $277 million from $240 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $125 million in 1996 and $114 million in 1995. Operating income increased to $152 million from $126 million. Revenues benefited from increases in worldwide home video and consumer products operations. Lower domestic theatrical revenues in the first quarter of 1996 were overcome by the second quarter domestic box office performance of theatrical releases, led by the success of Twister. EBITDA and operating income benefited from the revenue gains. Six Flags Theme Parks. As a result of TWE's sale of 51% of its interest in Six Flags, the operating results of Six Flags have been deconsolidated effective as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is accounted for under the equity method of accounting. Broadcasting - The WB Network. The WB Network recorded an operating loss of $36 million on $33 million of revenues in the first six months of 1996, compared to an operating loss of $33 million on $6 million of revenues in the first six months of 1995. The increased revenues and operating losses are primarily due to the expansion of programming in September 1995 to two nights of primetime scheduling, and the unveiling of Kids' WB!, the network's animated programming lineup on Saturday mornings and weekdays. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. Programming - HBO. Revenues increased to $875 million, compared to $786 million in the first six months of 1995. EBITDA increased to $168 million from $146 million. Depreciation and amortization amounted to $9 million in 1996 and 1995. Operating income increased to $159 million from $137 million. Revenues benefited primarily from a significant increase in subscriptions. EBITDA and operating income improved principally as a result of the revenue gains. Cable. Revenues increased to $1.908 billion, compared to $1.338 billion in the first six months of 1995. EBITDA increased to $744 million from $575 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $451 million in 1996 and $359 million in 1995. Operating income increased to $293 million from $216 million. Revenues and operating results benefited from the contribution of the TWE-Advance/Newhouse Partnership for a full six-month period and the consolidation of Paragon effective as of July 6, 1995. Excluding such effects, revenues benefited from an aggregate increase of 5% in basic cable and Primestar-related, direct broadcast satellite subscribers, increases in regulated cable rates as permitted under Time Warner Cable's "social contract" with the FCC and increases in pay-per-view and advertising revenues. Excluding the TWE-Advance/Newhouse Partnership and Paragon effects noted above, EBITDA and operating income increased as a result of the revenue gains, offset in part, with respect to operating income only, by higher depreciation and amortization relating to increased capital spending. Interest and Other, Net. Interest and other, net, decreased to $222 million in the first six months of 1996, compared to $304 million in the first six months of 1995. Interest expense decreased to $240 million, compared to $299 million in the first six months of 1995, principally as a result of interest savings on lower average debt levels related to management's debt reduction program and lower short-term, floating-rates of interest paid on borrowings under TWE's former and existing bank credit agreements. There was other income, net, of $18 million in the first six months of 1996, compared to other expense, net, of $5 million in 1995, principally due to an overall increase in investment-related income resulting from gains on the sale of certain unclustered cable systems recognized in 1996 in connection with management's debt reduction program, which more than exceeded a reduction in interest income resulting from lower average cash balances and lower average principal amounts due under the note receivable from U S WEST. FINANCIAL CONDITION AND LIQUIDITY June 30, 1996 Time Warner Financial Condition Time Warner had $10 billion of debt, $482 million of cash and equivalents (net debt of $9.5 billion), $225 million of borrowings against future stock option proceeds, $949 million of mandatorily redeemable preferred securities of subsidiaries, $1.586 billion of Series K Preferred Stock and $3.8 billion of shareholders' equity at June 30, 1996, compared to $9.9 billion of debt, $1.2 billion of cash and equivalents (net debt of $8.7 billion), $949 million of mandatorily redeemable preferred securities of subsidiaries and $3.7 billion of shareholders' equity at December 31, 1995. The increase in net debt principally reflects the assumption of approximately $2 billion of debt related to the CVI acquisition, offset in part by the use of approximately $1.55 billion of net proceeds from the issuance of the Series K Preferred Stock to reduce debt. The increase in shareholders' equity reflects the issuance in 1996 of approximately 2.9 million shares of common stock and approximately 6.3 million shares of preferred stock in connection with the CVI acquisition, offset in part by the repurchase of approximately 8.8 million shares of Time Warner Common Stock at an aggregate cost of approximately $360 million. On a combined basis (Time Warner and the Entertainment Group together), excluding borrowings against future stock option proceeds, there was $14.9 billion of net debt at June 30, 1996, compared to $14.7 billion of net debt at the beginning of the year. Investment in TWE Time Warner's investment in TWE at June 30, 1996 consisted of interests in 74.49% of the pro rata priority capital ("Series A Capital") and residual equity capital ("Residual Capital") of TWE, and 100% of the senior priority capital ("Senior Capital") and junior priority capital ("Series B Capital") of TWE. Such priority capital interests provide Time Warner (and with respect to the Series A Capital only, U S WEST) with certain priority claims to the net partnership income of TWE and distributions of TWE partnership capital, including certain priority distributions of partnership capital in the event of liquidation or dissolution of TWE. Each level of priority capital interest provides for an annual rate of return equal to or exceeding 8%, including an above-market 13.25% annual rate of return (11.25% to the extent concurrently distributed) related to Time Warner's Series B Capital interest, which, when taken together with Time Warner's contributed capital, represented a cumulative priority Series B Capital interest of $4.9 billion at June 30, 1996. While the TWE partnership agreement contemplates the reinvestment of significant partnership cash flows in the form of capital expenditures and otherwise provides for certain other restrictions that are expected to limit cash distributions on partnership interests for the foreseeable future, Time Warner's $1.5 billion Senior Capital interest and, to the extent not previously distributed, partnership income allocated thereto (based on an 8% annual rate of return) is required to be distributed to Time Warner in three annual installments beginning on July 1, 1997. Series K Exchangeable Preferred Stock In April 1996, Time Warner raised approximately $1.55 billion of net proceeds for debt reduction in a private placement of 1.6 million shares of Series K Preferred Stock, which pay cumulative dividends at the rate of 10-1/4% per annum. The issuance of the Series K Preferred Stock allowed the Company to realize cash proceeds through a security whose payment terms are principally linked (until a reorganization of TWE occurs, if any) to a portion of Time Warner's currently noncash-generating interest in the Series B Capital of TWE, as more fully described herein. Time Warner used the proceeds raised from the issuance of the Series K Preferred Stock to redeem $250 million principal amount of 8.75% Debentures due April 1, 2017 for $265 million in May 1996 (including redemption premiums and accrued interest thereon), and to reduce bank debt of TWI Cable Inc. by approximately $1.3 billion. In connection with the redemption of the 8.75% Debentures due April 1, 2017, Time Warner recognized an extraordinary loss of $9 million in May 1996. Generally, the terms of the Series K Preferred Stock only require Time Warner to pay cash dividends or to redeem, prior to its mandatory redemption date, any portion of the security for cash upon the receipt of certain cash distributions from TWE with respect to Time Warner's interests in the Series B Capital and Residual Capital of TWE (excluding stock option related distributions and certain tax related distributions). However, because such cash distributions are subject to restrictions under the TWE partnership agreement, Time Warner does not expect to pay cash dividends or to redeem any portion of the Series K Preferred Stock for cash in the foreseeable future. Instead, Time Warner expects to satisfy its dividend requirements through the issuance of additional shares of Series K Preferred Stock with an aggregate liquidation preference equal to the amount of such dividends. In addition, upon a reorganization of TWE, Time Warner must elect either to redeem each outstanding share of Series K Preferred Stock for cash, subject to certain conditions, or to exchange the Series K Preferred Stock for new Series L Preferred Stock, which also pays cumulative dividends at the rate of 10-1/4% per annum but is not linked to Time Warner's interest in the Series B Capital of TWE. The terms of the Series L Preferred Stock do not require Time Warner to pay cash dividends until July 2006 and provide Time Warner with an option to exchange the Series L Preferred Stock, subject to certain conditions, into 10-1/4% Senior Subordinated Debentures which do not require the payment of cash interest until July 2006. See Note 7 to the accompanying consolidated financial statements for a summary of the principal terms of the Series K Preferred Stock. Common Stock Repurchase Program In April 1996, Time Warner's Board of Directors authorized a program to repurchase, from time to time, up to 15 million shares of Time Warner common stock. In connection therewith, Time Warner entered into a five-year, $750 million revolving credit facility (the "Stock Option Proceeds Credit Facility") in May 1996 principally to support such stock repurchases. The common stock repurchased under the program is expected to be used to satisfy future share issuances related to the exercise of existing employee stock options. Actual repurchases in any period will be subject to market conditions. As of June 30, 1996, Time Warner had acquired approximately 8.8 million shares of its common stock for an aggregate cost of approximately $360 million. Such repurchases were principally funded with borrowings under the Stock Option Proceeds Credit Facility and available cash and equivalents. The Stock Option Proceeds Credit Facility provides for borrowings of up to $750 million, of which up to $100 million is reserved solely for the payment of interest and fees thereunder. At June 30, 1996, $225 million had been borrowed under the Stock Option Proceeds Credit Facility. Borrowings under the Stock Option Proceeds Credit Facility generally bear interest at LIBOR plus a margin equal to 75 basis points and are generally required to be prepaid from the cash proceeds received by Time Warner from the exercise of designated employee stock options. Such prepayments will permanently reduce the borrowing availability under the facility. At August 2, 1996, based on a closing market price of Time Warner common stock of $36.50, the aggregate exercise prices of outstanding vested, "in the money" stock options was approximately $1.5 billion, representing a 2 to 1 coverage ratio over the related borrowing availability. To the extent that such stock option proceeds are not sufficient to satisfy Time Warner's obligations under the Stock Option Proceeds Credit Facility, Time Warner is generally required to repay such borrowings using proceeds from the sale of shares of its common stock held in escrow under the Stock Option Proceeds Credit Facility or, at Time Warner's election, using available cash on hand. Time Warner initially placed 36 million shares in escrow under this arrangement and may, from time to time, have up to 52.5 million shares held in escrow. Such shares are not considered to be issued and outstanding capital stock of the Company. Because borrowings under the Stock Option Proceeds Credit Facility are expected to be principally repaid by Time Warner from the cash proceeds from the exercise of employee stock options, Time Warner's principal credit rating agencies have concluded that such borrowings and related financing costs are credit neutral and are excludable from debt and interest expense, respectively, for purposes of determining Time Warner's leverage and coverage ratios. Debt Refinancings In 1996, as more fully described below, Time Warner continued to capitalize on favorable market conditions through certain debt refinancings, which lowered interest rates, staggered debt maturities and, with respect to the redemption of the 8.75% Convertible Debentures in February 1996, eliminated the potential dilution from the conversion of such securities into 25.7 million shares of common stock. In January 1996, in connection with its acquisition of CVI and related companies, Time Warner assumed $500 million of public notes and debentures of CVI and a subsidiary of Time Warner borrowed $1.5 billion under its $8.3 billion credit agreement to refinance a like-amount of other indebtedness assumed or incurred in such acquisition. In February 1996, Time Warner redeemed the remaining $1.2 billion principal amount of 8.75% Convertible Debentures for $1.28 billion, including redemption premiums and accrued interest thereon. The redemption was financed with (1) proceeds raised from a $575 million issuance of Company-obligated mandatorily redeemable preferred securities of a subsidiary in December 1995 and (2) $750 million of proceeds raised from the issuance in January 1996, of (i) $400 million principal amount of 6.85% debentures due 2026, which are redeemable at the option of the holders thereof in 2003, (ii) $200 million principal amount of 8.3% discount debentures due 2036, which do not pay cash interest until 2016, (iii) $166 million principal amount of 7.48% debentures due 2008 and (iv) $150 million principal amount of 8.05% debentures due 2016. In connection with the 1996 redemption of the 8.75% Convertible Debentures, Time Warner recognized an extraordinary loss of $26 million. Cash Flows During the first six months of 1996, Time Warner's cash provided by operations amounted to $81 million and reflected $777 million of EBITDA from its Publishing, Music and Cable businesses and $132 million of distributions from TWE, less $426 million of interest payments, $133 million of income taxes, $36 million of corporate expenses and $233 million related to an increase in other working capital requirements, balance sheet accounts and noncash items. Cash used by operations of $99 million for the first six months of 1995 reflected $553 million of business segment EBITDA and $5 million of net distributions from TWE, less $289 million of interest payments, $127 million of income taxes, $39 million of corporate expenses and $202 million related to an increase in other working capital requirements, balance sheet accounts and noncash items. Cash used by investing activities increased to $303 million in the first six months of 1996, compared to $31 million in the first six months of 1995, principally as a result of the cash portion of the consideration paid to acquire CVI and related companies and a $129 million decrease in investment proceeds realized in 1995 in connection with management's debt reduction program. Capital expenditures increased to $161 million in the first six months of 1996, compared to $97 million in 1995, principally as a result of higher cable capital spending associated with Time Warner's cable acquisitions. Cash used by financing activities was $481 million for the first six months of 1996, compared to cash provided by financing activities of $445 million for the first six months of 1995. The use of cash in 1996 principally resulted from the use of $135 million of available cash and equivalents to finance a portion of the Company's share repurchase program and the use of $557 million of noncurrent cash and equivalents raised in the December 1995 issuance of the Preferred Trust Securities to redeem the remaining portion of the 8.75% Convertible Debentures in February 1996, offset in part by borrowings incurred to finance the cash portion of the consideration paid to acquire CVI and related companies. In addition, Time Warner raised approximately $1.55 billion of net proceeds in 1996 from the issuance of 1.6 billion shares of Series K Preferred Stock and used the net proceeds therefrom to reduce debt. Cash provided by financing activities in 1995 principally resulted from the issuance of $500 million principal amount of ten-year notes in June 1995, the proceeds of which were not used until September 1995 in connection with the redemption of a portion of the then outstanding 8.75% Convertible Debentures. Cash dividends paid increased to $135 million for the first six months of 1996, compared to $73 million for the first six months of 1995, principally as a result of dividends paid on the preferred stock issued in connection with the cable acquisitions and the ITOCHU/Toshiba Transaction. The assets and cash flows of TWE are restricted by the TWE partnership agreement and are unavailable to Time Warner except through the payment of certain fees, reimbursements, cash distributions and loans, which are subject to limitations. Under the New Credit Agreement, TWE and TWI Cable are permitted to incur additional indebtedness to make loans, advances, distributions and other cash payments to Time Warner, subject to their respective compliance with the cash flow coverage and leverage ratio covenants contained therein. Management believes that Time Warner's operating cash flow, cash and marketable securities and additional borrowing capacity are sufficient to fund its capital and liquidity needs for the foreseeable future without distributions and loans from TWE above those permitted by existing agreements. Entertainment Group Financial Condition The Entertainment Group had $5.6 billion of debt, $1.5 billion of Time Warner General Partners' Senior Capital and $6.7 billion of partners' capital at June 30, 1996, compared to $6.2 billion of debt, $1.4 billion of Time Warner General Partners' Senior Capital and $6.6 billion of partners' capital (net of the $169 million uncollected portion of the note receivable from U S WEST) at December 31, 1995. Cash and equivalents were $218 million at June 30, 1996, compared to $209 million at December 31, 1995, reducing the debt-net-of-cash amounts for the Entertainment Group to $5.4 billion and $6 billion, respectively. Cash Flows In the first six months of 1996, the Entertainment Group's cash provided by operations amounted to $1.198 billion and reflected $1.153 billion of EBITDA from the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable businesses and $359 million related to a reduction in working capital requirements, other balance sheet accounts and noncash items, less $247 million of interest payments, $32 million of income taxes and $35 million of corporate expenses. Cash provided by operations of $697 million in the first six months of 1995 reflected $988 million of business segment EBITDA and $76 million related to a reduction in working capital requirements, less $303 million of interest payments, $34 million of income taxes and $30 million of corporate expenses. Cash used by investing activities was $651 million in the first six months of 1996, compared to cash provided by investing activities of $175 million in the first six months of 1995, principally as a result of a $766 million decrease in investment proceeds realized in 1995 in connection with management's debt reduction program. Capital expenditures increased to $781 million in the first six months of 1996, compared to $704 million in the first six months of 1995, principally as a result of higher cable capital spending as discussed more fully below. Cash used by financing activities was $538 million in the first six months of 1996, compared to cash provided by financing activities of $320 million in the first six months of 1995, principally as a result of a $607 million net reduction in debt in 1996 and a $127 million increase in net distributions paid to Time Warner, offset in part by a $74 million decrease in collections on the note receivable from U S WEST. Management believes that TWE's operating cash flow, cash and equivalents and additional borrowing capacity are sufficient to fund its capital and liquidity needs for the foreseeable future. Cable Capital Spending Since the beginning of 1994, Time Warner Cable has been engaged in a plan to upgrade the technological capability and reliability of its cable television systems and develop new services, which it believes will position the business for sustained, long-term growth. Capital spending by Time Warner Cable, including the cable operations of both Time Warner and TWE, amounted to $681 million in the six months ended June 30, 1996, compared to $514 million in the six months ended June 30, 1995, and was financed in part through collections on the note receivable from U S WEST of $169 million and $243 million, respectively. Cable capital spending is budgeted to be approximately $900 million for the remainder of 1996 and is expected to be funded principally by cable operating cash flow. In exchange for certain flexibility in establishing cable rate pricing structures for regulated services that went into effect on January 1, 1996 and consistent with Time Warner Cable's long-term strategic plan, Time Warner Cable has agreed with the FCC to invest a total of $4 billion in capital costs in connection with the upgrade of its cable infrastructure, which is expected to be substantially completed over the next five years. The agreement with the FCC covers all of the cable operations of Time Warner Cable, including the owned or managed cable television systems of Time Warner, TWE and the TWE-Advance/Newhouse Partnership. Management expects to continue to finance such level of investment principally through the growth in cable operating cash flow derived from increases in subscribers and cable rates, bank credit agreement borrowings and the development of new revenue streams from expanded programming options, high speed data transmission, telephony and other services. Warner Bros. Backlog Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of theatrical and television product for pay cable, network, basic cable and syndicated television exhibition, amounted to $1.601 billion at June 30, 1996, compared to $1.056 billion at December 31, 1995 (including amounts relating to HBO of $208 million at June 30, 1996 and $175 million at December 31, 1995). Warner Bros.' backlog increased principally as a result of the licensing of the hit television series Friends and ER for domestic syndication and cable television exhibition beginning in 1998. Because backlog generally relates to contracts for the licensing of theatrical and television product which have already been produced, the recognition of revenue for such completed product is principally only dependent upon the commencement of the availability period for telecast under the terms of the related licensing agreement. In addition, cash licensing fees are collected periodically over the term of the related licensing agreements. Accordingly, the portion of backlog for which cash advances have not already been received has significant off-balance sheet asset value as a source of future funding. The backlog excludes advertising barter contracts, which are also expected to result in the future realization of cash through the sale of advertising spots received under such contracts. Interest Rate and Foreign Currency Risk Management Interest Rate Swap Contracts Time Warner uses interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. At June 30, 1996, Time Warner had interest rate swap contracts to pay floating-rates of interest (average six-month LIBOR rate of 5.5%) and receive fixed-rates of interest (average rate of 5.4%) on $2.6 billion notional amount of indebtedness, which resulted in approximately 46% of Time Warner's underlying debt, and 41% of the debt of Time Warner and the Entertainment Group combined, being subject to variable interest rates. The notional amount of outstanding contracts at June 30, 1996 by year of maturity, along with the related average fixed-rates of interest to be received and the average floating-rates of interest to be paid, are as follows: 1996-$300 million (receive-4.6%; pay-5.6%); 1998-$700 million (receive-5.5%; pay-5.6%); 1999-$1.2 billion (receive-5.5%; pay-5.4%); and 2000-$400 million (receive-5.5%; pay-5.4%). At December 31, 1995, Time Warner had interest rate swap contracts on a like-amount of $2.6 billion notional amount of indebtedness. Based on the level of interest rates prevailing at June 30, 1996, the fair value of Time Warner's fixed-rate debt was less than its carrying value by $12 million and it would have cost $58 million to terminate the related interest rate swap contracts, which combined is the equivalent of an unrealized loss of $46 million. Based on the level of interest rates prevailing at December 31, 1995, the fair value of Time Warner's fixed-rate debt exceeded its carrying value by $407 million and it would have cost $9 million to terminate its interest rate swap contracts, which combined was the equivalent of an unrealized loss of $416 million. Unrealized gains or losses on debt or interest rate swap contracts are not recognized for financial reporting purposes unless the debt is retired or the contracts are terminated prior to their maturity. Changes in the unrealized gains or losses on interest rate swap contracts and debt do not result in the realization or expenditure of cash unless the contracts are terminated or the debt is retired. However, based on Time Warner's variable-rate debt and related interest rate swap contracts outstanding at June 30, 1996, each 25 basis point increase or decrease in the level of interest rates would respectively increase or decrease Time Warner's annual interest expense and related cash payments by approximately $12 million, including $7 million related to interest rate swap contracts. Such potential increases or decreases are based on certain simplifying assumptions, including a constant level of variable-rate debt and related interest rate swap contracts during the period and, for all maturities, an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period. Foreign Exchange Contracts Time Warner uses foreign exchange contracts primarily to hedge the risk that unremitted or future royalties and license fees owed to Time Warner or TWE domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, Time Warner hedges a portion of its and TWE's combined foreign currency exposures anticipated over the ensuing twelve month period. At June 30, 1996, Time Warner has effectively hedged approximately half of the combined estimated foreign currency exposures that principally relate to anticipated cash flows to be remitted to the U.S. over the ensuing twelve month period, using foreign exchange contracts that generally have maturities of six months or less, which are generally rolled over to provide continuing coverage throughout the year. Time Warner often closes foreign exchange sale contracts by purchasing an offsetting purchase contract. At June 30, 1996, Time Warner had contracts for the sale of $483 million and the purchase of $165 million of foreign currencies at fixed rates, primarily English pounds (28% of net contract value), German marks (23%), Canadian dollars (19%), French francs (14%) and Japanese yen (11%), compared to contracts for the sale of $504 million and the purchase of $140 million of foreign currencies at December 31, 1995. Unrealized gains or losses related to foreign exchange contracts are recorded in income as the market value of such contracts change; accordingly, the carrying value of foreign exchange contracts approximates market value. The carrying value of foreign exchange contracts was not material at June 30, 1996 and December 31, 1995. No cash is required to be received or paid with respect to such gains and losses until the related foreign exchange contracts are settled, generally at their respective maturity dates. For the six months ended June 30, 1996 and 1995, Time Warner recognized $11 million in gains and $26 million in losses, respectively, and TWE recognized $4 million in gains and $13 million in losses, respectively, on foreign exchange contracts, which were or are expected to be offset by corresponding decreases and increases, respectively, in the dollar value of foreign currency royalties and license fee payments that have been or are anticipated to be received in cash from the sale of U.S. copyrighted products abroad. Time Warner reimburses or is reimbursed by TWE for contract gains and losses related to TWE's foreign currency exposure. Foreign currency contracts are placed with a number of major financial institutions in order to minimize credit risk. Based on the foreign exchange contracts outstanding at June 30, 1996, each 5% devaluation of the U.S. dollar as compared to the level of foreign exchange rates for currencies under contract at June 30, 1996 would result in approximately $24 million of unrealized losses and $8 million of unrealized gains on foreign exchange contracts involving foreign currency sales and purchases, respectively. Conversely, a 5% appreciation of the U.S. dollar would result in $24 million of unrealized gains and $8 million of unrealized losses, respectively. At June 30, 1996, none of Time Warner's foreign exchange purchase contracts relates to TWE's foreign currency exposure. However, with regard to the $24 million of unrealized losses or gains on foreign exchange sale contracts, Time Warner would be reimbursed by TWE, or would reimburse TWE, respectively, for approximately $5 million related to TWE's foreign currency exposure. Consistent with the nature of the economic hedge provided by such foreign exchange contracts, such unrealized gains or losses would be offset by corresponding decreases or increases, respectively, in the dollar value of future foreign currency royalty and license fee payments that would be received in cash within the ensuing twelve month period from the sale of U.S. copyrighted products abroad. TIME WARNER INC. CONSOLIDATED BALANCE SHEET (Unaudited) June 30, December 31, 1996 1995 (millions, except per share amounts) ASSETS Current assets Cash and equivalents $ 482 $ 628 Receivables, less allowances of $746 and $786 1,356 1,755 Inventories 450 443 Prepaid expenses 936 894 Total current assets 3,224 3,720 Cash and equivalents segregated for redemption of long-term debt - 557 Investments in and amounts due to and from Entertainment Group 5,945 5,734 Other investments 2,507 2,389 Property, plant and equipment, net 1,481 1,119 Music catalogues, contracts and copyrights 1,080 1,140 Cable television franchises 3,970 1,696 Goodwill 5,825 5,213 Other assets 476 564 Total assets $24,508 $22,132 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and royalties payable $ 1,361 $ 1,427 Debt due within one year 43 34 Other current liabilities 1,358 1,566 Total current liabilities 2,762 3,027 Long-term debt 9,928 9,907 Borrowings against future stock option proceeds 225 - Deferred income taxes 3,983 3,420 Unearned portion of paid subscriptions 688 654 Other liabilities 544 508 Company-obligated mandatorily redeemable preferred securities of subsidiaries holding solely subordinated notes and debentures of the Company (a) 949 949 Series K exchangeable preferred stock, $1 par value, 1.6 million shares outstanding at June 30, 1996 and $1.636 billion liquidation preference 1,586 - Shareholders' equity Preferred stock, $1 par value, 35.6 million and 29.7 million shares outstanding, $3.559 billion and $2.994 billion liquidation preference 36 30 Common stock, $1 par value, 386.8 million and 387.7 million shares outstanding (excluding 53.2 million and 45.7 million treasury shares) 387 388 Paid-in capital 5,866 5,422 Unrealized gains on certain marketable securities 177 116 Accumulated deficit (2,623) (2,289) Total shareholders' equity 3,843 3,667 Total liabilities and shareholders' equity $24,508 $22,132 ____________ (a) Includes $374 million of preferred securities that are redeemable for cash, or at Time Warner's option, approximately 12.1 million shares of Hasbro, Inc. common stock owned by Time Warner (Note 6). See accompanying notes. TIME WARNER INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 (millions, except per share amounts) Revenues (a) $2,139 $1,907 4,207 $3,724 Cost of revenues (a)(b) 1,248 1,019 2,525 2,122 Selling, general and administrative (a)(b) 676 704 1,357 1,280 Operating expenses 1,924 1,723 3,882 3,402 Business segment operating income 215 184 325 322 Equity in pretax income of Entertainment Group (a) 93 84 209 106 Interest and other, net (a) (282) (201) (578) (356) Corporate expenses (a) (18) (19) (36) (39) Income (loss) before income taxes 8 48 (80) 33 Income tax provision (39) (56) (44) (88) Loss before extraordinary item (31) (8) (124) (55) Extraordinary loss on retirement of debt, net of $5 million and $22 million income tax benefit (9) - (35) - Net loss (40) (8) (159) (55) Preferred dividend requirements (70) (5) (104) (8) Net loss applicable to common shares $ (110) $ (13) $ (263) $ (63) Loss per common share: Loss before extraordinary item $(0.26) $(0.03) $(0.58) $(0.17) Net loss $(0.28) $(0.03) $(0.67) $(0.17) Average common shares 389.5 381.4 390.6 380.5 __________________ (a) Includes the following income (expenses) resulting from transactions with the Entertainment Group and other related companies for the three and six months ended June 30, 1996, respectively, and for the corresponding periods in the prior year: revenues- $62 million and $103 million in 1996, and $49 million and $94 million in 1995; cost of revenues- $(53) million and $(79) million in 1996, and $(25) million and $(49) million in 1995; selling, general and administrative- $5 million and $5 million in 1996, and $16 million and $29 million in 1995; equity in pretax income of Entertainment Group- $4 million and $(4) million in 1996, and $(26) million and $(60) million in 1995; interest and other, net- $(8) million and $(17) million in 1996, and $(5) million and $1 million in 1995; and corporate expenses- $18 million and $35 million in 1996, and $15 million and $30 million in 1995. (b) Includes depreciation and amortization expense of: $ 224 $ 119 $ 452 $ 231 See accompanying notes. TIME WARNER INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1996 1995 (millions) OPERATIONS Net loss $ (159) $ (55) Adjustments for noncash and nonoperating items: Extraordinary loss on retirement of debt 35 - Depreciation and amortization 452 231 Noncash interest expense 46 116 Excess of equity in pretax income of Entertainment Group over distributions (77) (101) Changes in operating assets and liabilities (216) (290) Cash provided (used) by operations 81 (99) INVESTING ACTIVITIES Investments and acquisitions (307) (228) Capital expenditures (161) (97) Investment proceeds 165 294 Cash used by investing activities (303) (31) FINANCING ACTIVITIES Borrowings 2,298 650 Debt repayments (4,074) (166) Borrowings against future stock option proceeds 225 - Repurchases of Time Warner common stock (360) - Issuance of Series K Preferred Stock 1,552 - Dividends paid (135) (73) Other 13 34 Cash provided (used) by financing activities (481) 445 INCREASE (DECREASE) IN CASH AND EQUIVALENTS (703) 315 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a) 1,185 282 CASH AND EQUIVALENTS AT END OF PERIOD $ 482 $597 _______________ (a) Includes current and noncurrent cash and equivalents at December 31, 1995. See accompanying notes. TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Description of Business Time Warner Inc. ("Time Warner" or the "Company") is the world's leading media company, whose principal business objective is to create and distribute branded information and entertainment copyrights throughout the world. Time Warner has interests in three fundamental areas of business: Entertainment, consisting principally of interests in recorded music and music publishing, filmed entertainment, broadcasting, theme parks and cable television programming; News and Information, consisting principally of interests in magazine publishing, book publishing and direct marketing; and Telecommunications, consisting principally of interests in cable television systems. Substantially all of Time Warner's interests in filmed entertainment, broadcasting, theme parks, cable television programming and a majority of its cable television systems are held through Time Warner Entertainment Company, L.P. ("TWE"), a partnership in which Time Warner owns general and limited partnership interests in 74.49% of the pro rata priority capital ("Series A Capital") and residual equity capital ("Residual Capital") of TWE and 100% of the senior priority capital ("Senior Capital") and junior priority capital ("Series B Capital") of TWE. The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by a subsidiary of U S WEST, Inc. ("U S WEST"). Time Warner does not consolidate TWE and certain related companies (the "Entertainment Group") for financial reporting purposes because of certain limited partnership approval rights related to TWE's interest in certain cable television systems. Each of the business interests within Entertainment, News and Information and Telecommunications is important to management's objective of increasing shareholder value through the creation, extension and distribution of recognizable brands and copyrights throughout the world. Such brands and copyrights include (1) copyrighted music from many of the world's leading recording artists that is produced and distributed by a family of established record labels such as Warner Bros. Records, the Atlantic and Elektra Entertainment Groups and Warner Music International, (2) the unique and extensive film and television libraries of Warner Bros. and trademarks such as the Looney Tunes characters and Batman, (3) The WB Network, a new national broadcasting network launched in 1995 as an extension of the Warner Bros. brand and as an additional distribution outlet for Warner Bros.' collection of children cartoons and television programming, (4) Six Flags, the largest regional theme park operator in the United States, in which TWE owns a 49% interest, (5) HBO and Cinemax, the leading pay television services, (6) magazine franchises such as Time, People and Sports Illustrated and direct marketing brands such as Time Life Inc. and Book-of-the-Month Club and (7) Time Warner Cable, the second largest operator of cable television systems in the U.S. The operating results of Time Warner's various business interests are presented herein as an indication of financial performance (Note 9). Except for start-up losses incurred in connection with The WB Network, Time Warner's principal business interests generate significant operating income and cash flow from operations. The cash flow from operations generated by such business interests is significantly greater than their operating income due to significant amounts of noncash amortization of intangible assets recognized in various acquisitions accounted for by the purchase method of accounting. Noncash amortization of intangible assets recorded by Time Warner's business interests, including the unconsolidated business interests of the Entertainment Group, amounted to $256 million and $199 million for the three months ended June 30, 1996 and 1995, respectively, and $523 million and $388 million for the six months ended June 30, 1996 and 1995, respectively. Basis of Presentation The accompanying financial statements are unaudited but in the opinion of management contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles applicable to interim periods. