-----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, OgtvrmzcNmdwTc4DVlMMfC/ojm04UNuznE6nSrz/MGRpG1gG9s7phpV9qp0eW/bC MnZs1YAQrinttjjsORAyIw== 0000950117-02-001936.txt : 20020814 0000950117-02-001936.hdr.sgml : 20020814 20020814171636 ACCESSION NUMBER: 0000950117-02-001936 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AOL TIME WARNER INC CENTRAL INDEX KEY: 0001105705 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 134099534 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15062 FILM NUMBER: 02737089 BUSINESS ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2124848000 MAIL ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 10-Q 1 a33070.htm AOL TIME WARNER INC.

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, 2002

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the transition period from to .

1-15062
Commission file number

AOL TIME WARNER INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

13-4099534
(I.R.S. Employer
Identification Number)

75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number, including
area code, of 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.

Description of Class
Common Stock - $.01 par value
Series LMCN-V Common Stock - $.01 par value

Shares Outstanding
as of July 31, 2002
4,292,109,290
171,185,826

AOL TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.

INDEX TO FORM 10-Q

		Page
		AOL Time Warner	TWE
PART I.	FINANCIAL INFORMATION
	Management’s discussion and analysis of results of operations and financial condition	1	62
	Consolidated balance sheet at June 30, 2002 and December 31, 2001	27	76
	Consolidated statement of operations for the three and six months ended June 30, 2002 and 2001	28	77
	Consolidated statement of cash flows for the six months ended June 30, 2002 and 2001	29	78
	Consolidated statement of shareholders’ equity and partnership capital	30	79
	Notes to consolidated financial statements	31	80
	Supplementary information	54

PART II.	OTHER INFORMATION	94

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of AOL Time Warner Inc.’s (“AOL Time Warner” or the “Company”) financial condition, changes in financial condition and results of operations. The MD&A is organized as follows:

Overview. This section provides a general description of AOL Time Warner’s businesses, as well as recent developments that the Company believes are important in understanding the results of operations, as well as to anticipate future trends in those operations.

Results of operations. This section provides an analysis of the Company’s results of operations for the three and six months ended June 30, 2002 relative to the comparable periods in 2001. This analysis is presented on both a consolidated and segment basis. In addition, a brief description is provided of transactions and events that impact the comparability of the results being analyzed.

Financial condition and liquidity. This section provides an analysis of the Company’s financial condition as of June 30, 2002 and cash flows for the six months ended June 30, 2002.

Caution concerning forward-looking statements and risk factors. This section discusses how certain forward-looking statements made by the Company throughout MD&A and in the consolidated financial statements are based on management’s current expectations about future events and are inherently susceptible to uncertainty and changes in circumstances.

OVERVIEW

Description of Business

AOL Time Warner is the world’s leading media and entertainment company. The Company was formed in connection with the merger of America Online, Inc. (“America Online”) and Time Warner Inc. (“Time Warner”), which was consummated on January 11, 2001 (the “Merger”). As a result of the Merger, America Online and Time Warner each became a wholly owned subsidiary of AOL Time Warner.

AOL Time Warner classifies its business interests into six fundamental areas: AOL, consisting principally of interactive services, Web properties, Internet technologies and electronic commerce services; Cable, consisting principally of interests in cable television systems; Filmed Entertainment, consisting principally of interests in filmed entertainment and television production; Networks, consisting principally of interests in cable television and broadcast network programming; Music, consisting principally of interests in recorded music and music publishing; and Publishing, consisting principally of interests in magazine publishing, book publishing and direct marketing.

The Company has undertaken a number of business initiatives to advance cross-divisional activities, including shared infrastructures and cross-promotions of the Company’s various products and services, as well as cross-divisional and cross-platform advertising and marketing opportunities for significant advertisers. The Company’s integrated Global Marketing Solutions Group develops individualized advertising programs through which major brands can reach customers over a combination of the Company’s print, television and Internet media.

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

Use of EBITDA

AOL Time Warner evaluates operating performance based on several factors, including its primary financial measure of operating income (loss) before noncash depreciation of tangible assets and amortization of intangible assets (“EBITDA”). AOL Time Warner considers EBITDA an important indicator of the operational strength and performance of its businesses, including the ability to provide cash flows to service debt and fund capital expenditures. In addition, EBITDA eliminates the uneven effect across all business segments of considerable amounts of noncash depreciation of tangible assets and amortization of certain intangible assets deemed to have finite useful lives that were recognized in business combinations accounted for by the purchase method. As such, the following comparative discussion of the results of operations of AOL Time Warner includes, among other measures, an analysis of changes in EBITDA. However, EBITDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) and other measures of financial performance reported in accordance with generally accepted accounting principles.

Recent Developments

Securities Matters

Recently, the Securities and Exchange Commission and the Department of Justice began investigating the financial reporting and disclosure practices of the Company. The Company is cooperating in the investigations. Refer to Note 12 and Part II, Item 1 for additional information.

Investment in Time Warner Entertainment Company, L.P.

A majority of AOL Time Warner’s interests in the Filmed Entertainment and Cable segments, and a portion of its interests in the Networks segment, are held through Time Warner Entertainment Company, LP (“TWE”). As of March 31, 2002, AOL Time Warner owned general and limited partnership interests in TWE consisting of 74.49% of the pro rata priority capital (“Series A Capital”) and residual equity capital (“Residual Capital”), and 100% of the junior priority capital (“Series B Capital”). The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE were held by MediaOne TWE Holdings, Inc., a subsidiary of AT&T Corp. (“AT&T”).

During the second quarter of 2002, AT&T exercised a one-time option to increase its ownership in the Series A Capital and Residual Capital of TWE. As a result, on May 31, 2002, AT&T’s interest in the Series A Capital and Residual Capital of TWE increased by approximately 2.13% to approximately 27.64% and AOL Time Warner’s corresponding interest in the Series A Capital and Residual Capital of TWE decreased by approximately 2.13% to approximately 72.36%. In accordance with Staff Accounting Bulletin No. 51, “Accounting for Sales of Stock of a Subsidiary”, AOL Time Warner has reflected the pretax impact of the dilution of its interest in TWE of approximately $690 million as an adjustment to paid-in capital (Note 6).

AT&T has the right, during 60-day exercise periods occurring once every 18 months, to request that TWE incorporate and register its stock in an initial public offering. If AT&T exercises such right, TWE can decline to incorporate and register its stock, in which case AT&T may cause TWE to purchase AT&T ’s interest at the price at which an appraiser believes such stock could be sold in an initial public offering, subject to certain adjustments. In February 2001, AT&T delivered to TWE a notice requesting that TWE reconstitute itself as a corporation and register AT&T’s partnership interests for public sale. In June 2002, AT&T and TWE engaged Banc of America Securities LLC (“Banc of America”) to perform appraisals and make other determinations under the TWE Partnership Agreement. In July 2002, AOL Time Warner and AT&T agreed to temporarily suspend the registration rights process so that they can pursue discussion of an alternative transaction. For the time being, AOL Time Warner and AT&T have asked Banc of America not to deliver the determinations. The Company cannot at this time predict the outcome or effect, if any, of these discussions or the registration rights process, if resumed.

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

Restructuring of TWE-Advance/Newhouse Partnership and Road Runner

As of June 30, 2002, the TWE-Advance/Newhouse Partnership (“TWE-A/N”) was owned approximately 64.8% by TWE, the managing partner, 33.3% by the Advance/Newhouse Partnership (“Advance/Newhouse”) and 1.9% indirectly by AOL Time Warner. As of June 30, 2002, TWE-A/N owned cable television systems (or interests therein) serving approximately 7.0 million subscribers, of which 5.9 million subscribers were served by consolidated, wholly owned cable television systems and 1.1 million subscribers were served by unconsolidated, partially owned cable television systems. The financial position and operating results of TWE-A/N are currently consolidated by AOL Time Warner and TWE, and the partnership interest owned by Advance/Newhouse is reflected in the consolidated financial statements of AOL Time Warner and TWE as minority interest.

As of June 30, 2002, Road Runner, a high-speed cable modem Internet service provider, was owned by TWI Cable Inc. (a wholly owned subsidiary of AOL Time Warner), TWE and TWE-A/N, with AOL Time Warner owning approximately 65% on a fully attributed basis (i.e., after considering the portion attributable to the minority partners of TWE and TWE-A/N). AOL Time Warner’s interest in Road Runner is accounted for using the equity method of accounting because of certain approval rights currently held by Advance/Newhouse, a partner in TWE-A/N.

On June 24, 2002, TWE and Advance/Newhouse agreed to restructure TWE-A/N, which will result in Advance/Newhouse taking a more active role in the day-to-day operations of certain TWE-A/N cable systems serving approximately 2.1 million subscribers located primarily in Florida (the “Advance/Newhouse Systems”). The restructuring is anticipated to be completed by the end of 2002, upon the receipt of certain regulatory approvals. On August 1, 2002 (the “Debt Closing Date”), Advance/Newhouse and its affiliates arranged for a new credit facility to support the Advance/Newhouse Systems and repaid approximately $780 million of TWE-A/N’s senior indebtedness. As of the Debt Closing Date, Advance/Newhouse assumed management responsibilities for the Advance/Newhouse Systems, to the extent permitted under applicable government regulations, and, accordingly, AOL Time Warner and TWE will deconsolidate the financial position and operating results of these systems effective in the third quarter of 2002. Additionally, all prior period results associated with the Advance/Newhouse Systems will be reflected as a discontinued operation beginning in the third quarter of 2002. Under the new TWE-A/N Partnership Agreement, effective as of the Debt Closing Date, Advance/Newhouse’s partnership interest tracks only the performance of the Advance/Newhouse Systems, including associated liabilities, while AOL Time Warner retains all of the interests in the other TWE-A/N assets and liabilities. As part of the restructuring of TWE-A/N, on the Debt Closing Date, AOL Time Warner acquired Advance/Newhouse’s interest in Road Runner, thereby increasing its ownership to approximately 82% on a fully attributed basis. As a result, beginning in the third quarter of 2002, AOL Time Warner will consolidate the financial position and results of operations of Road Runner with the financial position and results of operations of AOL Time Warner’s Cable segment, retroactive to the beginning of the year. See Footnote 7 to the accompanying consolidated financial statements for more information regarding the impact of the deconsolidation of the Advance/Newhouse Systems and the consolidation of Road Runner on the revenues, EBITDA and operating income of the Cable segment and consolidated AOL Time Warner.

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

Warner’s consolidated net income of consolidating Road Runner will be equal to the portion of Road Runner’s losses previously attributable to Advance/Newhouse. This impact is not expected to be material to AOL Time Warner’s net income.

As of June 30, 2002, the Advance/Newhouse Systems had total assets of approximately $2.7 billion and had been allocated approximately $780 million of debt, which, upon the deconsolidation of the Advance/Newhouse Systems, will no longer be included in the consolidated assets and liabilities of AOL Time Warner. Additionally, as of June 30, 2002, Road Runner had total assets of approximately $180 million and no debt, which, upon the consolidation of Road Runner, will be included in the consolidated assets of AOL Time Warner.

Sale of Columbia House

In June 2002, AOL Time Warner and Sony Corporation of America reached a definitive agreement to each sell 85% of its 50% interest in the Columbia House Company Partnerships (“Columbia House”) to Blackstone Capital Partners III LP (“Blackstone”), an affiliate of The Blackstone Group, a private investment bank. The sale has resulted in the Company recognizing a pretax gain of approximately $59 million, which is included in other expense, net, in the accompanying consolidated statement of operations. In addition, the Company has deferred an approximate $28 million gain on the sale. As a result of the sale, the Company’s interest in Columbia House has been reduced to 7.5%. As part of the transaction, AOL Time Warner will continue to license music and video product to Columbia House for a five-year period (Note 4).

$10 Billion Revolving Credit Facilities

In July 2002, AOL Time Warner, together with certain of its consolidated subsidiaries, entered into two new, senior unsecured long-term revolving bank credit agreements with an aggregate borrowing capacity of $10 billion (the “2002 Credit Agreements”) and terminated three financing arrangements under certain previously existing bank credit facilities with an aggregate borrowing capacity of $12.6 billion (the “Old Credit Agreements”) which were to expire during 2002. The 2002 Credit Agreements are comprised of a $6 billion five–year revolving credit facility and a $4 billion 364–day revolving credit facility, borrowings under which may be extended for a period up to two years following the initial term. The borrowers under the 2002 Credit Agreements include AOL Time Warner, TWE, TWE–A/N and AOL Time Warner Finance Ireland. Borrowings will bear interest at specific rates, generally based on the credit rating for each of the borrowers, which is currently equal to LIBOR plus .625%, including facility fees of .10% and .125% on the total commitments of the 364-day and five-year facilities, respectively. The 2002 Credit Agreements provide for same-day funding, multi-currency capability and letter of credit availability. They contain maximum leverage and minimum GAAP net worth covenants of 4.5 times and $50 billion, respectively, for AOL Time Warner and maximum leverage covenant of 5.0 times for TWE and TWE-A/N, but do not contain any ratings-based defaults or covenants, nor an ongoing covenant or representation specifically relating to a material adverse change in the Company’s financial condition or results of operations. Borrowings may be used for general business purposes and unused credit will be available to support commercial paper borrowings (Note 9).

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

RESULTS OF OPERATIONS

Transactions Affecting Comparability of Results of Operations

Pro Forma Items

AOL Time Warner’s results for 2002 have been impacted by certain transactions and events that cause them not to be comparable to the results reported in 2001. In order to make the 2001 operating results more comparable to the 2002 presentation and make an analysis of 2002 and 2001 more meaningful, the following discussion of results of operations and changes in financial condition and liquidity is based on pro forma financial information for 2001 that has been adjusted for the items discussed in the following paragraphs.

New Accounting Standard for Goodwill and Other Intangible Assets . During 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”), which requires that, effective January 1, 2002, goodwill, including the goodwill included in the carrying value of investments accounted for using the equity method of accounting, and certain other intangible assets deemed to have an indefinite useful life, cease amortizing (Note 3). FAS 142 does not require retroactive restatement for all periods presented, however, the accompanying pro forma information for 2001 assumes that FAS 142 was in effect beginning January 1, 2001.

Consolidation of AOL Europe, S.A. (“AOL Europe”) . On January 31, 2002, AOL Time Warner acquired 80% of Bertelsmann AG’s (“Bertelsmann”) 49.5% interest in AOL Europe for $5.3 billion in cash and on July 1, 2002 acquired the remaining 20% of Bertelsmann’s interest for $1.45 billion in cash (Note 5). As a result of the purchase of Bertelsmann’s interest in AOL Europe, AOL Time Warner has a majority interest in and began consolidating AOL Europe, retroactive to the beginning of 2002. The pro forma information for 2001 assumes the interests in AOL Europe were acquired on January 1, 2001.

Consolidation of IPC Group Limited (“IPC”) . In October 2001, AOL Time Warner’s Publishing segment acquired IPC, the parent company of IPC Media, from Cinven, one of Europe’s leading private equity firms, for approximately $1.6 billion. The pro forma information for 2001 assumes that IPC was acquired on January 1, 2001.

New Accounting Standards

In addition to the pro forma adjustments previously discussed, in the first quarter of 2002, the Company adopted new accounting guidance in several areas that require retroactive restatement of all periods presented to reflect the new accounting provisions; therefore, these adjustments impact both pro forma and historical results. These adjustments are discussed below.

“Out-of-Pocket” Expenses

In November 2001, the FASB Staff issued as interpretive guidance Emerging Issues Task Force (“EITF”) Topic No. D-103, “Income Statement Characterization of Reimbursements Received for ‘Out-of-pocket’ Expenses Incurred” (“Topic D-103”). Topic D-103 requires that reimbursements received for out-of-pocket expenses be classified as revenue on the income statement and was effective for AOL Time Warner in the first quarter of 2002. The new guidance requires retroactive restatement of all periods presented to reflect the new accounting provisions. This change in revenue classification impacts AOL Time Warner’s Cable and Music segments, resulting in an

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

increase in both revenues and costs of approximately $122 million on both a pro forma and historical basis for the second quarter of 2001 and $221 million on both a pro forma and historical basis for the first six months of 2001.

Emerging Issues Task Force Issue No. 01-09

In April 2001, the FASB’s EITF reached a final consensus on EITF Issue No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products,” which was later codified along with other similar issues, into EITF 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products” (“EITF 01-09”). EITF 01-09 was effective for AOL Time Warner in the first quarter of 2002. EITF 01-09 clarifies the income statement classification of costs incurred by a vendor in connection with the reseller’s purchase or promotion of the vendor’s products, resulting in certain cooperative advertising and product placement costs previously classified as selling expenses to be reflected as a reduction of revenues earned from that activity. The new guidance impacts AOL Time Warner’s AOL, Music and Publishing segments. As a result of applying the provisions of EITF 01-09, the Company’s revenues and costs each were reduced by an equal amount of approximately $48 million on both a pro forma and historical basis in the second quarter of 2001 and $110 million on both a pro forma and historical basis for the first six months of 2001.

Other Significant Transactions and Nonrecurring Items

As more fully described herein and in the related footnotes to the accompanying consolidated financial statements, the comparability of AOL Time Warner’s operating results has been affected by certain significant transactions and nonrecurring items in each period.

AOL Time Warner’s operating results for the six months ended June 30, 2002 included (i) merger and restructuring costs of $107 million in the first quarter (Note 2), (ii) a noncash pretax charge of $945 million ($364 million in the second quarter) to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value (Note 4), (iii) an approximate $59 million gain in the second quarter on the sale of a portion of the Company’s interest in Columbia House (Note 4) and (iv) an approximate $31 million gain in the second quarter on the redemption of a portion of the Company’s interest in TiVo Inc. (“TiVo”) (Note 4 ).

For the six months ended June 30, 2001, AOL Time Warner’s operating results included (i) merger-related costs of approximately $71 million in the first quarter (Note 2) and (ii) a noncash pretax charge of approximately $620 million in the first quarter to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value (Note 4).

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

The impact of the significant transactions and nonrecurring items discussed above on the operating results for the three and six months ended June 30, 2002 and 2001 is as follows:

	Three Months Ended June 30,							Six Months Ended June 30,

	2002 Historical			2001 Pro Forma		2001 Historical		2002 Historical			2001 Pro Forma			2001 Historical

	(in millions, except per share amounts)
Adjustments for significant and nonrecurring items:
Merger and restructuring costs	$	—		$	—	$	—	$	107		$	71		$	71
Gain on sale of Columbia House		(59	)		—		—		(59	)		—			—
Gain on redemption of Tivo		(31	)		—		—		(31	)		—			—
Loss on writedown of investments		364			—		—		945			620			620


Pretax impact of adjustments		274			—		—		962			691			691

Income tax impact of adjustments		(110	)		—		—		(385	)		(276	)		(276	)


Net income impact of adjustments	$	164		$	—	$	—	$	577		$	415		$	415

Impact on basic income (loss) per common share before cumulative effect of accounting change	$	0.04		$	—	$	—	$	0.13		$	0.09		$	0.10


Impact on diluted income (loss) per common share before cumulative effect of accounting change	$	0.03		$	—	$	—	$	0.12		$	0.09		$	0.10

In addition, the Company adopted, effective January 1, 2002, new accounting rules for goodwill and certain intangible assets. Among the requirements of the new rules is that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. During the first quarter of 2002, the Company completed its impairment review and recorded a $54 billion noncash pretax charge for the impairment of goodwill, substantially all of which was generated in the Merger. The charge reflects overall market declines since the Merger was announced in January 2000, is non-operational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated financial statements (Note 3). In order to enhance comparability, the Company compares current year results to the prior year exclusive of this charge.

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

Revenues and EBITDA by business segment are as follows (in millions):

	Three Months Ended June 30

	Revenues									EBITDA

	2002 Historical			2001^(a)(b) Pro Forma			2001^(b) Historical			2002 Historical			2001^(a) Pro Forma			2001 Historical

AOL	$	2,266		$	2,327		$	2,133		$	473		$	652		$	801
Cable		2,103			1,782			1,782			872			777			777
Filmed Entertainment		2,386			1,893			1,893			328			250			250
Networks		1,957			1,828			1,828			420			444			444
Music		972			935			935			102			87			87
Publishing		1,396			1,291			1,155			337			296			271
Corporate		—			—			—			(80	)		(71	)		(71	)
Merger and restructuring costs		—			—			—			—			—			—
Intersegment elimination		(505	)		(450	)		(450	)		11			(22	)		(22	)

Total revenues and EBITDA	$	10,575		$	9,606		$	9,276		$	2,463		$	2,413		$	2,537


Depreciation and amortization		—			—			—			(801	)		(657	)		(2,261	)


Total revenues and operating income	$	10,575		$	9,606		$	9,276		$	1,662		$	1,756		$	276

	Six Months Ended June 30

	Revenues									EBITDA

	2002 Historical			2001^(a)(b) Pro Forma			2001^(b) Historical			2002 Historical			2001^(a) Pro Forma			2001 Historical

AOL	$	4,563		$	4,629		$	4,241		$	906		$	1,159		$	1,485
Cable		4,115			3,475			3,475			1,713			1,545			1,545
Filmed Entertainment		4,522			4,105			4,105			509			363			363
Networks		3,743			3,527			3,527			851			893			893
Music		1,919			1,839			1,839			198			181			181
Publishing		2,477			2,342			2,084			482			423			384
Corporate		—			—			—			(159	)		(145	)		(145	)
Merger and restructuring costs		—			—			—			(107	)		(71	)		(71	)
Intersegment elimination		(1,000	)		(878	)		(878	)		13			(23	)		(23	)

Total revenues and EBITDA	$	20,339		$	19,039		$	18,393		$	4,406		$	4,325		$	4,612


Depreciation and amortization		—			—			—			(1,535	)		(1,278	)		(4,483	)


Total revenues and operating income	$	20,339		$	19,039		$	18,393		$	2,871		$	3,047		$	129

______________

(a)

In order to enhance comparability, pro forma financial information for 2001 assumes that the acquisitions of IPC and the remaining interest in AOL Europe and the adoption of FAS 142 had occurred at the beginning of 2001.

(b)

Revenues reflect the provisions of EITF 01-09 and Topic D-103 that were adopted by the Company in the first quarter of 2002, which require retroactive restatement of 2001 to reflect the new accounting provisions. As a result, the net impact of EITF 01-09 and Topic D-103 was to increase revenues and costs by equal amounts of approximately $74 million for the second quarter of 2001 and approximately $111 million for the first six months of 2001.

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Consolidated Results

AOL Time Warner had revenues of $10.575 billion and net income of $394 million in 2002, compared to revenues of $9.606 billion and net income of $592 million on a pro forma basis in 2001 (revenues of $9.276 billion and net loss of $734 million on a historical basis). AOL Time Warner had basic and diluted net income per common

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

share of $0.09 in 2002 compared to basic and diluted net income per common share of $0.13 on a pro forma basis in 2001 (basic and diluted net loss per common share of $0.17 on a historical basis).

As previously described, the comparability of AOL Time Warner’s operating results for 2002 have been affected by the recognition of certain significant and nonrecurring items. These items totaled $274 million of pretax losses in 2002. If these items were excluded from earnings in 2002, the aggregate net effect would be to increase basic net income per common share by $0.04 to $0.13 and diluted net income per common share by $0.03 to $0.12.

Revenues . AOL Time Warner’s revenues increased to $10.575 billion in 2002, compared to $9.606 billion on a pro forma basis in 2001 ($9.276 billion on a historical basis). This overall increase in revenues was driven by an increase in Subscription revenues of 15% to $5.028 billion and an increase in Content and Other revenues of 20% to $3.477 billion, offset in part by a decrease in Advertising and Commerce revenues of 11% to $2.070 billion.

As discussed more fully below, the increase in Subscription revenues was principally due to increases in the number of subscribers and in subscription rates at the AOL, Cable and Networks segments. The increase in Content and Other revenues was principally due to increased revenue at the Filmed Entertainment segment related to improved international theatrical and worldwide home video results, offset in part by lower results at the AOL segment, primarily related to the termination of the iPlanet alliance with Sun Microsystems, Inc. (“Sun Microsystems”) in the third quarter of 2001. The decline in Advertising and Commerce revenues was due to lower advertising revenues principally related to the continued weakness in the online advertising market, which is expected to continue through at least the end of the year.

Depreciation and Amortization . Depreciation and amortization increased to $801 million in 2002 from $657 million on a pro forma basis in 2001 ($2.261 billion on a historical basis). This increase was primarily due to an increase in depreciation, reflecting higher levels of capital spending at the Cable segment related to the roll-out of digital services over the past three years, as well as increased capital spending that varies based on the number of new subscribers, which is depreciated over a shorter useful life. In addition, depreciation at the AOL segment increased primarily due to an increase in network assets acquired.

Interest Expense, Net . Interest expense, net, decreased to $444 million in 2002, from $469 million on a pro forma basis in 2001 ($352 million on a historical basis), due principally to lower market interest rates in 2002.

Other Expense, Net . Other expense, net, increased to $376 million in 2002 from $121 million on a pro forma basis in 2001 ($233 million on a historical basis). Other expense, net, in each period included pretax noncash charges to reduce the carrying value of certain investments that experienced an other-than-temporary decline in value. In 2002, this charge was approximately $364 million, primarily related to AOL Time Warner’s investments in Time Warner Telecom and Gateway, Inc., which was offset in part by an approximate $59 million gain on the sale of a portion of the Company’s interest in Columbia House and an approximate $31 million gain on the redemption of a portion of the Company’s interest in TiVo. In 2001, on a pro forma and historical basis, AOL Time Warner recorded a charge of approximately $54 million, which was almost entirely offset by pretax gains related to equity derivative instruments and the sale of certain investments. Excluding these charges and the Columbia House and TiVo gains, other expense, net, decreased by $19 million in 2002 primarily due to lower losses on equity method investees, offset in part by the absence of prior year net pretax investment-related gains, including gains related to the exchange of various unconsolidated cable television systems at TWE (attributable to AT&T’s minority interest). Depending upon general market conditions and the performance of individual investments in the Company’s portfolio, the Company may be required in the future to record a noncash charge to reduce the carrying value of

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individual investments to their fair value for other-than-temporary declines. Any such charge would be unrelated to the Company’s core operations and would be recorded in other expense, net (Note 4).

Minority Interest Expense . Minority interest expense was $147 million in 2002, compared to $150 million on a pro forma basis in 2001 ($76 million on a historical basis). Minority interest expense decreased slightly as the allocation of higher income at TWE and TWE-A/N to their minority owners was more than offset by the absence of prior year pretax gains related to the exchange of various unconsolidated cable television systems that were attributable to AT&T’s minority interest in TWE.

Income Tax Provision. The relationship between income before income taxes and income tax expense of AOL Time Warner is principally affected by certain financial statement expenses that are not deductible for income tax purposes, foreign income taxed at different rates and foreign losses with no U.S. tax benefit. AOL Time Warner had income tax expense of $301 million in 2002, compared to $424 million on a pro forma basis in 2001 ($349 million on a historical basis). While the effective tax rate in each period was comparable, slight differences are attributable to differing sources of foreign income taxed at different rates and foreign losses with no U.S. tax benefit in each period. As of June 30, 2002, the Company had net operating loss carryforwards of approximately $12.6 billion, primarily resulting from stock option exercises. These carryforwards are available to offset future US Federal taxable income and are, therefore, expected to reduce Federal taxes paid by the Company. If the net operating losses are not utilized, they expire in varying amounts, starting in 2010 through 2021.

Net Income Applicable to Common Shares and Income Per Common Share. AOL Time Warner’s net income decreased by $198 million to $394 million in 2002, compared to $592 million on a pro forma basis in 2001 (net loss of $734 million on a historical basis). However, excluding the after-tax effect of the significant and nonrecurring items referred to earlier, normalized net income decreased by $34 million to $558 million in 2002 from $592 million on a pro forma basis in 2001. Similarly, excluding the effect of significant and nonrecurring items, normalized basic and diluted net income per common share was $0.13 and $0.12, respectively in 2002 compared to $0.13 in 2001. The decrease in earnings principally resulted from higher depreciation expense, offset in part by an overall increase in AOL Time Warner’s EBITDA and lower interest expense, net.

Business Segment Results

AOL. Revenues decreased to $2.266 billion in 2002, compared to $2.327 billion on a pro forma basis in 2001 ($2.133 billion on a historical basis). EBITDA decreased 27% to $473 million in 2002, compared to $652 million on a pro forma basis in 2001 ($801 million on a historical basis).

Although total revenues decreased slightly, the mix in revenues changed. Specifically, revenues benefited from a 20% increase in Subscription revenues (from $1.489 billion to $1.786 billion), which was more than offset by a 42% decrease in Advertising and Commerce revenues (from $715 million to $412 million) and a 45% decrease in Content and Other revenues (from $123 million to $68 million).

During the quarter, Subscription revenues in the US and Europe increased by 18% and 34%, respectively. The growth in Subscription revenues was principally due to membership growth and price increases in both the US and Europe. The number of AOL brand subscribers in the US and Europe was 26.5 million and 6.0 million,

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respectively, at June 30, 2002 compared to 23.4 million and 4.8 million, respectively, at June 30, 2001. The average monthly subscription revenue per domestic subscriber for the quarter increased 5% to $18.18 as compared to $17.26 in the prior year quarter. The domestic increase reflects price increases in the standard unlimited rate plan of $1.95 per month to $23.90 (effective beginning in July 2001) and the Bring Your Own Access (BYOA) plan of $5 to $14.95 (which began rolling out in October 2001). These domestic rate plan increases were offset in part by new member acquisition programs and member service and retention programs that offer incentives in the form of discounts and free months to AOL’s members. In addition, AOL has entered into certain bundling programs with computer manufacturers (OEM) that generally do not result in subscription revenues during introductory periods as well as the sale of bulk subscriptions at a discounted rate to AOL’s selected strategic partners for distribution to their employees. As of June 30, 2002, of the 26.5 million domestic AOL members, approximately 79% were on standard unlimited pricing plans (including 12% under various free trial, member service and retention programs), 16% were on lower priced plans, including BYOA, bulk employee programs with strategic partners, and limited usage plans (weighted average monthly rate of approximately $11.50), with the remaining 5% on OEM bundled plans. As a result of price increases in various European countries offering the AOL service, the average monthly subscription revenue per European subscriber for the quarter increased 10% to $14.07 as compared to $12.78 in the prior year quarter.

The decline in Advertising and Commerce revenues resulted from a decline in advertising revenues (from $648 million to $342 million) as commerce revenues remained relatively flat. The decline in advertising revenues is principally due to continued weakness in the online advertising market, which is expected to continue at least through the end of this year. Also contributing to the decline in advertising revenues was a decline in revenues recognized from commitments received in prior periods. Domestic contractual commitments received in prior periods contributed advertising revenue of $220 million in the 2002 period as compared to $468 million in the comparable prior year period. This advertising revenue decline was in part mitigated by an increase in intercompany sales of advertising to other business segments of AOL Time Warner ($50 million in 2002 versus $29 million in 2001). During the quarter, advertising commitments declined to $860 million as of June 30, 2002 from $1.044 billion as of March 31, 2002. This compares to advertising commitments of $1.804 billion as of June 30, 2001 and $2.313 billion as of March 31, 2001. The Company expects to recognize a majority of the existing advertising commitments over the next four quarters.

The decrease in Content and Other revenues is primarily due to the termination of AOL’s iPlanet alliance with Sun Microsystems in the third quarter of 2001, which contributed approximately $86 million of revenue and approximately $58 million of EBITDA during the second quarter of 2001. This was offset in part by $26 million of network revenues which are derived primarily through network services provided to Road Runner, which began in November 2001.

The decline in EBITDA is primarily due to the advertising revenue shortfall, the absence of revenues from the iPlanet alliance and an increase in domestic marketing expenses, offset in part by a reduction in EBITDA losses at AOL Europe ($32 million in 2002 versus $149 million in 2001). The increase in advertising revenue generated from intercompany sales of advertising to other business segments of AOL Time Warner was more than offset by costs associated with increased intercompany advertising purchased by AOL on properties of other AOL Time Warner business segments ($73 million in 2002 versus $41 million in 2001).

Cable . Revenues increased 18% to $2.103 billion in 2002, compared to $1.782 billion on both a pro forma and historical basis in 2001. EBITDA increased 12% to $872 million in 2002 from $777 million on both a pro forma and historical basis in 2001.

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Revenues increased due to a 15% increase in Subscription revenues (from $1.640 billion to $1.894 billion) and a 47% increase in Advertising and Commerce revenues (from $142 million to $209 million). The increase in Subscription revenues was due to higher basic cable rates, an increase in subscribers to high-speed data services, an increase in digital cable subscribers and, to a lesser degree, an increase in basic cable subscribers. Digital cable subscribers increased by 54% to 3.9 million and high-speed data subscribers increased by 75% to 2.5 million in 2002 over the prior year comparable period. The increase in Advertising and Commerce revenues was primarily related to advertising purchased by programming vendors to promote their channels, including new channel launches, ($49 million in 2002 versus $0 in 2001) and the intercompany sale of advertising to other business segments of AOL Time Warner ($35 million in 2002 versus $10 million in 2001). The Company expects advertising sales to programming vendors to sequentially decline, resulting in declines in such advertising in the second half of 2002 as compared to the prior year.