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of Time Warner for the year ended December 31, 1995. The consolidated financial statements of Time Warner reflect the acquisitions of Summit Communications Group, Inc. ("Summit") effective as of May 2, 1995, KBLCOM Incorporated ("KBLCOM") effective as of July 6, 1995 and Cablevision Industries Corporation ("CVI") and related companies effective as of January 4, 1996 (collectively, the "Cable Acquisitions"). Certain reclassifications have been made to the 1995 financial statements to conform to the 1996 presentation. Effective January 1, 1996, Time Warner adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), which established standards for the recognition and measurement of impairment losses on long-lived assets and certain intangible assets. The adoption of FAS 121 did not have a material effect on Time Warner's financial statements. 2. ENTERTAINMENT GROUP Time Warner's investment in and amounts due to and from the Entertainment Group at June 30, 1996 and December 31, 1995 consists of the following: June 30, December 31, 1996 1995 (millions) Investment in TWE $6,239 $6,179 Stock option related distributions due from TWE 137 122 Credit agreement debt due to TWE (400) (400) Other liabilities due to TWE, principally related to home video distribution (281) (354) Other receivables due from TWE 135 76 Investment in and amounts due to and from TWE 5,830 5,623 Investment in other Entertainment Group companies 115 111 Total $5,945 $5,734 TWE is a Delaware limited partnership that was capitalized on June 30, 1992 to own and operate substantially all of the Filmed Entertainment, Programming-HBO and Cable businesses previously owned by subsidiaries of Time Warner. Certain Time Warner subsidiaries are the general partners of TWE ("Time Warner General Partners"). Time Warner acquired the aggregate 11.22% limited partnership interests previously held by subsidiaries of each of ITOCHU Corporation and Toshiba Corporation in 1995 for an aggregate cost of $1.36 billion, consisting of 15 million shares of convertible preferred stock (Series G Preferred Stock, Series H Preferred Stock and Series I Preferred Stock) and $10 million in cash (the "ITOCHU/Toshiba Transaction"). Accordingly, Time Warner and certain of its wholly-owned subsidiaries collectively own general and limited partnership interests in 74.49% of the Series A Capital and Residual Capital of TWE, and 100% of the Senior Capital and Series B Capital of TWE. The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are owned by U S WEST. The ITOCHU/Toshiba Transaction was accounted for by the purchase method of accounting for business combinations. The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation. TWE reported net income of $168 million and $60 million in the six months ended June 30, 1996 and 1995, respectively, no portion of which was allocated to the limited partnership interests. Each Time Warner General Partner has guaranteed a pro rata portion of approximately $5.5 billion of TWE's debt and accrued interest at June 30, 1996, based on the relative fair value of the net assets each Time Warner General Partner contributed to TWE. Such indebtedness is recourse to each Time Warner General Partner only to the extent of its guarantee. Set forth below is summarized financial information of the Entertainment Group, which reflects the consolidation by TWE of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995, the deconsolidation of Six Flags Entertainment Corporation ("Six Flags") effective as of June 23, 1995 and the consolidation of Paragon Communications ("Paragon") effective as of July 6, 1995. TIME WARNER ENTERTAINMENT GROUP Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 (millions) Operating Statement Information Revenues $2,610 $2,435 $5,097 $4,508 Depreciation and amortization 295 283 585 513 Business segment operating income 297 274 568 475 Interest and other, net 134 140 222 304 Minority interest 52 35 102 35 Income before income taxes 93 84 209 106 Net income 72 59 170 70 Six Months Ended June 30, 1996 1995 (millions) Cash Flow Information Cash provided by operations $1,198 $ 697 Capital expenditures (781) (704) Investments and acquisitions (66) (83) Investment proceeds 196 962 Borrowings 63 235 Debt repayments (670) (237) Collections on note receivable from U S WEST 169 243 Capital distributions (132) (5) Increase in cash and equivalents 9 1,192 June 30, December 31, 1996 1995 (millions) Balance Sheet Information Cash and equivalents $ 218 $ 209 Total current assets 2,710 2,909 Total assets 18,968 18,960 Total current liabilities 3,295 3,230 Long-term debt 5,575 6,137 Minority interests 848 726 Time Warner General Partners' Senior Capital 1,483 1,426 Partners' capital 6,735 6,576 The assets and cash flows of TWE are restricted by the TWE partnership and credit agreements and are unavailable for use by the partners except through the payment of certain fees, reimbursements, cash distributions and loans, which are subject to limitations. At June 30, 1996 and December 31, 1995, the Time Warner General Partners had recorded $137 million and $122 million, respectively, of stock option related distributions due from TWE, based on closing prices of Time Warner common stock of $39.25 and $37.875, respectively. Time Warner is paid when the options are exercised. The Time Warner General Partners also receive tax-related distributions from TWE. The payment of such distributions was previously subject to restrictions until July 1995 and is now made to the Time Warner General Partners on a current basis. During the six months ended June 30, 1996, the Time Warner General Partners received distributions from TWE in the amount of $132 million, consisting of $123 million of tax-related distributions and $9 million of stock option related distributions. During the six months ended June 30, 1995, the Time Warner General Partners received $5 million of stock option related distributions from TWE. On June 23, 1995, TWE sold 51% of its interest in Six Flags to an investment group led by Boston Ventures for $204 million and received $640 million in additional proceeds from Six Flags, representing payment of certain intercompany indebtedness and licensing fees. As a result of the transaction, Six Flags has been deconsolidated and TWE's remaining 49% interest in Six Flags is accounted for under the equity method of accounting. TWE reduced debt by approximately $850 million in 1995 in connection with the transaction, and a portion of the income on the transaction has been deferred by TWE principally as a result of its guarantee of certain third-party, zero-coupon indebtedness of Six Flags due in 1999. 3. CABLE TRANSACTIONS On April 1, 1995, TWE formed a cable television joint venture with the Advance/Newhouse Partnership ("Advance/Newhouse") to which Advance/Newhouse and TWE contributed cable television systems (or interests therein) serving approximately 4.5 million subscribers, as well as certain foreign cable investments and programming investments that included Advance/Newhouse's 10% interest in Primestar Partners, L.P. ("Primestar"). TWE owns a two-thirds equity interest in the TWE-Advance/Newhouse Partnership and is the managing partner. TWE consolidates the partnership and the one-third equity interest owned by Advance/Newhouse is reflected in TWE's consolidated financial statements as minority interest. In accordance with the partnership agreement, Advance/Newhouse can require TWE to purchase its equity interest for fair market value at specified intervals following the death of both of its principal shareholders. Beginning in the third year, either partner can initiate a dissolution in which TWE would receive two-thirds and Advance/Newhouse would receive one-third of the partnership's net assets. The assets contributed by TWE and Advance/Newhouse to the partnership were recorded at their predecessor's historical cost. No gain was recognized by TWE upon the capitalization of the partnership. On May 2, 1995, Time Warner acquired Summit, which owned cable television systems serving approximately 162,000 subscribers, in exchange for the issuance of approximately 1.6 million shares of Common Stock and approximately 3.3 million shares of a new convertible preferred stock ("Series C Preferred Stock") and the assumption of $140 million of indebtedness. The acquisition was accounted for by the purchase method of accounting for business combinations; accordingly, the cost to acquire Summit of approximately $351 million was allocated to the assets acquired in proportion to their respective fair values, as follows: cable television franchises-$372 million; goodwill-$146 million; other current and noncurrent assets-$144 million; long-term debt-$140 million; deferred income taxes-$166 million; and other current liabilities-$5 million. On July 6, 1995, Time Warner acquired KBLCOM which owned cable television systems serving approximately 700,000 subscribers and a 50% interest in Paragon, which owned cable television systems serving an additional 972,000 subscribers. The other 50% interest in Paragon was already owned by TWE. To acquire KBLCOM, Time Warner issued 1 million shares of Common Stock and 11 million shares of a new convertible preferred stock ("Series D Preferred Stock") and assumed or incurred approximately $1.2 billion of indebtedness. The acquisition was accounted for by the purchase method of accounting for business combinations; accordingly, the cost to acquire KBLCOM of approximately $1.033 billion was allocated to the net assets acquired in proportion to their respective fair values, as follows: investments-$950 million; cable television franchises-$1.366 billion; goodwill-$586 million; other current and noncurrent assets-$289 million; long-term debt-$1.213 billion; deferred income taxes-$895 million; and other current liabilities-$50 million. On January 4, 1996, Time Warner acquired CVI and related companies that owned cable television systems serving approximately 1.3 million subscribers, in exchange for the issuance of approximately 2.9 million shares of common stock and approximately 6.3 million shares of new convertible preferred stock ("Series E Preferred Stock" and "Series F Preferred Stock"), as adjusted, and the assumption or incurrence of approximately $2 billion of indebtedness. The acquisition was accounted for by the purchase method of accounting for business combinations; accordingly, the cost to acquire CVI and related companies of $904 million was preliminarily allocated to the net assets acquired in proportion to estimates of their respective fair values, as follows: cable television franchises-$2.390 billion; goodwill-$688 million; other current and noncurrent assets-$481 million; long-term debt-$1.766 billion; deferred income taxes-$731 million; and other current and noncurrent liabilities-$158 million. The accompanying consolidated statement of operations includes the operating results of each business from the respective closing date of each transaction. On a pro forma basis, giving effect to (i) all of the aforementioned cable transactions, (ii) the ITOCHU/Toshiba Transaction, (iii) the 1995 and early 1996 refinancing of approximately $4 billion of public debt by Time Warner and the 1995 execution of a new $8.3 billion credit agreement, under which approximately $2.7 billion of debt assumed in the cable acquisitions was refinanced by subsidiaries of Time Warner and $2.6 billion of pre-existing bank debt was refinanced by TWE, (iv) the issuance in April 1996 of 1.6 million shares of 10-1/4% Series K exchangeable preferred stock and the use of approximately $1.55 billion of net proceeds therefrom to reduce debt, (v) the sale of 51% of TWE's interest in Six Flags and (vi) the sale or expected sale or transfer of certain unclustered cable television systems owned by TWE, as if each of such transactions had occurred at the beginning of 1995, Time Warner would have reported for the three months ended June 30, 1996 and 1995, respectively, revenues of $2.139 billion and $2.113 billion, depreciation and amortization of $224 million and $237 million, operating income of $215 million and $171 million, equity in the pretax income of the Entertainment Group of $93 million and $73 million, a loss before extraordinary item of $29 million and $50 million ($0.27 and $0.33 per common share) and a net loss of $38 million and $50 million ($.29 and $0.33 per common share). On a pro forma basis, giving effect to the transactions described above as if each had occurred at the beginning of 1995, Time Warner would have reported for the six months ended June 30, 1996 and 1995, respectively, revenues of $4.207 billion and $4.138 billion, depreciation and amortization of $452 million and $467 million, operating income of $325 million and $290 million, equity in the pretax income of the Entertainment Group of $209 million and $128 million, a loss before extraordinary item of $102 million and $94 million ($0.66 and $0.65 per common share) and a net loss of $137 million and $94 million ($0.75 and $0.65 per common share). 4. LONG-TERM DEBT In January 1996, in connection with its acquisition of CVI and related companies, Time Warner assumed $500 million of public notes and debentures of CVI and a subsidiary of Time Warner borrowed $1.5 billion under its $8.3 billion credit agreement to refinance a like-amount of other indebtedness assumed or incurred in such acquisition. In February 1996, Time Warner redeemed the remaining $1.2 billion principal amount of 8.75% Convertible Subordinated Debentures due 2015 (the "8.75% Convertible Debentures") for $1.28 billion, including redemption premiums and accrued interest thereon. The redemption was financed with (1) proceeds raised from a $575 million issuance of Company-obligated mandatorily redeemable preferred securities of a subsidiary in December 1995 and (2) $750 million of proceeds raised from the issuance in January 1996, of (i) $400 million principal amount of 6.85% debentures due 2026, which are redeemable at the option of the holders thereof in 2003, (ii) $200 million principal amount of 8.3% discount debentures due 2036, which do not pay cash interest until 2016, (iii) $166 million principal amount of 7.48% debentures due 2008 and (iv) $150 million principal amount of 8.05% debentures due 2016. In connection with the 1996 redemption of the 8.75% Convertible Debentures, Time Warner recognized an extraordinary loss of $26 million. In April 1996, Time Warner raised approximately $1.55 billion of net proceeds in a private placement of 10-1/4% Series K exchangeable preferred stock (Note 7). The proceeds were used by Time Warner to redeem $250 million principal amount of 8.75% Debentures due April 1, 2017 for approximately $265 million in May 1996 (including redemption premiums and accrued interest thereon), and to reduce bank debt of TWI Cable Inc. by approximately $1.3 billion. In connection with the redemption of the 8.75% Debentures due April 1, 2017, Time Warner recognized an extraordinary loss of $9 million in May 1996. 5. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS In connection with a newly-authorized common stock repurchase program (Note 8), Time Warner entered into a five-year, $750 million revolving credit facility (the "Stock Option Proceeds Credit Facility") in May 1996 principally to support such stock repurchases, of which up to $100 million is reserved solely for the payment of interest and fees thereunder. At June 30, 1996, Time Warner had borrowed $225 million under the Stock Option Proceeds Credit Facility. Borrowings under the Stock Option Proceeds Credit Facility generally bear interest at LIBOR plus a margin equal to 75 basis points and are generally required to be prepaid from the cash proceeds received by Time Warner from the exercise of designated employee stock options. Such prepayments will permanently reduce the borrowing availability under the facility. At August 2, 1996, based on a closing market price of Time Warner common stock of $36.50, the aggregate exercise prices of outstanding vested, "in the money" stock options was approximately $1.5 billion, representing a 2 to 1 coverage ratio over the related borrowing availability. To the extent that such stock option proceeds are not sufficient to satisfy Time Warner's obligations under the Stock Option Proceeds Credit Facility, Time Warner is generally required to repay such borrowings using proceeds from the sale of shares of its common stock held in escrow under the Stock Option Proceeds Credit Facility or, at Time Warner's election, using available cash on hand. Time Warner initially placed 36 million shares in escrow under this arrangement and may, from time to time, have up to 52.5 million shares held in escrow. Such shares are not considered to be issued and outstanding capital stock of the Company. 6. MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES In August 1995, Time Warner issued approximately 12.1 million Company-obligated mandatorily redeemable preferred securities of a wholly-owned subsidiary ("PERCS") for aggregate gross proceeds of $374 million. The sole assets of the subsidiary that is the obligor on the PERCS are $385 million principal amount of 4% subordinated notes of Time Warner due December 23, 1997. Cumulative cash distributions are payable on the PERCS at an annual rate of 4%. The PERCS are mandatorily redeemable on December 23, 1997, for an amount per PERCS equal to the lesser of $54.41, and the market value of a share of common stock of Hasbro, Inc. ("Hasbro") on December 17, 1997, payable in cash or, at Time Warner's option, Hasbro common stock. Time Warner has the right to redeem the PERCS at any time prior to December 23, 1997, at an amount per PERCS equal to $54.41 (or in certain limited circumstances the lesser of such amount and the market value of a share of Hasbro common stock at the time of redemption) plus accrued and unpaid distributions thereon and a declining premium, payable in cash or, at Time Warner's option, Hasbro common stock. Time Warner owns approximately 12.1 million shares of Hasbro common stock, which can be used by Time Warner, at its election, to satisfy its obligations under the PERCS or its obligations under its zero coupon exchangeable notes due 2012. Such zero coupon notes are exchangeable and redeemable into an aggregate 12.1 million shares of Hasbro common stock. In December 1995, Time Warner issued approximately 23 million Company-obligated mandatorily redeemable preferred securities of a wholly-owned subsidiary ("Preferred Trust Securities") for aggregate gross proceeds of $575 million. The sole assets of the subsidiary that is the obligor on the Preferred Trust Securities are $592 million principal amount of 8-7/8% subordinated debentures of Time Warner due December 31, 2025. Cumulative cash distributions are payable on the Preferred Trust Securities at an annual rate of 8-7/8%. Cash distributions may be deferred at the election of Time Warner for any period not exceeding 20 consecutive quarters. The Preferred Trust Securities are mandatorily redeemable for cash on December 31, 2025, and Time Warner has the right to redeem the Preferred Trust Securities, in whole or in part, on or after December 31, 2000, or in other certain circumstances, in each case at an amount per Preferred Trust Security equal to $25 plus accrued and unpaid distributions thereon. Time Warner has certain obligations relating to the PERCS and the Preferred Trust Securities which amount to a full and unconditional guaranty of each subsidiary's obligations with respect thereto. 7. SERIES K EXCHANGEABLE PREFERRED STOCK In April 1996, Time Warner raised approximately $1.55 billion of net proceeds in a private placement of 1.6 million shares of 10-1/4% Series K exchangeable preferred stock ("Series K Preferred Stock"). The issuance of the Series K Preferred Stock allowed the Company to realize cash proceeds through a security whose payment terms are principally linked (until a reorganization of TWE occurs, if any) to a portion of Time Warner's currently noncash-generating interest in the Series B Capital of TWE. The proceeds raised from this transaction were used by Time Warner to reduce debt. Pursuant to a registered exchange offer expected to be made, Time Warner plans to exchange the privately-placed Series K Preferred Stock for registered Series M exchangeable preferred stock with substantially identical terms. Each share of Series K Preferred Stock is entitled to a liquidation preference of $1,000 and entitles the holder thereof to receive cumulative dividends at the rate of 10-1/4% per annum, payable quarterly (1) in cash, to the extent of an amount equal to the Pro Rata Percentage (as defined below) multiplied by the amount of cash distributions received by Time Warner from TWE with respect to its interests in the Series B Capital and Residual Capital of TWE, excluding stock option related distributions and certain tax related distributions (collectively, "Eligible TWE Cash Distributions"), or (2) to the extent of any balance, at Time Warner's option, (i) in cash or (ii) in-kind, through the issuance of additional shares of Series K Preferred Stock with an aggregate liquidation preference equal to the amount of such dividends. The "Pro Rata Percentage" is equal to the ratio of (1) the aggregate liquidation preference of the outstanding shares of Series K Preferred Stock, including any accumulated and unpaid dividends thereon, to (2) Time Warner's total interest in the Series B Capital of TWE, including any undistributed priority capital return thereon. Because cash distributions to Time Warner with respect to its interests in the Series B Capital and Residual Capital of TWE are generally restricted until June 30, 1998 and are subject to additional limitations thereafter under the TWE partnership agreement, Time Warner does not expect to pay cash dividends in the foreseeable future. The Series K Preferred Stock may be redeemed at the option of Time Warner, in whole or in part, on or after July 1, 2006, subject to certain conditions, at an amount per share equal to its liquidation preference plus accumulated and accrued and unpaid dividends thereon, and a declining premium through July 1, 2010 (the "Optional Redemption Price"). Time Warner is required to redeem shares of Series K Preferred Stock representing up to 20%, 25%, 33-1/3 % and 50% of the then outstanding liquidation preference of the Series K Preferred Stock on July 1 of 2012, 2013, 2014 and 2015, respectively, at an amount equal to the aggregate liquidation preference of the number of shares to be redeemed plus accumulated and accrued and unpaid dividends thereon (the "Mandatory Redemption Price"). Total payments in respect of such mandatory redemption obligations on any redemption date are limited to an amount equal to the Pro Rata Percentage of any cash distributions received by Time Warner from TWE in the preceding year in connection with the redemption of Time Warner's interest in the Series B Capital of TWE and in connection with certain cash distributions related to Time Warner's interest in the Residual Capital of TWE. The redemption of the Series B Capital of TWE is scheduled to occur ratably over a five-year period commencing on June 30, 2011. Time Warner is required to redeem any remaining outstanding shares of Series K Preferred Stock on July 1, 2016 at the Mandatory Redemption Price; however, in the event that Time Warner's interest in the Series B Capital of TWE has not been redeemed in full prior to such final mandatory redemption date, payments in respect of the final mandatory redemption obligation of the Series K Preferred Stock in 2016 will be limited to an amount equal to the lesser of the Mandatory Redemption Price and an amount equal to the Pro Rata Percentage of the fair market value of TWE (net of taxes) attributable to Time Warner's interests in the Series B Capital and Residual Capital of TWE. Accordingly, there is no assurance that such value will result in the redemption of the Series K Preferred Stock at its full liquidation preference plus accumulated and accrued and unpaid dividends thereon. Upon a reorganization of TWE, as defined in the related certificate of designation, Time Warner must elect either to (1) exchange each outstanding share of Series K Preferred Stock for shares of a new series of 10-1/4% exchangeable preferred stock ("Series L Preferred Stock") or (2) subject to certain conditions, redeem the outstanding shares of Series K Preferred Stock at an amount per share equal to 110% of the liquidation preference thereof, plus accumulated and accrued and unpaid dividends thereon or, after July 1, 2006, at the Optional Redemption Price. The Series L Preferred Stock has terms similar to those of the Series K Preferred Stock, except that (i) Time Warner may only pay dividends in-kind until June 30, 2006, (ii) Time Warner is required to redeem the outstanding shares of Series L Preferred Stock on July 1, 2011 at an amount per share equal to the liquidation preference thereof, plus accumulated and accrued and unpaid dividends thereon and (iii) Time Warner has the option to exchange, in whole but not in part, subject to certain conditions, the outstanding shares of Series L Preferred Stock for Time Warner 10-1/4% Senior Subordinated Debentures due July 1, 2011 (the "Senior Subordinated Debentures") having a principal amount equal to the liquidation preference of the Series L Preferred Stock plus accrued and unpaid dividends thereon. Interest on the Senior Subordinated Debentures is payable in cash or, at Time Warner's option through June 30, 2006, in-kind through the issuance of additional Senior Subordinated Debentures with a principal amount equal to such interest. The Senior Subordinated Debentures may be redeemed at the option of Time Warner, in whole or in part, on or after July 1, 2006, subject to certain conditions, at an amount per debenture equal to its principal amount plus accrued and unpaid interest, and a declining premium through July 1, 2010. 8. CAPITAL STOCK Changes in shareholders' equity are as follows: Six Months Ended June 30, 1996 1995 (millions) Balance at beginning of year $3,667 $1,148 Net loss (159) (55) Common dividends declared (70) (69) Preferred dividends declared (104) (8) Repurchases of Time Warner common stock (360) - Issuance of common stock and preferred stock in the Cable Acquisitions 680 383 Unrealized gains on certain marketable equity investments 61 4 Other, principally shares issued pursuant to stock option and dividend reinvestment plans 128 76 Balance at June 30 $3,843 $1,479 In April 1996, Time Warner's Board of Directors authorized a program to repurchase, from time to time, up to 15 million shares of Time Warner common stock. The common stock repurchased under the program is expected to be used to satisfy future share issuances related to the exercise of existing employee stock options. Actual repurchases in any period will be subject to market conditions. As of June 30, 1996, Time Warner had acquired approximately 8.8 million shares of its common stock for an aggregate cost of approximately $360 million. Such repurchases were principally funded with borrowings under the Stock Option Proceeds Credit Facility (Note 5) and available cash and equivalents. 9. SEGMENT INFORMATION Time Warner's businesses are conducted in three fundamental areas: Entertainment, consisting principally of interests in recorded music and music publishing, filmed entertainment, broadcasting, theme parks and cable television programming; News and Information, consisting principally of interests in magazine publishing, book publishing and direct marketing; and Telecommunications, consisting principally of interests in cable television systems. Time Warner's interests in filmed entertainment, broadcasting, theme parks, cable television programming and a majority of its cable television systems are held by the Entertainment Group, which is not consolidated for financial reporting purposes. Information as to the operations of Time Warner and the Entertainment Group in different business segments is set forth below. The operating results of Time Warner reflect the acquisitions of Summit effective as of May 2, 1995, KBLCOM effective as of July 6, 1995 and CVI and related companies effective as of January 4, 1996. The operating results of the Entertainment Group reflect the formation of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995, the deconsolidation of Six Flags effective as of June 23, 1995 and the consolidation of Paragon effective as of July 6, 1995. The operating results of Six Flags prior to June 23, 1995 are reported separately to facilitate comparability. Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Revenues (millions) Time Warner: Publishing $1,038 $ 928 $1,917 $1,759 Music 876 986 1,859 1,977 Cable 230 - 447 - Intersegment elimination (5) (7) (16) (12) Total $2,139 $1,907 $4,207 $3,724 Entertainment Group: Filmed Entertainment $1,272 $1,154 $2,490 $2,338 Six Flags Theme Parks - 204 - 227 Broadcasting - The WB Network 18 3 33 6 Programming - HBO 456 396 875 786 Cable 961 760 1,908 1,338 Intersegment elimination (97) (82) (209) (187) Total $2,610 $2,435 $5,097 $4,508 Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Operating Income (millions) Time Warner: Publishing $ 125 $ 114 $ 181 $ 169 Music 70 70 125 153 Cable 20 - 19 - Total $ 215 $ 184 $ 325 $ 322 Entertainment Group: Filmed Entertainment $ 79 $ 59 $ 152 $ 126 Six Flags Theme Parks - 31 - 29 Broadcasting - The WB Network (12) (12) (36) (33) Programming - HBO 83 70 159 137 Cable 147 126 293 216 Total $ 297 $ 274 $ 568 $ 475 Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Depreciation of Property, (millions) Plant and Equipment Time Warner: Publishing $ 17 $ 15 $ 32 $ 28 Music 19 24 42 47 Cable 33 - 66 - Total $ 69 $ 39 $140 $ 75 Entertainment Group: Filmed Entertainment $ 33 $ 23 $ 65 $ 45 Six Flags Theme Parks - 19 - 20 Broadcasting - The WB Network - - - - Programming - HBO 4 5 9 9 Cable 157 117 300 207 Total $194 $164 $374 $281 Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Amortization of Intangible Assets (1) (millions) Time Warner: Publishing $ 14 $ 9 $ 23 $ 18 Music 76 71 144 138 Cable 65 - 145 - Total $155 $ 80 $312 $156 Entertainment Group: Filmed Entertainment $ 29 $ 35 $ 60 $ 69 Six Flags Theme Parks - 8 - 11 Broadcasting - The WB Network - - - - Programming - HBO - - - - Cable 72 76 151 152 Total $101 $119 $211 $232 __________________ (1) Amortization includes all amortization relating to the acquisitions of Warner Communications Inc. ("WCI") in 1989, the American Television and Communications Corporation ("ATC") minority interest in 1992, the acquisitions of KBLCOM and Summit in 1995 and CVI and related companies in 1996, and to other business combinations accounted for by the purchase method. 10. CONTINGENCIES Pending legal proceedings are substantially limited to litigation incidental to businesses of Time Warner and alleged damages in connection with class action lawsuits. In the opinion of counsel and management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements of Time Warner. 11. ADDITIONAL FINANCIAL INFORMATION Additional financial information is as follows: Six Months Ended June 30, 1996 1995 (millions) Interest expense $471 $429 Cash payments made for interest 426 289 Cash payments made for income taxes 169 141 Tax-related distributions received from TWE 123 - Income tax refunds received 36 14 Noncash dividends 36 - TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION TWE is engaged principally in two fundamental areas of business: Entertainment, consisting principally of interests in filmed entertainment, broadcasting, theme parks and cable television programming; and Telecommunications, consisting principally of interests in cable television systems. TWE also manages the telecommunications properties owned by Time Warner and the combined cable television operations are conducted under the name of Time Warner Cable. Capitalized terms are as defined and described in the accompanying consolidated financial statements, or elsewhere herein. Significant Transactions In 1996, certain transactions were completed by Time Warner and TWE that have had an effect on TWE's results of operations and financial condition. Such transactions include: * The acquisition by Time Warner of Cablevision Industries Corporation ("CVI") and related companies on January 4, 1996, which strengthened Time Warner Cable's geographic clusters of cable television systems and substantially increased the number of cable subscribers managed by Time Warner Cable. Time Warner Cable now serves approximately 11.8 million subscribers in neighborhoods passing nearly 20% of the television homes in the U.S. * The closing of certain previously-announced sales by TWE of unclustered cable television systems which raised approximately $90 million of net proceeds for debt reduction. Including the 1995 sale of 51% of its interest in Six Flags Entertainment Corporation ("Six Flags"), TWE has now completed transactions that have raised approximately $1.1 billion for debt reduction. The nature of these transactions and their impact on the results of operations and financial condition of TWE are further discussed below. Use of EBITDA The following comparative discussion of the results of operations and financial condition of TWE includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the filmed entertainment and cable businesses of significant amounts of amortization of intangible assets recognized in Time Warner's $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992 and other business combinations accounted for by the purchase method. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for the businesses of TWE, and when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. RESULTS OF OPERATIONS EBITDA and operating income for TWE for the three and six months ended June 30, 1996 and 1995 are as follows: Three Months Ended June 30, Six Months Ended June 30, EBITDA Operating Income EBITDA Operating Income 1996 1995 1996 1995 1996 1995 1996 1995 (millions) Filmed Entertainment $140 $109 $ 79 $ 52 $ 271 $230 $ 149 $119 Six Flags Theme Parks - 58 - 31 - 60 - 29 Broadcasting - The WB Network (12) (12) (12) (12) (36) (33) (36) (33) Programming - HBO 87 74 83 70 168 145 159 137 Cable 376 312 147 125 744 556 293 205 Total $591 $541 $297 $266 $1,147 $958 $565 $457 Three Months Ended June 30, 1996 Compared to the Three Months Ended June 30, 1995 TWE had revenues of $2.608 billion, and net income of $74 million for the three months ended June 30, 1996, compared to revenues of $2.392 billion and net income of $56 million for the three months ended June 30, 1995. On a pro forma basis, giving effect to (i) the 1995 formation of the TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of approximately $2.6 billion of pre-existing bank debt, (iii) the 1995 consolidation of Paragon, (iv) the 1995 reacquisition of the Time Warner Service Partnership Assets, (v) the 1995 sale of 51% of TWE's interest in Six Flags and (vi) the sale or expected sale or transfer of certain unclustered cable television systems owned by TWE, as if each of such transactions had occurred at the beginning of 1995, TWE would have reported for the three months ended June 30, 1995, revenues of $2.317 billion, depreciation and amortization of $259 million, operating income of $241 million and net income of $47 million. No pro forma financial information has been presented for TWE for the three months ended June 30, 1996 because all of such transactions are already reflected, in all material respects, in the historical financial statements of TWE. As discussed more fully below, TWE's historical operating results in 1996 as compared to pro forma results in 1995 reflect an overall increase in operating income generated by its business segments, offset in part by a decrease in investment-related income and an increase in minority interest expense related to the TWE-Advance/Newhouse Partnership. On a historical basis, the positive effect from such underlying operating trends was slightly mitigated by the lack of contribution of Six Flags's operating results in 1996 which exceeded interest savings on lower average debt levels related to management's debt reduction program. As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $21 million and $25 million in the three months ended June 30, 1996 and 1995, respectively, have been provided in respect of the operations of TWE's domestic and foreign subsidiary corporations. Filmed Entertainment. Revenues increased to $1.270 billion, compared to $1.151 billion in the second quarter of 1995. EBITDA increased to $140 million from $109 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $61 million in 1996 and $57 million in 1995. Operating income increased to $79 million from $52 million. Revenues benefited from increases in worldwide theatrical, home video and television distribution operations. Domestic theatrical revenues in 1996 were led by the success of Twister and exceeded the prior year's performance despite difficult comparisons to successful films such as Batman Forever. EBITDA and operating income benefited from the revenue gains. Six Flags Theme Parks. As a result of TWE's sale of 51% of its interest in Six Flags, the operating results of Six Flags have been deconsolidated effective as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is accounted for under the equity method of accounting. Broadcasting - The WB Network. The WB Network recorded an operating loss of $12 million on $18 million of revenues in the second quarter of 1996, compared to $12 million of an operating loss on $3 million of revenues in the second quarter of 1995. The increase in revenues, as well as a corresponding increase in costs, primarily resulted from the expansion of programming in September 1995 to two nights of primetime scheduling, and the unveiling of Kids' WB!, the network's animated programming lineup on Saturday mornings and weekdays. Due to the start-up nature of this new broadcast operation, losses are expected to continue. Programming - HBO. Revenues increased to $456 million, compared to $392 million in the second quarter of 1995. EBITDA increased to $87 million from $74 million. Depreciation and amortization amounted to $4 million in 1996 and 1995. Operating income increased to $83 million from $70 million. Revenues benefited primarily from a significant increase in subscriptions. EBITDA and operating income improved principally as a result of the revenue gains. Cable. Revenues increased to $961 million, compared to $724 million in the second quarter of 1995. EBITDA increased to $376 million from $312 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $229 million in 1996 and $187 million in 1995. Operating income increased to $147 million from $125 million. Revenues and operating results benefited from the consolidation of Paragon effective as of July 6, 1995. Excluding such effect, revenues benefited from an aggregate increase of 5% in basic cable and Primestar-related, direct broadcast satellite subscribers, increases in regulated cable rates as permitted under Time Warner Cable's "social contract" with the Federal Communications Commission (the "FCC") and increases in pay-per-view and advertising revenues. Excluding the effect of consolidating Paragon, EBITDA and operating income increased as a result of the revenue gains, offset in part, with respect to operating income only, by higher depreciation and amortization relating to increased capital spending. Interest and Other, Net. Interest and other, net, decreased to $132 million in the second quarter of 1996, compared to $135 million in the second quarter of 1995. Interest expense decreased to $117 million, compared to $146 million in the second quarter of 1995, principally as a result of interest savings on lower average debt levels related to management's debt reduction program and lower short-term, floating-rates of interest paid on borrowings under TWE's former and existing bank credit agreements. There was other expense, net, of $15 million in the second quarter of 1996, compared to other income, net, of $11 million in 1995, principally due to a decrease in investment-related income, including a reduction in interest income resulting from lower average cash balances and lower average principal amounts due under the note receivable from U S WEST. Six Months Ended June 30, 1996 Compared to the Six Months Ended June 30, 1995 TWE had revenues of $5.093 billion and net income of $168 million for the six months ended June 30, 1996, compared to revenues of $4.438 billion and net income of $60 million for the six months ended June 30, 1995. On a pro forma basis, giving effect to (i) the 1995 formation of the TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of approximately $2.6 billion of pre-existing bank debt, (iii) the 1995 consolidation of Paragon, (iv) the 1995 reacquisition of the Time Warner Service Partnership Assets, (v) the 1995 sale of 51% of TWE's interest in Six Flags and (vi) the sale or expected sale or transfer of certain unclustered cable television systems owned by TWE, as if each of such transactions had occurred at the beginning of 1995, TWE would have reported for the six months ended June 30, 1995, revenues of $4.583 billion, depreciation and amortization of $528 million, operating income of $460 million and net income of $77 million. No pro forma financial information has been presented for TWE for the six months ended June 30, 1996 because all of such transactions are already reflected, in all material respects, in the historical financial statements of TWE. As discussed more fully below, TWE's historical operating results in 1996 as compared to pro forma results in 1995 reflect an overall increase in operating income generated by its business segments and an increase in investment-related income, offset in part by an increase in minority interest expense related to the TWE-Advance/Newhouse Partnership. On a historical basis, such underlying operating trends were enhanced by interest savings in 1996 on lower average debt levels related to management's debt reduction program, and were offset in part by an increase in minority interest expense related to the operations of the TWE-Advance/Newhouse Partnership for a full six-month period. As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $39 million in the six months ended June 30, 1996, and $36 million in the six months ended June 30, 1995, have been provided in respect of the operations of TWE's domestic and foreign subsidiary corporations. Filmed Entertainment. Revenues increased to $2.486 billion, compared to $2.334 billion in the first six months of 1995. EBITDA increased to $271 million from $230 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $122 million in 1996 and $111 million in 1995. Operating income increased to $149 million from $119 million. Revenues benefited from increases in worldwide home video and consumer products operations. Lower domestic theatrical revenues in the first quarter of 1996 were overcome by the second quarter domestic box office performance of theatrical releases, led by the success of Twister. EBITDA and operating income benefited from the revenue gains. Six Flags Theme Parks. As a result of TWE's sale of 51% of its interest in Six Flags, the operating results of Six Flags have been deconsolidated effective as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is accounted for under the equity method of accounting. Broadcasting - The WB Network. The WB Network recorded an operating loss of $36 million on $33 million of revenues in the first six months of 1996, compared to $33 million of an operating loss on $6 million of revenues in the first six months of 1995. The increased revenues and operating losses are primarily due to the expansion of programming in September 1995 to two nights of primetime scheduling, and the unveiling of Kids' WB!, the network's animated programming lineup on Saturday mornings and weekdays. Due to the start-up nature of this new broadcast operation, losses are expected to continue. Programming - HBO. Revenues increased to $875 million, compared to $777 million in the first six months of 1995. EBITDA increased to $168 million from $145 million. Depreciation and amortization amounted to $9 million in 1996 and $8 million in 1995. Operating income increased to $159 million from $137 million. Revenues benefited primarily from a significant increase in subscriptions. EBITDA and operating income improved principally as a result of the revenue gains. Cable. Revenues increased to $1.908 billion, compared to $1.281 billion in the first six months of 1995. EBITDA increased to $744 million from $556 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $451 million in 1996 and $351 million in 1995. Operating income increased to $293 million from $205 million. Revenues and operating results benefited from the contribution of the TWE-Advance/Newhouse Partnership for a full six-month period and the consolidation of Paragon effective as of July 6, 1995. Excluding such effects, revenues benefited from an aggregate increase of 5% in basic cable and Primestar-related, direct broadcast satellite subscribers, increases in regulated cable rates as permitted under Time Warner Cable's "social contract" with the FCC and increases in pay-per-view and advertising revenues. Excluding the TWE-Advance/Newhouse Partnership and Paragon effects noted above, EBITDA and operating income increased as a result of the revenue gains, offset in part, with respect to operating income only, by higher depreciation and amortization relating to increased capital spending. Interest and Other, Net. Interest and other, net, decreased to $221 million in the first six months of 1996, compared to $296 million in the first six months of 1995. Interest expense decreased to $239 million, compared to $296 million in the first six months of 1995, principally as a result of interest savings on lower average debt levels related to management's debt reduction program and lower short-term, floating-rates of interest paid on borrowings under TWE's former and existing bank credit agreements. Other income, net, increased to $18 million in the first six months of 1996, principally due to an overall increase in investment-related income resulting from gains on the sale of certain unclustered cable systems recognized in 1996 in connection with management's debt reduction program, which more than exceeded a reduction in interest income resulting from lower average cash balances and lower average principal amounts due under the note receivable from U S WEST. FINANCIAL CONDITION AND LIQUIDITY June 30, 1996 Financial Condition TWE had $5.6 billion of debt, $1.5 billion of Time Warner General Partners' Senior Capital and $6.6 billion of partners' capital at June 30, 1996, compared to $6.2 billion of debt, $1.4 billion of Time Warner General Partners' Senior Capital and $6.5 billion of partners' capital (net of the $169 million uncollected portion of the note receivable from U S WEST) at December 31, 1995. Cash and equivalents were $218 million at June 30, 1996, compared to $209 million at December 31, 1995, reducing the debt-net-of-cash amounts for TWE to $5.4 billion and $6 billion, respectively. Debt Reduction Program In the first six months of 1996, TWE closed certain previously-announced sales of unclustered cable television systems which raised approximately $90 million of proceeds for debt reduction. Including the 1995 sale of 51% of its interest in Six Flags, TWE has now completed transactions that have raised approximately $1.1 billion for debt reduction. Cash Flows In the first six months of 1996, TWE's cash provided by operations amounted to $1.197 billion and reflected $1.147 billion of EBITDA from the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable businesses and $364 million related to a reduction in working capital requirements, other balance sheet accounts and noncash items, less $247 million of interest payments, $32 million of income taxes and $35 million of corporate expenses. Cash provided by operations of $725 million in the first six months of 1995 reflected $958 million of business segment EBITDA and $132 million related to a reduction in working capital requirements, other balance sheet accounts and noncash items, less $301 million of interest payments, $34 million of income taxes and $30 million of corporate expenses. Cash used by investing activities was $650 million in the first six months of 1996, compared to cash provided by investing activities of $256 million in the first six months of 1995, principally as a result of a $757 million decrease in investment proceeds realized in 1995 in connection with management's debt reduction program. Capital expenditures increased to $781 million in the first six months of 1996, compared to $622 million in the first six months of 1995, principally as a result of higher cable capital spending as discussed more fully below. Cash used by financing activities was $538 million in the first six months of 1996, compared to cash provided by financing activities of $211 million in the first six months of 1995, principally as a result of a $607 million net reduction in debt in 1996 and a $102 million increase in distributions paid to Time Warner, offset in part by a $74 million decrease in collections on the note receivable from U S WEST. Management believes that TWE's operating cash flow, cash and equivalents and additional borrowing capacity are sufficient to meet its capital and liquidity needs for the foreseeable future. Cable Capital Spending Since the beginning of 1994, Time Warner Cable has been engaged in a plan to upgrade the technological capability and reliability of its cable television systems and develop new services, which it believes will position the business for sustained, long-term growth. Capital spending by TWE's Cable division amounted to $610 million in the six months ended June 30, 1996, compared to $433 million in the six months ended June 30, 1995, and was financed in part through collections on the note receivable from U S WEST of $169 million and $243 million, respectively. Cable capital spending by TWE's Cable division is budgeted to be approximately $700 million for the remainder of 1996 and is expected to be funded principally by cable operating cash flow. In exchange for certain flexibility in establishing cable rate pricing structures for regulated services that went into effect on January 1, 1996 and consistent with Time Warner Cable's long-term strategic plan, Time Warner Cable has agreed with the FCC to invest a total of $4 billion in capital costs in connection with the upgrade of its cable infrastructure, which is expected to be substantially completed over the next five years. The agreement with the FCC covers all of the cable operations of Time Warner Cable, including the owned or managed cable television systems of Time Warner, TWE and the TWE-Advance/Newhouse Partnership. Management expects to continue to finance such level of investment principally through the growth in cable operating cash flow derived from increases in subscribers and cable rates, bank credit agreement borrowings and the development of new revenue streams from expanded programming options, high speed data transmission, telephony and other services. Warner Bros. Backlog Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of theatrical and television product for pay cable, network, basic cable and syndicated television exhibition, amounted to $1.601 billion at June 30, 1996, compared to $1.056 billion at December 31, 1995 (including amounts relating to HBO of $208 million at June 30, 1996 and $175 million at December 31, 1995). Warner Bros.' backlog increased principally as a result of the licensing of the hit television series Friends and ER for domestic syndication and cable television exhibition beginning in 1998. Because backlog generally relates to contracts for the licensing of theatrical and television product which have already been produced, the recognition of revenue for such completed product is principally only dependent upon the commencement of the availability period for telecast under the terms of the related licensing agreement. In addition, cash licensing fees are collected periodically over the term of the related licensing agreements. Accordingly, the portion of backlog for which cash advances have not already been received has significant off-balance sheet asset value as a source of future funding. The backlog excludes advertising barter contracts, which are also expected to result in the future realization of cash through the sale of advertising spots received under such contracts. Foreign Currency Risk Management Time Warner uses foreign exchange contracts primarily to hedge the risk that unremitted or future license fees owed to TWE domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, Time Warner hedges a portion of its foreign currency exposures anticipated over the ensuing twelve month period, including those related to TWE. At June 30, 1996, Time Warner has effectively hedged approximately half of TWE's total estimated foreign currency exposures that principally relate to anticipated cash flows to be remitted to the U.S. over the ensuing twelve month period, using foreign exchange contracts that generally have maturities of three months or less, which generally are rolled over to provide continuing coverage throughout the year. TWE is reimbursed by or reimburses Time Warner for Time Warner contract gains and losses related to TWE's foreign currency exposure. Time Warner often closes foreign exchange sale contracts by purchasing an offsetting purchase contract. At June 30, 1996, Time Warner had contracts for the sale of $483 million and the purchase of $165 million of foreign currencies at fixed rates and maturities of three months or less. Of Time Warner's $318 million net sale contract position, none of the foreign exchange purchase contracts and $98 million of the foreign exchange sale contracts related to TWE's foreign currency exposure, primarily Japanese yen (21% of net contract position related to TWE), French francs (25%), German marks (12%) and Canadian dollars (18%), compared to a net sale contract position of $113 million of foreign currencies at December 31, 1995. Unrealized gains or losses related to foreign exchange contracts are recorded in income as the market value of such contracts change; accordingly, the carrying value of foreign exchange contracts approximates market value. The carrying value of foreign exchange contracts was not material at June 30, 1996 and December 31, 1995. No cash is required to be received or paid with respect to such gains and losses until the related foreign exchange contracts are settled, generally at their respective maturity dates. For the six months ended June 30, 1996 and 1995, TWE recognized $4 million in gains and $13 million in losses, respectively, on foreign exchange contracts, which were or are expected to be offset by corresponding increases in the dollar value of foreign currency license fee payments that have been or are anticipated to be received in cash from the sale of U.S. copyrighted products abroad. Time Warner places foreign currency contracts with a number of major financial institutions in order to minimize credit risk. Based on Time Warner's outstanding foreign exchange contracts related to TWE's exposure outstanding at June 30, 1996, each 5% devaluation of the U.S. dollar as compared to the level of foreign exchange rates for currencies under contract at June 30, 1996 would result in approximately $5 million of unrealized losses on foreign exchange contracts. Conversely, a 5% appreciation of the U.S. dollar as compared to the level of foreign exchange rates for currencies under contract at June 30, 1996 would result in $5 million of unrealized gains on contracts. Consistent with the nature of the economic hedge provided by such foreign exchange contracts, such unrealized gains or losses would be offset by corresponding decreases or increases, respectively, in the dollar value of future foreign currency license fee payments that would be received in cash within the ensuing twelve month period from the sale of U.S. copyrighted products abroad. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED BALANCE SHEET (Unaudited) June 30, December 31, 1996 1995 (millions) ASSETS Current assets Cash and equivalents $ 218 $ 209 Receivables, including $281 and $354 due from Time Warner, less allowances of $343 and $365 1,439 1,635 Inventories 891 904 Prepaid expenses 160 161 Total current assets 2,708 2,909 Noncurrent inventories 1,958 1,909 Loan receivable from Time Warner 400 400 Investments 400 383 Property, plant and equipment, net 5,585 5,205 Cable television franchises 3,212 3,360 Goodwill 4,058 4,119 Other assets 592 620 Total assets $18,913 $18,905 LIABILITIES AND PARTNERS' CAPITAL Current liabilities Accounts payable $ 603 $ 697 Participations and programming costs 1,274 1,090 Other current liabilities 1,401 1,427 Total current liabilities 3,278 3,214 Long-term debt 5,575 6,137 Other long-term liabilities, including $272 and $198 due to Time Warner 1,093 924 Minority interests 848 726 Time Warner General Partners' Senior Capital 1,483 1,426 Partners' capital Contributed capital 7,537 7,522 Undistributed partnership earnings (deficit) (901) (875) Note receivable from U S WEST - (169) Total partners' capital 6,636 6,478 Total liabilities and partners' capital $18,913 $18,905 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 (millions) Revenues (a) $2,608 $2,392 $5,093 $4,438 Cost of revenues (a)(b) 1,730 1,611 3,395 3,051 Selling, general and administrative (a)(b) 581 515 1,133 930 Operating expenses 2,311 2,126 4,528 3,981 Business segment operating income 297 266 565 457 Interest and other, net (a) (132) (135) (221) (296) Minority interest (52) (35) (102) (35) Corporate services (a) (18) (15) (35) (30) Income before income taxes 95 81 207 96 Income taxes (21) (25) (39) (36) Net income $ 74 $ 56 $ 168 $ 60 __________________ (a) Includes the following income (expenses) resulting from transactions with the partners of TWE and other related companies for the three and six months ended June 30, 1996, respectively, and for the corresponding periods in the prior year: revenues- $76 million and $99 million in 1996, $32 million and $58 million in 1995; cost of revenues- $(14) million and $(38) million in 1996, $(36) million and $(53) million in 1995; selling, general and administrative- $(7) million and $(9) million in 1996, $(23) million and $(40) million in 1995; interest and other, net- $7 million and $16 million in 1996, $6 million and $6 million in 1995; and corporate services- $(18) million and $(35) million in 1996, $(15) million and $(30) million in 1995. (b) Includes depreciation and amortization expense of: $ 294 $ 275 $ 582 $ 501 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1996 1995 (millions) OPERATIONS Net income $ 168 $ 60 Adjustments for noncash and nonoperating items: Depreciation and amortization 582 501 Changes in operating assets and liabilities 447 164 Cash provided by operations 1,197 725 INVESTING ACTIVITIES Investments and acquisitions (65) (75) Capital expenditures (781) (622) Investment proceeds 196 953 Cash provided (used) by investing activities (650) 256 FINANCING ACTIVITIES Borrowings 63 235 Debt repayments (670) (237) Capital distributions (132) (30) Collections on note receivable from U S WEST 169 243 Other 32 - Cash provided (used) by financing activities (538) 211 INCREASE IN CASH AND EQUIVALENTS 9 1,192 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 209 1,071 CASH AND EQUIVALENTS AT END OF PERIOD $ 218 $2,263 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Description of Business Time Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), is engaged principally in two fundamental areas of business: Entertainment, consisting principally of interests in filmed entertainment, broadcasting, theme parks and cable television programming; and Telecommunications, consisting principally of interests in cable television systems. Each of the business interests within Entertainment and Telecommunications is important to TWE's objective of increasing partner value through the creation, extension and distribution of recognizable brands and copyrights throughout the world. Such brands and copyrights include (1) the unique and extensive film and television libraries of Warner Bros. and trademarks such as the Looney Tunes characters and Batman, (2) The WB Network, a new national broadcasting network launched in 1995 as an extension of the Warner Bros. brand and as an additional distribution outlet for Warner Bros.' collection of children's cartoons and television programming, (3) Six Flags, the largest regional theme park operator in the United States, in which TWE owns a 49% interest, (4) HBO and Cinemax, the leading pay television services and (5) Time Warner Cable, the second largest operator of cable television systems in the U.S. The operating results of TWE's various business interests are presented herein as an indication of financial performance (Note 7). Except for start-up losses incurred in connection with The WB Network, TWE's principal business interests generate significant operating income and cash flow from operations. The cash flow from operations generated by such business interests is significantly greater than their operating income due to significant amounts of noncash amortization of intangible assets recognized principally in Time Warner Inc.'s ("Time Warner") $14 billion acquisition of Warner Communications Inc. ("WCI") in 1989 and $1.3 billion acquisition of the minority interest in American Television and Communications Corporation ("ATC") in 1992, a portion of which cost was allocated to TWE in accordance with the pushdown method of accounting. Non-cash amortization of intangible assets recorded by TWE's businesses amounted to $101 million and $119 million for the three months ended June 30, 1996 and 1995, respectively, and $211 million and $232 million for the six months ended June 30, 1996 and 1995, respectively. Subsidiaries of Time Warner are the general partners of TWE ("Time Warner General Partners"). During 1995, Time Warner acquired the aggregate 11.22% limited partnership interests previously held by subsidiaries of each of ITOCHU Corporation and Toshiba Corporation. As a result, Time Warner and certain of its wholly-owned subsidiaries collectively own general and limited partnership interests in 74.49% of the pro rata priority capital ("Series A Capital") and residual equity capital ("Residual Capital") of TWE, and 100% of the senior priority capital ("Senior Capital") and junior priority capital ("Series B Capital") of TWE. The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by a subsidiary of U S WEST, Inc. ("U S WEST"). Basis of Presentation The accompanying financial statements are unaudited but in the opinion of management contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the periods presented, in conformity with generally accepted accounting principles applicable to interim periods. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of TWE for the year ended December 31, 1995. The consolidated financial statements reflect (i) the formation by TWE of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995, (ii) the deconsolidation of Six Flags Entertainment Corporation ("Six Flags") effective as of June 23, 1995 and (iii) the consolidation of Paragon Communications ("Paragon") effective as of July 6, 1995. Certain reclassifications have been made to the prior year's financial statements to conform to the 1996 presentation. Effective January 1, 1996, TWE adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121") which established standards for the recognition and measurement of impairment losses on long-lived assets and certain intangible assets. The adoption of FAS 121 did not have a material effect on TWE's financial statements. 2. TWE-ADVANCE/NEWHOUSE PARTNERSHIP On April 1, 1995, TWE formed a cable television joint venture with the Advance/Newhouse Partnership ("Advance/Newhouse") to which Advance/Newhouse and TWE contributed cable television systems (or interests therein) serving approximately 4.5 million subscribers, as well as certain foreign cable investments and programming investments that included Advance/Newhouse's 10% interest in Primestar Partners, L.P. ("Primestar"). TWE owns a two-thirds equity interest in the TWE-Advance/Newhouse Partnership and is the managing partner. TWE consolidates the partnership and the one-third equity interest owned by Advance/Newhouse is reflected in TWE's balance sheet as minority interest. In accordance with the partnership agreement, Advance/Newhouse can require TWE to purchase its equity interest for fair market value at specified intervals following the death of both of its principal shareholders. Beginning in the third year, either partner can initiate a dissolution in which TWE would receive two-thirds and Advance/Newhouse would receive one-third of the partnership's net assets. The assets contributed by TWE and Advance/Newhouse to the partnership were recorded at their predecessor's historical cost, which, with respect to Advance/Newhouse, consisted of assets contributed to the partnership of approximately $338 million and liabilities assumed by the partnership of approximately $9 million. No gain was recognized by TWE upon the capitalization of the partnership. The accompanying consolidated statement of operations includes the operating results of the Advance/Newhouse businesses from the date of contribution to the partnership. On a pro forma basis, giving effect to (i) the 1995 formation of the TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of approximately $2.6 billion of pre-existing bank debt, (iii) the 1995 consolidation of Paragon, (iv) the 1995 reacquisition of the Time Warner Service Partnership Assets (Note 6), (v) the 1995 sale of 51% of TWE's interest in Six Flags and (vi) the sale or expected sale or transfer of certain unclustered cable television systems owned by TWE, as if each of such transactions had occurred at the beginning of 1995, TWE would have reported for the three and six months ended June 30, 1995, respectively, revenues of $2.317 billion and $4.583 billion, depreciation and amortization of $259 million and $528 million, operating income of $241 million and $460 million and net income of $47 million and $77 million. 3. SIX FLAGS On June 23, 1995, TWE sold 51% of its interest in Six Flags to an investment group led by Boston Ventures for $204 million and received $640 million in additional proceeds from Six Flags, representing payment of certain intercompany indebtedness and licensing fees. As a result of the transaction, Six Flags has been deconsolidated and TWE's remaining 49% interest in Six Flags is accounted for under the equity method of accounting. TWE reduced debt by approximately $850 million in 1995 in connection with the transaction, and a portion of the income on the transaction has been deferred by TWE principally as a result of its guarantee of certain third-party, zero-coupon indebtedness of Six Flags due in 1999. 4. INVENTORIES Inventories consist of: June 30, 1996 December 31, 1995 Current Noncurrent Current Noncurrent (millions) Film costs: Released, less amortization $ 353 $ 447 $ 529 $ 437 Completed and not released 192 53 74 22 In process and other 63 454 11 396 Library, less amortization - 690 - 717 Programming costs, less amortization 204 314 219 337 Merchandise 79 - 71 - Total $ 891 $1,958 $ 904 $1,909 5. LONG-TERM DEBT Long-term debt consists of: June 30, December 31, 1996 1995 (millions) Credit agreement, weighted average interest rates of 6.0% and 6.4% $1,384 $2,185 Commercial paper, weighted average interest rates of 5.8% and 6.2% 397 157 Publicly held notes and debentures 3,781 3,781 Other 13 14 Total $5,575 $6,137 Each Time Warner General Partner has guaranteed a pro rata portion of approximately $5.5 billion of TWE's debt and accrued interest thereon based on the relative fair value of the net assets each Time Warner General Partner contributed to TWE. Such indebtedness is recourse to each Time Warner General Partner only to the extent of its guarantee. 6. PARTNERS' CAPITAL Changes in partners' capital were as follows: Six Months Ended June 30, 1996 1995 (millions) Balance at beginning of year $6,478 $6,233 Net income 168 60 Capital contributions 15 - Distributions (147) (316) Allocation of income to Time Warner General Partners' Senior Capital (57) (67) Collections on note receivable from U S WEST 169 243 Other 10 1 Balance at June 30 $6,636 $6,154 In September 1995, TWE reacquired substantially all of the assets of the Time Warner Service Partnerships, subject to the liabilities relating thereto, (the "Time Warner Service Partnership Assets") in exchange for Series B Capital interests in TWE equal to approximately $400 million. The reacquisition was recorded for financial statement purposes based on the $124 million historical cost of the Time Warner Service Partnership Assets. Prior to such reacquisition, the Time Warner Service Partnerships owned and operated certain assets of TWE which had been distributed to the Time Warner General Partners in September 1993 in order to ensure compliance with the Modification of Final Judgment entered on August 24, 1982 by the United States District Court for the District of Columbia applicable to U S WEST and its affiliated companies, which may have included TWE. Prior to September 1995, TWE was required to make quarterly cash distributions related to its Series B Capital in the amount of $12.5 million to the Time Warner General Partners ("TWSP Distributions"), which the General Partners were then required to contribute to the Time Warner Service Partnerships. TWE is required to make distributions to reimburse the partners for income taxes at statutory rates based on their allocable share of taxable income, and to reimburse Time Warner for its stock options granted to employees of TWE based on the amount by which the market price of Time Warner common stock exceeds the option exercise price on the exercise date or, with respect to options granted prior to the TWE capitalization on June 30, 1992, the greater of the exercise price and the $27.75 market price of Time Warner common stock at the time of the TWE capitalization. TWE accrues a stock option distribution and a corresponding liability with respect to unexercised options when the market price of Time Warner common stock increases during the accounting period, and reverses previously-accrued stock option distributions and the corresponding liability when the market price of Time Warner common stock declines. During the six months ended June 30, 1996, TWE accrued $123 million of tax-related distributions and $24 million of stock option distributions, based on closing prices of Time Warner common stock of $39.25 at June 30, 1996 and $37.875 at December 31, 1995. During the six months ended June 30, 1995, TWE accrued $25 million of TWSP Distributions and $156 million of tax-related distributions, as well as $135 million of stock option distributions as a result of an increase at that time in the market price of Time Warner common stock. In the six months ended June 30, 1996, TWE paid distributions to the Time Warner General Partners in the amount of $132 million, consisting of $123 million of tax-related distributions and $9 million of stock option related distributions. In the six months ended June 30, 1995, TWE paid the Time Warner General Partners distributions in the amount of $30 million, consisting of $25 million of TWSP Distributions and $5 million of stock option related distributions. 7. SEGMENT INFORMATION TWE's businesses are conducted in two fundamental areas of business: Entertainment, consisting principally of interests in filmed entertainment, broadcasting, theme parks and cable television programming; and Telecommunications, consisting principally of interests in cable television systems. Information as to the operations of TWE in different business segments is set forth below. The operating results of TWE reflect the formation of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995, the deconsolidation of Six Flags effective as of June 23, 1995 and the consolidation of Paragon effective as of July 6, 1995. The operating results of Six Flags prior to June 23, 1995 are reported separately to facilitate comparability. Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 (millions) Revenues Filmed Entertainment $1,270 $1,151 $2,486 $2,334 Six Flags Theme Parks - 204 - 227 Broadcasting - The WB Network 18 3 33 6 Programming - HBO 456 392 875 777 Cable 961 724 1,908 1,281 Intersegment elimination (97) (82) (209) (187) Total $2,608 $2,392 $5,093 $4,438 Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 (millions) Operating Income Filmed Entertainment $ 79 $ 52 $ 149 $ 119 Six Flags Theme Parks - 31 - 29 Broadcasting - The WB Network (12) (12) (36) (33) Programming - HBO 83 70 159 137 Cable 147 125 293 205 Total $ 297 $ 266 $ 565 $ 457 Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 (millions) Depreciation of Property, Plant and Equipment Filmed Entertainment $ 32 $ 22 $ 62 $ 42 Six Flags Theme Parks - 19 - 20 Broadcasting - The WB Network - - - - Programming - HBO 4 4 9 8 Cable 157 111 300 199 Total $ 193 $ 156 $ 371 $ 269 Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 (millions) Amortization of Intangible Assets (1) Filmed Entertainment $ 29 $ 35 $ 60 $ 69 Six Flags Theme Parks - 8 - 11 Broadcasting - The WB Network - - - - Programming - HBO - - - - Cable 72 76 151 152 Total $ 101 $ 119 $ 211 $ 232 ______________ (1) Amortization includes amortization relating to the acquisition of WCI in 1989 and the ATC minority interest in 1992 and to other business combinations accounted for by the purchase method. 