EBITDA increased principally as a result of the revenue gains, offset in part by increases in programming and other operating costs. The increase in video programming costs of 22% relates to general programming rate increases across both basic and digital services, the addition of new programming services and higher basic and digital subscriber levels. Programming costs are expected to continue to increase as general programming rates increase and digital services continue to be rolled out. Other operating costs increased as a result of increased costs associated with the roll out of new services, higher property taxes associated with the upgrade of cable plants and higher development spending in the Interactive Personal Video division.

Filmed Entertainment. Revenues increased 26% to $2.386 billion in 2002, compared to $1.893 billion on both a pro forma and historical basis in 2001. EBITDA increased 31% to $328 million in 2002, compared to $250 million on both a pro forma and historical basis in 2001.

Revenues and EBITDA increased at both Warner Bros. and the filmed entertainment businesses of Turner Broadcasting System, Inc. (the “Turner filmed entertainment businesses”), which include New Line Cinema, Castle Rock and the former film and television libraries of Metro-Goldwyn-Mayer, Inc. and RKO pictures.

For Warner Bros., the revenue increase was primarily related to the worldwide home video release of Harry Potter and the Sorcerer’s Stone, the domestic home video release of Ocean’s Eleven , as well as the continued international theatrical success of those films and the theatrical success of the second quarter release of Scooby Doo, offset in part by reduced commerce revenues related to the closure of its Studio Stores. For the Turner filmed entertainment businesses, revenues increased primarily due to New Line Cinema’s continued theatrical success of The Lord of the Rings: The Fellowship of the Ring and Blade II .

For Warner Bros., EBITDA increased principally due to the strong revenue growth. For the Turner filmed entertainment businesses, EBITDA increased primarily due to the revenue increase as well as an absence of losses on certain theatrical releases in 2001 .

Networks. Revenues increased 7% to $1.957 billion in 2002, compared to $1.828 billion on both a pro forma and historical basis in 2001. EBITDA declined 5% to $420 million in 2002 from $444 million on both a pro forma and historical basis in 2001.

Revenues grew primarily due to a 7% increase in Subscription revenues with growth at both the cable networks of TBS (the “Turner cable networks”) and HBO, a 5% increase in Advertising and Commerce revenues

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(from $679 million to $710 million) with growth at both the Turner cable networks and The WB Network and a 21% increase in Content and Other revenues with growth at HBO, offset in part by declines at the Turner cable networks. EBITDA decreased due to lower results at the Turner cable networks, offset in part by improved results at HBO and, to a lesser degree, The WB Network.

For the Turner cable networks, Subscription revenues benefited from higher domestic rates and an increase in the number of domestic subscribers, led by TNT, CNN, Turner Classic Movies, TBS and Cartoon Network cable networks. Advertising and Commerce revenues increased marginally (from $557 million to $569 million) due to a slight recovery in the cable television advertising market and a small increase in intercompany sales of advertising to other business segments of AOL Time Warner ($25 million in 2002 versus $23 million in 2001). For HBO, Subscription revenues benefited from an increase in the number of subscribers and higher rates. Content and Other revenues benefited from higher home video sales of HBO’s original programming and higher licensing and syndication revenue from the broadcast comedy series, Everybody Loves Raymond . For The WB Network, the increase in Advertising and Commerce revenues (from $122 million to $141 million) was driven by higher rates.

For the Turner cable networks, the decrease in EBITDA was principally due to higher programming, marketing and newsgathering costs, partially offset by the increased revenues. In addition, EBITDA was negatively impacted by reserves established on receivables from Adelphia Communications, a major cable television operator (“Adelphia”). For HBO, the increase in EBITDA was principally due to the increase in revenues and reduced costs relating to the finalization of certain licensing agreements, offset in part by reserves established on receivables from Adelphia and the write–off of development costs. For The WB Network, the improvement in EBITDA was principally due to the increase in revenues, offset in part by higher programming costs.

Music . Revenues increased 4% to $972 million in 2002, compared to $935 million on both a pro forma and historical basis in 2001. EBITDA increased 17% to $102 million in 2002 from $87 million on both a pro forma and historical basis in 2001.

Revenues increased primarily due to increases in DVD manufacturing and merchandising sales, and the impact of the acquisition of Word Entertainment in January 2002, offset in part by the negative effect of changes in foreign currency exchange rates on international revenues and lower industry–wide domestic recorded music sales.

The increase in EBITDA is due primarily to the higher revenues and the impact of various cost–saving and restructuring programs. As of June 30, 2002, the Music segment had increased its domestic album market share to 17.6%, compared to 17.1% at June 30, 2001.

Publishing. Revenues increased 8% to $1.396 billion in 2002, compared to $1.291 billion on a pro forma basis in 2001 ($1.155 billion on a historical basis). EBITDA increased 14% to $337 million in 2002 from $296 million on a pro forma basis in 2001 ($271 million on a historical basis).

The increase in revenues is due to a 12% increase in Subscription revenues, 6% increase in Advertising and Commerce revenues (from $805 million to $850 million) and a 14% increase in Content and Other revenues. The growth in Subscription revenues was primarily due to lower commission payments to subscription agents as well as the impact of Synapse Group Inc. (“Synapse”), which was acquired in December 2001. The growth in Advertising and Commerce revenues was primarily due to revenues recognized by Synapse. This was offset in part by lower commerce revenues from Time Life’s direct marketing business and a 1% decline in advertising revenue resulting

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from the weakness in the magazine advertising market. The increase in Content and Other revenues is due primarily to increased sales at the AOL Time Warner Book Group driven by new releases in the quarter.

The growth in EBITDA is due primarily to the increase in revenue, overall cost savings, including cost savings in connection with the integration of IPC, and reduced costs relating to the final settlement of certain liabilities associated with the closure of American Family Enterprises (“AFE”), offset in part by additional reserves established on receivables from newsstand distributors.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Consolidated Results

AOL Time Warner had revenues of $20.339 billion, income before the cumulative effect of an accounting change of $393 million and net loss of $53.846 billion in 2002, compared to revenues of $19.039 billion and net income of $571 million on a pro forma basis in 2001 (revenues of $18.393 billion and net loss of $2.103 billion on a historical basis). AOL Time Warner had basic and diluted income before the cumulative effect of an accounting change per common share of $0.09 in 2002 and a basic and diluted net loss of $12.12 after considering the cumulative effect of the accounting change, compared to basic and diluted net income per common share of $0.13 and $0.12, respectively, on a pro forma basis in 2001 (basic and diluted net loss per common share of $0.48 on a historical basis).

As previously described, the comparability of AOL Time Warner’s operating results for 2002 and 2001 has been affected by the recognition of certain significant and nonrecurring items. Excluding the cumulative effect of an accounting change, these items totaled $962 million of pretax losses in 2002 compared to $691 million of pretax losses on a pro forma and historical basis in 2001. In addition, net income in 2002 was reduced by a charge of approximately $54.239 billion relating to the cumulative effect of an accounting change, discussed further in Notes 1 and 3. If these items were excluded from earnings, the aggregate net effect would be to increase basic net income per common share by $12.34 to $0.22 in 2002 and diluted net income per common share by $12.33 to $0.21 in 2002. This compares to an increase in basic and diluted net income per common share of $0.09 if these items were excluded on a pro forma basis in 2001 from basic and diluted net income per common share of $0.13 and $0.12, respectively, to basic and diluted net income per common share of $0.22 and $0.21, respectively (a decrease in basic and diluted net loss per common share of $0.10 to $0.38 on a historical basis in 2001).

Revenues . AOL Time Warner’s revenues increased to $20.339 billion in 2002, compared to $19.039 billion on a pro forma basis in 2001 ($18.393 billion on a historical basis). The overall increase in revenues was driven by an increase in Subscription revenues of 14% to $9.768 billion and an increase in Content and Other revenues of 10% to $6.676 billion, offset by a decrease in Advertising and Commerce revenues of 12% to $3.895 billion.

As discussed more fully below, the increase in Subscription revenues was principally due to increases in the number of subscribers and in subscription rates at the AOL, Cable and Networks segments. The increase in Content and Other revenues was principally due to increased revenue at the Filmed Entertainment segment related to improved international theatrical and worldwide home video results, offset in part by lower results at the AOL segment, primarily related to the termination of the iPlanet alliance with Sun Microsystems. The decline in Advertising and Commerce revenues was principally due to lower advertising revenues related to the first quarter weakness in the overall advertising market and continued weakness in the online advertising market. The weakness in the online advertising market is expected to continue through at least the end of the year.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
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Depreciation and Amortization . Depreciation and amortization increased to $1.535 billion in 2002 from $1.278 billion on a pro forma basis in 2001 ($4.483 billion on a historical basis). This increase was primarily due to an increase in depreciation, reflecting higher levels of capital spending at the Cable segment related to the roll–out of digital services over the past three years, as well as increased capital spending that varies based on the number of new subscribers, which is depreciated over a shorter useful life. In addition, depreciation at the AOL segment increased primarily due to an increase in network assets acquired.

Interest Expense, Net . Interest expense, net, decreased to $823 million in 2002, from $904 million on a pro forma basis in 2001 ($671 million on a historical basis), due principally to lower market interest rates in 2002.

Other Expense, Net . Other expense, net, increased to $1.074 billion in 2002 from $849 million on a pro forma basis in 2001 ($1.105 billion on a historical basis). Other expense, net, in each period included pretax noncash charges to reduce the carrying value of certain investments that experienced an other–than–temporary decline in value. In 2002, this charge was approximately $945 million, primarily related to AOL Time Warner’s investments in Time Warner Telecom and Gateway, which was offset in part by an approximate $59 million gain on the sale of a portion of the Company’s interest in Columbia House and an approximate $31 million gain on the redemption of a portion of the Company’s interest in TiVo. In 2001, on a pro forma and historical basis, AOL Time Warner recorded a charge of approximately $674 million, which was offset in part by approximately $54 million of pretax gains related to equity derivative instruments and the sale of certain investments. Excluding these charges and the Columbia House and TiVo gains, other expense, net, decreased by $10 million in 2002 primarily due to lower losses on equity method investees, offset in part by the absence of prior year net pretax investment–related gains, including gains related to the exchange of various unconsolidated cable television systems at TWE and TWE–A/N (attributable to the minority owners of TWE and TWE–A/N). Depending upon general market conditions and the performance of individual investments in the Company’s portfolio, the Company may be required in the future to record a noncash charge to reduce the carrying value of individual investments to their fair value for other–than–temporary declines. Any such charge would be unrelated to the Company’s core operations and would be recorded in other expense, net.

Minority Interest Expense . Minority interest expense increased to $273 million in 2002, compared to $271 million on a pro forma basis in 2001 ($180 million on a historical basis). Minority interest expense increased slightly as accretion on the preferred securities of AOL Europe and the allocation of higher income at TWE–A/N and TWE to their minority owners were partially offset by the absence in 2002 of an allocation of pretax gains related to the exchange of various unconsolidated cable television systems in 2001 at TWE and TWE–A/N attributable to the minority owners of TWE and TWE–A/N.

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As of June 30, 2002, the Company had net operating loss carryforwards of approximately $12.6 billion, primarily resulting from stock option exercises. These carryforwards are available to offset future US Federal taxable income and are, therefore, expected to reduce Federal taxes paid by the Company. If the net operating losses are not utilized, they expire in varying amounts, starting in 2010 through 2021.

Net Income (Loss) Applicable to Common Shares and Income (Loss) Per Common Share Before the Cumulative Effect of an Accounting Change. AOL Time Warner’s income before the cumulative effect of an accounting change decreased by $178 million to $393 million in 2002, compared to net income of $571 million on a pro forma basis in 2001 (net loss of $2.103 billion on a historical basis). However, excluding the after–tax effect of the significant and nonrecurring items referred to earlier, normalized net income decreased by $16 million to $970 million in 2002 from $986 million on a pro forma basis in 2001. Similarly, excluding the effect of significant and nonrecurring items, normalized basic and diluted net income per common share was $0.22 and $0.21, respectively in both 2002 and 2001. The decrease in earnings principally resulted from higher depreciation expense, offset almost entirely by an overall increase in AOL Time Warner’s EBITDA and lower interest expense, net.

Business Segment Results

AOL. Revenues decreased to $4.563 billion in 2002, compared to $4.629 billion on a pro forma basis in 2001 ($4.241 billion on a historical basis). EBITDA decreased 22% to $906 million in 2002, compared to $1.159 billion on a pro forma basis in 2001 ($1.485 billion on a historical basis).

Although total revenues were only slightly lower, the mix in revenues changed. Specifically, revenues benefited from a 20% increase in Subscription revenues (from $2.930 billion to $3.503 billion), which was offset by a 36% decrease in Advertising and Commerce revenues (from $1.436 billion to $913 million) and a 44% decrease in Content and Other revenues (from $263 million to $147 million).

For the six–month period, Subscription revenues in the US and Europe increased by 17% and 34%, respectively. The growth in Subscription revenues was principally due to membership growth and price increases in both the US and Europe. The number of AOL brand subscribers in the US and Europe were 26.5 million and 6.0 million, respectively, at June 30, 2002 compared to 23.4 million and 4.8 million, respectively, at June 30, 2001. The average monthly subscription revenue per domestic subscriber for the six months ended June 30, 2002 increased 5% to $18.11 from $17.28 in the comparable prior year period. The domestic increase reflects price increases in the standard unlimited rate plan of $1.95 per month to $23.90 (effective beginning in July 2001) and the BYOA plan of $5 to $14.95 (which began rolling out in October 2001). These domestic rate plan increases were offset in part by new member acquisition programs and member service and retention programs that offer incentives in the form of discounts and free months to AOL’s members. In addition, AOL has entered into certain bundling programs with OEMs that generally do not result in subscription revenues during introductory periods as well as the sale of bulk subscriptions at a discounted rate to AOL’s selected strategic partners for distribution to their employees. As of June 30, 2002, of the 26.5 million domestic AOL members, approximately 79% were on standard unlimited pricing plans (including 12% under various free trial, member service and retention programs), 16% were on lower priced plans, including BYOA, bulk employee programs with strategic partners, and limited usage plans (weighted average monthly rate of approximately $11.20), with the remaining 5% on OEM bundled plans. As a result of price increases in various European countries offering the AOL service, the average monthly subscription revenue per European subscriber for the six–month period increased 10% to $13.82 as compared to $12.52 in the prior year period.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
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The decline in Advertising and Commerce revenues resulted from a decline in advertising revenues (from $1.286 billion to $737 million) offset in part by an increase in commerce revenues from the expansion of AOL’s merchandise business. The decline in advertising revenues was principally due to continued weakness in the online advertising market, which is expected to continue at least through the end of this year. Also contributing to the decline in advertising revenues was a decline in revenues recognized from commitments received in prior periods. Domestic contractual commitments received in prior periods contributed advertising revenue of $511 million in the 2002 period as compared to $839 million in the comparable prior year period. This advertising revenue decline was in part mitigated by an increase in intercompany sales of advertising to other business segments of AOL Time Warner ($104 million in 2002 versus $50 million in 2001). During the six–month period, advertising commitments declined to $860 million as of June 30, 2002 from $1.478 billion as of December 31, 2001. This compares to advertising commitments of $1.804 billion as of June 30, 2001, and $2.616 billion as of December 31, 2000. The Company expects to recognize a majority of the existing advertising commitments over the next four quarters.

The decrease in Content and Other revenues is primarily due to the termination of AOL’s iPlanet alliance with Sun Microsystems in the third quarter of 2001, which contributed approximately $174 million of revenue and approximately $120 million of EBITDA during the first six months of 2001. This was offset in part by $52 million of revenues which were derived primarily through network services provided to Road Runner, which began in November 2001.

The decline in EBITDA is primarily due to the advertising revenue decline and the absence of revenues from the iPlanet alliance and an increase in domestic marketing expenses, offset in part by a reduction in EBITDA losses at AOL Europe ($125 million in 2002 versus $326 million in 2001), the continued decline in network costs on a per hour basis, and other cost management initiatives entered into during 2001. The increase in advertising revenue generated from intercompany sales of advertising to other business segments of AOL Time Warner was more than offset by costs associated with increased intercompany advertising purchased by AOL on properties of other AOL Time Warner business segments ($148 million in 2002 versus $77 million in 2001).

Cable . Revenues increased 18% to $4.115 billion in 2002, compared to $3.475 billion on both a pro forma and historical basis in 2001. EBITDA increased 11% to $1.713 billion in 2002 from $1.545 billion on both a pro forma and historical basis in 2001.

Revenues increased due to a 16% increase in Subscription revenues (from $3.216 billion to $3.719 billion) and a 53% increase in Advertising and Commerce revenues (from $259 million to $396 million). The increase in Subscription revenues was due to higher basic cable rates, an increase in subscribers to high–speed data services, an increase in digital cable subscribers and, to a lesser degree, an increase in basic cable subscribers. Digital cable subscribers increased by 54% to 3.9 million and high–speed data subscribers increased by 75% to 2.5 million in 2002 over the prior year comparable period. The increase in Advertising and Commerce revenues was primarily related to advertising purchased by programming vendors to promote their channels, including new channel launches, ($99 million in 2002 versus $20 million in 2001), and the intercompany sale of advertising to other business segments of AOL Time Warner ($67 million in 2002 versus $13 million in 2001). The Company expects advertising sales to programming vendors to sequentially decline, resulting in declines in such advertising in the second half of 2002 as compared to the prior year.

EBITDA increased principally as a result of the revenue gains, offset in part by increases in programming and other operating costs. The increase in video programming costs of 25% relate to general programming rate increases across both basic and digital services, the addition of new programming services and

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higher basic and digital subscriber levels. Programming costs are expected to continue to increase as general programming rates increase and digital services continue to be rolled out. Other operating costs increased as a result of increased costs associated with the roll out of new services, higher property taxes associated with the upgrade of cable plants and higher development spending in the Interactive Personal Video division.

Filmed Entertainment. Revenues increased 10% to $4.522 billion in 2002, compared to $4.105 billion on both a pro forma and historical basis in 2001. EBITDA increased 40% to $509 million in 2002, compared to $363 million on both a pro forma and historical basis in 2001.

Revenues and EBITDA increased at Warner Bros. while revenues declined and EBITDA increased at the Turner filmed entertainment businesses, which include New Line Cinema, Castle Rock and the former film and television libraries of Metro–Goldwyn–Mayer, Inc. and RKO pictures.

For Warner Bros., the revenue increase was primarily related to the worldwide theatrical and home video release of Harry Potter and the Sorcerer’s Stone and the worldwide theatrical and domestic home video release of Ocean’s Eleven . Warner Bros.’ revenues also benefited from higher worldwide consumer products licensing results, offset in part by reduced commerce revenues related to the closure of its Studio Stores. For the Turner filmed entertainment businesses, revenues decreased primarily due to lower television revenues related to the absence in 2002 of significant syndication revenues to broadcast Seinfeld and lower pay–television and basic cable television revenues due to the timing of TV availabilities for film product. This was offset in part by New Line Cinema’s continued theatrical success of The Lord of the Rings: The Fellowship of the Ring, as well as the theatrical successes of John Q and Blade II, which were released in 2002 .

For Warner Bros., EBITDA increased principally due to improvements in the mix of theatrical product, primarily the profitability of Harry Potter and the Sorcerer’s Stone . For the Turner filmed entertainment businesses, EBITDA increased primarily due to continued theatrical success of The Lord of the Rings: The Fellowship of the Ring as well as the absence of losses on certain theatrical releases in 2001.

Networks. Revenues increased 6% to $3.743 billion in 2002, compared to $3.527 billion on both a pro forma and historical basis in 2001. EBITDA declined 5% to $851 million in 2002 from $893 million on both a pro forma and historical basis in 2001.

Revenues grew primarily due to an 8% increase in Subscription revenues with growth at both the Turner cable networks and HBO and an 18% increase in Content and Other revenues with growth at HBO, offset in part by decreases at the Turner cable networks. Advertising and Commerce revenues were essentially flat ($1.276 billion in 2002 compared to $1.268 billion in 2001) with increases at The WB Network and flat revenues at the Turner cable networks. EBITDA decreased due to lower results at the Turner cable networks and The WB Network, offset in part by improved results at HBO.

For the Turner cable networks, Subscription revenues benefited from higher domestic rates and an increase in the number of domestic subscribers, led by TNT, CNN, Turner Classic Movies, TBS and Cartoon Network cable networks. Advertising and Commerce revenues were essentially flat ($1.024 billion in 2002 compared to $1.029 billion in 2001) reflecting the slight recovery in the cable television advertising market during the second quarter of 2002, which was offset in part by a slight decline in intercompany sales of advertising to other business segments of AOL Time Warner ($51 million in 2002 versus $55 million in 2001). For HBO, Subscription revenues benefited from an increase in the number of subscribers and higher rates. Content and Other revenues benefited from higher

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

home video sales of HBO’s original programming and higher licensing and syndication revenue from the broadcast comedy series Everybody Loves Raymond . For The WB Network, the increase in Advertising and Commerce revenues was driven by higher rates.

For the Turner cable networks, the decrease in EBITDA was principally due to higher programming, marketing and newsgathering costs, partially offset by the increased Subscription revenues. In addition, EBITDA was negatively impacted by reserves established on receivables from Adelphia. For The WB Network, the EBITDA decline was principally due to higher program license fees offset in part by higher Advertising and Commerce revenues and a slight decrease in marketing costs. For HBO, the increase in EBITDA was principally due to the increase in revenues and reduced costs relating to the finalization of certain licensing agreements, offset in part by reserves established on receivables from Adelphia and the write–off of development costs.

Music . Revenues increased 4% to $1.919 billion in 2002, compared to $1.839 billion on both a pro forma and historical basis in 2001. EBITDA increased 9% to $198 million in 2002 from $181 million on both a pro forma and historical basis in 2001.

Revenues increased primarily due to increases in DVD manufacturing and merchandising sales, increases in the Music segment’s worldwide recorded music sales and the impact of the acquisition of Word Entertainment in January 2002, offset in part by the negative effect of changes in foreign currency exchange rates.

Publishing. Revenues increased 6% to 2.477 billion in 2002, compared to $2.342 billion on a pro forma basis in 2001 ($2.084 billion on a historical basis). EBITDA increased 14% to $482 million in 2002 from $423 million on a pro forma basis in 2001 ($384 million on a historical basis).

The increase in revenues is due to a 3% increase in Subscription revenues, 5% increase in Advertising and Commerce revenues (from $1.457 billion to $1.523 billion) and a 19% increase in Content and Other revenues. The growth in both Subscription revenues and Advertising and Commerce revenues was primarily due to revenues recognized by Synapse, which was acquired in December 2001. This was offset in part by lower commerce revenues from Time Life’s direct marketing business and a 3% decline in advertising revenue as a result of the continued overall weakness in the magazine advertising market. The increase in Content and Other revenues is due primarily to increased sales at the AOL Time Warner Book Group due to the carryover successes of 2001 bestsellers and the success of several 2002 releases.

The growth in EBITDA is due primarily to the increase in revenues, overall cost savings, including cost savings in connection with the integration of IPC, and reduced costs relating to the final settlement of certain liabilities associated with the closure of AFE, offset in part by additional reserves established on receivables from newsstand distributors.

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

FINANCIAL CONDITION AND LIQUIDITY
June 30, 2002

Current Financial Condition

At June 30, 2002, AOL Time Warner had $28.0 billion of debt, $1.7 billion of cash and equivalents, a portion of which was used to acquire the remaining 20% of Bertelsmann’s interest in AOL Europe on July 1, 2002 (net debt of $26.3 billion, defined as total debt less cash and cash equivalents) and $97.7 billion of shareholders’ equity, compared to $22.8 billion of debt, $719 million of cash and equivalents (net debt of $22.1 billion) and $152.1 billion of shareholders’ equity at December 31, 2001. In addition, AOL Europe also had approximately $779 million, including accrued dividends, of redeemable preferred securities outstanding, which is classified as Minority Interest in the accompanying consolidated balance sheet. These securities are required to be redeemed by the Company in April 2003 in cash, AOL Time Warner common stock, or a combination thereof, at the discretion of the Company. The Company’s outstanding utilization under its accounts receivable and backlog securitization facilities was approximately $1.8 billion as of June 30, 2002 and $1.6 billion as of December 31, 2001.

On April 8, 2002, the Company issued the remaining $6.0 billion principal amount of debt in a public offering under AOL Time Warner’s $10 billion shelf registration statement. In July 2002, the Company entered into $10 billion of revolving credit facilities and terminated approximately $12.6 billion in previously existing credit facilities, and made a $1.45 billion cash payment to acquire the remaining 20% of Bertelsmann’s interest in AOL Europe. Taking into account these transactions, the Company had approximately $6.7 billion of committed, available funding. The Company has no scheduled debt maturities for the remainder of 2002. The Company’s total committed capacity at June 30, 2002, under its accounts receivable and backlog securitization facilities was approximately $1.980 billion. Approximately $800 million of committed capacity under the Company’s securitization facilities will mature in the third quarter of 2002. The Company intends to renew these securitization facilities prior to their maturity but there can be no assurance that it will be able to do so.

As discussed in more detail below, management believes that AOL Time Warner’s operating cash flow, cash and equivalents, borrowing capacity under committed bank credit agreements and commercial paper programs are sufficient to fund its capital and liquidity needs for the foreseeable future.

Cash Flows

Operating Activities

Cash provided by operations increased to $3.994 billion for the first six months of 2002 as compared to $1.816 billion on a pro forma basis in 2001. This year over year growth in cash flow from operations was driven primarily by over $1.4 billion of improvements in working capital, an increase in EBITDA, lower income taxes and interest payments and a decrease in payments to settle restructuring and merger–related liabilities. The improvements in working capital are related to reduced working capital needs in the current period compared to increased working capital needs in the prior period. Working capital needs are subject to wide fluctuations based on the timing of cash transactions related to production schedules, the acquisition of programming, collection of sales proceeds and similar items. The current period benefits are largely expected to reverse in the second half of the year.

During the first six months of 2002, cash provided by operations of $3.994 billion reflected $4.406 billion of EBITDA, less $661 million of net interest payments, $110 million of net income taxes paid and $381 million of payments to settle merger and restructuring liabilities. Cash flow from operations also reflects a reduction in other working capital requirements of $740 million.

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

During the first six months of 2001, cash provided by operations of $1.816 billion on a pro forma basis reflected $4.325 billion of pro forma EBITDA, less $825 million of pro forma net interest payments, $204 million of pro forma net income taxes paid and $788 million of payments to settle restructuring and merger–related liabilities. Cash flow from operations also reflects an increase in working capital requirements of $692 million. On a historical basis in the first six months of 2001, there was $2.269 billion of cash provided by operations.

Investing Activities

Cash used by investing activities was $7.230 billion in the first six months of 2002, compared to cash used by investing activities of $729 million on a pro forma basis in 2001. The year over year increase in cash used by investing activities is primarily due to the increased cash used for acquisitions and investments, principally the acquisition of 80% of Bertelsmann’s interest in AOL Europe. Also contributing to the increase is the absence in 2002 of proceeds from the sale of short–term investments that occurred in the first six months of 2001 (primarily money market investments held by the America Online at the time of the Merger).

During the first six months of 2002, cash used by investing activities of $7.230 billion reflected approximately $5.937 billion of cash used for acquisitions and investments, including $5.3 billion which related to the acquisition of 80% of Bertelsmann’s interest in AOL Europe. In addition, cash used by investing activities in 2002 included $1.514 billion of capital expenditures and product development costs, offset in part by $221 million of proceeds received from the sale of investments.

During the first six months of 2001, cash used by investing activities of $729 million on a pro forma basis reflected $1.252 billion of cash used for acquisitions and investments and $1.854 billion of capital expenditures and product development costs, offset in part by $690 million of cash acquired in the Merger and $1.687 billion of proceeds received from the sale of investments. The proceeds received from the sale of investments in 2001 was due primarily to the sale of short–term investments previously held by America Online. On a historical basis in the first six months of 2001, there was $675 million of cash used by investing activities.

Financing Activities

Cash provided by financing activities was $4.226 billion for the first six months of 2002 as compared to cash used by financing activities of $2.650 billion on a pro forma basis in 2001. The year over year increase in cash provided by financing activities is principally due to incremental borrowings in the current period used to finance the acquisition of 80% of Bertelsmann’s interest in AOL Europe compared to net repayments on borrowings and the repurchase of AOL Time Warner common stock in the prior period.

During the first six months of 2002, cash provided from financing activities of $4.226 billion resulted from approximately $4.426 billion of net incremental borrowings, primarily used to acquire 80% of Bertelsmann’s interest in AOL Europe, and $215 million of proceeds received principally from the exercise of employee stock options, offset in part by the redemption of redeemable preferred securities at AOL Europe for $255 million, the repurchase of AOL Time Warner common stock for total cash of $102 million, $47 million of dividends and partnership distributions and $17 million of principal payments on capital leases.

During the first six months of 2001, cash used by financing activities of $2.650 billion on a pro forma basis primarily resulted from $1.380 billion of net payments on borrowings, the repurchase of AOL Time Warner common stock for an aggregate cost of $1.376 billion, the redemption of mandatorily redeemable preferred securities of a

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

subsidiary for $575 million and $53 million of dividends and partnership distributions, offset in part by $727 million of proceeds received principally from the exercise of employee stock options. On a historical basis in the first six months of 2001, there was $2.847 billion of cash used by financing activities.

Free Cash Flow

AOL Time Warner evaluates operating performance based on several measures including free cash flow, which is defined as cash provided by operations less capital expenditures and product development costs, dividend payments and partnership distributions, and principal payments on capital leases. The comparability of AOL Time Warner’s free cash flow has been affected by certain significant unusual and nonrecurring items in each period. Specifically, AOL Time Warner’s free cash flow has been impacted by the cash impact of the significant and nonrecurring items previously discussed. In addition, free cash flow has been impacted by payments made in settling other merger and restructuring liabilities. For the first six months of 2002, these items aggregated approximately $381 million of cash payments. On both a pro forma and historical basis for 2001 these items aggregated approximately $788 million. Excluding the effect of these nonrecurring items, free cash flow increased to $2.797 billion in 2002 from $697 million on a pro forma basis in 2001 ($1.170 billion on a historical basis), primarily due to the increase in EBITDA, improved cash flows from the Company’s filmed entertainment businesses, reduced interest and taxes paid, lower capital expenditures and product development costs and improvements in working capital. In addition, excluding the effect of nonrecurring items, the free cash flow during the first six months of 2002 represented a 62% conversion of EBITDA to free cash flow, compared to a 16% conversion ratio on a pro forma basis in 2001. Part of the growth in free cash flow was related to the timing of various cash payments and receipts which are expected to have an offsetting impact on free cash flow generation in future quarters. As a result, the Company expects a reduction in the rate that it converts EBITDA to free cash flow during the second half of 2002. On an as reported basis, free cash flow in 2002 was $2.416 billion, compared to a deficit of $91 million on a pro forma basis in 2001 (free cash flow of $382 million on a historical basis).

TWE Cash Flow Restrictions

The assets and cash flows of TWE are restricted by certain borrowing and partnership agreements and are unavailable to AOL Time Warner except through the payment of certain fees, reimbursements, cash distributions and loans, which are subject to limitations. Under its bank credit agreements, TWE is permitted to incur additional indebtedness to make loans, advances, distributions and other cash payments to AOL Time Warner, subject to its individual compliance with the cash flow coverage and leverage ratio covenants contained therein.

Common Stock Repurchase Program

In January 2001, AOL Time Warner’s Board of Directors authorized a common stock repurchase program that allows AOL Time Warner to repurchase, from time to time, up to $5 billion of common stock over a two–year period. During the first six months of 2002, the Company repurchased approximately 4 million shares at an aggregate cost of $102 million. These repurchases increased the cumulative shares purchased under this common stock repurchase program to approximately 79.4 million shares at an aggregate cost of $3.148 billion. In an effort to maintain financial flexibility, the pace of share repurchases under this program has slowed in 2002. As such, the Company does not expect that its repurchases of common stock for the remainder of the year will be significant.

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

$10 Billion Shelf Registration Statement

In January 2001, AOL Time Warner filed a shelf registration statement with the SEC, which allowed AOL Time Warner to offer and sell from time to time, debt securities, preferred stock, series common stock, common stock and/or warrants to purchase debt and equity securities in amounts up to $10 billion in initial aggregate public offering prices. On April 19, 2001, AOL Time Warner issued an aggregate of $4 billion principal amount of debt securities under this shelf registration statement at various fixed interest rates and maturities of 5, 10 and 30 years. On April 8, 2002, AOL Time Warner issued the remaining $6 billion principal amount of debt securities under this shelf registration statement at various fixed interest rates and maturities of 3, 5, 10 and 30 years. The net proceeds to the Company were approximately $3.964 billion under the first issuance and approximately $5.930 billion under the second issuance, both of which were used for general corporate purposes, including, but not limited to, the repayment of outstanding commercial paper and bank debt (Note 9).