8. COMMITMENTS AND CONTINGENCIES Pending legal proceedings are substantially limited to litigation incidental to the businesses of TWE. In the opinion of counsel and management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements of TWE. 9. ADDITIONAL FINANCIAL INFORMATION Additional financial information is as follows: Six Months Ended June 30, 1996 1995 (millions) Interest expense $239 $296 Cash payments made for interest 247 301 Cash payments made for income taxes (net) 32 34 PART II. OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to the litigation entitled U S WEST, INC. et al. v. TIME WARNER INC., et al., described on page 46 of Time Warner's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 (the "March 1996 Form 10-Q"). On June 6, 1996, the Court of Chancery of the State of Delaware rendered an opinion dismissing with prejudice all of the claims asserted by U S WEST and reserving decision on the counterclaims interposed by Time Warner. U S WEST has not appealed the decision of the Court of Chancery, and the period for filing a notice of appeal has closed. On July 8, 1996, a purported class action was filed in the Circuit Court of Blount County, Tennessee at Maryville, entitled ROBINSON AND SILVEY v. EMI MUSIC DISTRIBUTION, INC., SONY MUSIC ENTERTAINMENT, INC., WARNER ELEKTRA ATLANTIC CORPORATION, UNI DISTRIBUTION CORPORATION, BERTELSMANN MUSIC GROUP, INC. and POLYGRAM GROUP DISTRIBUTION, INC., No. L-10462. The action is brought on behalf of persons who, from June 26, 1992 to the present, purchased recorded music compact discs ("CDS") indirectly from defendants in Tennessee, Alabama, California, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New Mexico, North Dakota, South Dakota, West Virginia, Wisconsin and the District of Columbia, and alleges that the defendants are engaged in a conspiracy to fix the prices of CDS, in violation of the antitrust, unfair trade practices and consumer protection statutes of each of those jurisdictions. Also on July 8, the Circuit Court issued an order conditionally granting class certification, subject to defendants' right to move to decertify the class. On July 25, 1996, Warner Elektra Atlantic Corporation was served with an antitrust civil investigative demand from the Office of the Attorney General of the State of Florida that calls for the production of documents in connection with an investigation to determine whether there "is, has been or may be" a "conspiracy to fix the prices" of CDS or conduct consisting of "unfair methods of competition" or "unfair trade practices" in the sale and marketing of CDS. Reference is made to the actions filed in Superior Court, Fulton County, Georgia, and consolidated as LEWIS, et al. v. TURNER BROADCASTING SYS., INC., et al., described on page 46 of the March 1996 Form 10-Q. The Superior Court heard arguments on defendants' motion for judgment based on the pleadings on June 17, 1996. Reference is made to the litigation entitled SAMUEL D. MOORE, et al. v. AMERICAN FEDERATION OF TELEVISION AND RADIO ARTISTS, et al., described on page I-43 of Time Warner's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"). In July 1996, the plaintiffs filed a motion to amend the complaint, which the recording companies will oppose. The proposed second amended complaint is based on substantially the same allegations as the prior complaint and seeks to recover substantial monetary damages, liquidated damages, equitable relief, and attorney's fees from the recording companies. The proposed complaint includes a claim asserted derivatively on behalf of the American Federation of Television and Radio Artists Health and Retirement Fund as well as a renewal of some of the claims that had previously been dismissed from this lawsuit. Reference is made to the litigation entitled SAMUEL D. MOORE, et al. v. SONY MUSIC ENTERTAINMENT GROUP, et al., described on page I-43 of the 1995 Form 10-K. The plaintiffs have filed an appeal from the District Court for the Southern District of New York's order of dismissal and have filed the motion described in the preceding paragraph to amend the complaint in the SAMUEL D. MOORE, et al. v. AMERICAN FEDERATION OF TELEVISION AND RADIO ARTISTS, et al. lawsuit. Reference is made to the description of the Federal lawsuit filed by TWE in November 1992 seeking to overturn major provisions of the 1992 Cable Act, described on page I-42 of the 1995 Form 10-K. Argument on the appeal to the United States Supreme Court of the December 1995 decision of the District Court for the District of Columbia upholding the "must-carry" requirements of the 1992 Cable Act has been set for October 7, 1996. Item 4. Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Stockholders of Time Warner was held on May 16, 1996 (the "1996 Annual Meeting"). (b) (i) The following were elected directors of Time Warner at the 1996 Annual Meeting: Beverly Sills Greenough Carla A. Hills Reuben Mark Francis T. Vincent, Jr. (ii) The following continue as directors of Time Warner: Merv Adelson Lawrence B. Buttenweiser David T. Kearns Gerald M. Levin Michael A. Miles J. Richard Munro Richard D. Parsons Donald S. Perkins Raymond S. Troubh (c) The following matters were voted upon at the 1996 Annual Meeting: (i) Election of directors for terms expiring in 1999: Broker For Withheld Non-Votes Beverly Sills Greenough 379,744,375 8,584,724 0 Carla A. Hills 380,217,114 8,111,985 0 Reuben Mark 380,302,725 8,026,374 0 Francis T. Vincent, Jr. 380,037,805 8,291,294 0 (ii) Approval of the Time Warner Inc. 1996 Stock Option Plan for Non-Employee Directors: Broker Votes For Votes Against Abstentions Non-Votes 326,072,622 56,169,055 6,087,422 0 (iii) Approval of the appointment of Ernst & Young LLP as independent auditors of Time Warner for 1996: Broker Votes For Votes Against Abstentions Non-Votes 385,858,867 1,549,493 920,739 0 (iv) Stockholder resolution relating to the use of chlorine-free paper: Broker Votes For Votes Against Abstentions Non-Votes 18,231,697 315,833,635 17,647,793 36,615,974 (v) Stockholder resolution urging an amendment to the bylaws of Time Warner which would require that the chairman of the board be an independent director not formerly the chief executive of Time Warner: Broker Votes For Votes Against Abstentions Non-Votes 61,066,333 279,632,038 11,014,754 36,615,974 (vi) Stockholder resolution calling for the election of directors annually and not by classes: Broker Votes For Votes Against Abstentions Non-Votes 101,412,025 185,960,115 64,340,985 36,615,974 (d) Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference. (b) Reports on Form 8-K. (i) Time Warner filed a Current Report on Form 8-K dated April 2, 1996, reporting in Item 5 that it had issued a press release dated April 2, 1996 announcing that it had raised $1.5 billion for debt reduction by issuing 1.5 million shares of Series K Exchangeable Preferred Stock under Rule 144A. (ii) Time Warner filed a Current Report on Form 8-K dated April 4, 1996, reporting in Item 5 that it had issued a press release dated April 4, 1996 announcing that its offering of Series K Exchangeable Preferred Stock had been increased to 1.6 million shares as a result of the exercise by the underwriters of an option to purchase an additional 100,000 shares to cover overallotments. (iii) Time Warner filed a Current Report on Form 8-K dated April 11, 1996, filing pursuant to Item 7 thereof the Certificate of Designation of the 10-1/4% Series K Exchangeable Preferred Stock and the related Form of Senior Subordinated Indenture. (iv) Time Warner filed a Current Report on Form 8-K dated May 15, 1996, setting forth in Item 7 certain pro forma financial statements of Time Warner and Time Warner Entertainment Group at March 31, 1996, reflecting certain transactions entered into by Time Warner and TWE during 1995 and 1996. (v) Time Warner filed a Current Report on Form 8-K dated August 6, 1996, reporting in Item 5 that it had issued a press release dated August 6, 1996 announcing that as a result of a printer's error, a preliminary draft of a report on Form 8-K relating to the acquisition of Turner Broadcasting System, Inc. was inadvertently filed through the SEC's electronic filing system. TIME WARNER INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Time Warner Inc. (Registrant) By: /s/ Richard J. Bressler Name: Richard J. Bressler Title: Senior Vice President and Chief Financial Officer Dated: August 14, 1996 EXHIBIT INDEX Pursuant to Item 601 of Regulation S-K Exhibit No. Description of Exhibit 10.1 Credit Agreement dated as of May 23, 1996 (the "Credit Agreement") among Time Warner Inc. (the "Registrant"), the several lenders from time to time parties thereto and Chemical Bank, as administrative agent. 10.2 Escrow Agreement dated as of May 23, 1996 among the Registrant, The Bank of New York, as escrow agent and Chemical Bank, as administrative agent under the Credit Agreement. 10.3 Time Warner Inc. 1996 Stock Option Plan for Non-Employee Directors (which is incorporated by reference to Annex A to the Registrant's definitive Proxy Statement dated March 29, 1996, used in connection with the Registrant's 1996 Annual Meeting of Stockholders). 27 Financial Data Schedule. EX-27 2 ART. 5 FDS FOR 2ND QTR 10-Q
5 TIME WARNER INC. Exhibit 27 FINANCIAL DATA SCHEDULE This schedule contains summary financial information extracted from the financial statements of Time Warner Inc. for the six months ended June 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 482 0 2,102 746 450 3,224 2,427 946 24,508 2,762 9,928 387 0 36 3,420 24,508 4,207 4,207 2,225 2,225 0 0 471 (80) 44 (124) 0 (35) 0 (159) (0.67) (0.67)
EX-10.1 3 EXECUTION COPY CREDIT AGREEMENT among TIME WARNER INC., The Several Lenders from Time to Time Parties Hereto and CHEMICAL BANK, as Administrative Agent Dated as of May 23, 1996 TABLE OF CONTENTS Page SECTION 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . .1 1.1 Defined Terms. . . . . . . . . . . . . . . . . . . .1 1.2 Other Definitional Provisions. . . . . . . . . . . 17 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS. . . . . . . . . . 18 2.1 Revolving Credit Commitments . . . . . . . . . . . 18 2.2 Procedure for Borrowing. . . . . . . . . . . . . . 19 2.3 Commitment and Other Fees. . . . . . . . . . . . . 19 2.4 Termination or Reduction of Commitments. . . . . . 20 2.5 Repayment of Loans; Evidence of Debt; Limited Recourse . . . . . . . . . . . . . . . . . . . . 20 2.6 Optional and Mandatory Prepayments . . . . . . . . 21 2.7 Conversion and Continuation Options. . . . . . . . 23 2.8 Minimum Amounts and Maximum Number of Tranches . . 23 2.9 Interest Rates and Payment Dates . . . . . . . . . 24 2.10 Computation of Interest and Fees . . . . . . . . . 24 2.11 Inability to Determine Interest Rate . . . . . . . 25 2.12 Pro Rata Treatment and Payments. . . . . . . . . . 25 2.13 Illegality . . . . . . . . . . . . . . . . . . . . 26 2.14 Requirements of Law. . . . . . . . . . . . . . . . 26 2.15 Taxes. . . . . . . . . . . . . . . . . . . . . . . 28 2.16 Indemnity. . . . . . . . . . . . . . . . . . . . . 30 2.17 Change of Lending Office . . . . . . . . . . . . . 30 2.18 Replacement of Lenders under Certain Circumstances. . . . . . . . . . . . . . . . . . 30 SECTION 3. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . 31 3.1 Financial Condition. . . . . . . . . . . . . . . . 31 3.2 No Change. . . . . . . . . . . . . . . . . . . . . 32 3.3 Corporate Existence; Compliance with Law . . . . . 32 3.4 Corporate Power; Authorization; Enforceable Obligations. . . . . . . . . . . . . . . . . . . 32 3.5 No Legal Bar . . . . . . . . . . . . . . . . . . . 33 3.6 No Material Litigation . . . . . . . . . . . . . . 33 3.7 No Default . . . . . . . . . . . . . . . . . . . . 33 3.8 Ownership of Property; Liens . . . . . . . . . . . 33 3.9 Intellectual Property. . . . . . . . . . . . . . . 33 3.10 No Burdensome Restrictions . . . . . . . . . . . . 34 3.11 Taxes. . . . . . . . . . . . . . . . . . . . . . . 34 3.12 Federal Regulations. . . . . . . . . . . . . . . . 34 3.13 ERISA. . . . . . . . . . . . . . . . . . . . . . . 34 3.14 Investment Company Act; Other Regulations. . . . . 35 3.15 Purpose of Loans . . . . . . . . . . . . . . . . . 35 3.16 Environmental Matters. . . . . . . . . . . . . . . 35 3.17 Escrowed Stock . . . . . . . . . . . . . . . . . . 36 -i- SECTION 4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . 37 4.1 Conditions to Initial Loans. . . . . . . . . . . . 37 4.2 Conditions to Each Loan. . . . . . . . . . . . . . 39 SECTION 5. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . 39 5.1 Financial Statements . . . . . . . . . . . . . . . 40 5.2 Certificates; Other Information. . . . . . . . . . 40 5.3 Payment of Obligations . . . . . . . . . . . . . . 41 5.4 Maintenance of Existence . . . . . . . . . . . . . 41 5.5 Maintenance of Property; Insurance . . . . . . . . 42 5.6 Inspection of Property; Books and Records; Discussions. . . . . . . . . . . . . . . . . . . 42 5.7 Notices. . . . . . . . . . . . . . . . . . . . . . 42 5.8 Environmental Laws . . . . . . . . . . . . . . . . 43 5.9 Maintenance of Escrow Agreement; Compliance with Ratios; Undertakings to Deliver Common Stock . . 43 5.10 Directions to Escrow Agent; Release of Escrowed Stock. . . . . . . . . . . . . . . . . . . . . . 45 5.11 Stock Option Plans . . . . . . . . . . . . . . . . 46 SECTION 6. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . 46 6.1 Limitation on Liens. . . . . . . . . . . . . . . . 47 6.2 Limitation on Fundamental Changes. . . . . . . . . 47 6.3 Limitation on Sale of Assets . . . . . . . . . . . 47 SECTION 7. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . 47 7.1 Events of Default. . . . . . . . . . . . . . . . . 47 7.2 Special Remedy . . . . . . . . . . . . . . . . . . 50 SECTION 8. THE ADMINISTRATIVE AGENT . . . . . . . . . . . . . 50 8.1 Appointment. . . . . . . . . . . . . . . . . . . . 50 8.2 Delegation of Duties . . . . . . . . . . . . . . . 50 8.3 Exculpatory Provisions . . . . . . . . . . . . . . 50 8.4 Reliance by Administrative Agent . . . . . . . . . 51 8.5 Notice of Default. . . . . . . . . . . . . . . . . 51 8.6 Non-Reliance on Administrative Agent and Other Lenders. . . . . . . . . . . . . . . . . . . . . 52 8.7 Indemnification. . . . . . . . . . . . . . . . . . 52 8.8 Administrative Agent in Its Individual Capacity. . 53 8.9 Successor Administrative Agent . . . . . . . . . . 53 SECTION 9. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . 53 9.1 Amendments and Waivers . . . . . . . . . . . . . . 53 9.2 Notices. . . . . . . . . . . . . . . . . . . . . . 54 9.3 No Waiver; Cumulative Remedies . . . . . . . . . . 55 9.4 Survival of Representations and Warranties . . . . 55 9.5 Payment of Expenses and Taxes. . . . . . . . . . . 55 9.6 Successors and Assigns; Participations and Assignments. . . . . . . . . . . . . . . . . . . 56 9.7 Consent to Assignment to TW Inc. . . . . . . . . . 59 -ii- 9.8 Adjustments to Number of Shares of Common Stock and Stock Price. . . . . . . . . . . . . . . . . 60 9.9 Adjustments; Set-off . . . . . . . . . . . . . . . 60 9.10 Counterparts . . . . . . . . . . . . . . . . . . . 61 9.11 Severability . . . . . . . . . . . . . . . . . . . 61 9.12 Integration. . . . . . . . . . . . . . . . . . . . 61 9.13 GOVERNING LAW. . . . . . . . . . . . . . . . . . . 62 9.14 Submission To Jurisdiction; Waivers. . . . . . . . 62 9.15 Acknowledgements . . . . . . . . . . . . . . . . . 62 9.16 WAIVERS OF JURY TRIAL. . . . . . . . . . . . . . . 63 SECTION 10. PROCEDURES TO INCREASE BASE COMMITMENT . . . . . . 63 10.1 Increase in Base Maximum Commitment Amount . . . . 63 10.2 Individual Lender Responsibility . . . . . . . . . 64 SCHEDULES Schedule I Commitments; Addresses for Notices Schedule II List of Options EXHIBITS Exhibit A Form of Note Exhibit B Form of Escrow Agreement Exhibit C Borrowing Certificate Exhibit D-1 Form of Opinion of Cravath, Swaine & Moore, counsel to the Borrower Exhibit D-2 Form of Opinion of Peter R. Haje, Esq., general counsel of the Borrower Exhibit E Form of Borrowing Base Certificate Exhibit F Form of Assignment and Acceptance -iii- CREDIT AGREEMENT, dated as of May 23, 1996 among TIME WARNER INC., a Delaware corporation (together with its successors and permitted assigns, the "Borrower", except that after the assumption provided for in subsection 9.7, the "Borrower" shall mean TW Inc. and its successors and permitted assigns), the several banks and other financial institutions from time to time parties to this Agreement (collectively, the "Lenders") and Chemical Bank, a New York banking corporation, as administrative agent for the Lenders hereunder. W I T N E S S E T H : WHEREAS, the Borrower has requested that the Lenders extend a revolving credit facility to the Borrower in an aggregate principal amount up to $750,000,000; and WHEREAS, the Lenders have indicated their willingness to extend such a facility to the Borrower on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "ABR": for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by Chemical as its prime rate in effect at its principal office in New York City (the Prime Rate not being intended to be the lowest rate of interest charged by Chemical in connection with extensions of credit to debtors); "Base CD Rate" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) a fraction, the numerator of which is one and the denominator of which is one minus the C/D Reserve Percentage and (b) the C/D Assessment Rate; "Three-Month Secondary CD Rate" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board of Governors of the Federal Reserve System (the "Board") through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical 2 Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 A.M., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it; and "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. Any change in the ABR due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "ABR Loans": Loans the rate of interest applicable to which is based upon the ABR. "Administrative Agent": Chemical, together with its affiliates, as the arranger of the Commitments and as the agent for the Lenders under this Agreement and the other Loan Documents. "Affiliate": as to any Person, any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Aggregate Loan Value": when used in reference to Escrowed Stock and to Options, means the aggregate Loan Value thereof determined (i) in the case of Escrowed Stock, based upon the aggregate amount thereof in the Escrow Account at the close of business on the Business Day 3 immediately preceding the relevant Valuation Date and based upon the Loan Value thereof as of the Trading Day immediately preceding such Valuation Date and (ii) in the case of Options, based upon the unexercised Options as of the close of business on the last Business Day of the week immediately preceding the relevant Valuation Date, provided that whether or not such Options are "in the money" and vested shall be determined as of, and based upon the Loan Value of the Common Stock as of, the Trading Day immediately preceding such Valuation Date. "Agreement": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Applicable Margin": 0.75% per annum. "Assignee": as defined in subsection 9.6(c). "Available Commitment": as to any Lender at any time, an amount equal to the excess, if any, of (a) the amount of such Lender's Commitment over (b) the aggregate principal amount of all Loans made by such Lender then outstanding. "Base Maximum Commitment Amount": at any date of determination an amount equal to the excess, if any, of the Maximum Commitment Amount over the aggregate Notional Reduction Amounts for all Trigger Events occurring on or prior to such date as such amount may be increased pursuant to subsection 10.1. "Borrower": as defined in the preamble to this Agreement. "Borrowing Base Calculation": the calculation of the Ratios pursuant to subsections 2.1(a)(1) and (2). "Borrowing Base Certificate": as defined in subsection 5.2(c). "Borrowing Date": any Business Day specified in a notice pursuant to subsection 2.2 as a date on which the Borrower requests the Lenders to make Loans hereunder. "Business": as defined in subsection 3.16(b). "Business Day": a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close and, with respect to any Eurodollar Loan, a day on which dealings in foreign currencies and exchange between banks may be carried on in London, England. 4 "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "C/D Assessment Rate": for any day as applied to any ABR Loan, the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund maintained by the Federal Deposit Insurance Corporation (the "FDIC") classified as well-capitalized and within supervisory subgroup "B" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. section 327.4 (or any successor provision) to the FDIC (or any successor) for the FDIC's (or such successor's) insuring time deposits at offices of such institution in the United States. "C/D Reserve Percentage": for any day as applied to any ABR Loan, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) (the "Board"), for determining the maximum reserve requirement for a Depositary Institution (as defined in Regulation D of the Board) in respect of new non-personal time deposits in Dollars having a maturity of 30 days or more. "Change in Law": (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof after the date of this Agreement or (c) compliance by any Lender or the Administrative Agent with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Chemical": Chemical Bank. "Closing Date": the date on which the conditions precedent set forth in subsection 4.1 shall be satisfied and the initial Loans shall have been made hereunder. "Closing Date Margin Requirement": Common Stock with an Aggregate Loan Value equal to two times the Maximum Commitment Amount on the Closing Date. "Code": the Internal Revenue Code of 1986, as amended from time to time. 5 "Commitment": as to any Lender, the obligation of such Lender to make Loans to the Borrower hereunder in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule I, as such amount may be reduced from time to time in accordance with the provisions of this Agreement. "Commitment Percentage": as to any Lender at any time, the percentage which such Lender's Commitment then constitutes of the Maximum Commitment Amount (or, at any time after the Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Loans then outstanding constitutes of the aggregate principal amount of the Loans then outstanding). "Commitment Period": the period from and including the date hereof to but not including the Termination Date or such earlier date on which the Commitments shall terminate as provided herein. "Common Stock": the shares of common stock of the Borrower, as such may be modified pursuant to subsection 9.8. "Commonly Controlled Entity": an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code. "Compliance Ratio Period": any period during the Commitment Period commencing with the Valuation Date on which the ratio of (x) the Aggregate Loan Value of the Escrowed Stock to (y) the Covered Amount (calculated as of the close of business on the Business Day immediately preceding such Valuation Date and after giving effect to any requested borrowing and any prepayment hereunder to be made on such Valuation Date), is greater than 1.70 to 1, as set forth in the Borrowing Base Certificate delivered in respect of such Valuation Date and ending on the earlier of (a) the date on which a Default or Event of Default shall have occurred and (b) the Business Day immediately succeeding the Valuation Date on which the ratio of (x) the Aggregate Loan Value of the Escrowed Stock to (y) the Covered Amount (calculated as of the close of business on the Business Day immediately preceding such Valuation Date and after giving effect to any requested borrowing and any prepayment hereunder to be made on such Valuation Date), is equal to or less than 1.70 to 1, as set forth in the Borrowing Base Certificate delivered in respect of such Valuation Date. 6 "Consolidated Amortization Expense": for any period, for any Person, the amortization expense of such Person and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP. "Consolidated Cash Flow": for any period, for any Person, (a) the Consolidated Net Income of such Person for such period, plus (b) to the extent deducted in calculating Consolidated Net Income of such Person for such Period, the sum of (without duplication) (i) Consolidated Depreciation Expense, (ii) Consolidated Amortization Expense, (iii) Consolidated Interest Expense, (iv) income tax expense of such Person and its Subsidiaries, each as determined in accordance with GAAP after eliminating all intercompany items and (v) non-recurring non-cash items, minus (c) to the extent included in calculating Consolidated Net Income of such Person for such period, interest income, all as determined on a consolidated basis for such Person and its Subsidiaries in accordance with GAAP. "Consolidated Depreciation Expense": for any period, for any Person, the depreciation expense of such Person and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense": for any period, for any Person, the interest expense of such Person and its consolidated Subsidiaries, including, without duplication, total interest expense for such period (including that attributable to Financing Leases in accordance with GAAP) with respect to all outstanding Indebtedness of such Person and its consolidated Subsidiaries, including all capitalized interest, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, as such amount may be increased or decreased by the net income or loss from Interest Rate Agreements for such period determined in accordance with GAAP, determined on a consolidated basis in accordance with GAAP, all determined on a consolidate basis for such period taken as a single accounting period. "Consolidated Net Income": for any period, for any Person, the net income (or loss) of such Person and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP; provided, however, that the following, without duplication, shall be excluded: (a) the income (or loss) of any Person that is not a Subsidiary of such Person and in which any other Person (other than such Person or any of its Subsidiaries) has a joint interest; (b) the income (or loss) 7 of any Person accrued prior to the date it becomes a Subsidiary of such Person or is merged into or consolidated with such Person or any of its Subsidiaries or such Person's assets are acquired by such Person or any of its Subsidiaries; (c) any income of any Subsidiary of such Person to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of such income is not at the time permitted by operation of the terms of its charter or any agreement or instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Subsidiary, (d) dividends, interest, income or other distributions or payments on any investment in or with respect to any Person which is not a Subsidiary of such Person, (e) the income (or loss) realized by such Person or any of its Subsidiaries from dispositions of assets other than in the ordinary course of business (including as the result of the sale of any business assets, business segment or business operations), (f) the income resulting from any write-up of any asset, (g) the aggregate net gain (or loss) during such period arising from any revaluation (but not sale) of readily marketable securities, (h) the aggregate net gain (or loss) during such period arising from extraordinary transactions and (i) the income (or loss) from discontinued operations. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Covered Amount": as defined in subsection 2.1. "Current Reg. U Loan Value": as of any date of determination thereof, is an amount equal to 50% of the Aggregate Loan Value of the Escrowed Stock determined as of the Trading Day preceding the date of such determination. "Default": any of the events specified in subsection 7.1, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Disclosure Documents": as to the Borrower, all filings made with the Securities and Exchange Commission pursuant to Section 13(a) of the Securities Exchange Act of 1934 since January 1, 1996 and on or prior to the Closing Date. "Dollars" and "$": dollars in lawful currency of the United States of America. 8 "Environmental Laws": any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "Escrow Account": shall mean the account established by the Escrow Agent to hold the Escrowed Stock. "Escrow Agent": The Bank of New York, a New York banking institution, and its successors as Escrow Agent under the Escrow Agreement. "Escrow Agreement": the Escrow Agreement to be executed and delivered by the Borrower, the Escrow Agent and the Administrative Agent, substantially in the form of Exhibit B, as the same may be amended, supplemented or otherwise modified from time to time. "Escrowed Stock": at any date of determination, Common Stock held by the Escrow Agent pursuant to the Escrow Agreement at such date. "Eurocurrency Reserve Requirements": for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such System. "Eurodollar Base Rate": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, the rate per annum equal to the rate at which Chemical is offered Dollar deposits at or about 10:00 A.M., New York City time, two Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations in respect of its Eurodollar Loans are then being conducted for 9 delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its Eurodollar Loan to be outstanding during such Interest Period. "Eurodollar Loans": Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "Eurodollar Rate": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): Eurodollar Base Rate 1.00 - Eurocurrency Reserve Requirements "Event of Default": any of the events specified in subsection 7.1, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Excluded Taxes": shall mean, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder (a) income or franchise taxes imposed on (or measured by) its net income by the jurisdiction under the laws of which it is organized, or the jurisdiction in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits or similar tax imposed by the United States if such Lender's applicable lending office is located in the United States and (c) in the case of a Foreign Lender, any U.S. withholding tax imposed on amounts payable to such Foreign Lender under this Agreement because of its failure or inability to comply with subsection 2.15(d), unless (and to the extent that) (i) such withholding tax liability arises or is increased by reason of a Change in Law occurring after such Foreign Lender becomes a Lender under this Agreement or (ii) such Foreign Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such withholding tax liability pursuant to subsection 2.15(a). "Federal Funds Effective Rate": as defined in the definition of "ABR" contained in this subsection. "Financing Lease": any lease of property, real or personal, the obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of such lessee. 10 "Foreign Lender": with respect to any Loan, shall mean any Lender making such Loan that is organized under the laws of a jurisdiction other than the United States. "GAAP": generally accepted accounting principles in the United States of America in effect from time to time. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee Obligation": as to any Person (the "guaranteeing person"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or 11 determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "Indebtedness": of any Person at any date, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (b) any other indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument, (c) all obligations of such Person under Financing Leases, (d) all obligations of such Person in respect of acceptances issued or created for the account of such Person and (e) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof. "Insolvency": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. "Interest Component": at any date of determination, shall mean three months interest on the Loans calculated using the weighted average interest rate then applicable to the Loans at such date (after giving effect to any requested borrowing hereunder and using, for any such requested borrowing, the Borrower's estimate of the interest rate to be applicable thereto). "Interest Payment Date": (a) as to any ABR Loan, the last day of each March, June, September and December, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period, and (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day which is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period. "Interest Period": with respect to any Eurodollar Loan: (i) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or notice of 12 conversion, as the case may be, given with respect thereto; and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are subject to the following: (1) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (2) any Interest Period that would otherwise extend beyond the Termination Date shall end on the Termination Date; and (3) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. "Interest Rate Agreement": any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate futures contract, interest rate option contract or other similar agreement or arrangement designed to manage the exposure of a Person to or any of its Subsidiaries to fluctuating interest rates. "Interest Sublimit": when the Maximum Commitment Amount is: (A) $600,000,000 or more, $100,000,000; (B) less than $600,000,000 but equal to or more than $400,000,000, $75,000,000; (C) less than $400,000,000 but equal to or more than $200,000,000, $50,000,000; and 13 (D) less than $200,000,000, $25,000,000. "Lenders": as defined in the preamble to this Agreement. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any Financing Lease having substantially the same economic effect as any of the foregoing). "Loan": as defined in subsection 2.1. "Loan Documents": this Agreement, any Notes and the Escrow Agreement. "Loan Value": when used in reference to Common Stock, means the current market price per share of the Common Stock as of the Trading Day immediately preceding the relevant Valuation Date and based upon the aggregate amount of Escrowed Stock in the Escrow Account as of the Business Day immediately preceding such Valuation Date; when used in reference to Options, means the exercise price of unexercised vested Options that are "in the money" determined (x) with respect to the existence of unexercised Options, as of the close of business on the last Business Day of the week immediately preceding the relevant Valuation Date, (y) with respect to whether or not such Options are "in the money", based on the Loan Value of the Common Stock as of the Trading Day immediately preceding such Valuation Date and (z) with respect to whether or not such Options are vested, as of the close of business on the Trading Day immediately preceding such Valuation Date. The current market price per share on (a) any Trading Day, shall be deemed to be the reported last sale price for any such Trading Day and (b) any other date, shall be deemed to be the reported last sale price for the Trading Day before the date in question. The reported last sales price for each day shall be the reported last sales price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange Composite Tape or, if such security is not listed or admitted to trading on the New York Stock Exchange at such time, on the principal national securities exchange on which such security is listed or admitted to trading or, if not 14 listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or, if such security is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the security on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such date as furnished by any New York Stock Exchange member firm regularly making a market in such security selected for such purpose by the Board of Directors of the Borrower or a committee thereof or, if no such quotations are available, the fair market value of such Common Stock as determined by a New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board of Directors of the Borrower or a committee thereof. "Majority Lenders": at any time, Lenders the Commitment Percentages of which aggregate more than 50%. "Material Adverse Effect": a material adverse effect on (a) the business, results of operations, condition (financial or otherwise), properties or liabilities of the Borrower and its Subsidiaries taken as a whole or (b) the rights or remedies of the Administrative Agent or the Lenders or the ability of the Borrower to perform its obligations to the Administrative Agent or the Lenders under any Loan Document. "Material Subsidiary": of any Person, shall mean each Subsidiary of such Person which, either alone or together with the Subsidiaries of such Subsidiary, meets any of the following conditions: (i) the investments of such Person and its Subsidiaries in, or their proportionate share (based on their equity interests) of the fair value or book value of the total assets (after intercompany eliminations) of, the Subsidiary in question exceeds 5% of the fair market or book value, respectively, of the total assets of such Person and its Subsidiaries; (ii) the equity of such Person and its Subsidiaries in the revenues of the Subsidiary in question exceeds 5% of the revenues from continuing operations of such Person and its Subsidiaries (on a consolidated basis) for the twelve-month period ending on the last day of such Person's most recently ended fiscal quarter; or 15 (iii) the equity of such Person and its Subsidiaries in the Consolidated Cash Flow of the Subsidiary in question exceeds 5% of the Consolidated Cash Flow of such Person and its Subsidiaries for the twelve-month period ended on the last day of such Person's most recently ended fiscal quarter. "Materials of Environmental Concern": any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "Maximum Commitment Amount": at any date of determination, the aggregate amount of the Commitments then in effect. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NASDAQ": as defined in the definition of "Loan Value" contained in this subsection 1.1. "Net Cash Proceeds": in connection with any sale of Escrowed Stock the cash proceeds received therefrom net of all reasonable investment banking fees, legal fees, accountants fees, underwriting discounts and commissions and other customary fees and expenses, actually incurred in connection therewith. "Non-Material Subsidiary": with respect to any Person, any Subsidiary of such Person which is not a Material Subsidiary. "Note": as defined in subsection 2.5(e). "Notional Reduction Amount": with respect to each Trigger Event, (i) if the Base Maximum Commitment Amount immediately prior thereto was equal to or less than the Current Reg. U Loan Value of the Escrowed Stock, the amount by which the Base Maximum Commitment Amount would have to have been reduced so that the related withdrawal and sale of Escrowed Stock would not have caused the Base Maximum Commitment Amount to exceed the Current Reg. U Loan Value of the Escrowed Stock after giving effect to such withdrawal and sale or (ii) if the Base Maximum Commitment Amount immediately prior thereto exceeded such Current Reg. U Loan Value, the amount by which the Base Maximum Commitment 16 Amount would have to have been reduced so as not to have caused an increase in the amount by which such Base Maximum Commitment Amount exceeded the Current Reg. U Loan Value after giving effect to such withdrawal and sale. "Options": the approximately [82,613,421] options to purchase Common Stock reflected on Schedule II (excluding each such option the expiration date of which is, after the Closing Date, extended beyond the maturity date of such option set forth on Schedule II), as such Options may be adjusted pursuant to subsection 9.8. "Other Taxes": any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution or delivery of, or otherwise with respect to, this Agreement. "Participant": as defined in subsection 9.6(b). "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor thereto. "Person": an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan": at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Prime Rate": as defined in the definition of "ABR" contained in this subsection 1.1. "Properties": as defined in subsection 3.16. "Ratios": the ratios referred to in subsection 2.1. "Register": as defined in subsection 9.6(d). "Regulation U": Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. 17 "Reorganization": with respect to any Multiemployer Plan, the condition that such Plan is in reorganization within the meaning of Section 4241 of ERISA. "Repayment Amount": as defined in subsection 2.5(f). "Reportable Event": any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg. section 2615. "Requirement of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or final, non-appealable determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer": the chief executive officer and the president of the Borrower or, with respect to financial matters, the chief financial officer of the Borrower. "Sale Event": as defined in subsection 5.9(d). "Single Employer Plan": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Subsidiary": as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "Surplus Escrowed Stock": as of the indicated effective date of any request for an increase in the Base Maximum Commitment Amount, the sum of (i) the amount of Common Stock deposited in the Escrow Account in connection with such request plus (ii) an amount equal to the excess, 18 if any, of (x) the amount of Escrowed Stock prior to the deposit referred to in the preceding clause (i) over (y) the portion of such Escrowed Stock that is at that time required for a Trigger Event not to occur. "Taxes": any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority, other than Excluded Taxes. "Termination Date": the fifth anniversary of the Closing Date. "Trading Day": (x) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y) if the Common Stock is quoted on the National Market System of the NASDAQ, a day on which trades may be made on such National Market System or (z) otherwise, any Business Day. "Tranche": the collective reference to Eurodollar Loans the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). "Transferee": as defined in subsection 9.6(f). "Trigger Event": each withdrawal of Escrowed Stock from the Escrow Account that, after giving effect to any concurrent reduction in the Maximum Commitment Amount, (i) results in the Base Maximum Commitment Amount exceeding the Current Reg. U Loan Value of the Escrowed Stock or (ii) which causes an increase in the amount by which such Base Maximum Commitment Amount exceeds such Current Reg. U Loan Value. "Type": as to any Loan, its nature as an ABR Loan or a Eurodollar Loan. "Undertakings": the collective reference to the Borrower's obligations hereunder to comply with the Ratios, to comply with the provisions of subsections 5.9 and 5.10 and to comply with the provisions of Section 5 of the Escrow Agreement. "Valuation Date": means the second Business Day of each week. 19 1.2 Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any Notes or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in any Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms relating to the Borrower and its Subsidiaries not defined in subsection 1.1 and accounting terms partly defined in subsection 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 Revolving Credit Commitments. (a) Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans ("Loans") to the Borrower from time to time during the Commitment Period in an aggregate principal amount at any one time outstanding not to exceed the amount of such Lender's Commitment, provided that no Lender shall be required to make a Loan to the extent that, after giving effect thereto (1) the ratio of (x) the sum of (i) the Aggregate Loan Value of the Escrowed Stock and (ii) the Aggregate Loan Value of the Options, in each case as of the immediately preceding Valuation Date, to (y) the sum (such sum, the "Covered Amount") of the aggregate outstanding principal amount of the Loans plus the Interest Component at such time, would be less than 1.70 to 1.0; or (2) the ratio of (x) the Aggregate Loan Value of the Escrowed Stock as of the immediately preceding Valuation Date, to (y) the Covered Amount at such time would be less than (A) when the Loan Value of the Escrowed Stock is greater than or equal to $24 per share (as adjusted pursuant to subsection 9.8), 1.25 to 1.0 and (B) when the Loan Value of the Escrowed Stock is less than $24 per share (as adjusted pursuant to subsection 9.8), 1.40 to 1.0. 20 During the Commitment Period the Borrower may use the Commitments by borrowing, prepaying the Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b) The Loans may from time to time be (i) Eurodollar Loans, (ii) ABR Loans, (iii) or a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with subsections 2.2 and 2.7, provided that no Loan shall be made as a Eurodollar Loan after the day that is one month prior to the Termination Date. 2.2 Procedure for Borrowing. The Borrower may borrow under the Commitments during the Commitment Period on any Business Day, provided that the Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 10:00 A.M., New York City time, (a) three Business Days prior to the requested Borrowing Date, if all or any part of the requested Loans are to be initially Eurodollar Loans and (b) one Business Day prior to the requested Borrowing Date, otherwise), specifying (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, ABR Loans or a combination thereof, (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the respective amounts of each such Type of Loan and the lengths of the initial Interest Periods therefor and (v) the portion of the requested Loans, if any, allocable to the Interest Sublimit. Each borrowing under the Commitments shall be in an amount equal to (x) in the case of ABR Loans, $5,000,000 or integral amounts of $1,000,000 in excess thereof (or, if the then Available Commitments are less than $5,000,000, such lesser amount) and (y) in the case of Eurodollar Loans $5,000,000 or integral amounts of $1,000,000 in excess thereof. Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Lender thereof. Each Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of the Borrower at the office of the Administrative Agent specified in subsection 9.2 prior to 11:00 A.M., New York City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. The foregoing provisions shall not apply to the continuation or conversion of Loans pursuant to subsection 2.7. 21 2.3 Commitment and Other Fees. The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee for the period from and including the first day of the Commitment Period to the Termination Date, computed at the rate of 1/4th of 1% per annum on the average daily amount of the Available Commitment of such Lender during the period for which payment is made, payable quarterly in arrears on the last day of each March, June, September and December and on the Termination Date or such earlier date as the Commitments shall terminate as provided herein, commencing on the first of such dates to occur after the date hereof. In addition the Borrower agrees to pay the Administrative Agent the fees specified in the letter, dated April 12, 1996, from Chase Securities Inc. and Chemical to the Borrower. 2.4 Termination or Reduction of Commitments. (a) The Borrower shall have the right, upon not less than five Business Days' notice to the Administrative Agent, to terminate the Commitments or, from time to time, to reduce the amount of the Commitments but not below the outstanding principal amount of the Loans after giving effect to any prepayments thereof to be made on or prior to the effective date of such termination or reduction. Any such reduction shall be in an amount equal to $5,000,000 or integral amounts of $1,000,000 in excess thereof and shall reduce permanently the Commitments then in effect. Upon receipt of any notice pursuant to this subsection 2.4(a), the Administrative Agent shall promptly notify each Lender thereof. (b) On the fifteenth day of each month or if such day is not a Business Day, on the next succeeding Business Day (commencing with the first such day to occur in the month following the month in which the Closing Date occurs), the Commitments shall automatically and permanently be reduced by an amount equal to the cash proceeds received by or on behalf of the Borrower during the immediately preceding month from the exercise of Options (or, in the case of the first such day, received in respect of the Options through the last day of the preceding month) (the "Automatic Commitment Reduction Amount"), provided that to the extent that the Automatic Commitment Reduction Amount as calculated with respect to any month or period is less than $1,000,000, the Commitments shall not be reduced pursuant to this subsection and such Automatic Commitment Reduction Amount shall be added to the calculation of the Automatic Commitment Reduction Amount in respect of the immediately subsequent month. 2.5 Repayment of Loans; Evidence of Debt; Limited Recourse. (a) Subject to the limitations on recourse to the Borrower set forth in subsection 2.5(f), the Borrower hereby unconditionally promises to pay to the Administrative Agent for 22 the account of each Lender the then unpaid principal amount of each Loan of such Lender on the Termination Date (or such earlier date on which the Loans become due and payable pursuant to subsection 7.1). Subject to the limitations on recourse to the Borrower set forth in subsection 2.5(f), the Borrower hereby further agrees to pay interest on the unpaid principal amount of the Loans from time to time outstanding from the date hereof until payment in full thereof at the rates per annum, and on the dates, set forth in subsection 2.9. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Borrower to such Lender resulting from each Loan of such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain the Register pursuant to subsection 9.6(d), and a subaccount therein for each Lender, in which shall be recorded (i) the amount of each Loan made hereunder, the Type thereof and each Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) both the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof. (d) The entries made in the Register and the accounts of each Lender maintained pursuant to subsection 2.5(b) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Borrower to repay (with applicable interest) the Loans made to such Borrower by such Lender in accordance with the terms of this Agreement. (e) The Borrower agrees that, upon the request to the Administrative Agent by any Lender, the Borrower will execute and deliver to such Lender a promissory note of the Borrower evidencing the Loans of such Lender, substantially in the form of Exhibit A with appropriate insertions as to date and principal amount (a "Note"). (f) Subject to the two succeeding sentences, the obligation to repay the Loans, together with the interest thereon pursuant to this Agreement (collectively, the "Repayment Amount"), shall be recourse to the Borrower only in an amount equal to the cash proceeds from the exercising of the Options and 23 an amount equal to the Net Cash Proceeds of the sale of the Escrowed Stock and to the Undertakings. Notwithstanding the foregoing, the obligations set forth in subsections 2.3, 2.14, 2.15, 2.16 (other than clause (b) of subsection 2.16), 6.1 and 9.5 shall be fully recourse to the Borrower. In addition, to the extent provided in subsection 7.2, if the Borrower shall fail to perform any of its Undertakings (taking into account the time periods provided for herein for such performance) and, as a result, the Loans and all other amounts owing in respect thereof shall not be paid in full, the Repayment Amount shall become fully recourse to the Borrower, and the Repayment Amount and all other amounts owing to the Administrative Agent and the Lenders shall be immediately due and payable in cash. 2.6 Optional and Mandatory Prepayments. (a) The Borrower may at any time and from time to time prepay the Loans, in whole or in part, without premium or penalty, upon irrevocable notice to the Administrative Agent (which notice must be received by the Administrative Agent prior to 10:00 A.M., New York City time, at least (i) three Business Days prior to the date of such prepayment with respect to Eurodollar Loans and (ii) one Business Day prior to the date of such prepayment with respect to ABR Loans), specifying the date and amount of prepayment and whether the prepayment is of Eurodollar Loans, ABR Loans or a combination thereof, and, if of a combination thereof, the amount allocable to each. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with any amounts payable pursuant to subsection 2.16 and accrued interest to such date on the amount prepaid. Partial prepayments under this subsection 2.6(a) shall be in an aggregate principal amount of $5,000,000 or in integral amounts of $1,000,000 in excess thereof. (b) If on any Valuation Date (the "First Valuation Date") the Borrower is not in compliance with the Ratios (after giving effect to any deposit of Common Stock into the Escrow Account pursuant to subsection 5.9), the Borrower shall, without notice or demand, on or before the immediately succeeding Valuation Date (if on such date the Borrower is still not in compliance with the Ratios) prepay the Loans in an aggregate principal amount necessary to cause compliance with the Ratios as of the First Valuation Date. (c) Upon the release of Escrowed Stock from the Escrow Account, the Borrower shall prepay the Loans in an amount equal to the greater of (i) the amount, if any, necessary to cause compliance with the Ratios (after giving effect to the release of such Escrowed Stock) and (ii) (x) if the outstanding amount of 24 the Loans immediately prior to the release of the Escrowed Stock was less than or equal to the Current Reg. U Loan Value of the Escrowed Stock prior to such release, an amount such that after giving effect thereto, the outstanding principal amount of the Loans does not exceed the Current Reg. U Loan Value of the remaining Escrowed Stock or (y) if the outstanding amount of the Loans immediately prior to the release of the Escrowed Stock exceeded the Current Reg. U Loan Value of the Escrowed Stock prior to such release, an amount such that after giving effect thereto, the amount of such excess does not increase based on the Current Reg. U Loan Value of the remaining Escrowed Stock. All prepayments required to be made pursuant to this subsection 2.6(c) shall be due (x) in the case of any such prepayment obligation which is to be satisfied with the proceeds from the sale of such Escrowed Stock, not later than the second Business Day following receipt of the proceeds from the sale of such Escrowed Stock and (y) otherwise, on the Business Day such Escrowed Stock is released. (d) On each date that the Commitments are reduced pursuant to subsection 2.4, the Borrower shall prepay the Loans by the amount, if any, that the outstanding aggregate principal amount of the Loans exceeds the Maximum Commitment Amount (after giving effect to such reduction in the Commitments). (e) Each prepayment pursuant to subsections 2.6(b) through (d) shall be accompanied by payment of any amounts payable pursuant to subsection 2.16 and accrued interest to such date on the amount prepaid. 2.7 Conversion and Continuation Options. (a) Notwithstanding the provisions of subsection 2.2, the Borrower may elect from time to time to convert Eurodollar Loans to ABR Loans by giving the Administrative Agent at least one Business Day's prior irrevocable notice of such election (which notice must be received by the Administrative Agent prior to 10:00 A.M., New York City time), provided that any such conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert ABR Loans to Eurodollar Loans by giving the Administrative Agent at least three Business Days' prior irrevocable notice of such election. Any such notice of conversion to Eurodollar Loans shall specify the length of the initial Interest Period or Interest Periods therefor. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. All or any part of outstanding Eurodollar Loans and ABR Loans may be converted as provided herein, provided that (i) no Loan may be converted into a Eurodollar Loan when any Event of Default has occurred and is continuing and the Administrative Agent has determined that such 25 a conversion is not appropriate and (ii) no Loan may be converted into a Eurodollar Loan after the date that is one month prior to the Termination Date. (b) Notwithstanding subsection 2.2, any Eurodollar Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving notice to the Administrative Agent, in accordance with the applicable provisions of the term "Interest Period" set forth in subsection 1.1, of the length of the next Interest Period to be applicable to such Loans, provided that no Eurodollar Loan may be continued as such (i) when any Event of Default has occurred and is continuing and the Administrative Agent has determined that such a continuation is not appropriate or (ii) after the date that is one month prior to the Termination Date and provided, further, that if the Borrower shall fail to give such notice or if such continuation is not permitted such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period. Upon receipt of any notice pursuant to this subsection 2.7(b), the Administrative Agent shall promptly notify each Lender thereof. 2.8 Minimum Amounts and Maximum Number of Tranches. All borrowings, conversions and continuations of Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the Loans comprising each Tranche shall be equal to $5,000,000 or integral amounts of $1,000,000 in excess thereof. In no event shall there be more than 20 Tranches outstanding at any time. 2.9 Interest Rates and Payment Dates. (a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin. (b) Each ABR Loan shall bear interest at a rate per annum equal to the ABR. (c) If all or a portion of (i) any principal of any Loan, (ii) any interest payable thereon, (iii) any commitment fee or (iv) any other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), the amount which is not paid when due shall bear interest at a rate per annum which is (x) in the case of principal, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this subsection plus 2% or (y) in the case of any such overdue interest, commitment fee or other amount, the rate described in paragraph (b) of this 26 subsection plus 2%, in each case from the date of such non-payment until such overdue principal, interest, commitment fee or other amount is paid in full (as well after as before judgment). (d) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this subsection shall be payable from time to time on demand. 2.10 Computation of Interest and Fees. (a) Commitment fees and, whenever it is calculated on the basis of the Prime Rate, interest shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed; and, otherwise, interest shall be calculated on the basis of a 360-day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the ABR, the Eurocurrency Reserve Requirements, the C/D Assessment Rate or the C/D Reserve Percentage shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to subsection 2.9(a). 2.11 Inability to Determine Interest Rate. If prior to the first day of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (b) the Administrative Agent shall have received notice from the Majority Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, 27 the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as ABR Loans, (y) any Loans that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be continued as ABR Loans and (z) any outstanding Eurodollar Loans shall be converted, on the first day of such Interest Period, to ABR Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert Loans to Eurodollar Loans. 2.12 Pro Rata Treatment and Payments. (a) Each borrowing by the Borrower from the Lenders hereunder, each payment by the Borrower on account of any commitment fee hereunder and any reduction of the Commitments of the Lenders shall be made pro rata according to the respective Commitment Percentages of the Lenders. Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Loans shall be made pro rata according to the respective outstanding principal amounts of the Loans then held by the Lenders. All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without set off or counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Administrative Agent's office specified in subsection 9.2, in Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. (b) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its Commitment Percentage of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to the daily average Federal Funds Effective Rate for the period until 28 such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. If such Lender's Commitment Percentage of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to the Loans comprising such borrowing, on demand, from the Borrower. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such borrowing for purposes of this Agreement. 2.13 Illegality. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert ABR Loans to Eurodollar Loans shall forthwith be cancelled and (b) such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to ABR Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to subsection 2.16. 2.14 Requirements of Law. (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for changes in the rate of tax on the overall net income of such Lender); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or 29 other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender reasonably deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduced amount receivable. (b) If any Lender shall have reasonably determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount reasonably deemed by such Lender to be material, then from time to time, the Borrower shall promptly pay to such Lender such additional amount or amounts as will compensate such Lender or such corporation for such reduction. (c) If any Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this subsection submitted by such Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.15 Taxes. (a) All payments made by the Borrower under this Agreement and any Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future Taxes or Other Taxes. If any such Taxes or Other Taxes are required to be withheld from any amounts payable 30 to the Administrative Agent or any Lender hereunder or under any Note, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that the Borrower shall not be required to increase any such amounts payable to any Foreign Lender if such Foreign Lender fails to comply with the requirements of paragraph (d) of this subsection. Whenever any Taxes or Other Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. The agreements in this subsection 2.15 shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (b) In addition, the Borrower agrees to pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent and each Lender, within 10 days after written demand therefor, for the full amount of any Taxes or Other Taxes (including Taxes or Other Taxes imposed or asserted on amounts payable under this subsection) paid by the Administrative Agent or such Lender, as the case may be, with respect to payments by or on account of any obligation of the Borrower hereunder and any liability (including penalties, interest and reasonable expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error. (d) Each Foreign Lender shall: (i) deliver to the Borrower and the Administrative Agent (A) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, and (B) an Internal Revenue Service Form W-8 or W-9, or successor applicable form, as the case may be; (ii) deliver to the Borrower and the Administrative Agent two further copies of any such form or certification on or before the date that any such form or certification 31 expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Borrower or the Administrative Agent; unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Administrative Agent. Such Lender shall certify (i) in the case of a Form 1001 or 4224, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. Each Person that shall become a Lender or a Participant pursuant to subsection 9.6 shall, upon the effectiveness of the related transfer, be required to provide all of the forms and statements required pursuant to this subsection, provided that in the case of a Participant such Participant shall furnish a copy of all such required forms and statements to the Lender from which the related participation shall have been purchased. (e) If the Administrative Agent or any Lender shall become aware that it is entitled to claim a refund from any Governmental Authority in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrower, or with respect to which the Borrower has paid additional amounts pursuant to this subsection 2.15, it shall promptly notify the Borrower of the availability of such refund claim and shall, within ten (10) days after receipt of a request by the Borrower, make a claim to such Governmental Authority for such refund at the Borrower's expense. If the Administrative Agent or any Lender receives a refund (including pursuant to a claim for refund made pursuant to the preceding sentence) in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this subsection 2.15, it shall, within ten (10) days from the date of such receipt, pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this subsection 2.15 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of such Lender or the Administrative Agent and without interest (other than interest paid by the relevant Governmental Authority with respect to such 32 refund); provided, however, that the Borrower, upon the request of such Lender or the Administrative Agent, agrees to repay the amount paid over to the Borrower (plus penalties, interest or other charges) to such Lender or the Administrative Agent in the event such Lender or the Administrative Agent is required to repay such refund to such Governmental Authority. 2.16 Indemnity. The Borrower agrees to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment or conversion of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid or converted, or not so borrowed, converted or continued, for the period from the date of such prepayment or conversion or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.17 Change of Lending Office. Each Lender agrees that if it makes any demand for payment under subsection 2.14 or 2.15(a), or if any adoption or change of the type described in subsection 2.13 shall occur with respect to it, it will use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions and so long as such efforts would not be disadvantageous to it, as determined in its sole discretion) to designate a different lending office if the making of such a designation would reduce or obviate the need for the Borrower to make payments under subsection 2.14 or 2.15(a), or would eliminate or reduce the effect of any adoption or change described in subsection 2.13. 33 2.18 Replacement of Lenders under Certain Circumstances. The Borrower shall be permitted to replace any Lender which (a) requests reimbursement for amounts owing pursuant to subsection 2.14 or 2.15(a) or (b) is affected in the manner described in subsection 2.13 and as a result thereof any of the actions described in said subsection are required to be taken; provided that (i) such replacement does not conflict with any Requirement of Law, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) the Borrower shall repay (or the replacement bank or institution shall purchase, at par) all Loans and other amounts owing to such replaced Lender prior to the date of replacement, (iv) the Borrower shall be liable to such replaced Lender under subsection 2.16 if any Eurodollar Loan owing to such replaced Lender shall be prepaid (or purchased) other than on the last day of the Interest Period relating thereto, (v) the replacement bank or institution, if not already a Lender, and the terms and conditions of such replacement, shall be reasonably satisfactory to the Administrative Agent, (vi) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of subsection 9.6 (provided that the Borrower shall be obligated to pay the registration and processing fee referred to therein), and (vii) until such time as such replacement shall be consummated, the Borrower shall pay all additional amounts (if any) required pursuant to subsection 2.14 or 2.15(a), as the case may be. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent and the Lenders to enter into this Agreement and to make the Loans, the Borrower hereby represents and warrants to the Administrative Agent and each Lender that: 3.1 Financial Condition. The consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at December 31, 1995 and the related consolidated statements of income and of cash flows for the fiscal year ended on such date, reported on by Ernst & Young, LLP, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. The unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at March 31, 1996 and the related unaudited consolidated statements of income and of cash flows for the three-month period ended on such date, certified by a Responsible Officer, copies of which have heretofore been 34 furnished to each Lender, are complete and correct and present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the three-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). Neither the Borrower nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to above, any material Guarantee Obligation, contingent liability or liability for taxes, or any material long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the foregoing statements or in the notes thereto to the extent required by GAAP. 3.2 No Change. Since December 31, 1995 there has been no development, circumstance or event which has had or could reasonably be expected to have a Material Adverse Effect. 3.3 Corporate Existence; Compliance with Law. Each of the Borrower and its Material Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is in compliance with all Requirements of Law, except in each case to the extent that such failure could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 3.4 Corporate Power; Authorization; Enforceable Obligations. The Borrower has the corporate power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party and to borrow hereunder and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement and any Notes and to authorize the execution, delivery and performance of the Loan Documents to which it is a party. Except as contemplated by the Escrow Agreement, no consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the 35 borrowings hereunder or with the execution, delivery, performance, validity or enforceability of the Loan Documents to which the Borrower is a party. This Agreement has been, and each other Loan Document to which it is a party will be, duly executed and delivered on behalf of the Borrower. This Agreement constitutes, and each other Loan Document to which it is a party when executed and delivered will constitute, a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 3.5 No Legal Bar. The execution, delivery and performance of the Loan Documents to which the Borrower is a party, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of the Borrower or of any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. 3.6 No Material Litigation. Subject to the matters disclosed in the Disclosure Documents, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any of its Subsidiaries or against any of its or their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a Material Adverse Effect. 3.7 No Default. Subject to the matters disclosed in the Disclosure Documents, neither the Borrower nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 3.8 Ownership of Property; Liens. Each of the Borrower and its Subsidiaries has good record and marketable title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property except, in each case, to the extent that the failure to have such could not reasonably be expected to have a Material Adverse Effect. Except to the extent contemplated by the Escrow Agreement, no Lien exists on any of the Escrowed Stock or the exercise price payable to the Borrower in respect of the Options. 36 3.9 Intellectual Property. The Borrower and each of its Subsidiaries owns, or is licensed or otherwise entitled to use, all trademarks, tradenames, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted except for those the failure to own or license or otherwise be entitled to use which could not reasonably be expected to have a Material Adverse Effect (the "Intellectual Property"). The use of such Intellectual Property by the Borrower and its Subsidiaries does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 3.10 No Burdensome Restrictions. Subject to the matters disclosed in the Disclosure Documents, no Requirement of Law or Contractual Obligation of the Borrower or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. 3.11 Taxes. Each of the Borrower and its Subsidiaries has filed or caused to be filed all tax returns which, to the knowledge of the Borrower, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than (i) any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or its Subsidiaries, as the case may be, or (ii) with respect to any Subsidiary, any that could not reasonably be expected to have a Material Adverse Effect). With respect to the Borrower, no tax Lien has been filed, and, with respect to any Subsidiary, no tax Lien has been filed that could reasonably be expected to have a Material Adverse Effect. No claim is being asserted against the Borrower or any of its Subsidiaries with respect to any such tax that could reasonably be expected to have a Material Adverse Effect. 3.12 Federal Regulations. No part of the proceeds of any Loans will be used for any purpose which violates, or which would be inconsistent with, Regulation G or Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. On the Closing Date, the Borrower will furnish to the Administrative Agent and each Lender a statement in conformity with the requirements of FR Form G-1 or FR Form U-1 referred to in said Regulation G or Regulation U, as the case may be. 37 3.13 ERISA. Neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, which, if then terminated, has had or could reasonably be expected to have a Material Adverse Effect. Each Plan has complied with the applicable provisions of ERISA and the Code except where such failure to comply could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Commonly Controlled Entity has incurred or reasonably expects to incur any liability under Title IV of ERISA (other than for premiums due to the PBGC which are not in default) which, individually or in the aggregate, reasonably, has or could be expected to have a Material Adverse Effect and no Lien in favor of the PBGC or a Plan has arisen, during such five year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by an amount which, when aggregated for all such Plans whose liabilities exceed its assets, is in excess of $50,000,000. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither the Borrower nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made, where such withdrawal or liability could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. No such Multiemployer Plan is in Reorganization or Insolvent where the effect of such Reorganization or Insolvency could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 3.14 Investment Company Act; Other Regulations. The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Federal or State statute or regulation (other than Regulation X of the Board of Governors of the Federal Reserve System) which limits its ability to incur Indebtedness. 