$10 Billion Revolving Credit Facilities

Capital Expenditures and Product Development Costs

AOL Time Warner’s capital expenditures and product development costs amounted to $1.514 billion and $1.854 billion for the six months ended June 30, 2002 and 2001, respectively ($1.834 billion on a historical basis). Capital expenditures and product development costs principally relate to the Company’s Cable segment ($975 million in 2002 as compared to $1.141 billion in 2001), which over the past several years has been engaged in a plan to upgrade the technological capability and reliability of its cable television systems and develop new services. Also contributing to capital expenditures and product development costs are product development costs incurred by the AOL segment which amounted to $120 million and $179 million for the six months ended June 30, 2002 and 2001, respectively.

AOL Time Warner’s Cable segment generally capitalizes expenditures for tangible fixed assets having a useful life of greater than one year. Capitalized costs typically include direct material, direct labor, overhead and interest. Sales and marketing costs, as well as the costs of repairing or maintaining existing fixed assets, are

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

expensed as incurred. Types of capitalized expenditures at the Cable segment include plant upgrades, initial drops, converters and cable modems. With respect to converters and cable modems, the Cable segment capitalizes direct installation charges only upon the initial deployment of such assets. All costs incurred in the re–deployment of these assets are expensed as incurred. Similarly, once a given household has been wired, all costs incurred in subsequent disconnects and reconnects applicable to that household are expensed as incurred. Depreciation on these assets is provided generally using the straight–line method over their estimated useful life. For converters and modems, such life is generally 3–5 years and for plant upgrades, such useful life is up to 16 years. As of June 30, 2002, the total net book value of capitalized labor and overhead costs associated with the installation of converters and modems was approximately $200 million.

Included in the AOL segment’s product development costs are costs incurred for the production of technologically feasible computer software that generates additional functionality to its existing software products. Capitalized costs typically include direct labor and related overhead for software produced by AOL as well as the cost of software purchased from third parties. Costs incurred on a product prior to the determination that the product is technologically feasible, as well as maintenance costs of established products, are expensed as incurred. All costs in the software development process which are experimental in nature are classified as research and development and are expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, such costs are capitalized until the software has completed testing and is mass–marketed. Amortization is provided on a product–by–product basis using the greater of the straight–line method or the current year revenue as a percentage of total revenue estimates for the related software product, not to exceed five years, commencing the month after the date of the product release. The total net book value related to capitalized software costs was approximately $335 million as of June 30, 2002.

Filmed Entertainment Backlog

Backlog represents the amount of future revenue not yet recorded from cash contracts for the licensing of theatrical and television product for pay cable, basic cable, network and syndicated television exhibition. Backlog for all of AOL Time Warner’s Filmed Entertainment companies was approximately $3.5 billion at June 30, 2002, compared to approximately $3.8 billion at December 31, 2001 (including amounts relating to the licensing of film product to AOL Time Warner’s Networks segment of approximately $992 million at June 30, 2002 and approximately $1.231 billion at December 31, 2001).

CAUTION CONCERNING FORWARD–LOOKING STATEMENTS AND RISK FACTORS

The SEC encourages companies to disclose forward–looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This document contains such “forward–looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, EBITDA and cash flow. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify such forward–looking statements. Those forward–looking statements are based on management’s present expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward–looking statements whether as a result of such changes, new information, future events or otherwise.

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

AOL Time Warner operates in highly competitive, consumer–driven and rapidly changing Internet, media and entertainment businesses. These businesses are affected by government regulation, economic, strategic, political and social conditions, consumer response to new and existing products and services, technological developments and, particularly in view of new technologies, the continued ability to protect intellectual property rights. AOL Time Warner’s actual results could differ materially from management’s expectations because of changes in such factors. Other factors and risks could adversely affect the operations, business or financial results of AOL Time Warner or its business segments in the future and could also cause actual results to differ from those contained in the forward–looking statements, including those identified in AOL Time Warner’s other filings with the SEC and the following:

For AOL Time Warner’s America Online businesses, the ability to develop new products and services to remain competitive; the ability to develop, adopt or have access to new technologies; the ability to successfully implement its broadband strategy; the ability to have access to distribution channels controlled by third parties; the ability to retain and grow the subscriber base; the ability to provide adequate server, network and system capacity; increased costs and business disruption resulting from the financial difficulties being experienced by a number of AOL’s network service providers including WorldCom; the risk of unanticipated increased costs for network services; increased competition from providers of Internet services; the ability to renew existing advertising or marketing commitments, including the ability to renew or replace individual large multi–period online advertising commitments with similar commitments or with shorter term advertising sales, which are generally affected more by the current unfavorable state of overall online advertising market conditions; the ability to maintain or renew large advertising arrangements (during the six months ended June 30, 2002, the ten most significant third party advertising customers of America Online represented 42% of total America Online domestic advertising revenues as compared to 29% for six months ended June 30, 2001); the ability to maintain or enter into new electronic commerce, advertising, marketing or content arrangements; the risk that the online advertising market will not improve at all or at a rate comparable to improvements in the general advertising market; the ability to maintain and grow market share in the enterprise software industry; the risks from changes in US and international regulatory environments affecting interactive services; and the ability to continue to expand successfully internationally.

For AOL Time Warner’s cable business, more aggressive than expected competition from new technologies and other types of video programming distributors, including DBS and DSL; increases in government regulation of basic cable or equipment rates or other terms of service (such as “digital must–carry,” open access or common carrier requirements); government regulation of other services, such as broadband cable modem service; increased difficulty in obtaining franchise renewals; the failure of new equipment (such as digital set–top boxes) or services (such as digital cable, high–speed online services, telephony over cable or video–on–demand) to appeal to enough consumers or to be available at prices consumers are willing to pay, to function as expected and to be delivered in a timely fashion; fluctuations in spending levels by advertisers and consumers; the ability to enter into new program vendor advertising arrangements; and greater than expected increases in programming or other costs.

For AOL Time Warner’s filmed entertainment businesses generally, their ability to continue to attract and select desirable talent and scripts at manageable costs; general increases in production costs; fragmentation of consumer leisure and entertainment time (and its possible negative effects on the broadcast and cable networks, which are significant customers of these businesses); continued popularity of merchandising; the potential repeal of the Sonny Bono Copyright Term Extension Act; the uncertain impact of technological developments which may facilitate piracy of the Company’s copyrighted works; and risks associated with foreign currency exchange rates. With respect to feature films, the increasing marketing costs associated with theatrical film

AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

releases in a highly competitive marketplace; with respect to television programming, a decrease in demand for television programming provided by non–affiliated producers; and with respect to home video, the ability to maintain relationships with significant customers in the rental and sell–through markets.

For AOL Time Warner’s network businesses, greater than expected programming or production costs; public and cable operator resistance to price increases (and the negative impact on premium programmers of increases in basic cable rates); increased regulation of distribution agreements; the sensitivity of network advertising to economic cyclicality and to new media technologies; the impact of consolidation among cable and satellite distributors; piracy of programming by means of Internet peer–to–peer file sharing; the impact of personal video recorder “ad–stripping” functions on advertising sales; the development of new technologies that alter the role of programming networks and services; and greater than expected fragmentation of consumer viewership due to an increased number of programming services or the increased popularity of alternatives to television.

For AOL Time Warner’s music business, its ability to continue to attract and select desirable talent at manageable costs; the popular demand for particular artists and albums; the timely completion of albums by major artists; its ability to continue to enforce its intellectual property rights in digital environments; piracy of programming by means of Internet peer–to–peer file sharing; its ability to develop a successful business model applicable to a digital online environment; the potential repeal of Subsection (6) of California Labor Code Section 2855 regarding the maximum length of personal service contracts; the potential repeal of the Sonny Bono Copyright Term Extension Act; risks associated with foreign currency exchange rates; and the overall strength of global music sales.

For AOL Time Warner’s print media and publishing businesses, fluctuations in spending levels by advertisers and consumers; unanticipated increases in paper, postal and distribution costs (including costs resulting from financial pressure on the US Postal Service); increased costs and business disruption resulting from instability in the newsstand distribution channel; the introduction and increased popularity of alternative technologies for the provision of news and information; and the ability to continue to develop new sources of circulation.

For AOL Time Warner generally, the risks related to the continued successful operation of the businesses of AOL Time Warner on an integrated basis and the possibility that the Company will not be able to continue to realize the benefits of the combination of these businesses; lower than expected valuations associated with the cash flows and revenues at the AOL Time Warner segments may result in the inability of the Company to realize the value of recorded intangibles and goodwill at those segments.

In addition, the Company’s overall financial strategy, including growth in operations, maintaining its financial ratios and a strong balance sheet, could be adversely affected by increased interest rates, decreased liquidity in the capital markets (including any reduction in its ability to access either the capital markets for debt securities or bank financings), failure to meet earnings expectations, significant acquisitions or other transactions, economic slowdowns and changes in the Company’s plans, strategies and intentions.

AOL TIME WARNER INC.
CONSOLIDATED BALANCE SHEET

	June 30, 2002 Historical			December 31, 2001 Historical
	(Unaudited)
	(millions, except per share amounts)
ASSETS
Current assets
Cash and equivalents	$	1,709		$	719
Receivables, less allowances of $2.224 and $1.889 billion		4,996			6,054
Inventories		1,668			1,791
Prepaid expenses and other current assets		1,802			1,710

Total current assets		10,175			10,274
Noncurrent inventories and film costs		3,418			3,490
Investments, including available-for-sale securities		5,286			6,886
Property, plant and equipment		13,114			12,684
Intangible assets subject to amortization		7,335			7,289
Intangible assets not subject to amortization		37,822			37,708
Goodwill		80,105			127,424
Other assets		2,853			2,804

Total assets	$	160,108		$	208,559

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	2,125		$	2,257
Participations payable		1,407			1,253
Royalties and programming costs payable		1,573			1,515
Deferred revenue		1,489			1,456
Debt due within one year		87			48
Other current liabilities		6,128			6,443

Total current liabilities		12,809			12,972
Long-term debt		27,935			22,792
Deferred income taxes		10,849			11,260
Deferred revenue		1,118			1,054
Other liabilities		4,483			4,819
Minority interests		5,198			3,591

Shareholders’ equity
Series LMCN-V Common Stock, $0.01 par value, 171.2 million shares outstanding in each period		2			2
AOL Time Warner Common Stock, $0.01 par value, 4.289 and 4.258 billion shares outstanding		42			42
Paid-in capital		155,051			155,172
Accumulated other comprehensive income (loss), net		(339	)		49
Retained earnings		(57,040	)		(3,194	)

Total shareholders’ equity		97,716			152,071

Total liabilities and shareholders’ equity	$	160,108		$	208,559

See accompanying notes.

AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

	Three Months Ended June 30,									Six Months Ended June 30,

	2002 Historical			2001^(a) Pro Forma			2001 Historical			2002 Historical			2001^(a) Pro Forma			2001 Historical

				(millions, except per share amounts)
Revenues:
Subscriptions	$	5,028		$	4,382		$	4,098		$	9,768		$	8,532		$	7,987
Advertising and commerce		2,070			2,338			2,273			3,895			4,435			4,309
Content and other		3,477			2,886			2,905			6,676			6,072			6,097


Total revenues^(b)		10,575			9,606			9,276			20,339			19,039			18,393

Costs of revenues^(b)		(6,168	)		(5,237	)		(4,892	)		(11,998	)		(10,771	)		(9,939	)
Selling, general and administrative^(b)		(2,568	)		(2,439	)		(2,327	)		(5,020	)		(4,810	)		(4,698	)
Amortization of goodwill and other intangible assets		(177	)		(174	)		(1,781	)		(343	)		(340	)		(3,556	)
Merger and restructuring costs		—			—			—			(107	)		(71	)		(71	)


Operating income		1,662			1,756			276			2,871			3,047			129

Interest expense, net^(b)		(444	)		(469	)		(352	)		(823	)		(904	)		(671	)
Other expense, net^(b)		(376	)		(121	)		(233	)		(1,074	)		(849	)		(1,105	)
Minority interest expense		(147	)		(150	)		(76	)		(273	)		(271	)		(180	)


Income (loss) before income taxes and cumulative effect of accounting change		695			1,016			(385	)		701			1,023			(1,827	)

Income tax provision		(301	)		(424	)		(349	)		(308	)		(452	)		(276	)

Income (loss) before cumulative effect of accounting change		394			592			(734	)		393			571			(2,103	)
Cumulative effect of accounting change		—			—			—			(54,239	)		—			—


Net income (loss) applicable to common shares	$	394		$	592		$	(734	)	$	(53,846	)	$	571		$	(2,103	)


Basic income (loss) per common share before cumulative effect of accounting change	$	0.09		$	0.13		$	(0.17	)	$	0.09		$	0.13		$	(0.48	)
Cumulative effect of accounting change		—			—			—			(12.21	)		—			—

Basic net income (loss) per common share	$	0.09		$	0.13		$	(0.17	)	$	(12.12	)	$	0.13		$	(0.48	)


Average basic common shares		4,454.1			4,434.9			4,434.9			4,441.7			4,423.8			4,423.8


Diluted income (loss) per common share before cumulative effect of accounting change	$	0.09		$	0.13		$	(0.17	)	$	0.09		$	0.12		$	(0.48	)
Cumulative effect of accounting change		—			—			—			(12.21	)		—			—

Diluted net income (loss) per common share	$	0.09		$	0.13		$	(0.17	)	$	(12.12	)	$	0.12		$	(0.48	)

Average diluted common shares		4,528.2			4,606.1			4,606.1			4,531.2			4,598.8			4,598.8

______________

(a)

In order to enhance comparability, pro forma statements for 2001 are presented supplementally as if IPC and the remaining interest in AOL Europe had been acquired and FAS 142 had been applied at the beginning of 2001 (Note 1).

(b)

Includes the following income (expenses) resulting from transactions with related companies:

Revenues	$	251		$	229		$	229		$	473		$	466		$	466
Cost of revenues		(101	)		(74	)		(74	)		(183	)		(177	)		(177	)
Selling, general and administrative		7			1			1			12			(12	)		(12	)
Interest income (expense), net		9			4			4			5			8			8
Other income (expense), net		(9	)		(5	)		(5	)		(5	)		(10	)		(10	)

See accompanying notes.

AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
(Unaudited)

	2002 Historical			2001^(a) Pro Forma			2001 Historical

	(millions, except per share amounts)
OPERATIONS
Net income (loss)	$	(53,846	)	$	571		$	(2,103	)
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change		54,239			—			—
Depreciation and amortization		1,535			1,278			4,483
Amortization of film costs		1,067			1,066			1,066
Loss on writedown of investments		954			674			674
Net gain on sale of investments		(94	)		(33	)		(33	)
Equity in losses of investee companies after distributions		227			301			584
Changes in operating assets and liabilities, net of acquisitions		(88	)		(2,041	)		(2,402	)

Cash provided by operations		3,994			1,816			2,269


INVESTING ACTIVITIES
Acquisition of Time Warner Inc. cash and equivalents		—			690			690
Investments and acquisitions, net of cash acquired		(5,937	)		(1,252	)		(1,218	)
Capital expenditures and product development costs		(1,514	)		(1,854	)		(1,834	)
Investment proceeds		221			1,687			1,687

Cash used by investing activities		(7,230	)		(729	)		(675	)


FINANCING ACTIVITIES
Borrowings		13,406			6,555			6,245
Debt repayments		(8,980	)		(7,935	)		(7,834	)
Redemption of mandatorily redeemable preferred securities of subsidiary		(255	)		(575	)		(575	)
Proceeds from exercise of stock option and dividend reimbursement plans		215			727			727
Current period repurchases of common stock		(102	)		(1,376	)		(1,376	)
Dividends paid and partnership distributions		(47	)		(53	)		(53	)
Principal payments on capital leases		(17	)		—			—
Other		6			7			19

Cash provided (used) by financing activities		4,226			(2,650	)		(2,847	)


INCREASE (DECREASE) IN CASH AND EQUIVALENTS		990			(1,563	)		(1,253	)


CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		719			2,801			2,610


CASH AND EQUIVALENTS AT END OF PERIOD	$	1,709		$	1,238		$	1,357

______________

(a)

In order to enhance comparability, pro forma financial statements for 2001 are presented supplementally as if IPC and the remaining interest in AOL Europe had been acquired and FAS 142 had been applied at the beginning of 2001 (Note 1).

See accompanying notes.

AOL TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Six Months Ended June 30,
(Unaudited)

	2002 Historical			2001 Historical

	(millions)

BALANCE AT BEGINNING OF PERIOD	$	152,071		$	6,778

Issuance of common stock in connection with America Online-Time Warner merger		—			146,430
Reversal of America Online’s deferred tax valuation allowance		—			4,419


Balance at beginning of period, adjusted to give effect to the America Online-Time Warner merger		152,071			157,627

Net loss		(53,846	)		(2,103	)
Other comprehensive loss^(a)		(388	)		(3	)

Comprehensive loss		(54,234	)		(2,106	)

Repurchases of AOL Time Warner common stock		(102	)		(1,376	)
Dilution of interest in Time Warner Entertainment Company, L.P. (net of $276 million income tax impact)		(414	)		—
Other, principally shares issued pursuant to stock option and benefit plans, including $121 million and $1.180 billion of tax benefit		395			1,942


BALANCE AT END OF PERIOD	$	97,716		$	156,087

______________

(a)

2002 includes a $141 million pretax reduction (income tax impact of $56 million), related to the write-down of certain investments, accounted for under FAS 115, from a decline in market value determined to be other-than-temporary.

See accompanying notes.

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

AOL Time Warner Inc. (“AOL Time Warner” or the “Company”) is the world’s leading media and entertainment company. The Company was formed in connection with the merger of America Online, Inc. (“America Online”) and Time Warner Inc. (“Time Warner”), which was consummated on January 11, 2001 (the “Merger”). As a result of the Merger, America Online and Time Warner each became a wholly owned subsidiary of AOL Time Warner.

Each of the business interests within AOL Time Warner – AOL, Cable, Filmed Entertainment, Networks, Music and Publishing – 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) leading worldwide Internet services, such as the AOL and Compuserve services, leading Web properties, such as Netscape, Moviefone and MapQuest, instant messaging services, such as ICQ and AOL Instant Messenger, and music properties, such as the AOL Music Channel and Winamp, (2) Time Warner Cable, currently the second largest operator of cable television systems in the U.S., (3) the unique and extensive film, television and animation libraries owned or managed by Warner Bros. and New Line Cinema, and trademarks such as the Looney Tunes characters, Batman and The Flintstones , (4) leading television networks, such as The WB Network, HBO, Cinemax, CNN, TNT, TBS Superstation and Cartoon Network, (5) 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, Atlantic Records, Elektra Entertainment and Warner Music International and (6) magazine franchises, such as Time, People and Sports Illustrated .

Investment in Time Warner Entertainment Company, L.P.

A majority of AOL Time Warner’s interests in the Filmed Entertainment and Cable segments, and a portion of its interests in the Networks segment, are held through Time Warner Entertainment Company, L.P. (“TWE”). As of June 30, 2002, AOL Time Warner owned general and limited partnership interests in TWE consisting of 72.36% of the pro rata priority capital (“Series A Capital”) and residual equity capital (“Residual Capital”), and 100% of the junior priority capital (“Series B Capital”). The remaining 27.64% limited partnership interests in the Series A Capital and Residual Capital of TWE were held by MediaOne TWE Holdings, Inc., a subsidiary of AT&T Corp. (“AT&T”) (Note 6).

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Basis of Presentation

Interim Financial Statements

The accompanying consolidated 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 accounting principles generally accepted in the United States applicable to interim periods. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements of AOL Time Warner, included in its Annual Report on Form 10–K for the year ended December 31, 2001, as amended by Amendment No. 1 thereto on Form 10–K/A filed March 26, 2002 and Amendment No. 2 thereto on Form 10–K/A filed June 28, 2002 (the “2001 Form 10–K”).

Revenue Classification Changes

Reimbursement of “Out–of–Pocket” Expenses

In November 2001, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) issued as interpretive guidance EITF Topic No. D–103, “Income Statement Characterization of Reimbursements Received for ‘Out–of–Pocket’ Expenses Incurred” (“Topic D–103”). Topic D–103 requires that reimbursements received for out–of–pocket expenses be classified as revenue on the income statement and was effective for AOL Time Warner in the first quarter of 2002. The new guidance requires retroactive restatement of all periods presented to reflect the new accounting provisions. This change in revenue classification impacts AOL Time Warner’s Cable and Music segments, resulting in an increase in both revenues and costs of approximately $122 million on both a pro forma and historical basis in the second quarter of 2001 and an increase in both revenues and costs of approximately $221 million on both a pro forma and historical basis for the first six months of 2001.

Emerging Issues Task Force Issue No. 01–09

In April 2001, EITF reached a final consensus on EITF Issue No. 00–25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products,” which was later codified along with other similar issues, into EITF Issue No. 01–09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products” (“EITF 01–09”). EITF 01–09 was effective for AOL Time Warner in the first quarter of 2002. EITF 01–09 clarifies the income statement classification of costs incurred by a vendor in connection with the reseller’s purchase or promotion of the vendor’s products, resulting in certain cooperative advertising and product placement costs previously classified as selling expenses to be reflected as a reduction of revenues earned from that activity. The new guidance impacts AOL Time Warner’s AOL, Music and Publishing segments and requires retroactive restatement of all periods presented to reflect the new accounting provisions. As a result of applying the provisions of EITF 01–09, the Company’s revenues and costs each were reduced by an equal amount of approximately $48 million on a pro forma and historical basis in the second quarter of 2001 and approximately $110 million on a pro forma and historical basis for the first six months of 2001.

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Accounting for Business Combinations

In July 2001, the FASB issued Statements of Financial Accounting Standards (“Statement”) No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling–of–interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. The new standards generally were effective for AOL Time Warner in the first quarter of 2002 and for purchase business combinations consummated after June 30, 2001. Upon adoption of FAS 142 in the first quarter of 2002, AOL Time Warner recorded a one–time, noncash charge of approximately $54 billion to reduce the carrying value of its goodwill. Such charge is non–operational in nature and is reflected as a cumulative effect of accounting change in the accompanying consolidated statement of operations. For additional discussion on the impact of adopting FAS 142, see Note 3.

Reclassifications

Certain reclassifications have been made to the prior year’s financial information to conform to the June 30, 2002 presentation.

2. MERGER AND RESTRUCTURING COSTS

Merger Costs

In accordance with accounting principles generally accepted in the United States, AOL Time Warner generally treats merger costs relating to business combinations accounted for using the purchase method of accounting as additional purchase price paid. However, certain merger costs do not meet the criteria for capitalization and are expensed as incurred. Certain merger costs were expensed as incurred as they either related to the operations of the acquirer, including the AOL operations with respect to the Merger, or otherwise did not qualify as a liability or cost assumed in a purchase business combination, including AOL Time Warner’s acquisition of Time Warner. Merger costs both capitalized and expensed are discussed in more detail in the following paragraphs.

Merger Costs Capitalized as a Cost of Acquisition

In connection with the Merger, the Company has reviewed its operations and implemented several plans to restructure the operations of America Online and Time Warner (“restructuring plans”). As part of the restructuring plans, the Company accrued a restructuring liability of approximately $1.340 billion during 2001. The restructuring accruals relate to costs to exit and consolidate certain activities of Time Warner, as well as costs to terminate employees across various Time Warner business units. Such amounts were recognized as liabilities assumed in the purchase business combination and included in the allocation of the cost to acquire Time Warner. Accordingly, such amounts resulted in additional goodwill being recorded in connection with the Merger.

Of the total restructuring accrual, approximately $880 million related to work force reductions and represented employee termination benefits. Because certain employees can defer receipt of termination benefits for up to 24 months, cash payments are continuing after the employee was terminated. Termination payments of approximately $300 million were made in 2001 ($95 million of which was in the second quarter and $135 million for the first six months of 2001),

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

an additional $64 million was paid in the second quarter of 2002 and approximately $168 million was paid for the first six months of 2002. In addition, for the first six months of 2002, there were noncash reductions in the restructuring accrual of approximately $16 million (none in the second quarter), as actual termination payments were less than amounts originally estimated. As of June 30, 2002, the remaining liability of approximately $396 million was primarily classified as a current liability in the accompanying consolidated balance sheet.

The restructuring accrual also includes approximately $460 million associated with exiting certain activities, primarily related to lease and contract termination costs. Specifically, the Company plans to consolidate certain operations and has exited other under–performing operations, including the Studio Store operations of the Filmed Entertainment segment and the World Championship Wrestling operations of the Networks segment. The restructuring accrual associated with other exiting activities specifically includes incremental costs and contractual termination obligations for items such as lease termination payments and other facility exit costs incurred as a direct result of these plans, which will not have future benefits. Payments related to exiting activities were approximately $165 million in 2001 ($40 million of which was paid in the second quarter and $60 million for the first six months of 2001), an additional $30 million was paid in the second quarter of 2002 and $66 million was paid in the first six months of 2002. In addition, for the second quarter and the first six months of 2002, there were noncash reductions in the restructuring accrual of approximately $15 million, as actual termination payments were less than amounts originally estimated. As of June 30, 2002, the remaining liability of approximately $214 million was primarily classified as a current liability in the accompanying consolidated balance sheet.

Selected information relating to the restructuring costs included in the allocation of the cost to acquire Time Warner is as follows (in millions):

	Employee Termination			Other Exit Costs			Total

Initial Accruals	$	880		$	460		$	1,340
Cash paid – 2001		(300	)		(165	)		(465	)

Restructuring liability as of December 31, 2001		580			295			875
Cash paid – 2002		(168	)		(66	)		(234	)
Noncash reductions^(a) – 2002		(16	)		(15	)		(31	)

Restructuring liability as of June 30, 2002	$	396		$	214		$	610

______________

(a)

Noncash reductions represent adjustments to the restructuring accrual, and a corresponding reduction in goodwill, as actual costs related to employee terminations and other exit costs were less than originally estimated.

Merger Costs Expensed as Incurred

During 2001, the restructuring plans included approximately $250 million of merger costs that were expensed as incurred and included in merger and restructuring costs in the accompanying consolidated statement of operations (none of which was recognized in the second quarter and $71 million for the first six months of 2001). Of the $250 million, approximately $201 million related to employee termination benefits and other contractual terminations at the AOL segment, approximately $37 million related to the renegotiation of various contractual commitments in the Music

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

segment and approximately $12 million related to costs incurred in connection with the termination of AOL Time Warner’s merger discussions with AT&T regarding their broadband businesses. As of June 30, 2002, approximately $39 million of the $250 million has not been paid and is primarily classified as a current liability in the accompanying consolidated balance sheet.

Restructuring Costs

During the first six months of 2002, the Company has incurred and accrued other restructuring costs of $107 million related to various contractual terminations and obligations, including certain contractual employee termination benefits. As of June 30, 2002, $71 million has been paid against these accruals. The remaining $36 million is primarily classified as a current liability in the accompanying consolidated balance sheet. These costs are included in merger and restructuring costs in the accompanying consolidated statement of operations.

Included in the 2002 restructuring charge is $64 million related to lease obligations of the AOL segment for network modems that will no longer be used because network providers are upgrading their networks to newer technology. Specifically, under certain existing agreements with network providers, AOL is leasing the modems used in providing network services from a third–party. During the first quarter of 2002, a plan was established under which a network provider would upgrade and replace the AOL supplied modems. Accordingly, the Company accrued the remaining lease obligations, less estimated recoveries, for the period that these modems will no longer be in use.

In addition to the lease costs referred to above, there is one remaining network arrangement that continues to use AOL supplied modems, in which AOL has a remaining modem lease obligation of approximately $65 million. AOL is currently in discussions with the network provider regarding the use of AOL supplied modems. If the network provider of this remaining network arrangement should similarly decide to replace the AOL modems, the Company could be required to recognize an additional restructuring charge in subsequent periods for the portion of the remaining lease obligation, less estimated recoveries, related to the period the AOL modems would not be in use.

3. GOODWILL AND INTANGIBLE ASSETS

As discussed in Note 1, in January 2002, AOL Time Warner adopted FAS 142, which requires companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, FAS 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be reviewed for impairment upon adoption of FAS 142 (January 1, 2002) and annually thereafter. The Company will perform its annual impairment review during the fourth quarter of each year, commencing in the fourth quarter of 2002.

Under FAS 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The Company’s reporting units are generally consistent with the operating segments underlying the segments identified in Note 11 – Segment Information. This methodology differs from AOL Time Warner’s previous policy, as provided under accounting standards existing at that time, of using undiscounted cash flows on an enterprise–wide basis to determine if goodwill was recoverable.

Upon adoption of FAS 142 in the first quarter of 2002, AOL Time Warner recorded a one–time, noncash charge of approximately $54 billion to reduce the carrying value of its goodwill. Such charge is nonoperational in nature and is reflected as a cumulative effect of accounting change in the accompanying consolidated statement of operations. In calculating the impairment charge, the fair value of the impaired reporting units underlying the segments were estimated using either a discounted cash flow methodology, recent comparable transactions or a combination thereof.

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The FAS 142 goodwill impairment is associated solely with goodwill resulting from the Merger. The amount of the impairment primarily reflects the decline in the Company’s stock price since the Merger was announced and valued for accounting purposes in January of 2000. Prior to performing the review for impairment, FAS 142 required that all goodwill deemed to be related to the entity as a whole be assigned to all of the Company’s reporting units, including the reporting units of the acquirer. This differs from the previous accounting rules where goodwill was assigned only to the businesses of the company acquired. As a result, a portion of the goodwill generated in the Merger has been reallocated to the AOL segment.

A summary of changes in the Company’s goodwill during the first six months of 2002, and total assets at June 30, 2002, by business segment is as follows (in millions):

	Goodwill										Total Assets

	January 1, 2002⁽¹⁾		Acquisitions & Adjustments⁽²⁾			Impairments⁽³⁾			June 30, 2002		June 30, 2002

AOL	$	27,729	$	7,077		$	—		$	34,806	$	40,372
Cable		33,263		—			(22,980	)		10,283		48,491
Filmed Entertainment⁽⁴⁾		9,110		(107	)		(4,091	)		4,912		15,885
Networks⁽⁵⁾		33,562		22			(13,077	)		20,507		31,688
Music		5,477		29			(4,796	)		710		7,337
Publishing		18,283		(137	)		(9,259	)		8,887		14,103
Corporate		—		—			—			—		2,232

Total	$	127,424	$	6,884		$	(54,203	)	$	80,105	$	160,108

______________

(1)

Reflects the reallocation of goodwill to the AOL reporting unit under FAS 142.

(2)

Adjustments primarily relate to the Company’s preliminary purchase price allocation for several acquisitions. Specifically, the ultimate goodwill associated with certain acquisitions (including IPC, Business 2.0, Synapse, AOL Europe, and This Old House) continues to be adjusted as the value of the assets and liabilities (including merger liabilities) acquired are finalized.

(3)

The impairment charge does not include approximately $36 million related to goodwill impairments associated with equity investees.

(4)

Includes impairments at Warner Bros. $(2.851 billion) and at the Turner filmed entertainment businesses $(1.240 billion).

(5)

Includes impairments at the Turner cable networks $(10.933 billion), HBO $(1.933 billion) and The WB Network $(211 million).

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

As of June 30, 2002 and December 31, 2001, the Company’s intangible assets and related accumulated amortization consisted of the following (in millions):

	As of June 30, 2002							As of December 31, 2001

	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Intangible assets subject to amortization:
Music catalogues and copyrights	$	3,180	$	(241	)	$	2,939	$	3,080	$	(153	)	$	2,927
Film library		3,559		(293	)		3,266		3,559		(196	)		3,363
Customer lists and other intangible assets		1,808		(678	)		1,130		1,519		(520	)		999


Total	$	8,547	$	(1,212	)	$	7,335	$	8,158	$	(869	)	$	7,289


Intangible assets not subject to amortization :
Cable television franchises	$	28,449	$	(1,878	)	$	26,571	$	28,452	$	(1,878	)	$	26,574
Sports franchises		500		(20	)		480		500		(20	)		480
Brands, trademarks and other intangible assets		11,091		(320	)		10,771		10,974		(320	)		10,654


Total	$	40,040	$	(2,218	)	$	37,822	$	39,926	$	(2,218	)	$	37,708

The Company recorded amortization expense of $177 million during the second quarter of 2002 compared to $174 million on a pro forma basis during the second quarter of 2001. The Company recorded amortization expense of $343 million for the first six months of 2002 compared to $340 million on a pro forma basis for the first six months of 2001. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding 5 years are as follows: 2002: $680 million; 2003: $646 million; 2004: $634 million; 2005: $568 million; and 2006: $435 million. As acquisitions and dispositions occur in the future and as purchase price allocations are finalized, these amounts may vary.