3.15 Purpose of Loans. The proceeds of the Loans shall be used by the Borrower for general corporate purposes of 38 the Borrower, including to pay interest and fees on the Loans; provided that the Interest Sublimit shall be made available exclusively for the payment of interest and fees on the Loans and provided further that under the circumstances and for the period described in subsection 5.9(d), the proceeds of all Loans shall be made available exclusively for the payment of interest and fees on the Loans. 3.16 Environmental Matters. Except as set forth on Schedule 3.16: (a) To the best knowledge of the Borrower, the facilities and properties owned, leased or operated by the Borrower or any of its Subsidiaries (the "Properties") do not contain, and have not previously contained, any Materials of Environmental Concern in amounts or concentrations which (i) constitute or constituted a violation of, or (ii) could reasonably be expected to give rise to liability under, any Environmental Law except in either case insofar as such violation or liability, or any aggregation thereof, is not reasonably likely to have a Material Adverse Effect. (b) To the best knowledge of the Borrower, the Properties and all operations at the Properties are in compliance, and have in the last year been in compliance, in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the business operated by the Borrower or any of its Subsidiaries (the "Business") which non-compliance, contamination or violations, individually or in the aggregate are reasonably likely to have a Material Adverse Effect. (c) To the best knowledge of the Borrower, Materials of Environmental Concern have not been transported or disposed of from the Properties in violation of, or in a manner or to a location which could reasonably be expected to give rise to liability under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could reasonably be expected to give rise to liability under, any applicable Environmental Law except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, is not reasonably likely to have a Material Adverse Effect. 39 3.17 Escrowed Stock. The share certificates representing Common Stock held by the Escrow Agent from time to time will represent Common Stock which is duly authorized for issuance and upon its release by the Escrow Agent and its sale as contemplated by the terms hereof and of the Escrow Agreement, and when paid for in an amount not less than par, including when sold in accordance with the Escrow Agreement to satisfy the obligations of the Borrower hereunder, will be duly and validly issued and fully paid and nonassessable. 3.18 Options. (a) The stock option agreements related to the Options are in full force and effect and each such agreement constitutes a legal, valid and binding obligation of the Borrower and the other parties thereto enforceable against the Borrower and the other parties thereto in accordance with its terms. (b) Schedule II contains a list of the Options and the related expiration dates and exercise prices thereof and sets forth whether or not such Options are vested and/or "in the money", all as of the date specified therein, which Schedule is complete and correct in all material respects as of such date. (c) The information supplied by the Borrower contained in the Confidential Information Memorandum dated April 1996 and delivered to the Lenders in connection with the transactions contemplated hereby and as supplemented by the Disclosure Documents does not, when taken as a whole, contain, as of the date hereof, any untrue statement of a material fact and does not omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not materially misleading; and there is no fact known to the Borrower that has not been disclosed in the Disclosure Documents or otherwise in writing to the Lenders that has had or could reasonably be expected to have a Material Adverse Effect. SECTION 4. CONDITIONS PRECEDENT 4.1 Conditions to Initial Loans. The agreement of each Lender to make the initial Loan requested to be made by it is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan on the Closing Date, of the following conditions precedent: (a) Loan Documents. The Administrative Agent shall have received (i) this Agreement, executed and delivered by a duly authorized officer of the Borrower, with a counterpart for each Lender and (ii) the Escrow Agreement, 40 executed and delivered by a duly authorized officer of each party thereto, with a counterpart or a conformed copy for each Lender. (b) Borrowing Certificate. The Administrative Agent shall have received, with a copy for each Lender, a certificate of the Borrower, dated the Closing Date, substantially in the form of Exhibit C, with appropriate insertions and attachments, satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Borrower. (c) Corporate Proceedings. The Administrative Agent shall have received, with a copy for each Lender, a copy of the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of the Borrower authorizing (i) the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party and (ii) the borrowings contemplated hereunder, certified by the Secretary or an Assistant Secretary of the Borrower as of the Closing Date, which certificate shall be in form and substance satisfactory to the Administrative Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded and are in full force and effect. (d) Incumbency Certificate. The Administrative Agent shall have received, with a copy for each Lender, a certificate of the Borrower, dated the Closing Date, as to the incumbency and signature of the officers of the Borrower executing any Loan Document satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Borrower. (e) Corporate Documents. The Administrative Agent shall have received true and complete copies of the certificate of incorporation and by-laws of the Borrower, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Borrower. (f) Form U-1. The Administrative Agent shall have received a Form F.R. U-1 for each Lender, duly completed and satisfactory to such Lender and in conformity with Regulation U. 41 (g) Fees. The Administrative Agent shall have received the fees to be received on the Closing Date and referred to in the letter dated April 12, 1996 from Chase Securities Inc. and Chemical to the Borrower, and each Lender shall have received the up-front fee agreed to be paid to such Lender by the Administrative Agent. (h) Legal Opinions. The Administrative Agent shall have received, with a counterpart for each Lender, the following executed legal opinions: (i) the executed legal opinion of Cravath, Swaine & Moore, counsel to the Borrower, substantially in the form of Exhibit D-1; and (ii) the executed legal opinion of Peter R. Haje, Esq., general counsel of the Borrower, substantially in the form of Exhibit D-2. Each such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Administrative Agent may reasonably require. (i) Escrowed Stock; Stock Powers. The Administrative Agent shall have received evidence, satisfactory to it, that certificates representing Common Stock authorized for issuance at least equal to the Closing Date Margin Requirement (together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the Borrower) have been delivered to the Escrow Agent to be held by the Escrow Agent in accordance with the terms of the Escrow Agreement. (j) Disclosure Documents. The Administrative Agent shall have received, with copies for each Lender, true and complete copies of each Disclosure Document, certified as such as of the Closing Date by an officer of the Borrower. 4.2 Conditions to Each Loan. The agreement of each Lender to make any Loan requested to be made by it pursuant to subsection 2.2 on any date (including, without limitation, its initial Loan) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and warranties made by the Borrower in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date. 42 (b) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Loans requested to be made on such date. (c) Borrowing Base. After giving effect to the Loans to be made on such date and any prepayments made on such date, the Borrower shall be in compliance with the Ratios as of the immediately preceding Valuation Date and, except with respect to the initial Loans to be made hereunder, the Administrative Agent shall have received a Borrowing Base Certificate in respect of such Valuation Date confirming compliance as of such Valuation Date. (d) Base Maximum Commitment Amount. The outstanding principal amount of the Loans does not exceed the Base Maximum Commitment Amount on such date after giving effect to the Loans to be made on such date and any corresponding increase in the Base Maximum Commitment Amount on such date. (e) Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be satisfactory in form and substance to the Administrative Agent, and the Administrative Agent shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. Each borrowing by the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date thereof that the conditions contained in this subsection have been satisfied. SECTION 5. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect or any amount is owing to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Borrower shall and (except in the case of subsections 5.1, 5.2, 5.7, 5.9, 5.10 and 5.11) shall cause each of its Material Subsidiaries to: 5.1 Financial Statements. Furnish to each Lender: (a) as soon as available, but in any event within 100 days after the end of each fiscal year of the Borrower, a copy of the consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such year and 43 the related consolidated statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a qualification arising out of the scope of the audit, by Ernst & Young, LLP or other independent certified public accountants of nationally recognized standing; and (b) as soon as available, but in any event not later than 60 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and retained earnings and of cash flows of the Borrower and its consolidated Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments); all such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 5.2 Certificates; Other Information. Furnish to each Lender: (a) concurrently with the delivery of the financial statements referred to in subsection 5.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 5.1(a) and (b), a certificate of a Responsible Officer stating that, to the best of such Officer's knowledge, during such period the Borrower has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Loan Documents to be observed, performed or satisfied by it, and that such Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate; 44 (c) (i) on or prior to the second Business Day of each week (or, at any time during a Compliance Ratio Period, simultaneously with the delivery of the certificate referred to in clause (ii) below but calculated as of the Valuation Date immediately preceding the date of delivery), an officers certificate substantially in the form of Exhibit E (a "Borrowing Base Certificate") and (ii) on or prior to the tenth day of each month (or if such day is not a Business Day, the next succeeding Business Day), a report in form and substance satisfactory to the Administrative Agent setting forth, among other things, (A) the Options exercised during the previous month and the aggregate cash and stock exercise prices received by or on behalf of the Borrower in respect thereof and (B) the remaining unexercised Options, the related expiration dates and exercise prices thereof, whether such Options are vested and whether such Options are "in the money", in each case certified by any Vice President of the Borrower as true and correct in all material respects; (d) promptly upon transmission thereof, copies of all other financial statements and reports which the Borrower sends to its stockholders, and promptly after the same are filed, copies of all other financial statements and public reports which the Borrower may be required to make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority, but excluding any preliminary or confidential filings, any filings required to be made by the Borrower pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Act") and any filings required to be made by the Borrower pursuant to Section 16(a) of the Act; and (e) promptly, such additional financial and other information as any Lender may from time to time reasonably request. 5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Material Subsidiaries, as the case may be. 5.4 Maintenance of Existence. Preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its 45 business except as otherwise permitted pursuant to subsections 6.2 and 9.7; provided, however, but subject to subsection 6.4, that the Borrower shall not be required to preserve any such right, privilege or franchise, or the corporate existence of any Material Subsidiary, if the Board of Directors of the Borrower shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower and each of its Material Subsidiaries, taken as a whole, and that the loss thereof is not, and will not be, adverse in any material respect to the Lenders; comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, be reasonably expected to have a Material Adverse Effect. 5.5 Maintenance of Property; Insurance. Keep all property useful and necessary in its business in good working order and condition; maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies engaged in the same or a similar business or as are otherwise commercially reasonable at such time. 5.6 Inspection of Property; Books and Records; Discussions. Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Material Subsidiaries with officers and employees of the Borrower and its Material Subsidiaries and with its independent certified public accountants. 5.7 Notices. Promptly give notice to the Administrative Agent and each Lender of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Borrower or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any of its Subsidiaries and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect; 46 (c) except to the extent contained in the Disclosure Documents, any litigation or proceeding affecting the Borrower or any of its Subsidiaries that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect or in which injunctive or similar relief is sought; and (d) the following events, as soon as possible and in any event within 30 days after the Borrower knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Borrower proposes to take with respect thereto. 5.8 Environmental Laws. Comply with all applicable Environmental Laws and obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws except to the extent that failure to do so could not be reasonably expected to have a Material Adverse Effect. 5.9 Maintenance of Escrow Agreement; Compliance with Ratios; Undertakings to Deliver Common Stock. (a) At all times on and after the Closing Date and prior to the payment in full of the Loans and all other amounts owing to the Lenders and the Administrative Agent hereunder, maintain the Escrow Agreement in full force and effect. (b) At all times maintain on deposit with the Escrow Agent sufficient share certificates representing authorized shares of Escrowed Stock to comply with the Ratios as and to the extent required by subsection 2.6. The Borrower may comply with the foregoing requirement by (i) (except after a Sale Event as provided in subsection 5.9(d) and prior to the sale of all Common Stock being held in the Escrow Account as of such Sale Event) depositing additional share certificates representing authorized shares of Common Stock in the Escrow Account (together with an 47 undated stock power for each such certificate executed in blank by a duly authorized officer of the Borrower), (ii) causing the Escrow Agent to deliver Escrowed Stock to the Borrower for sale and, to the extent required by subsection 2.6, applying the Net Cash Proceeds thereof, together with any additional amounts required pursuant to such subsection, to the prepayment of the Loans or (iii) prepaying the required amount of the Loans pursuant to subsection 2.6(b). If at the close of business on any Valuation Date the Borrower shall not be in compliance with the Ratios, the Borrower shall comply with the Ratios by any one or more of the methods referred to above on or prior to the succeeding Valuation Date. For purposes of determining compliance with the Ratios, the computation thereof on any Valuation Date shall remain in effect until the succeeding Valuation Date. (c) The Borrower shall be permitted to withdraw shares of Escrowed Stock from time to time (i) so long as, after giving effect thereto, (A) no Default or Event of Default shall have occurred, (B) the Borrower is in compliance with the Ratios as of the immediately preceding Valuation Date and (C) after giving effect to such withdrawal and any concurrent reduction in the Maximum Commitment Amount, the Maximum Commitment Amount is less than or equal to 50% of the Aggregate Loan Value of the remaining Escrowed Stock as of the Valuation Date immediately preceding the date of withdrawal or (ii) if such withdrawal is for the purpose of sale and the Net Cash Proceeds thereof are applied, together with any additional amounts, to the extent required to maintain compliance with Regulation U, as (and to the extent) provided in subsection 2.6(c). (d) If (i) the aggregate number of shares of Escrowed Stock delivered from time to time into the Escrow Account (net of any permitted withdrawals made pursuant to clause (i) of subsection 5.9(c)) equals or exceeds 52,500,000 (a "Sale Event") and (ii) the Borrower is not in compliance with the Ratios, the Borrower, at the request of the Administrative Agent, shall sell such number of shares of the Escrowed Stock as shall be necessary to generate Net Cash Proceeds that when applied to prepay the outstanding Loans as provided in subsection 2.6(c) will cause compliance with the Ratios calculated as of the most recent Valuation Date. The Borrower shall apply such Net Cash Proceeds as provided in such subsection. In addition the Borrower may, after a Sale Event, sell Escrowed Stock for the purpose of paying interest and commitment fees hereunder. After a Sale Event and except as provided in subsection 10.1(c), the Borrower will not be permitted to deposit additional shares of Common Stock into the Escrow Account until all shares then being held in the Escrow Account have been sold. At such time as all such Escrowed Stock shall have been sold, if the Borrower is not in compliance with 48 the Ratios, calculated as of the immediately preceding Valuation Date (after giving effect to all such Escrowed Stock sold and any prepayments of the Loans), it shall (unless it prepays the required amount of the Loans pursuant to subsection 2.6(b)) deposit additional shares in the Escrow Account on or prior to the next Valuation Date to bring it into compliance as of the immediately preceding Valuation Date. After a Sale Event and prior to the sale of all Common Stock being held in the Escrow Account as of the Sale Event, the Borrower may continue to borrow subject to the terms and conditions of this Agreement. After a Sale Event and the sale of all Common Stock held in the Escrow Account as of the Sale Event, new borrowings pursuant to subsection 2.2 will not be available for any purpose other than to pay interest and fees hereunder until the Valuation Date on which the Loan Value of the Common Stock exceeds $20 per share, as such $20 per share price may be adjusted pursuant to subsection 9.8 (the "Reset Date"). (e) After the occurrence of (i) a Sale Event, (ii) the sale of all Common Stock being held in the Escrow Account as of such Sale Event and (iii) the Reset Date, the foregoing provisions of this subsection 5.9 shall be applicable as if a Sale Event had never occurred, so that, among other things, (A) the Borrower will be permitted to borrow for any of the purposes permitted hereunder up to the Maximum Commitment Amount and (B) the aggregate amount of shares of Common Stock delivered from time to time into the Escrow Account for purposes of clause (i) of the first sentence of paragraph (d) of this subsection shall be deemed to equal the amount therein on the Reset Date and, to the extent the number of such shares is less than 52,500,000, the Borrower will again be entitled to contribute up to such amount in the aggregate. (f) On the Termination Date (or on any other date on which the Loans are accelerated or otherwise become due) and without limiting any of the other undertakings of the Borrower hereunder, the Borrower shall have deposited in the Escrow Account Common Stock which, when sold, will provide Net Cash Proceeds sufficient to repay all outstanding Loans and all accrued interest thereon and all other amounts owing to the Lenders and the Administrative Agent hereunder (to the extent not otherwise repaid); compliance with the foregoing will be determined on the basis of the actual proceeds received from any such sales of Common Stock. 5.10 Directions to Escrow Agent; Release of Escrowed Stock. (a) So long as no Event of Default has occurred and is then continuing, the Borrower may obtain the release to it or its order of Escrowed Stock by delivering a written request to the Escrow Agent with a copy to the Administrative Agent. Such 49 written request shall contain a certification that no Event of Default has occurred and that the requested release is permitted by the terms hereof, and shall set forth in reasonable detail the calculation of (i) the Current Reg. U Loan Value of the Escrowed Stock prior to any such release, (ii) the Current Reg. U Loan Value of the remaining Escrowed Stock and (iii) the Base Maximum Commitment Amount before and after giving effect to any such release. Upon the release of any Escrowed Stock to the Borrower or its order pursuant to paragraph (a) or (b) of this subsection and if the Borrower intends to satisfy any prepayment obligation under subsection 2.6(c) that arises from the release of such Escrowed Stock, the Borrower shall use its reasonable best efforts to immediately sell such Escrowed Stock (or the portion thereof required to discharge its obligation under subsection 2.6(c)), and agrees that any such sale shall be in consideration of a concurrent transfer of cash to the Borrower. (b) If an Event of Default has occurred and is continuing, (i) the Borrower may obtain the release to it or its order of Escrowed Stock only with the written consent of the Administrative Agent and (ii) the Administrative Agent may deliver to the Escrow Agent a Blocking Notice (as defined in the Escrow Agreement); provided that prior to delivering a Blocking Notice to the Escrow Agent the Administrative Agent shall, unless stayed, prohibited or otherwise prevented by applicable law or otherwise, notify the Borrower at least one Business Day prior thereto of its intent to deliver a Blocking Notice. (c) If an Event of Default has occurred and is continuing or if any Loans are outstanding following the Termination Date or any interest or other amounts owing to the Lenders or the Administrative Agent hereunder remain unpaid following the Termination Date, the Administrative Agent shall have the right to direct the Escrow Agent to deliver to a buyer (or its nominee or agent), in a sale effected at the direction of the Administrative Agent, such number of shares of the Escrowed Stock (which in the case of a failure to maintain compliance with the Ratios will be only that amount necessary when sold pursuant to the terms of the Escrow Agreement to return to compliance as of the immediately preceding Valuation Date) as are necessary for the Administrative Agent to sell in order to generate Net Cash Proceeds equal to all amounts then owing hereunder and to use the proceeds thereof to repay such amounts. All proceeds received in respect of Escrowed Stock sold at the direction of the Administrative Agent shall be applied to the payment of the Loans and other amounts owing to the Administrative Agent and the Lenders hereunder and under any other Loan Documents in such order as the Administrative Agent shall direct. 50 (d) All rights and remedies provided to the Administrative Agent under the Escrow Agreement are subject to the terms of this Agreement. 5.11 Stock Option Plans. Comply with, and satisfy when due, all obligations relating to or arising under the Borrower's stock option plans pursuant to which Options are outstanding. SECTION 6. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect or any amount is owing to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Borrower shall not and, in the case of subsection 6.1, shall not permit any of its Subsidiaries to and, in the case of subsection 6.4, shall not permit any of its Material Subsidiaries to, directly or indirectly: 6.1 Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any Escrowed Stock or the exercise price of the Options (or the cash proceeds to be received by or on behalf of the Borrower from the exercise of the Options) except for Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP. 6.2 Limitation on Fundamental Changes. In the case of the Borrower only, and except as contemplated by subsection 9.7, enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets except the Borrower may be merged or consolidated with any Person provided that (a) immediately after giving effect to such merger or consolidation, no Default or Event of Default shall have occurred and be continuing or would result therefrom and (b) the Borrower shall be the continuing or surviving corporation (or, if the Borrower shall not be the continuing or surviving corporation, the continuing or surviving corporation shall assume the obligations of the Borrower hereunder on terms satisfactory to the Administrative Agent). 6.3 Limitation on Sale of Assets. In the case of the Borrower only, convey, sell, lease, assign, transfer or otherwise dispose of all or substantially all of its property, business or assets, whether in a single transaction or a series of related 51 transactions except in a transaction in which the acquiring corporation assumes the obligations of the Borrower hereunder pursuant to an agreement satisfactory to the Administrative Agent and which does not otherwise result in a Default or an Event of Default. 6.4 Change in Business. Alter in a fundamental and substantial manner the character or scope of the businesses of the Borrower and its Subsidiaries taken as a whole from that conducted by its respective businesses immediately prior to the Closing Date. SECTION 7. EVENTS OF DEFAULT 7.1 Events of Default. If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan when due in accordance with the terms thereof or hereof; or the Borrower shall fail to pay any interest on any Loan, or any other amount payable hereunder, within five days, but in no event less than three Business Days, after any such interest or other amount becomes due in accordance with the terms thereof or hereof; or (b) Any representation or warranty made or deemed made by the Borrower herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Borrower shall default in the observance or performance of any of its Undertakings (other than with respect to Section 5 of the Escrow Agreement) or any agreement contained in Section 6; or (d) The Borrower shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days; or (e) The Borrower or any of its Subsidiaries shall default in any payment of principal of or interest on any Indebtedness (other than the Loans) or in the payment of any Guarantee Obligation when due (whether at the stated 52 maturity, upon acceleration, or otherwise) beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created; provided, however, that no Default or Event of Default shall exist under this paragraph unless the aggregate amount of Indebtedness and/or Guarantee Obligations in respect of which any default referred to in this paragraph shall have occurred shall be equal to at least $10,000,000, individually, or $50,000,000 in the aggregate; or (f) (i) The Borrower or any of its Material Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Material Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Material Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower or any of its Material Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any of its Material Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any of its Material Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) Any Person or "group" (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (A) shall have acquired beneficial 53 ownership of securities (including options) having a majority of the ordinary voting power in the election of directors of the Borrower or (B) shall obtain the power (whether or not exercised) to elect a majority of the Borrower's directors or (ii) the Board of Directors of the Borrower shall not consist of a majority of Continuing Directors; "Continuing Directors" shall mean the directors of the Borrower on the Closing Date and each other director, if such other director's nomination for election to the Board of Directors of the Borrower is recommended by a majority of the then Continuing Directors; then, and in any such event, but subject to the limitations with respect to recourse set forth in subsection 2.5(f), (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) of this Section with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Majority Lenders, the Administrative Agent may, or upon the request of the Majority Lenders, the Administrative Agent shall, by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) with the consent of the Majority Lenders, the Administrative Agent may, or upon the request of the Majority Lenders, the Administrative Agent shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. 7.2 Special Remedy. If the Borrower shall fail to perform, including as a result of applicable bankruptcy law or otherwise, any of its Undertakings (taking into account the time periods provided for herein for such performance) and, as a result thereof, the Loans shall not be paid in full, then the Repayment Amount shall become fully recourse to the Borrower, and the Repayment Amount and all other amounts owing to the Administrative Agent and the Lenders shall be immediately due and payable. SECTION 8. THE ADMINISTRATIVE AGENT 8.1 Appointment. Each Lender hereby irrevocably designates and appoints the Administrative Agent as the agent of 54 such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. 8.2 Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care. 8.3 Exculpatory Provisions. Neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable to any Lender for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower. 8.4 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, 55 notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Majority Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 8.5 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Majority Lenders; provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 8.6 Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Administrative Agent to any 56 Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent, any Affiliate of the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 8.7 Indemnification. The Lenders agree to indemnify the Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Commitment Percentages in effect on the date on which indemnification is sought, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Administrative Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the payment of the Loans and all other amounts payable hereunder. 57 8.8 Administrative Agent in Its Individual Capacity. The Administrative Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though the Administrative Agent were not the Administrative Agent hereunder and under the other Loan Documents. With respect to the Loans made by it, the Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 8.9 Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 10 days' notice to the Lenders. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Majority Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent (provided that it shall have been approved by the Borrower), shall succeed to the rights, powers and duties of the Administrative Agent hereunder. Effective upon such appointment and approval, the term "Administrative Agent" shall mean such successor agent, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. After any retiring Administrative Agent's resignation as Administrative Agent, the provisions of this Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents. SECTION 9. MISCELLANEOUS 9.1 Amendments and Waivers. Neither this Agreement nor any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this subsection. The Majority Lenders may, or, with the written consent of the Majority Lenders, the Administrative Agent may, from time to time, (a) enter into with the Borrower written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Borrower hereunder or thereunder or (b) waive, on such terms and conditions as the Majority Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any 58 Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (i) reduce the amount or extend the scheduled date of maturity of any Loan, or reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Lender's Commitment, in each case without the consent of each Lender affected thereby, or (ii) amend, modify or waive any provision of this subsection or subsections 2.5(f), 5.9, 5.10 or 7.2 or reduce the percentage specified in the definition of Majority Lenders, or consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents or reduce the Ratios required to be maintained by the Borrower hereunder or amend the definition of Undertakings, in each case without the written consent of all the Lenders, or (iii) amend, modify or waive any provision of Section 8 without the written consent of the then Administrative Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Borrower, the Lenders, the Administrative Agent and all future holders of the Loans. In the case of any waiver, the Borrower, the Lenders and the Administrative Agent shall be restored to their former positions and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. 9.2 Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile transmission) and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (a) in the case of delivery by hand, when delivered, (b) in the case of delivery by mail, three days after being deposited in the mails, postage prepaid, or (c) in the case of delivery by facsimile transmission, when sent and receipt has been confirmed, addressed as follows in the case of the Borrower and the Administrative Agent, and as set forth in Schedule I in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto: The Borrower: 75 Rockefeller Plaza New York, New York 10019 Attention: Chief Financial Officer Fax: (212) 307-0126 and 59 Attention: General Counsel Fax: (212) 956-7281 with copies to Cravath, Swaine & Moore 825 Eighth Avenue New York, New York 10019 Attention: William P. Rogers, Jr., Esq. Fax: (212) 474-3700 The Administrative Agent: Chemical Bank 270 Park Avenue New York, New York 10017 Attention: Dorothy Vena Fax: (212) 270-7904 provided that any notice, request or demand to or upon the Administrative Agent or the Lenders pursuant to subsection 2.2, 2.4, 2.6, 2.7, or 2.12 shall not be effective until received. 9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 9.4 Survival of Representations and Warranties. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. 9.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay or reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and 60 thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all its reasonable costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including, without limitation, the reasonable fees and disbursements of counsel (including the allocated fees and expenses of in-house counsel) to each Lender and of counsel to the Administrative Agent, (c) to pay, indemnify, and hold each Lender and the Administrative Agent (and their respective affiliates, officers, directors, employees, advisors and agents) harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender and the Administrative Agent harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents or the use or the proposed use of the proceeds of the Loans and any such other documents, including, without limitation, any of the foregoing relating to the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Borrower, any of its Subsidiaries or any of the Properties (all the foregoing in this clause (d), collectively, the "indemnified liabilities"), provided that the Borrower shall have no obligation hereunder to the Administrative Agent or any Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Administrative Agent or any such Lender. The agreements in this subsection shall survive repayment of the Loans and all other amounts payable hereunder. 9.6 Successors and Assigns; Participations and Assignments. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Administrative Agent and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender except as specified in subsection 9.7. (b) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable 61 law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, the Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. No Lender shall be entitled to create in favor of any Participant, in the participation agreement pursuant to which such Participant's participating interest shall be created or otherwise, any right to vote on, consent to or approve any matter relating to this Agreement or any other Loan Document except for those specified in clauses (i) and (ii) of the proviso to subsection 9.1. The Borrower agrees that if amounts outstanding under this Agreement are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, provided that, in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in subsection 9.9(a) as fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of subsections 2.14, 2.15 and 2.16 with respect to its participation in the Commitments and the Loans outstanding from time to time as if it was a Lender; provided that, in the case of subsection 2.15, such Participant shall have complied with the requirements of said subsection and provided, further, that no Participant shall be entitled to receive any greater amount pursuant to any such subsection than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time and from time to time assign to any Lender or any affiliate thereof or, with the consent of the Borrower and the Administrative Agent (which in each case shall not be unreasonably withheld), to an additional bank or financial 62 institution (an "Assignee") all or any part of its rights and obligations under this Agreement and the other Loan Documents pursuant to an Assignment and Acceptance, substantially in the form of Exhibit F, executed by such Assignee, such assigning Lender (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Borrower and the Administrative Agent) and delivered to the Administrative Agent for its acceptance and recording in the Register, provided that, in the case of any such assignment to an additional bank or financial institution, the sum of the aggregate principal amount of the Loans and the aggregate amount of the Available Commitments being assigned and, if such assignment is of less than all of the rights and obligations of the assigning Lender, the sum of the aggregate principal amount of the Loans and the aggregate amount of the Available Commitment remaining with the assigning Lender are each not less than $10,000,000 (or such lesser amount as may be agreed to by the Borrower and the Administrative Agent). Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment as set forth therein, and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). Notwithstanding any provision of this paragraph (c) and paragraph (e) of this subsection, the consent of the Borrower shall not be required, and, unless requested by the Assignee and/or the assigning Lender, new Notes shall not be required to be executed and delivered by the Borrower, for any assignment which occurs at any time when any of the events described in subsection 7.1(f) shall have occurred and be continuing. (d) The Administrative Agent, on behalf of the Borrower, shall maintain at the address of the Administrative Agent referred to in subsection 9.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders may (and, in the case of any Loan or other obligation hereunder not evidenced by a Note, shall) treat each Person whose name is recorded in the Register as the owner of a Loan or other obligation hereunder as the owner thereof for all purposes of this Agreement and the other Loan 63 Documents, notwithstanding any notice to the contrary. Any assignment of any Loan or other obligation hereunder not evidenced by a Note shall be effective only upon appropriate entries with respect thereto being made in the Register. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Assignee (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Borrower and the Administrative Agent) together with payment to the Administrative Agent of a registration and processing fee of $3,000, the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. (f) The Borrower authorizes each Lender to disclose to any Participant or Assignee (each, a "Transferee") and any prospective Transferee any and all financial information in such Lender's possession concerning the Borrower and its Affiliates which has been delivered to such Lender by or on behalf of the Borrower pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Borrower in connection with such Lender's credit evaluation of the Borrower and its Affiliates prior to becoming a party to this Agreement. (g) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this subsection concerning assignments of Loans and Notes relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests, including, without limitation, any pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank in accordance with applicable law. (h) Each Lender making any sale or assignment permitted by this subsection agrees to deliver to the Participant or Assignee, as the case may be, copies of all Form U-1's theretofore delivered to it hereunder. 9.7 Consent to Assignment to TW Inc.. (a) Upon the consummation of the acquisition of Turner Broadcasting System, Inc. by Time Warner Inc. the Common Stock will be exchanged for common stock of TW Inc., a Delaware corporation, and Time Warner Inc. will become a wholly-owned Subsidiary of TW Inc. Effective with the consummation of such transaction, the Lenders hereby consent to the assignment to and assumption by TW Inc. of the obligations of the Borrower hereunder. 64 (b) Effective upon the consummation of such acquisition and the Administrative Agent, the Lenders and the Escrow Agent receiving written notice from Time Warner Inc. and TW Inc. that Time Warner Inc. is a wholly-owned subsidiary of TW Inc., TW Inc. hereby (a) assumes all obligations of Time Warner Inc. under this Agreement and each other Loan Document, (b) agrees that it shall become the "Borrower" hereunder and under each other Loan Document and the "Depositor" under the Escrow Agreement, and shall be bound by the provisions hereof and thereof as if it were the "Borrower" or the "Depositor", as the case may be, as the original signatory hereto and thereto, (c) agrees that all references to the "Borrower" herein or in any other Loan Document and to the "Depositor" in the Escrow Agreement shall be deemed to be references to TW Inc. and its permitted successors and assigns and (d) agrees that all references to Common Stock and Options shall be deemed to refer to the equivalent interests of TW Inc. Upon TW Inc.'s effective assumption of (x) the Borrower's obligations hereunder and under each other Loan Document and (y) the Depositor's obligations under the Escrow Agreement, Time Warner Inc. shall automatically be released from its obligations under this Agreement and each other Loan Document. 9.8 Adjustments to Number of Shares of Common Stock and Stock Price. (a) In case the Borrower shall (i) pay a dividend or make a distribution on the Common Stock in shares of its Capital Stock or reclassify its Common Stock, (ii) subdivide the outstanding Common Stock into a greater number of shares, (iii) combine the outstanding Common Stock into a smaller number of shares or (iv) distribute to the holders of its shares of Common Stock any assets or property, including debt or equity securities (excluding (i) distributions in shares of its Capital Stock and (ii) regularly scheduled cash dividends payable on shares of Common Stock), the $24 per share price specified in subsection 2.1, the $20 per share price specified in subsection 5.9 and the 52,500,000 shares of Common Stock referred to in subsection 5.9 shall be adjusted so that such figures represent the equivalent amounts after the happening of any of the events described above, and/or the definition of "Common Stock" contained herein shall be modified to include therein any such assets or property that are also made subject to the Options, provided that, if any such assets or property has no loan value for purposes of Regulation U, such assets or property shall not be included in determining Base Maximum Commitment Amount, Current Reg. U Loan Value, Notional Reduction Amount, Surplus Escrowed Stock and Trigger Event. An adjustment made pursuant to this subsection shall become effective immediately after the record date in the case of a dividend, and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. 65 (b) No adjustments specified in subsection 9.8(a) shall be required unless such adjustment would require an increase or decrease of at least 1% in the amounts in question; provided, however, that any adjustments which by reason of this subsection are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (c) Whenever an adjustment is required to be made as herein provided, the Borrower shall deliver a certificate of a Responsible Officer to the Administrative Agent, setting forth in reasonable detail the relevant calculations for such adjustment and setting forth a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment, absent manifest error. 9.9 Adjustments; Set-off. (a) If any Lender (a "benefitted Lender") shall at any time receive any payment of all or part of its Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 7.1(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans, or interest thereon, such benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loans, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower 66 and the Administrative Agent after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. 9.10 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent. 9.11 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.12 Integration. This Agreement and the other Loan Documents represent the entire agreement of the Borrower, the Administrative Agent and the Lenders with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to subject matter hereof or thereof not expressly set forth or referred to herein or in the other Loan Documents. 9.13 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 9.14 Submission To Jurisdiction; Waivers. The Borrower hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgement in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or 67 proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in subsection 9.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, punitive or consequential damages. 9.15 Acknowledgements. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between Administrative Agent and Lenders, on the one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders. 9.16 WAIVERS OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 68 SECTION 10. PROCEDURES TO INCREASE BASE COMMITMENT 10.1 Increase in Base Maximum Commitment Amount. (a) The Borrower shall have the right, upon not less than two Business Days' notice to the Administrative Agent (who will thereafter promptly notify the Lenders thereof), and upon satisfaction of the conditions set forth in subsection 10.1(b), to increase the Base Maximum Commitment Amount by the amount specified in such notice, provided that the amount of such increase shall not exceed the lesser of (i) the excess of the Maximum Commitment Amount over the then Base Maximum Commitment Amount and (ii) the Current Reg. U Loan Value of the Surplus Escrowed Stock (including any Escrowed Stock to be deposited in the Escrow Account concurrently with the effectiveness of such increase) as of the effective date of such increase. (b) The right of the Borrower to increase the Base Maximum Commitment Amount is subject to the satisfaction of the condition precedent that the Administrative Agent shall have received a Form F.R. U-1 for each Lender, duly completed and satisfactory to such Lender and in conformity with Regulation U, which form shall treat the requested increase in Base Maximum Commitment Amount as a new extension of a revolving credit facility to the Borrower as of the effective date of the requested increase. (c) Notwithstanding the provisions of subsection 5.9(d), the Borrower shall at all times be entitled to deposit certificates representing additional Common Stock into the Escrow Account following a Sale Event and prior to the sale of all Common Stock held in the Escrow Account as of the Sale Event to the extent necessary to increase the Base Maximum Commitment Amount so that the Borrower shall be entitled to borrow the full amount that it could have borrowed under the Borrowing Base Calculation without regard to such deposit of additional shares. Notwithstanding anything to the contrary contained in this Agreement, after a Sale Event and prior to the occurrence of the events described in clause (ii) of subsection 5.9(e), all certificates representing Common Stock that are deposited into the Escrow Account pursuant to this subsection 10.1(c) shall be excluded in the calculation of the Ratios. Following the sale of an amount of Escrowed Stock equal to the amount held in the Escrow Account as of the relevant Sale Event, all such shares so deposited shall be included in the Borrowing Base Calculation. 10.2 Individual Lender Responsibility. Each Lender shall be responsible for its own compliance with and administration of the provisions of subsection 10.1(b), and the Administrative Agent shall have no responsibility for any determinations made or to be made by any Lender pursuant to this Section. 69 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. TIME WARNER INC. By: Title: CHEMICAL BANK, as Administrative Agent and as a Lender By: Title: 70 BANK OF AMERICA NT & SA By: Title: BANK OF BOSTON By: Title: BANK OF MONTREAL By: Title: THE BANK OF NEW YORK By: Title: THE BANK OF NOVA SCOTIA By: Title: BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: Title: BANQUE NATIONALE DE PARIS By: Title: By: Title: 71 BANQUE PARIBAS By: Title: BARCLAYS BANK PLC By: Title: CIBC INC. By: Title: CITIBANK, N.A. By: Title: COMMERZBANK AG By: Title: By: Title: CREDIT LYONNAIS NEW YORK BRANCH By: Title: 72 CREDIT SUISSE By: Title: By: Title: THE DAI-ICHI KANGYO BANK, LTD. By: Title: THE FUJI BANK, LIMITED, NEW YORK BRANCH By: Title: THE INDUSTRIAL BANK OF JAPAN, LIMITED By: Title: THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED By: Title: MELLON BANK, N.A. By: Title: MITSUBISHI TRUST & BANKING By: Title: 73 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: Title: NATIONSBANK, N.A. By: Title: ROYAL BANK OF CANADA By: Title: THE SAKURA BANK, LIMITED By: Title: THE SANWA BANK, LIMITED By: Title: SOCIETE GENERALE By: Title: THE SUMITOMO BANK, LTD., NEW YORK BRANCH By: Title: 74 THE TOKAI BANK, LTD. By: Title: CONSENTED AND AGREED TO FOR PURPOSES OF SUBSECTION 9.7: TW INC. By: Title: EXHIBIT A [FORM OF] NOTE $__________ New York, New York ______________, 199 FOR VALUE RECEIVED, the undersigned, Time Warner Inc., a Delaware corporation (together with its successors and permitted assigns, the "Borrower", except that after the assumption provided for in subsection 9.7 of the Credit Agreement, the "Borrower" shall mean TW Inc. and its successors and permitted assigns), hereby unconditionally promises to pay to the order of ____________ (the "Lender") at the office of Chemical Bank, located at 270 Park Avenue, New York, New York 10017, in lawful money of the United States of America and in immediately available funds, on the Termination Date (as defined in the Credit Agreement referred to below) the principal amount of (a) ________________ DOLLARS ($__________), or, if less, (b) the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower pursuant to subsection 2.1 of the Credit Agreement referred to below. The Borrower further agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in subsection 2.9 of the Credit Agreement. The holder of this Note is authorized to endorse on the schedules annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date, Type and amount of each Loan made pursuant to the Credit Agreement and the date and amount of each payment or prepayment of principal thereof, each continuation thereof, each conversion of all or a portion thereof to another Type and, in the case of Eurodollar Loans, the length of each Interest Period with respect thereto. Each such endorsement shall constitute prima facie evidence of the accuracy of the information endorsed. The failure to make any such endorsement shall not affect the obligations of the Borrower in respect of such Loan. This Note (a) is one of the Notes referred to in the Credit Agreement, dated as of May 23, 1996 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the Lender, the other banks and financial institutions from time to time parties thereto and Chemical Bank, as administrative agent, (b) is subject to the provisions of the Credit Agreement and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. 2 Upon the occurrence of any one or more of the Events of Default, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided in the Credit Agreement. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind, except as may be provided in subsection 7.1 of the Credit Agreement. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. TIME WARNER INC. By: ____________________ Name: Title: Schedule A To Note LOANS, CONVERSIONS AND REPAYMENTS OF ABR LOANS Amount of Principal Amount of ABR Amount Converted of ABR Loans Date Loans to ABR Loans Repaid Amount of ABR Loans Converted to Eurodollar Unpaid Principal Notations Loans Balance of ABR Loans Made By Schedule B To Note LOANS, CONTINUATIONS, CONVERSIONS AND REPAYMENTS OF EURODOLLAR LOANS Amount Converted Interest Paid and Amount of to or Continued as Eurodollar Rate with Date Eurodollar Loans Eurodollar Loans Respect Thereto Amount of Principal Amount of Eurodollar Unpaid Principal of Eurodollar Loans Loans Converted to Balance of Notations Repaid ABR Loans Eurodollar Loans Made By EXHIBIT C [FORM OF] BORROWING CERTIFICATE Reference is made to the Credit Agreement, dated as of May 23, 1996 (the "Credit Agreement"), among Time Warner Inc., a Delaware corporation (together with its successors and permitted assigns, the "Borrower", except that after the assumption provided for in subsection 9.7 of the Credit Agreement, the "Borrower" shall mean TW Inc. and its successors and permitted assigns), the several banks and other financial institutions from time to time parties thereto (collectively, the "Lenders"), and Chemical Bank, a New York banking corporation, as Administrative Agent for the Lenders (in such capacity, the "Administrative Agent"). Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. Pursuant to subsection 4.1(b) of the Credit Agreement, the undersigned, Vice President and Assistant Secretary of the Borrower, hereby certify as follows: 1. Each of the representations and warranties made by the Borrower in or pursuant to any Loan Document or in or pursuant to any certificate, document or financial or other statement furnished by or on behalf of the Borrower pursuant to or in connection with any Loan Document, is true and correct in all material respects on and as of the date hereof with the same effect as if made on the date hereof except for representations and warranties stated to relate to a specific earlier date, in which case such representations and warranties were true and correct in all material respects as of such earlier date; 2. No Default or Event of Default has occurred and is continuing as of the date hereof or after giving effect to the Loans to be made on the date hereof; 3. There are no liquidation or dissolution proceedings pending or to my knowledge threatened against the Borrower nor has any other event occurred affecting or threatening the corporate existence of the Borrower, except as contemplated by subsection 9.7 of the Credit Agreement; 4. The Borrower is duly organized, validly existing and in good standing under the laws of the State of Delaware; 2 5. Attached hereto as Exhibit A is a copy of a Certificate of the Secretary of State of Delaware, dated reasonably close to the Closing Date and certifying that the Borrower is duly incorporated and in good standing under the laws of Delaware; 6. As of the date hereof, (a) the amount of the "present fair saleable value" of the assets of the Borrower exceeds the amount that will be required to pay the probable "liabilities of the Borrower, contingent or otherwise" on its debts as they become absolute and matured (as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors), (b) the fair value of the assets of the Borrower is greater than the total amount of liabilities, including, without limitation, contingent liabilities of the Borrower, (c) the Borrower does not, nor does it intend to, engage in business or any transaction for which the Borrower's property would constitute an unreasonably small amount of capital, and (d) the Borrower is able to pay its debts as they mature and does not intend to incur debts or liabilities beyond the Borrower's ability to pay such debts and liabilities as they mature, taking into account the timing of and amounts of cash to be received by the Borrower and the timing of and amounts of cash to be payable on or in respect of such debts or liabilities, in each case after giving effect to the transactions contemplated by the Credit Agreement and the Loans to be made on Closing Date and to the application of the proceeds of such Loans; 7. As of May __, 1996 (the Trading Day immediately preceding the date hereof), the current market price per share (as determined in accordance with the provisions set forth in the definition of Loan Value contained in subsection 1.1 of the Credit Agreement) of the Common Stock is $___ per share; 8. Stock certificates representing [________] shares of Common Stock (together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the Borrower) have been delivered to the Escrow Agent; 9. The Aggregate Loan Value of the Escrowed Stock referred to in paragraph 8 (based upon the current market price per share set forth in paragraph 7) is [______], which amount is at least two times the Maximum Commitment Amount in effect as of the date hereof; 3 10. The Aggregate Loan Value of the Options set forth on Schedule II to the Credit Agreement (calculated in accordance with the provisions set forth in the definition of Aggregate Loan Value contained in subsection 1.1 of the Credit Agreement as of the date set forth in such Schedule) is [______]; 11. The aggregate amount of the Loans requested to be made by the Lenders on the date hereof is [______]; 12. As of the date hereof, the Interest Component is [______]; 13. The ratio of (x) the sum of (i) the Aggregate Loan Value of the Escrowed Stock (as set forth in paragraph 9) and (ii) the Aggregate Loan Value of the Options (as set forth in paragraph 10) to (y) the Covered Amount (calculated as the sum of the amounts indicated in paragraphs 11 and 12) is ___ to ___; and 14. The ratio of (x) the Aggregate Loan Value of the Escrowed Stock (as set forth in paragraph 9) to (y) the Covered Amount is ___ to ___. IN WITNESS WHEREOF, each of the undersigned has executed and delivered this Borrowing Certificate on the [ day of May 1996] [Insert Closing Date]. TIME WARNER INC. By: ______________________ Name: Title: Vice President By: ______________________ Name: Title: Assistant Secretary EXHIBIT F [FORM OF] ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement, dated as of May 23, 1996 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Time Warner Inc., a Delaware corporation (together with its successors and permitted assigns, the "Borrower", except that after the assumption provided for in subsection 9.7 of the Credit Agreement, the "Borrower" shall mean TW Inc. and its successors and permitted assigns), the Lenders named therein and Chemical Bank, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. The Assignor identified on Schedule l hereto (the "Assignor") and the Assignee identified on Schedule l hereto (the "Assignee") agree as follows: 1. The Assignor hereby irrevocably sells and assigns to the Assignee without recourse to the Assignor, and the Assignee hereby irrevocably purchases and assumes from the Assignor without recourse to the Assignor, as of the Effective Date (as defined below), the interest described in Schedule 1 hereto (the "Assigned Interest") in and to the Assignor's rights and obligations under the Credit Agreement and the other Loan Documents as set forth on Schedule 1 hereto (the "Assigned Facility"), in a principal amount for such Assigned Facility as set forth on Schedule 1 hereto. 2. The Assignor (a) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto or with respect to the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto, other than that the Assignor has not created any adverse claim upon the interest being assigned by it hereunder and that such interest is free and clear of any such adverse claim; (b) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower, any of its Subsidiaries or any other obligor or the performance or observance by the Borrower, any of its Subsidiaries or any other obligor of any of their respective obligations under the Credit Agreement or any other Loan Document or any other instrument or document furnished pursuant hereto or thereto; and (c) attaches 2 any Note held by it evidencing the Assigned Facility and (i) requests that the Administrative Agent, upon request by the Assignee, exchange the attached Note for a new Note or Notes payable to the Assignee and (ii) if the Assignor has retained any interest in the Assigned Facility, requests that the Administrative Agent exchange the attached Note for a new Note or Notes payable to the Assignor, in each case in amounts which reflect the assignment being made hereby (and after giving effect to any other assignments which have become effective on the Effective Date). 3. The Assignee (a) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (b) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements delivered pursuant to subsection 3.1 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (c) agrees that it will, independently and without reliance upon the Assignor, the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; (d) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Administrative Agent by the terms thereof, together with such powers as are incidental thereto; and (e) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with its terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender including, if it is organized under the laws of a jurisdiction outside the United States, its obligation pursuant to subsection 2.15(d) of the Credit Agreement. 4. The effective date of this Assignment and Acceptance shall be the Effective Date of Assignment described in Schedule 1 hereto (the "Effective Date"). Following the execution of this Assignment and Acceptance, it will be delivered to the Administrative Agent for acceptance by it and recording by the Administrative Agent pursuant to the Credit Agreement, effective as of the Effective Date (which shall not, unless otherwise agreed to by the Administrative Agent, be earlier than five Business Days after the date of such acceptance and recording by the Administrative Agent). 3 5. Upon such acceptance and recording, from and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to the Effective Date and to the Assignee for amounts which have accrued subsequent to the Effective Date. The Assignor and the Assignee shall make all appropriate adjustments in payments by the Administrative Agent for periods prior to the Effective Date or with respect to the making of this assignment directly between themselves. 6. From and after the Effective Date, (a) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and under the other Loan Documents and shall be bound by the provisions thereof and (b) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 7. This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed as of the date first above written by their respective duly authorized officers on Schedule 1 hereto. Schedule 1 to Assignment and Acceptance Name of Assignor: ___________________ Name of Assignee: ___________________ Effective Date of Assignment: __________________ Credit Principal Commitment Percentage Facility Assigned Amount Assigned Assigned 1/ $_______________ ____.______________% [Name of Assignor] [Name of Assignee] By:___________________ By:___________________ Name: Name: Title: Title: Accepted [and Consented To]: CHEMICAL BANK, as Administrative Agent By: ____________________ Name: Title: [Consented To: TIME WARNER INC. By:___________________ Name: Title:] _________________________________________________ 1/ Calculate the Commitment Percentage that is assigned to at least 15 decimal places and show as a percentage of the aggregate commitments of all Lenders. SCHEDULE I CREDIT AGREEMENT COMMITMENTS AND ADDRESSES FOR NOTICES NAME AND ADDRESS FOR NOTICES REVOLVING COMMITMENT AAMOUNT AND COMMITMENT PERCENTAGE CHEMICAL BANK Commitment Amount: $30,400,000 270 Park Avenue New York, NY 10017 Commitment Percentage: 4.053333333 Attn: Dorothy Vena Tel: (212) 270-4048 Fax: (212) 270-7904 BANK OF AMERICA NT & SA Commitment Amount: $25,700,000 335 Madison Avenue New York, NY 10017 Commitment Percentage: 3.426666667 Attn: Matthew Flynn Tel: (212) 503-8372 Fax: (212) 503-7173 BANK OF MONTREAL Commitment Amount: $25,700,000 430 Park Avenue, 16th Floor New York, NY 10022 Commitment Percentage: 3.426666667 Attn: Allegra Griffiths Tel: (212) 605-1426 Fax: (212) 605-1648 THE BANK OF NEW YORK Commitment Amount: $25,700,000 One Wall Street, 16th Floor New York, NY 10266 Commitment Percentage: 3.426666667 Attn: Brendan Nedzi Tel: (212) 635-8628 Fax: (212) 635-8593 THE BANK OF NOVA SCOTIA Commitment Amount: $25,700,000 One Liberty Plaza, 26th Floor New York, NY 10006 Commitment Percentage: 3.426666667 Attn: Vincent Fitzgerald Tel: (212) 225-5042 Fax: (212) 225-5091 BANK OF TOKYO-MITSUBUISHI TRUST COMPANY Commitment Amount: $25,700,000 1251 Avenue of the Americas New York, NY 10116-3138 Commitment Percentage: 3.426666667 Attn: John Judge Tel: (212) 782-4383 FAX: (212) 782-6442 Page 2 BANQUE NATIONALE DE PARIS Commitment Amount: $25,700,000 499 Park Avenue New York, NY 10022 Commitment Percentage: 3.426666667 Attn: Nuala Marley Tel: (212)-415-9726 Fax: (212) 415-9695 BANQUE PARIBAS Commitment Amount: $25,700,000 787 Seventh Avenue New York, NY 10019 Commitment Percentage: 3.426666667 Attn: Philippe Vaurchex Tel: (212) 841-2226 Fax: (212) 841-2369 BARCLAYS BANK PLC Commitment Amount: $25,700,000 388 Market Street San Francisco, CA 94111 Commitment Percentage: 3.426666667 Attn: James Tan Tel: (415) 765-4718 Fax: (415) 765-4760 CIBC INC. Commitment Amount: $25,700,000 425 Lexington Avenue New York, NY 10017 Commitment Percentage: 3.426666667 Attn: Matthew Jones Tel: (212) 856-3714 Fax: (212) 856-3558 CITIBANK, N.A. Commitment Amount: $25,700,000 4th Floor/Zone 16 399 Park Avenue Commitment Percentage: 3.426666667 New York, NY 10043 Attn: Mary E. Thomas Tel: (212) 559-3094 Fax: (212) 793-6873 COMMERZBANK AG Commitment Amount: $25,700,000 2 World Financial Center New York, NY 10261 Commitment Percentage: 3.426666667 Attn: Robert Donohue Tel: (212) 266-7336 Fax: (212) 266-7374 CREDIT LYONNAIS NEW YORK BRANCH Commitment Amount: $25,700,000 1301 Avenue of the Americas New York, NY 10019 Commitment Percentage: 3.426666667 Attn: Steve Levi Tel: (212) 261-7324 Fax: (212) 261-3318 Page 3 CREDIT SUISSE Commitment Amount: $25,700,000 12 East 49th Street New York, NY 10017 Commitment Percentage: 3.426666667 Attn: Ed Barr Tel: (212) 238-5414 Fax: (212) 238-5439 THE DAI-ICHI KANGYO BANK, LTD. Commitment Amount: $25,700,000 One World Trade Center, Suite 4911 New York, NY 10048 Commitment Percentage: 3.426666667 Attn: Seiji Imai Tel: (212) 432-8441 Fax: (212) 524-0579 THE FIRST NATIONAL BANK OF BOSTON Commitment Amount: $25,700,000 100 Federal Street Boston, MA 02110 Commitment Percentage: 3.426666667 Attn: Kathryn Ticknor Tel: (617) 434-4624 Fax: (617) 434-3401 THE FUJI BANK, LIMITED, NEW YORK BRANCH Commitment Amount: $25,700,000 Two World Trade Center, 79-81 Floors New York, NY Commitment Percentage: 3.426666667 Attn: John D. Doyle Tel: (212) 898-2087 Fax: (212) 912-0516 THE INDUSTRIAL BANK OF JAPAN, LIMITED Commitment Amount: $25,700,000 245 Park Avenue New York, NY 10167-0037 Commitment Percentage: 3.42666667 Attn: Akira Yoshida Tel: (212) 309-6562 Fax: (212) 682-2870 THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED Commitment Amount: $25,700,000 165 Broadway, 49th Floor New York, NY 10008 Commitment Percentage: 3.426666667 Attn: Tetsuya Fukunaga Tel: (212) 335-4549 Fax: (212) 608-2371 MELLON BANK, N.A. Commitment Amount: $25,700,000 One Mellon Bank Center Pittsburgh, PA 15286-0001 Commitment Percentage: 3.426666667 Attn: Maribeth Donnelly Tel: (412) 236-2472 Fax: (412) 234-6375 Page 4 MITSUBISHI TRUST & BANKING Commitment Amount: $25,700,000 520 Madison Avenue, 26th Floor New York, NY 10022 Commitment Percentage: 3.426666667 Attn: Bea Kossodo Tel: (212) 891-8454 Fax: (212) 755-2349 MORGAN GUARANTY TRUST COMPANY OF NEW YORK Commitment Amount: $25,700,000 60 Wall Street New York, NY 10260-0060 Commitment Percentage: 3.426666667 Attn: George Stapleton Tel: (212) 648-7831 Fax: (212) 648-5018 NATIONSBANK, N.A. Commitment Amount: $25,700,000 767 Fifth Avenue New York, NY 10153-0083 Commitment Percentage: 3.426666667 Attn: James Gilland Tel: (212) 407-5330 Fax: (212) 593-1083 ROYAL BANK OF CANADA Commitment Amount: $25,700,000 Financial Square New York, NY 10005-3531 Commitment Percentage: 3.426666667 Attn: Barbara Meijer Tel: (212) 428-6288 Fax: (212) 428-6460 THE SAKURA BANK, LIMITED Commitment Amount: $25,700,000 277 Park Avenue New York, NY 10172 Commitment Percentage: 3.426666667 Attn: Pierre Vautravers [Fuminori Ohira] Tel: (212) 756-6820 [(212) 756-6769] Fax: (212) 888-7651 [(212) 888-7651] THE SANWA BANK, LIMITED Commitment Amount: $25,700,000 55 East 52nd Street, 26th Floor New York, NY 10055 Commitment Percentage: 3.426666667 Attn: Joseph Leo Tel: (212) 339-6205 Fax: (212) 754-1304 SOCIETE GENERALE Commitment Amount: $25,700,000 1221 Avenue of the Americas New York, NY 10020 Commitment Percentage: 3.426666667 Attn: Mark Vigil Tel: (212) 278-7350 Fax: Page 5 THE SUMITOMO BANK, LTD., NEW YORK BRANCH Commitment Amount: $25,700,000 277 Park Avenue, 6th Floor New York, NY 10172 Commitment Percentage: 3.426666667 Attn: Leo Pagarigan Tel: (212) 224-4118 Fax: (212) 224-5188 THE TOKAI BANK, LTD. Commitment Amount: $25,700,000 55 East 52nd Street, 12th Floor New York, NY 10055 Commitment Percentage: 3.426666667 Attn: Stuart Schulman Tel: (212) 339-1117 Fax: (212) 754-2171 EX-10.2 4 Exhibit 10.2 EXECUTION COPY ESCROW AGREEMENT This ESCROW AGREEMENT, dated as of May 23, 1996 is made among TIME WARNER INC., a Delaware corporation (together with its successors and permitted assigns, the "Depositor", except that after the assumption provided for in subsection 9.7 of the Credit Agreement, the "Depositor" shall mean TW Inc. together with its permitted successors and assigns), THE BANK OF NEW YORK, a New York banking corporation (together with its successors and permitted assigns, the "Escrow Agent") and CHEMICAL BANK, a New York banking corporation, in its capacity as Administrative Agent (the "Administrative Agent"; and together with the Depositor, the "Beneficiaries") under the Credit Agreement, dated as of May 23, 1996, among the Depositor, the several banks, financial institutions and other entities from time to time parties thereto (the "Lenders") and Chemical Bank, as Administrative Agent (as the same may from time to time be amended, supplemented or otherwise modified, the "Credit Agreement"). W I T N E S S E T H: WHEREAS, under the Credit Agreement the Depositor is required to deposit in escrow a specified number of shares of common stock of the Depositor, as adjusted pursuant to subsections 9.7 and 9.8 of the Credit Agreement (the "Stock") and from time to time may be required to deposit in escrow additional shares of Stock; WHEREAS, the Depositor wishes to appoint the Escrow Agent to act as its agent for the purposes of taking and retaining custody of the shares of Stock required to be deposited in escrow under the Credit Agreement; and WHEREAS, each of the Depositor and the Administrative Agent wishes to appoint the Escrow Agent to act as its agent for the other purposes of this Agreement and carrying out the Escrow Agent's other obligations hereunder; NOW, THEREFORE, in consideration of the mutual agreements herein contained and of other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: SECTION 1. DEFINED TERMS 1.1 Definitions. (a) Unless otherwise defined herein (i) terms defined in the preamble and recitals hereto are used herein as so defined and (ii) terms defined in the Credit Agreement are used herein as so defined; and the following terms shall have the following meanings: "Authorized Representative": as defined in subsection 2.3 hereof. 2 "Blocking Notice": as defined in subsection 2.4 hereof. "Blocking Period": as defined in subsection 5.1 hereof. "Escrowed Stock": as defined in subsection 2.2 hereof. "Securities Act": as defined in subsection 5.3 hereof. (b) All references herein to "the Agreement" or "this Agreement" are to this Escrow Agreement as it may be amended, supplemented or modified from time to time, and all references hereto to Sections, subsections and Exhibits are to Sections, subsections and Exhibits of this Agreement unless otherwise specified. SECTION 2. APPOINTMENT AND DUTIES OF THE ESCROW AGENT 2.1 Appointment of Escrow Agent. The Depositor hereby appoints the Escrow Agent to act as its agent for the purposes of taking and retaining custody of the shares of Stock required to be deposited in escrow under the Credit Agreement in accordance with the terms and conditions of this Agreement; and each of the Administrative Agent and the Depositor appoints the Escrow Agent to act as its agent for purposes of carrying out the Escrow Agent's other obligations hereunder. 2.2 Deposit of Escrowed Stock. The Depositor may from time to time deposit with the Escrow Agent certificates representing shares of Stock pursuant to the terms of the Credit Agreement (such Stock, the "Escrowed Stock"), together with undated stock powers duly executed in blank in respect of such Escrowed Stock. All such deposited Stock shall be accompanied by a notice from the Depositor to the Escrow Agent substantially in the form of Exhibit 1, with a copy of such notice sent to the Administrative Agent. The sole responsibilities of the Escrow Agent with respect to Escrowed Stock shall be to act as custodian thereof for the Depositor so long as such Escrowed Stock shall remain in the Escrow Agent's possession. The Escrow Agent shall promptly, but in any event within one (1) Business Day, provide to the Administrative Agent written verification of all Stock deposited hereunder or removed from escrow hereunder by the Depositor substantially in the form of Exhibit 2. The Escrow Agent shall have no duty to monitor the delivery to it of such shares of Stock other than to note receipt of such on its records and to notify the Administrative Agent thereof as provided in the preceding sentence. 