During the first six months of 2002, the Company acquired the following intangible assets (in millions):

			Weighted Average Amortization Period

Music catalogues and copyrights	$	100		15 years
Customer lists and other intangible assets subject to amortization		289		6 years
Cable television franchises		10		Indefinite
Brands, trademarks and other intangible assets not subject to amortization		117		Indefinite


Total	$	516

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The 2001 results on a historical basis do not reflect the provisions of FAS 142. Had AOL Time Warner adopted FAS 142 on January 1, 2001, the historical net income (loss) and basic and diluted net income (loss) per common share would have been changed to the adjusted amounts indicated below:

	Three Months Ended June 30, 2001

	(millions, except per share amounts)
	Net income (loss)			Net income (loss) per basic common share			Net income (loss) per diluted common share

As reported – historical basis	$	(734	)	$	(0.17	)	$	(0.17	)
Impact of dilutive shares on historical net loss		—			—			0.01
Add: Goodwill amortization		1,304			0.30			0.28
Add: Intangible amortization		364			0.08			0.08
Add: Equity investee goodwill amortization		141			0.03			0.03
Minority interest impact		(62	)		(0.01	)		(0.01	)
Income tax impact^(a)		(177	)		(0.04	)		(0.04	)

Adjusted	$	836		$	0.19		$	0.18

______________

(a)

Because goodwill is nondeductible for tax purposes, the income tax impact reflects only the ceasing of intangible amortization and equity investee goodwill amortization.

	Six Months Ended June 30, 2001

	(millions, except per share amounts)
	Net income (loss)			Net income (loss) per basic common share			Net income (loss) per diluted common share

As reported – historical basis	$	(2,103	)	$	(0.48	)	$	(0.48	)
Impact of dilutive shares on historical net loss		—			—			0.02
Add: Goodwill amortization		2,579			0.58			0.56
Add: Intangible amortization		728			0.17			0.16
Add: Equity investee goodwill amortization		284			0.06			0.06
Minority interest impact		(79	)		(0.02	)		(0.02	)
Income tax impact^(a)		(373	)		(0.08	)		(0.08	)

Adjusted	$	1,036		$	0.23		$	0.22

______________

(a)

Because goodwill is nondeductible for tax purposes, the income tax impact reflects only the ceasing of intangible amortization and equity investee goodwill amortization.

4. INVESTMENTS

Investment Write-Downs

The United States economy has experienced a broad decline in the public equity markets, particularly in technology stocks, including investments held in the Company’s portfolio. Similarly, the Company experienced significant declines in the value of certain privately held investments, restricted securities and investments accounted for using the equity method of accounting. As a result, the Company recorded noncash pretax charges to reduce the carrying value of certain investments that experienced other-than-temporary declines of approximately $364 million in the second quarter of 2002 and $945 million for the six months ended June 30, 2002, which are included in other expense, net, in the accompanying consolidated statement of operations. The Company recorded noncash pretax charges of $54 million for the second quarter of 2001 and $674 million for the first six months of 2001, on both a pro forma and historical basis, which are included in other expense, net, in the accompanying consolidated statement of operations. In addition, the 2001 second quarter charge was almost entirely offset by pretax gains related to equity derivative instruments and the sale of certain securities.

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Included in the noncash pretax charges noted above for the three and six months ended June 30, 2002 is a charge of approximately $201 million and $772 million, respectively, to reduce AOL Time Warner’s investment in Time Warner Telecom Inc. (“Time Warner Telecom”), and $101 million in the second quarter relating to an investment in Gateway Inc. for declines deemed to be other-than-temporary. Time Warner Telecom is a leading fiber facilities-based provider of metropolitan and regional optical broadband networks and services to business customers. The value of the Time Warner Telecom investment was adjusted upward in the Merger by over $2 billion to its estimated fair value. Since the date of the Merger, Time Warner Telecom’s share price has declined significantly, resulting in impairment charges of approximately $1.2 billion in the fourth quarter of 2001 and approximately $772 million for the first six months of 2002. As of June 30, 2002, the remaining carrying value of the Company’s investment in Time Warner Telecom is approximately $85 million.

As of June 30, 2002, Time Warner Telecom was owned 44% by AOL Time Warner, 14% by Advance/Newhouse Partnership and 42% by other third parties. AOL Time Warner’s interest in Time Warner Telecom is being accounted for using the equity method of accounting. For the three months ended June 30, 2002, Time Warner Telecom had revenues, operating loss and net loss of approximately $185 million, $4 million and $31 million, respectively. For the six months ended June 30, 2002, Time Warner Telecom had revenues, operating loss and net loss of approximately $353 million, $23 million and $74 million, respectively.

As of June 30, 2002, AOL Time Warner has total investments, excluding equity-method investments, of $1.953 billion for which the carrying value exceeded their estimated fair value by approximately $350 million. This is primarily due to unrealized losses of approximately $400 million based on a carrying value of approximately $1.2 billion related to the Company’s investment in Hughes Electronics Corp. (“Hughes”). At this time, management has concluded that the decline in fair value of the Company’s investment in Hughes is temporary. However, depending upon general market conditions and the performance of individual investments, including Hughes and investments accounted for under the equity method of accounting, the Company may be required in the future to record a noncash charge to reduce the carrying value of individual investments to their fair value for other-than-temporary declines. Any such charge would be unrelated to the Company’s core operations and would be recorded in other income (expense), net.

Sale of Columbia House

The Columbia House Company Partnerships (“Columbia House”) was a 50-50 joint venture between AOL Time Warner and Sony Corporation of America (“Sony”). In June 2002, AOL Time Warner and Sony reached a definitive agreement to each sell 85% of its 50% interest in Columbia House to Blackstone Capital Partners III LP (“Blackstone”), an affiliate of The Blackstone Group, a private investment bank. Under the terms of the sale agreement, the Company received proceeds of approximately $125 million in cash and a subordinated note receivable from Columbia House Holdings, Inc., a majority owned subsidiary of Blackstone, with a face amount of approximately $35 million. The sale has resulted in the Company recognizing a pretax gain of approximately $59 million, which is included in other expense, net, in the accompanying consolidated statement of operations. In addition, the Company has deferred an approximate $28 million gain on the sale. The deferred gain primarily relates to the estimated fair value of the portion of the proceeds received as a note receivable, which will be deferred until such time as the realization of such note becomes more fully assured. As a result of the sale, the Company’s interest in Columbia House has been reduced to 7.5%. As part of the transaction, AOL Time Warner will continue to license music and video product to Columbia House for a five-year period.

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Redemption of an interest in TiVo

During the second quarter of 2002, approximately 1.6 million shares of preferred stock of TiVo Inc. (“TiVo”) held by the Company were redeemed. As a part of this transaction, the Company also sold certain rights and licenses for developed technology to TiVo. In return, the Company received proceeds of approximately $44 million of cash and recognized a gain of approximately $31 million, which is included in other expense, net, in the accompanying consolidated statement of operations.

AOL Latin America Convertible Debt

America Online Latin America, Inc. (“AOL Latin America”) is a joint venture among AOL Time Warner, the Cisneros Group and Banco Itaú (a leading Brazilian bank) that provides online services and support principally to customers in Brazil, Mexico and Argentina. In August 2000, AOL Latin America successfully completed an initial public offering of approximately 25 million shares of its Class A common stock, representing approximately 10% of the ownership interest in AOL Latin America at the time of the offering.

In March 2002, AOL Time Warner announced that it will make available to AOL Latin America up to $160 million throughout 2002 to fund the operations of AOL Latin America. In exchange for this investment, AOL Time Warner will receive senior convertible notes. Each note will carry a fixed interest rate of 11% per annum (payable quarterly), will have a five-year maturity and will be convertible into AOL Latin America convertible preferred stock, which is convertible into Class A common stock of AOL Latin America at a conversion price of $3.624 per share (20% above the market price at the time of investment). Assuming the conversion of all of the Company’s investments in convertible securities of AOL Latin America, including the full $160 million principal amount of notes, AOL Time Warner’s economic interest in AOL Latin America would increase to approximately 50%. AOL Latin America has the option to redeem the notes after 18 months and the option to make interest payments in either cash or additional shares of convertible preferred stock. As of June 30, 2002, AOL Time Warner had provided AOL Latin America approximately $45 million of this committed amount.

5. AOL EUROPE

AOL Europe S.A. (“AOL Europe”) was a joint venture between AOL Time Warner and Bertelsmann AG (“Bertelsmann”). AOL Europe provides the AOL service and the CompuServe service in several European countries. In March 2000, America Online and Bertelsmann announced an agreement to restructure their interests in AOL Europe. This restructuring consisted of a put and call arrangement under which the Company could purchase or be required to purchase Bertelsmann’s 49.5% interest in AOL Europe for consideration ranging from $6.75 billion to $8.25 billion.

On January 31, 2002, AOL Time Warner acquired 80% of Bertelsmann’s 49.5% interest in AOL Europe for $5.3 billion in cash as a result of Bertelsmann’s exercise of its initial put option. On July 1, 2002, AOL Time Warner acquired the remaining 20% of Bertelsmann’s interest for $1.45 billion in cash. As a result of the purchase of Bertelsmann’s interest in AOL Europe, AOL Time Warner has a majority interest and began consolidating AOL Europe, retroactive to the beginning of 2002. Previously, the Company owned a 49.5% preferred interest in AOL Europe and accounted for its investment in AOL Europe using the equity method of accounting. At January 31, 2002, AOL Europe had $573 million of debt which was subsequently refinanced with AOL Time Warner debt carrying lower interest rates. Additionally, in February 2002, certain redeemable preferred securities previously issued by AOL Europe were redeemed for $255 million. AOL Europe’s remaining $725 million of preferred securities are redeemable in April 2003 in cash, AOL Time Warner common stock, or a combination thereof, at the discretion of the Company (Note 10).

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

As of January 1, 2002, AOL Europe had total assets of approximately $150 million, consisting principally of approximately $88 million in receivables and approximately $52 million in cash and equivalents. In addition, AOL Europe had approximately $2.0 billion of total liabilities, including $573 million of debt, approximately $415 million of other current liabilities and approximately $1 billion of redeemable preferred securities, including $255 million of redeemable preferred securities redeemed in February 2002. The assets and liabilities of AOL Europe are included in the AOL segment. In connection with the allocation of the price paid by AOL Time Warner to acquire the additional interest in AOL Europe, the AOL segment recognized approximately $7.0 billion of goodwill and approximately $230 million of subscriber lists, which will be amortized over a useful life of 5 years with no residual value. The allocation of the purchase price is preliminary because the Company has yet to complete its valuation process for these intangible assets.

6. INVESTMENT IN TWE

TWE is a Delaware limited partnership that was capitalized in 1992 to own and operate substantially all of the Filmed Entertainment-Warner Bros., Networks-HBO and The WB Network, and Cable businesses previously owned by subsidiaries of AOL Time Warner. As of March 31, 2002, AOL Time Warner, through its wholly owned subsidiaries, collectively owned general and limited partnership interests in TWE consisting of 74.49% of the Series A Capital and Residual Capital and 100% of the Series B Capital. The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE were held by AT&T. Certain AOL Time Warner subsidiaries are the general partners of TWE (the “General Partners”).

During the second quarter of 2002, AT&T exercised a one-time option to increase its ownership in the Series A Capital and Residual Capital of TWE. The option allowed AT&T to obtain up to an additional 6.33% of Series A Capital and Residual Capital interests determined based on the compounded annual growth rate of TWE’s adjusted Cable EBITDA, as defined in the option agreement, over the life of the option, and whether AT&T or TWE elected to have the exercise price paid with partnership interests rather than cash. On April 19, 2002, AT&T delivered to TWE a notice that the option would be exercised on a cashless basis, effective May 31, 2002. As a result, on May 31, 2002, AT&T’s interest in the Series A Capital and Residual Capital of TWE increased by approximately 2.13% to approximately 27.64% and AOL Time Warner’s corresponding interest in the Series A and Residual Capital of TWE decreased by approximately 2.13% to approximately 72.36%. In accordance with Staff Accounting Bulletin No. 51, “Accounting for Sales of Stock of a Subsidiary,” AOL Time Warner has reflected the pretax impact of the dilution of its interest in TWE of approximately $690 million as an adjustment to equity. Due to the Company’s 100% ownership of the Series B Capital, AOL Time Warner’s economic interest in TWE exceeds 72.36%.

AT&T has the right, during 60-day exercise periods occurring once every 18 months, to request that TWE incorporate and register its stock in an initial public offering. If AT&T exercises such right, TWE can decline to incorporate and register its stock, in which case AT&T may cause TWE to purchase AT&T’s interest at the price at which an appraiser believes such stock could be sold in an initial public offering, subject to certain adjustments. In February 2001, AT&T delivered to TWE a notice requesting that TWE reconstitute itself as a corporation and register AT&T’s partnership interests for public sale. In June 2002, AT&T and TWE engaged Banc of America Securities LLC (“Banc of America”) to perform appraisals and make other determinations under the TWE Partnership Agreement. In July 2002, AOL Time Warner and AT&T agreed to temporarily suspend the registration process so that they can purse discussion of an alternative transaction. For the time being, AOL Time Warner and AT&T have asked Banc of America not to deliver the determinations. The Company cannot at this time predict the outcome or effect, if any, of these discussions or the registration rights process, if resumed.

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation. As a result of the Merger, a portion of the $147 billion cost to acquire Time Warner was allocated to the underlying net assets of TWE, to the extent acquired. TWE reported net income of $863 million, excluding a $22 billion noncash charge related to the cumulative effect of an accounting change, for the first six months of 2002 and net income of $767 million on a pro forma basis for the first six months of 2001 ($582 million net loss on a historical basis). Because of the priority rights over allocations of income and distributions of TWE held by the General Partners, $805 million of TWE’s income for the six months ended June 30, 2002 was allocated to AOL Time Warner and $58 million was allocated to AT&T. On a pro forma basis for the six months ended June 30, 2001, $726 million of TWE’s net income was allocated to AOL Time Warner and $41 million was allocated to AT&T ($540 million of TWE’s loss was allocated to AOL Time Warner and $42 million was allocated to AT&T on a historical basis).

The assets and cash flows of TWE are restricted by the TWE partnership and credit agreements. As such, they are unavailable for use by the partners except through the payment of certain fees, reimbursements, cash distributions and loans, which are subject to limitations.

7. RESTRUCTURING OF TWE-ADVANCE/NEWHOUSE PARTNERSHIP AND ROAD RUNNER

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

A/N, on the Debt Closing Date, AOL Time Warner acquired Advance/Newhouse’s interest in Road Runner, thereby increasing its ownership to approximately 82% on a fully attributed basis. As a result, beginning in the third quarter of 2002, AOL Time Warner will consolidate the financial position and results of operations of Road Runner with the financial position and results of operations of AOL Time Warner’s Cable segment, retroactive to the beginning of the year.

The impact on the AOL Time Warner Cable segment of consolidating Road Runner is affected by certain transactions between Road Runner and the AOL Time Warner Cable segment. Specifically, a substantial portion of Road Runner’s revenues are derived from transactions with AOL Time Warner’s Cable segment. As a result, upon consolidation of Road Runner’s results of operations with the results of operations of the Cable segment, a substantial portion of Road Runner’s revenues will be eliminated. The deconsolidation of the Advance/Newhouse Systems and the consolidation of Road Runner will affect the results of operations of AOL Time Warner’s Cable segment, as follows (in millions):

Cable Segment

	Three Months Ended June 30

	2002									2001 Pro Forma

	Revenue			EBITDA			Operating Income			Revenue			EBITDA			Operating Income

Cable Segment	$	2,103		$	872		$	523		$	1,782		$	777		$	505
TWE-A/N Impact		(363	)		(172	)		(107	)		(304	)		(137	)		(85	)
Road Runner Impact		73			(25	)		(38	)		54			(42	)		(59	)
Intercompany Impact		(51	)		—			—			(30	)		—			—

Pro Forma Cable Segment	$	1,762		$	675		$	378		$	1,502		$	598		$	361

	Six Months Ended June 30

	2002									2001 Pro Forma

	Revenue			EBITDA			Operating Income			Revenue			EBITDA			Operating Income

Cable Segment	$	4,115		$	1,713		$	1,040		$	3,475		$	1,545		$	1,031
TWE-A/N Impact		(715	)		(333	)		(205	)		(596	)		(271	)		(171	)
Road Runner Impact		142			(53	)		(79	)		107			(90	)		(127	)
Intercompany Impact		(97	)		—			—			(57	)		—			—

Pro Forma Cable Segment	$	3,445		$	1,327		$	756		$	2,929		$	1,184		$	733

The impact on AOL Time Warner’s consolidated operating results of deconsolidating the Advance/Newhouse Systems and consolidating Road Runner is affected by the intercompany transactions between Road Runner and the Cable segment, as noted above, as well as certain transactions with other segments of AOL Time Warner. For example, beginning in the fourth quarter of 2001, the AOL segment provided network services to Road Runner, the revenues of which will be eliminated in AOL Time Warner’s consolidated financial statements upon consolidation of Road Runner. AOL Time Warner’s consolidated results will also be impacted by certain transactions with the Advance/Newhouse Systems that were previously eliminated in consolidation. For example, the Advance/Newhouse Systems purchase cable programming from the Turner cable networks and HBO. Once the Advance/Newhouse Systems are deconsolidated, these programming revenues recognized by the Networks segment will no longer need to be eliminated in consolidation. The impact of the deconsolidation of the Advance/Newhouse Systems and the consolidation of Road Runner, including the impact of the intercompany transactions discussed above, is as follows (in millions):

AOL Time Warner

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

	Three Months Ended June 30

	2002									2001 Pro Forma

	Revenue			EBITDA			Operating Income			Revenue			EBITDA			Operating Income

AOL Time Warner	$	10,575		$	2,463		$	1,662		$	9,606		$	2,413		$	1,756
TWE-A/N Impact		(363	)		(172	)		(107	)		(304	)		(137	)		(85	)
Road Runner Impact		73			(25	)		(38	)		54			(42	)		(59	)
Intercompany Impact		(51	)		—			—			(7	)		—			—

Pro Forma AOL Time Warner	$	10,234		$	2,266		$	1,517		$	9,349		$	2,234		$	1,612

	Six Months Ended June 30

	2002									2001 Pro Forma

	Revenue			EBITDA			Operating Income			Revenue			EBITDA			Operating Income

AOL Time Warner	$	20,339		$	4,406		$	2,871		$	19,039		$	4,325		$	3,047
TWE-A/N Impact		(715	)		(333	)		(205	)		(596	)		(271	)		(171	)
Road Runner Impact		142			(53	)		(79	)		107			(90	)		(127	)
Intercompany Impact		(96	)		—			—			(15	)		—			—

Pro Forma AOL Time Warner	$	19,670		$	4,020		$	2,587		$	18,535		$	3,964		$	2,749

Exclusive of any gain or loss associated with these transactions, the impact of the TWE-A/N restructuring on AOL Time Warner’s consolidated net income will be substantially mitigated because the earnings of TWE-A/N attributable to Advance/Newhouse’s current one-third interest are reflected as minority interest expense in the accompanying consolidated statement of operations. Additionally, because AOL Time Warner had previously accounted for its investment in Road Runner using the equity method of accounting, the impact on AOL Time Warner’s consolidated net income of consolidating Road Runner will be equal to the portion of Road Runner’s losses previously attributable to the minority partners of TWE-A/N. This impact is not expected to materially impact AOL Time Warner’s net income.