2.3 Authorized Representatives. The Escrow Agent shall accept only written instructions of an Authorized Representative (as defined below) of the Administrative Agent or 3 the Depositor concerning the use, handling and disposition of the Escrowed Stock. Each individual designated as an authorized representative of the Administrative Agent, the Depositor or the Escrow Agent (each, an "Authorized Representative") is authorized to give and receive notices, requests and instructions and to deliver certificates and documents in connection with this Agreement on behalf of the Administrative Agent, the Depositor or the Escrow Agent, as the case may be, and the specimen signature for each such Authorized Representative thereof initially authorized hereunder is set forth on Exhibits 5, 6 and 7 hereto, respectively. From time to time the Administrative Agent, the Depositor and the Escrow Agent may, by delivering to each of the others a revised exhibit, change the information previously given, but each of the other parties hereto shall be entitled to rely conclusively on the last exhibit until receipt of a superseding exhibit. 2.4 Right of Depositor to Withdraw Escrowed Stock. (a) Unless the Escrow Agent shall have received written notice (a "Blocking Notice") from the Administrative Agent that the Escrow Agent may no longer accept directions from the Depositor pursuant hereto, the Escrow Agent, upon the receipt of a written request from the Depositor, in substantially the form of Exhibit 3 hereto (with a copy to the Administrative Agent) specifying the number of shares of Escrowed Stock to be released by the Escrow Agent to the Depositor, shall release the number of shares of Escrowed Stock specifically requested by the Depositor to the Depositor. The Escrow Agent shall deliver to the Depositor (or to the Person designated by the Depositor in such written request) upon receipt of such written instructions of the Depositor, as rapidly as practicable, but in no case later than two (2) Business Days, all of the shares of Escrowed Stock so designated for delivery, together with the undated stock powers in respect of such Escrowed Stock. For purposes of effecting such release, the Escrow Agent may deliver to the Depositor for exchange certificates representing all or a portion of the Escrowed Stock for one or more certificates aggregating the number of shares of Escrowed Stock specified by the Depositor as remaining in escrow. In such case the Depositor will promptly redeliver to the Escrow Agent certificates representing such remaining shares, together with new undated stock powers duly executed in blank for such remaining shares. (b) Any instruction by the Depositor to deliver the shares of Escrowed Stock to the Depositor (or to a Person designated by the Depositor) must inform the Escrow Agent, to the Escrow Agent's satisfaction, of the terms and method of delivery of the shares of such Stock. The Depositor shall hold the Escrow Agent harmless from losses or damages to any person for the safe transmittal of the shares of Stock if the Escrow Agent has complied with the Depositor's instructions regarding their delivery. 4 2.5 Right of Administrative Agent to Direct Escrow Agent. (a) At any time after the Administrative Agent shall have delivered a Blocking Notice to the Escrow Agent, the Escrow Agent, upon the receipt of a written request from the Administrative Agent, in substantially the form of Exhibit 4 (with a copy to the Depositor) specifying the number of shares of Escrowed Stock to be released by the Escrow Agent, shall release the number of shares of Escrowed Stock specifically requested by the Administrative Agent to the buyer (or such buyer's nominee or agent) set forth in such written request. The Escrow Agent shall deliver to the buyer (or such buyer's nominee or agent) set forth in such written request, as rapidly as practicable, but in no case later than two (2) Business Days, all of the shares of Escrowed Stock so designated for delivery, together with the undated stock powers in respect of such Escrowed Stock. (b) Any instruction by the Administrative Agent to deliver the shares of Escrowed Stock must inform the Escrow Agent, to the Escrow Agent's satisfaction, of the terms and method of delivery of the shares of such Stock to or for the account of the purchaser thereof. The Administrative Agent shall hold the Escrow Agent harmless from losses or damages to any person for the safe transmittal of the shares of Stock if the Escrow Agent has complied with the Administrative Agent's instructions regarding their delivery. (c) During a Blocking Period, the Depositor shall only be permitted to request the release of Escrowed Stock with the written consent of the Administrative Agent. Once a Blocking Notice is received by the Escrow Agent, without the written consent of the Administrative Agent, the Escrow Agent shall not thereafter release any Escrowed Stock to the Depositor or its order (even if the Depositor's request was received prior to the delivery of the Blocking Notice). (d) The Depositor hereby authorizes and instructs the Escrow Agent to comply with any instruction received by it from the Administrative Agent in writing that (a) states that a Blocking Period is in effect and (b) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from the Depositor, and the Depositor and the Administrative Agent agree that the Escrow Agent shall be fully protected in so complying. 2.6 Reliance of Escrow Agent. The notices, statements, directions and certificates requested under or required by this Section 2 shall be full authority for and direction to the Escrow Agent to execute the certificates and notices and deliver the shares of Stock and stock powers referred to herein and the Escrow Agent shall promptly do so. The Escrow Agent in so doing shall have no liability to any Person except on account of its wilful misconduct or negligence. In addition, 5 anything to the contrary contained in this Agreement notwithstanding, the Escrow Agent shall have no obligation to ascertain, inquire or otherwise determine whether or not actions taken (or requested to be taken), or notices given, under this Agreement are being taken (or requested to be taken) or given in accordance with the terms of the Credit Agreement. 2.7 Safekeeping of Escrowed Stock. All shares of Escrowed Stock (together with the related stock powers) shall be kept in fireproof vaults or cabinets at the office of the Escrow Agent specified in subsection 6.2, or at such other office as shall be specified to the Beneficiaries by 30 days' prior written notice. All shares of Escrowed Stock (together with the related stock powers) shall be placed together in a separate file cabinet with an appropriate identifying label and maintained in such a manner so as to permit retrieval and access. 2.8 Recordkeeping. The Escrow Agent shall keep all shares of Escrowed Stock clearly segregated from any other documents or instruments in its files and shall establish and at all times maintain an account (the "Escrow Account") at its office referred to in subsection 2.7 which sets forth the Escrowed Stock from time to time being held pursuant to this Agreement. The Escrow Agent shall maintain a clear listing of all shares of Escrowed Stock and indicate that the Escrow Account is an escrow account and all such shares of Escrowed Stock are held in escrow pursuant to this Agreement, and that the Escrow Agent is holding such files solely as Escrow Agent pursuant hereto. 2.9 Inspection of Escrowed Stock. The Escrow Agent hereby agrees and covenants that, on reasonable prior notice, it will permit any representative of the Depositor or the Administrative Agent (or any of their agents), during the Escrow Agent's normal business hours, to examine the books of account, records, reports and other papers of the Escrow Agent relating to the shares of Escrowed Stock, and to make copies and extracts therefrom, all at such reasonable times and as often as may be reasonably requested. 2.10 No Implied Duties or Covenants. The Escrow Agent undertakes to perform such duties and only such duties as are specifically set forth in this Agreement and no implied covenants or obligations shall be read into this Agreement against the Escrow Agent; in the absence of bad faith on its part, the Escrow Agent may rely, as to the truth of the statements and correctness of the instructions given, on instruments and reports furnished to the Escrow Agent and conforming to the requirements of this Agreement. 6 2.11 Standard of Care. In performing its duties as the Escrow Agent, the Escrow Agent shall use the highest degree of care and attention employed by the custodians holding and transferring shares of stock. 2.12 No Representations or Warranties. The Escrow Agent makes no warranty or representation as to the validity of the shares of Stock and is acting solely as agent of the Beneficiaries to furnish only those services which are expressly described herein and any other administerial service or action which is reasonably requested by the Depositor or the Administrative Agent in order to accomplish the purposes of this Agreement. 2.13 Compensation of Escrow Agent. At the time of execution of this Agreement, the Depositor covenants and agrees to pay to the Escrow Agent and the Escrow Agent shall be entitled to receive, under a written agreement with the Depositor, compensation for all services rendered by it hereunder and in the exercise and performance of any of the powers and duties hereunder of the Escrow Agent, and the Depositor will pay or reimburse the Escrow Agent upon its request for all reasonable expenses, disbursements and advances incurred or made by the Escrow Agent in accordance with any of the provisions of this Agreement (including the reasonable fees and expenses of its agents and counsel) except any such expense, disbursement or advance as may arise from its negligence or bad faith. SECTION 3. INDEMNIFICATION 3.1 Indemnification of Escrow Agent. The Depositor agrees to indemnify and hold the escrow agent and its directors, officers, agents and employees harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever, including reasonable attorney's fees, that may be imposed on, incurred by, or asserted against it or them in any way relating to or arising out of this Agreement or any action taken or not taken by it or them hereunder unless such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements were imposed on, incurred by or asserted against the Escrow Agent because of the breach by the Escrow Agent of its obligations hereunder, which breach was caused by the negligence, lack of good faith or willful misconduct on the part of the Escrow Agent or any of its directors, officers, agents or employees. The foregoing indemnification shall survive any termination of this Escrow Agreement. 3.2 Exculpatory Provisions. (a) Neither the Escrow Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it 7 or them hereunder or in connection herewith in good faith and believed by it or them to be within the purview of this Escrow Agreement, including, without limitation, in the selection of shippers and methods of shipment, except for its or their own negligence, lack of good faith or willful misconduct. In no event shall the Escrow Agent or its directors, officers, agents and employees be held liable for any special, indirect, punitive or consequential damages resulting from any action taken or omitted to be taken by it or them hereunder or in connection herewith even if advised of the possibility of such damages. The Escrow Agent shall not be responsible to the Depositor, the Administrative Agent or any other party for recitals, statements or warranties or representations of any other party hereto contained herein, in the Credit Agreement or in any document or be bound to ascertain or inquire as to the performance or observance of any of the terms of this Escrow Agreement or the Credit Agreement on the part of Administrative Agent or the Depositor. (b) The Escrow Agent may, with the consent of the Depositor (which consent shall not be unreasonably withheld), consult with legal counsel (the reasonable expenses of which will be the responsibility of the Depositor) as to any matter relating to this Agreement, and the Escrow Agent shall not incur any liability in acting in good faith in accordance with any advice from said counsel. (c) Subject in all circumstances to the provisions of subsection 2.5 (which provides, among other things, that during a Blocking Period (i) the Escrow Agent shall only follow directions of the Depositor with the written consent of the Administrative Agent and (ii) the Depositor authorizes and instructs the Escrow Agent to comply with the instructions of the Administrative Agent), in the event of any ambiguity or uncertainty hereunder or in any notice, instruction or other communication received by the Escrow Agent hereunder, the Escrow Agent may, in its sole discretion, refrain from taking any action other than retaining possession of the Escrowed Stock, unless the Escrow Agent receives written instructions, signed by the Depositor or the Administrative Agent or by the Depositor and the Administrative Agent jointly, which eliminates such ambiguity or uncertainty. SECTION 4. TERMINATION OF AGREEMENT 4.1 Termination by Notice. This Agreement may be terminated at any time by the Depositor (with the consent, which shall not be unreasonably withheld, of the Administrative Agent) by written notice delivered by an Authorized Representative of both of them to the Escrow Agent. In such event, the Depositor (with the consent, which shall not be unreasonably withheld, of the Administrative Agent) will select a replacement escrow agent. The effective date of termination shall be as specified in such notice. 8 4.2 Termination Procedures. (a) Upon the termination of this Agreement and upon written notice to the Escrow Agent from the Depositor and the Administrative Agent, the Escrow Agent shall deliver to any successor escrow agent (or, if the Commitments shall have terminated and the Loans and all other amounts owing under the Loan Documents shall have been paid in full, to the Depositor or its designee), at the Escrow Agent's office, all shares of Stock then held by the Escrow Agent (together with the related stock powers). (b) If, upon termination of this Agreement, the Depositor fails to accept delivery of, or provide written delivery instructions for, all shares of Escrowed Stock then held by the Escrow Agent pursuant to this Agreement, the Escrow Agent shall have the right upon thirty (30) days' prior written notice to the Depositor and the Administrative Agent, to store the unaccepted shares of Escrowed Stock in a non-fireproof area and shall not be held liable by the Depositor for damage, theft, fire or other perils relating to the shares of Escrowed Stock. Upon termination of this Agreement, the Escrow Agent will not accept any instructions from the Depositor other than arrangements for complete delivery of all shares of Stock in its possession. Upon the Depositor's failure to arrange complete delivery or provide instructions for delivery within thirty (30) days of termination, the Escrow Agent shall have the right to mail all packages by regular, insured U.S.A. mail or United Parcel Service to the Depositor. SECTION 5. RIGHTS OF ADMINISTRATIVE AGENT AFTER A BLOCKING NOTICE. 5.1 Blocking Period Rights. The following provisions of this Section 5 shall apply during any period when a Blocking Notice is in effect and has not been withdrawn by the Administrative Agent (a "Blocking Period"). 5.2 Right to Dispose of Escrowed Stock. During a Blocking Period commenced in accordance with the terms of subsection 5.10 of the Credit Agreement, the Administrative Agent may exercise, in addition to all other rights and remedies granted in this Agreement and in the Credit Agreement the following rights and remedies. The Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except as may be required by the Credit Agreement or any notice required by law referred to below) to or upon the Depositor or any other Person (all and each of which demands, defenses, presentments, protests, advertisements and notices are (except as aforesaid) hereby waived), may in such circumstances, on behalf of the Depositor, forthwith sell (or cause the sale of), assign, give option or options to purchase or otherwise dispose of and deliver the Escrowed Stock or any part thereof (or contract to do any of the 9 foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Administrative Agent or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk subject to any requirements of applicable law. The Administrative Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Escrowed Stock so sold, free of any right or equity of redemption in the Depositor, which right or equity is hereby waived and released. The Administrative Agent shall apply the Net Cash Proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Escrowed Stock or in any way relating to the Escrowed Stock or the rights of the Administrative Agent and the Lenders hereunder, to the payment in whole or in part of the Loans to the extent then due and all other amounts then owing under the Credit Agreement in accordance with its terms, in such order as the Administrative Agent may elect, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law need the Administrative Agent account for the surplus, if any, to the Depositor. To the extent permitted by applicable law, the Depositor waives all claims, damages and demands it may acquire against the Administrative Agent or any Lender arising out of the exercise by them of any rights hereunder in accordance with this Agreement and the Credit Agreement. If any notice of a proposed sale or other disposition of Escrowed Stock shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. The Depositor shall remain liable for any deficiency (but only to the extent set forth in the Credit Agreement) if the proceeds of any sale or other disposition of Escrowed Stock are insufficient to pay the Loans and all other amounts owing under the Credit Agreement and the reasonable fees and disbursements of any attorneys employed by the Administrative Agent or any Lender to collect such deficiency. 5.3 Registration Rights; Private Sales. (a) If the Administrative Agent shall determine to exercise its right, on behalf of the Depositor, to sell (or cause the sale of) any or all of the Escrowed Stock on behalf of the Depositor pursuant to subsection 5.2 hereof, and if in the opinion of the Administrative Agent it is necessary or advisable to have the Escrowed Stock, or that portion thereof to be sold, registered under the provisions of the Securities Act of 1933, as amended (the "Securities Act"), the Depositor will execute and deliver, and cause its directors and officers to execute and deliver, all such instruments and documents, and do or cause to be done all 10 such other acts as may be, in the opinion of the Administrative Agent, necessary or advisable to register the Escrowed Stock, or that portion thereof to be sold, under the provisions of the Securities Act, to use its best efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of the Escrowed Stock, or that portion thereof to be sold, and to make all amendments thereto and/or to the related prospectus which, in the opinion of the Administrative Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto. The Depositor agrees to comply with the provisions of the securities or "Blue Sky" laws of any and all jurisdictions which the Administrative Agent shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of Section 11(a) of the Securities Act. (b) The Depositor recognizes that the Administrative Agent may be unable to effect or cause a public sale of any or all the Escrowed Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Depositor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Administrative Agent shall be under no obligation to delay a sale of any of the Escrowed Stock for the period of time necessary to permit the Depositor to register such securities for public sale under the Securities Act, or under applicable state securities laws, even though the Depositor has agreed to do so. (c) The Depositor further agrees to use its reasonable best efforts to do or cause to be done all such other acts as may be reasonably necessary to make such sale or sales of all or any portion of the Escrowed Stock pursuant to this Section valid and binding and in compliance with any and all other applicable Requirements of Law. The Depositor further agrees that a breach of any of the covenants contained in this Section will cause irreparable injury to the Administrative Agent and the Lenders, that the Administrative Agent and the Lenders have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section shall be specifically enforceable against the Depositor, and the Depositor 11 hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Credit Agreement. 5.4 Administrative Agent's Appointment as Attorney-in- Fact. (a) During any Blocking Period, the Depositor hereby irrevocably constitutes and appoints the Administrative Agent and any officer or agent of the Administrative Agent, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Depositor and in the name of the Depositor or in the Administrative Agent's own name, from time to time in the Administrative Agent's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, including, without limitation, any endorsements, assignments or other instruments of transfer. (b) The Depositor hereby ratifies all that said attorneys shall lawfully do or cause to be done pursuant to the power of attorney granted in subsection 5.4(a). All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated. 5.5 Duty of Administrative Agent. The Administrative Agent's sole duty with respect to the custody, safekeeping and physical preservation of any Escrowed Stock in its possession shall be to deal with it in the same manner as the Administrative Agent deals with similar securities and property for its own account that it is holding for sale. Neither the Administrative Agent, any Lender nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Escrowed Stock or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Escrowed Stock upon the request of the Depositor or any other Person or to take any other action whatsoever with regard to the Escrowed Stock or any part thereof. SECTION 6. MISCELLANEOUS 6.1 Assignment, Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto, and their respective successors and permitted assigns. Except as otherwise provided in this Agreement, no other Person shall have any right or obligation hereunder. Notwithstanding anything contained in this Agreement to the contrary, this Agreement may not be assigned (a) by the Escrow Agent without the prior written consent of the Administrative 12 Agent and the Depositor, which shall not be unreasonably withheld and (b) by the Depositor without the prior written consent of the Administrative Agent (except as specified in subsection 9.7 of the Credit Agreement). 6.2 Notices. (a) Except as otherwise specifically provided for in this Agreement, all notices, payments and other communications between the parties hereto shall be given by an Authorized Representative of the Administrative Agent, the Escrow Agent or the Depositor, as the case may be, in writing (including by facsimile) and shall be either hand delivered or mailed by registered or certified mail, postage prepaid, return receipt requested, or by facsimile (with receipt confirmed and with a hard copy sent promptly), Federal Express, other overnight couriers providing receipts or electronic mail as follows: If to the Administrative Agent: Chemical Bank 270 Park Avenue New York, New York 10017 Attention: Dorothy Vena Telephone Number: (212) 270-4048 Telecopy Number: (212) 270-7904 If to the Escrow Agent: The Bank of New York 101 Barclay Street Floor 12 East New York, New York 10286 Attention: Corporate Trust Escrow Unit Telephone Number: (212) 815-5228 Telecopy Number: (212) 815-5999 If to the Depositor: Time Warner Inc. 75 Rockefeller Plaza New York, New York 10019 Attention: Chief Financial Officer Telephone Number: (212) 484-7375 Telecopy Number: (212) 307-0126 Copies to: Attention: General Counsel Telephone Number: (212) 484-7580 Telecopy Number: (212) 956-7281 13 and to Cravath, Swaine & Moore 825 Eighth Avenue New York, New York 10019 Attention: William P. Rogers, Jr. Telephone: (212) 474-1270 Telecopy: (212) 474-3700 (b) Except with respect to the Escrow Agent, where notices shall be deemed effective when received, any such notice, payment or communication so delivered or addressed and mailed by certified mail, postage prepaid, return receipt requested, shall be deemed to have been given when so mailed. Notice given by Federal Express or electronic mail shall be deemed given twenty- four (24) hours after communicated. Any party may change the address to which notices, payments or communications shall be given by notifying the other party in writing as provided for in this subsection. (c) The Depositor shall provide written notice to the Escrow Agent within one Business Day of the effective date of the assumption referred to in the preamble hereto. 6.3 No Set-off. The Escrow Agent, in its capacity as escrow agent hereunder or otherwise, hereby agrees that it will not set-off against the shares of Escrowed Stock delivered under this Agreement or the proceeds thereof any claims which it may have against the Administrative Agent, the Depositor or any other Person. The Escrow Agent, in its capacity as escrow agent hereunder or otherwise, hereby expressly waives any and all rights it may have to file a lien against any share of Escrowed Stock individually or in the aggregate. 6.4 Headings. The headings herein are for purposes of reference only and shall not otherwise affect the meaning or interpretation of any provision hereof. 6.5 Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall for any reason whatsoever be held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. 6.6 TW Inc. Assumption. Effective upon receiving notice from Time Warner Inc. that the assumption referred to in the preamble hereto has occurred, TW Inc. shall, in accordance with subsection 9.7 of the Credit Agreement, be the "Depositor" for all purposes of this Agreement. 14 6.7 Counterparts. This Agreement may be executed in two or more counterparts (and by different parties on separate counterparts), each of which shall be an original, but all of which together shall constitute one and the same instrument. 6.8 Merger and Integration. Except as specifically stated otherwise herein, this Agreement sets forth the entire understanding of the parties relating to the subject matter hereof, and all prior understandings, written or oral, are superseded by this Agreement. This Agreement may not be modified, amended, waived or supplemented except as provided herein. 6.9 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 6.10 Genuineness of Documents. In the absence of bad faith or negligence on the part of the Escrow Agent, the Escrow Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any request, instructions, certificate, opinion or other document furnished to the Escrow Agent, reasonably believed by the Escrow Agent to be genuine and to have been signed or presented by the proper party or parties and conforming to the requirements of this Agreement; but in the case of any document or other request, instruction, document or certificate which by any provision hereof is specifically required to be furnished to the Escrow Agent, the Escrow Agent shall be under a duty to examine the same to determine whether or not it conforms to the requirements of this Agreement. The Escrow Agent may consult with counsel and any opinion of counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such opinion of counsel. 6.11 Not a Security Interest. The Beneficiaries hereby acknowledge and agree that this Agreement is not intended to, and does not, create a security interest in the Escrowed Stock. The parties hereto hereby acknowledge and agree that (a) neither the Administrative Agent nor any Lender has any interest in Common Stock by virtue of the transactions contemplated by the Credit Agreement or this Agreement and (b) the Lenders are not, and under no circumstances shall be deemed, holders of the Common Stock (nor do they have, and under no circumstances shall they be deemed to have, any interest therein) by virtue of any of the provisions hereof or of the Credit Agreement. 6.12 WAIVERS OF JURY TRIAL. THE DEPOSITOR, THE ESCROW AGENT AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR 15 PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. 6.13 Amendments and Waiver. This Escrow Agreement may be modified only by a written amendment signed by all the parties hereto, and no waiver of any provision hereof shall be effective unless expressed in writing and signed by the party to be charged. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers as of the day and year first above written. THE BANK OF NEW YORK, as the Escrow Agent By: ________________________ Name: Title: CHEMICAL BANK, as Administrative Agent under the Credit Agreement By: ________________________ Name: Title: TIME WARNER INC., as Depositor By: ________________________ Name: Title: EXHIBIT 1 [DATE] The Bank of New York, as Escrow Agent 101 Barclay Street Floor 12 East New York, New York 10286 Attention: Corporate Trust Escrow Unit Re: The Escrow Agreement, dated as of May 23, 1996 (as amended, supplemented or otherwise modified from time to time, the "Escrow Agreement"), among Time Warner Inc., a Delaware corporation (together with its successors and assigns, the "Depositor", except that after the assumption referred to in subsection 9.7 of the Credit Agreement, the "Depositor" shall mean TW Inc. and its successors and assigns), The Bank of New York, a New York banking corporation (the "Escrow Agent") and Chemical Bank, a New York banking corporation, as Administrative Agent (in such capacity, the "Administrative Agent"). Dear Sirs: Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Escrow Agreement. In accordance with the terms of the Escrow Agreement and the Credit Agreement referred to therein, enclosed please find the following shares of Stock (together with properly completed undated stock powers executed in blank by a duly authorized officer of the Depositor), all of which shall be held in escrow pursuant to the terms of the Escrow Agreement: Stock Certificate Number Number of Shares TIME WARNER INC., as Depositor By: _________________________ Name: Title: cc: Chemical Bank, as Administrative Agent 2 The Escrow Agent hereby acknowledges receipt of the above-listed Stock (and related stock powers) as of _______________, 19__ and confirms to Depositor that it is holding such documents in accordance with the terms of the Escrow Agreement. THE BANK OF NEW YORK, as Escrow Agent By: _________________________ Name: Title: EXHIBIT 2 [DATE] Chemical Bank, as Administrative Agent 270 Park Avenue New York, New York 10017 Attention: Dorothy Vena Re: The Escrow Agreement, dated as of May 23, 1996 (as amended, supplemented or otherwise modified from time to time, the "Escrow Agreement"), among Time Warner Inc., a Delaware corporation (together with its successors and assigns, the "Depositor", except that after the assumption referred to in subsection 9.7 of the Credit Agreement, the "Depositor" shall mean TW Inc. and its successors and assigns), The Bank of New York, a New York banking corporation (the "Escrow Agent") and Chemical Bank, a New York banking corporation, as Administrative Agent (in such capacity, the "Administrative Agent"). Dear Sirs: Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Escrow Agreement. In accordance with subsection 2.2 of the Escrow Agreement, we hereby notify you that [on __________ __, 19__ we received from the Depositor a notice (a copy of which is attached hereto as acknowledged by us), pursuant to which the shares of Stock (together with properly completed stock powers executed in blank by a duly authorized officer of the Depositor) set forth therein were delivered to the Escrow Agent and are now being held in escrow pursuant to the terms of the Escrow Agreement] [on _____________________, 19__ we received from the Depositor a notice in accordance with subsection 2.4 of the Escrow Agreement (a copy of which is attached) pursuant to which the Depositor requested that we release to the Depositor the Stock described therein. On [__________ __, 19__] we released said Stock to the Depositor.] THE BANK OF NEW YORK, as Escrow Agent By: _________________________ Name: Title: EXHIBIT 3 [DATE] The Bank of New York, as Escrow Agent 101 Barclay Street Floor 12 East New York, New York 10286 Attention: Corporate Trust Escrow Unit Re: The Escrow Agreement, dated as of May 23, 1996 (as amended, supplemented or otherwise modified from time to time, the "Escrow Agreement"), among Time Warner Inc., a Delaware corporation (together with its successors and assigns, the "Depositor", except that after the assumption referred to in subsection 9.7 of the Credit Agreement, the "Depositor" shall mean TW Inc. and its successors and assigns), The Bank of New York, a New York banking corporation (the "Escrow Agent") and Chemical Bank, a New York banking corporation, as Administrative Agent (in such capacity, the "Administrative Agent"). Dear Sirs: Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Escrow Agreement. In accordance with subsection 2.4 of the Escrow Agreement, the Depositor hereby formally requests the release and transfer of ____ shares of Stock (Stock Certificate Nos. ___, ___ and ___), together with the related stock powers, and the delivery of the same to [_______________] via _______________ at the address listed below: Delivery Address ___________________ In connection therewith, the Depositor hereby certifies that: (a) no Default or Event of Default (as defined in the Credit Agreement) has occurred and is continuing; (b) the release requested hereby is permitted by the terms of the Credit Agreement and the Escrow Agreement [and is being requested pursuant to subsection 5.9(c)(i) of the Credit Agreement as, after giving effect to the release requested hereby, (i) no Default or Event of Default shall 2 have occurred, (ii) the Borrower is in compliance with the Ratios as of the immediately preceding Valuation Date and (iii) after giving effect to any concurrent reduction in the Maximum Commitment Amount, the Maximum Commitment Amount is less than or equal to 50% of the Aggregate Loan Value of the remaining Escrowed Stock as of the Valuation Date immediately preceding the date of withdrawal]; (c) the Current Reg. U Loan Value of the Escrowed Stock prior to the release requested hereby is [_______]; (d) the Current Reg. U Loan Value of the Escrowed Stock after giving effect to the release requested hereby is [________]; (e) prior to giving effect to the release requested hereby, the Base Maximum Commitment Amount is [_______]; and (f) after giving effect to the release requested hereby, the Base Maximum Commitment Amount is [________], as set forth below, [INSERT CALCULATIONS IN REASONABLE DETAIL]. TIME WARNER INC., as Depositor By: ________________________ Name: Title: The Depositor hereby acknowledges receipt of the shares of Stock referred to above this __ day of __________, 199_. TIME WARNER INC., as Depositor By: ____________________ Name: Title: cc: Chemical Bank, as Administrative Agent EXHIBIT 4 [DATE] The Bank of New York, as Escrow Agent 101 Barclay Street Floor 12 East New York, New York 10286 Attention: Corporate Trust Escrow Unit Re: The Escrow Agreement, dated as of May 23, 1996 (as amended, supplemented or otherwise modified from time to time, the "Escrow Agreement"), among Time Warner Inc., a Delaware corporation (together with its successors and assigns, the "Depositor", except that after the assumption referred to in subsection 9.7 of the Credit Agreement, the "Depositor" shall mean TW Inc. and its successors and assigns), The Bank of New York, a New York banking corporation (the "Escrow Agent") and Chemical Bank, a New York banking corporation, as Administrative Agent (in such capacity, the "Administrative Agent"). Dear Sirs: Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Escrow Agreement. In accordance with subsection 2.5 of the Escrow Agreement, the Administrative Agent hereby formally requests the release and transfer of ____ shares of Stock (Stock Certificate Nos. ___, ___ and ___), together with the related stock powers, and the delivery of the same to [_____________________] via _______________ at the address listed below: Delivery Address ___________________________ In connection therewith, the Administrative Agent hereby certifies that the release requested hereby is permitted by the terms of the Credit Agreement and the Escrow Agreement. CHEMICAL BANK, as Administrative Agent By: ____________________ Name: Title: 2 The Administrative Agent hereby acknowledges receipt of the shares of Stock referred to above this __ day of __________, 199_. CHEMICAL BANK, as Administrative Agent By: ________________ Name: Title: cc: The Depositor EXHIBIT 5 AUTHORIZED REPRESENTATIVES OF THE ADMINISTRATIVE AGENT EXHIBIT 6 AUTHORIZED REPRESENTATIVES OF THE DEPOSITOR Name Signature ____________________ ________________________ Title: ____________________ ________________________ Title: ____________________ ________________________ Title: ____________________ ________________________ Title: EXHIBIT 7 AUTHORIZED REPRESENTATIVES OF THE ESCROW AGENT Name Signature ____________________ ________________________ Title: ___________________ ________________________ Title: ____________________ ________________________ Title: ____________________ ________________________ Title: -----END PRIVACY-ENHANCED MESSAGE-----