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

8. INVENTORIES

Inventories and film costs consist of:

	June 30 2002		December 31, 2001

	(millions)
Programming costs, less amortization	$	2,429	$	2,536
Magazines, books, recorded music and other merchandise		479		553
Film costs-Theatrical:
Released, less amortization		827		847
Completed and not released		241		356
In production		555		381
Development and pre-production		316		290
Film costs-Television:
Released, less amortization		205		162
Completed and not released		26		95
In production		2		59
Development and pre-production		6		2

Total inventories and film costs^(a)		5,086		5,281
Less current portion of inventory		1,668		1,791

Total noncurrent inventories and film costs	$	3,418	$	3,490

______________

(a)

Does not include $3.266 billion and $3.363 billion of net film library costs as of June 30, 2002 and December 31, 2001, respectively, which are included in intangible assets subject to amortization on the accompanying consolidated balance sheet. See Note 3.

9. LONG-TERM DEBT

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

guaranteed. Borrowings will bear interest at specific rates, generally based on the credit rating for each of the borrowers, currently equal to LIBOR plus .625% including facility fees of .10% and .125% on the total commitments of the 364-day and five-year facilities, respectively. The 2002 Credit Agreements provide for same-day funding, multi-currency capability and letter of credit availability. They contain maximum leverage and minimum GAAP net worth covenants of 4.5 times and $50 billion, respectively, for AOL Time Warner and maximum leverage covenant of 5.0 times for TWE and TWE-A/N, but do not contain any ratings-based defaults or covenants, nor an ongoing covenant or representation specifically relating to a material adverse change in the Company’s financial condition or results of operations. Borrowings may be used for general business purposes and unused credit will be available to support commercial paper borrowings.

10. MANDATORILY REDEEMABLE PREFERRED SECURITIES

AOL Europe has 725,000 redeemable preferred securities outstanding with a liquidation preference of $725 million. Dividends are accreted at an annual rate of 6% and the total accumulated dividends as of June 30, 2002 were approximately $54 million. These securities and related dividends are classified as Minority Interest in the accompanying consolidated balance sheet. The preferred shares are required to be redeemed no later than April 1, 2003 in cash, AOL Time Warner stock or a combination thereof, at the Company’s discretion.

In 1995, the Company, through TW Companies, 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 was the obligor on the Preferred Trust Securities were $592 million principal amount of 8 7/8% subordinated debentures of TW Companies due December 31, 2025. Cumulative cash distributions were payable on the Preferred Trust Securities at an annual rate of 8 7/8%. The Preferred Trust Securities were mandatorily redeemable for cash on December 31, 2025, and TW Companies had the right to redeem the Preferred Trust Securities, in whole or in part, on or after December 31, 2000, or in other certain circumstances.

On February 13, 2001, TW Companies redeemed all 23 million shares of the Preferred Trust Securities. The redemption price was $25 per security, plus accrued and unpaid distributions thereon equal to $0.265 per security. The total redemption price of $581 million was funded with borrowings under the Old Credit Agreements.

11. SEGMENT INFORMATION

Information as to the operations of AOL Time Warner in different business segments is set forth below based on the nature of the products and services offered. AOL Time Warner evaluates performance based on several factors, of which the primary financial measure is operating income (loss) before noncash depreciation of tangible assets and amortization of intangible assets (“EBITDA”).

AOL Time Warner’s results for 2002 have been impacted by certain transactions and events that cause them not to be comparable to the results reported in the 2001. In order to make the 2001 operating results more comparable to the

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

2002 presentation and make an analysis of 2002 and 2001 more meaningful, supplemental pro forma operating results for 2001 have been presented as if IPC and the remaining interest in AOL Europe had been acquired and FAS 142 had been applied at the beginning of 2001.

The accounting policies of the business segments are the same as those described in the summary of significant accounting policies under Note 1 in the Company’s 2001 Form 10-K. Intersegment sales are accounted for at fair value as if the sales were with third parties.

	Three Months Ended June 30,									Six Months Ended June 30,

	2002 Historical			2001^(a) Pro Forma			2001^(a) Historical			2002 Historical			2001^(a) Pro Forma			2001^(a) Historical

	(millions)
Revenues
AOL	$	2,266		$	2,327		$	2,133		$	4,563		$	4,629		$	4,241
Cable		2,103			1,782			1,782			4,115			3,475			3,475
Filmed Entertainment		2,386			1,893			1,893			4,522			4,105			4,105
Networks		1,957			1,828			1,828			3,743			3,527			3,527
Music		972			935			935			1,919			1,839			1,839
Publishing		1,396			1,291			1,155			2,477			2,342			2,084
Intersegment elimination		(505	)		(450	)		(450	)		(1,000	)		(878	)		(878	)

Total revenues	$	10,575		$	9,606		$	9,276		$	20,339		$	19,039		$	18,393

______________

(a)

Revenues reflect the provisions of EITF 01-09 and Topic D-103 that were adopted by the Company in the first quarter of 2002, which require retroactive restatement of 2001 to reflect the new accounting provisions. As a result, the net impact of EITF 01-09 and Topic D-103 was to increase revenues and costs by equal amounts of approximately $74 million and $111 million for the three and six months ended June 30, 2001, respectively.

Intersegment Revenues

In the normal course of business, the AOL Time Warner segments enter into transactions with one another. The most common types of intercompany transactions include:

The Filmed Entertainment segment generating content revenue by licensing television and theatrical programming to the Networks segment;

The Networks segment generating subscription revenues by selling cable network programming to the Cable segment; and

The AOL, Cable, Networks and Publishing segments generating advertising and commerce revenue by cross-promoting the products and services of all AOL Time Warner segments.

These intercompany transactions are recorded by each segment at fair value as if the transactions were with third parties and, therefore, impact segment performance. While intercompany transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses recognized by the segment that is counterparty to the transaction) are eliminated in consolidation and, therefore, do not themselves impact consolidated results. Revenues recognized by AOL Time Warner’s segments on intercompany transactions are as follows:

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,

	2002 Historical		2001 Pro Forma		2001 Historical		2002 Historical		2001 Pro Forma		2001 Historical

	(millions)
Intercompany Revenues
AOL	$	50	$	29	$	29	$	104	$	50	$	50
Cable		40		10		10		75		13		13
Filmed Entertainment		133		187		187		303		368		368
Networks		156		146		146		306		305		305
Music		112		68		68		188		127		125
Publishing		14		10		10		24		17		17

Total intercompany revenues	$	505	$	450	$	450	$	1,000	$	878	$	878

Included in the total intercompany revenues above are intercompany advertising and commerce revenues, as follows:

	Three Months Ended June 30,									Six Months Ended June 30,

	2002 Historical			2001 Pro Forma			2001 Historical			2002 Historical			2001 Pro Forma			2001 Historical

	(millions)
EBITDA^(a)
AOL	$	473		$	652		$	801		$	906		$	1,159		$	1,485
Cable		872			777			777			1,713			1,545			1,545
Filmed Entertainment		328			250			250			509			363			363
Networks		420			444			444			851			893			893
Music		102			87			87			198			181			181
Publishing		337			296			271			482			423			384
Corporate		(80	)		(71	)		(71	)		(159	)		(145	)		(145	)
Merger and restructuring costs		—			—			—			(107	)		(71	)		(71	)
Intersegment elimination		11			(22	)		(22	)		13			(23	)		(23	)

Total EBITDA	$	2,463		$	2,413		$	2,537		$	4,406		$	4,325		$	4,612

______________

(a)

EBITDA represents operating income (loss) before noncash depreciation of tangible assets and amortization of intangible assets. After deducting depreciation and amortization, for the three months ended June 30, AOL Time Warner’s operating income was $1.662 billion, in 2002 and $1.756 billion in 2001 ($276 million on a historical basis). For the six months ended June 30, AOL Time Warner’s operating income was $2.871 billion in 2002 and $3.047 billion in 2001 ($129 million on a historical basis).

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Three Months Ended June 30, Six Months Ended June 30,

2002
Historical 2001
Pro Forma 2001
Historical 2002
Historical 2001
Pro Forma 2001
Historical

(millions)

Depreciation of Property, Plant and
   Equipment

AOL $ 160 $ 100 $ 99 $ 289 $ 206 $ 200

Cable 346 272 272 669 514 514

Filmed Entertainment 19 23 23 38 45 45

Networks 42 39 39 81 78 78

Music 28 24 24 56 46 46

Publishing 23 19 17 46 38 33

Corporate 6 6 6 13 11 11

   Total depreciation $ 624 $ 483 $ 480 $ 1,192 $ 938 $ 927

Three Months Ended June 30, Six Months Ended June 30,

2002
Historical 2001
Pro Forma 2001
Historical 2002
Historical 2001
Pro Forma 2001
Historical

(millions)

Amortization of Intangible Assets^(a)

AOL $ 42 $ 44 $ 33 $ 84 $ 90 $ 68

Cable 3 — 630 4 — 1,256

Filmed Entertainment 47 48 119 95 96 237

Networks 8 11 479 11 15 953

Music 45 45 209 88 88 415

Publishing 32 26 231 61 51 464

Corporate — — 80 — — 163

   Total amortization $ 177 $ 174 $ 1,781 $ 343 $ 340 $ 3,556

______________

(a)

Includes amortization relating to business combinations accounted for by the purchase method, substantially all of which arose in the $147 billion acquisition of Time Warner in 2001.

As discussed in Note 3, when FAS 142 is initially applied, all goodwill recognized on the Company’s consolidated balance sheet on that date is reviewed for impairment using the new guidance. Before performing the review for impairment, the new guidance requires that all goodwill deemed to relate to the entity as a whole be assigned to all of the Company’s reporting units (generally, the AOL Time Warner operating segments), including the reporting units of the acquirer. This differs from the previous accounting rules, which required goodwill to be assigned only to the businesses of the company acquired. As a result, a portion of the goodwill generated in the Merger was reallocated to the AOL segment resulting in a change in segment assets. Following are AOL Time Warner’s assets by business segment, reflecting the reallocation of goodwill in accordance with FAS 142, as of June 30, 2002 and December 31, 2001:

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

	June 30, 2002 Historical		December 31, 2001 Historical

	(millions)
Assets
AOL	$	40,372	$	34,072
Cable		48,491		71,269
Filmed Entertainment		15,885		20,646
Networks		31,688		44,580
Music		7,337		12,399
Publishing		14,103		23,374
Corporate		2,232		2,219

Total assets	$	160,108	$	208,559

12. COMMITMENTS AND CONTINGENCIES

Securities Matters

As of August 13, 2002, twenty class action lawsuits have been filed, naming as defendants the Company, certain current and former executives of the Company and, in three instances, America Online. Seventeen of these were filed in the United States District Court for the Southern District of New York, two were filed in the United States District Court for the Eastern District of Virginia and one in the United States District Court for the Eastern District of Texas (the “AOL Time Warner Shareholder Litigation”). The complaints purport to be made on behalf of certain shareholders of the Company and allege that the Company made material mispresentations and/or omissions of material fact in violation of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. Plaintiffs claim that the Company failed to disclose America Online's declining advertising revenues and that the Company and America Online inappropriately inflated advertising revenues in a series of transactions. Certain of the lawsuits also allege that certain of the individual defendants and other insiders at the Company improperly sold their personal holdings of AOL Time Warner stock. Three of the lawsuits, in addition to the above allegations, allege that the Company failed to disclose that the Merger was not generating the synergies anticipated at the time of the announcement of the Merger and, further, that the Company inappropriately delayed writing down more than $50 billion of goodwill. The lawsuits seek an unspecified amount in compensatory damages. The Company intends to defend against the lawsuits vigorously. The Company is unable to predict the outcome of the cases or reasonably estimate a range of possible loss.

On July 23, 2002, Pfeiffer v. Case et al., a shareholder derivative action, was filed in New York State Supreme Court for the County of New York, and on August 7, 2002, Hall v. Case et al., also a shareholder derivative action, was filed in the United States District Court for the Southern District of New York. Both suits name the directors and certain officers of the Company as defendants, as well as the Company as a nominal defendant. The complaints allege that defendants breached their fiduciary duties by causing the Company to issue corporate statements that did not accurately disclose that America Online had declining advertising revenues, that the Merger was not generating the synergies anticipated at the time of the announcement of the Merger, and that the Company inappropriately delayed writing down more than $50 billion of goodwill, thereby exposing the Company to potential liability for alleged violations of federal securities laws. The lawsuits further allege that certain of the defendants improperly sold their personal holdings of AOL Time Warner securities. The lawsuits request that all proceeds from any improper sales of AOL Time Warner common stock and any improper salaries or payments be returned to the Company. The Company intends to defend against the lawsuits vigorously. The Company is unable to predict the outcome of the cases or reasonably estimate a range of possible loss.

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

In addition, the Securities and Exchange Commission and the Department of Justice are investigating the financial reporting and disclosure practices of the Company. The Company is cooperating in the investigations. The Company cannot predict the outcome of the investigations at this time.

During the week beginning August 5, 2002, the Company learned of information regarding three transactions involving its AOL division that, upon further review, may result in the Company concluding that the consideration received was recognized inappropriately as advertising and commerce revenues. The aggregate advertising and commerce revenues recognized in connection with these transactions were $12.7 million, $5.3 million, $5.3 million, $5.3 million, $11.8 million and $8.5 million, respectively, over the six quarters ending March 31, 2002, with corresponding expenses of approximately $1.25 million recorded in each of the respective quarters. The Company is continuing its review of these and other advertising transactions at the AOL division. When the Company has completed this review, it will determine whether its accounting for these transactions was inappropriate and, if so, what action, if any, is appropriate with respect to its reported financial results.

The Company cannot predict at this time what action will be determined to be appropriate in response to all of the foregoing, although one possible outcome is a restatement of prior periods’ results.

Other Matters

On January 22, 2002, Netscape, a wholly-owned subsidiary of America Online, sued Microsoft Corporation (“Microsoft”) in the United States District Court for the District of Columbia for antitrust violations under Sections 1 and 2 of the Sherman Act, as well as for other common law violations. Among other things, the complaint alleges that Microsoft’s actions to maintain its monopoly in the market for Intel-compatible personal computer operating systems worldwide injured Netscape, consumers and competition in violation of Section 2 of the Sherman Act and continues to do so. The complaint also alleges that Microsoft’s actions constitute illegal monopolization and attempted monopolization of a worldwide market for Web browsers and that Microsoft has engaged in illegal practices by tying its Web browser, Internet Explorer, to Microsoft’s operating system in various ways. The complaint seeks damages for the injuries inflicted upon Netscape, including treble damages and attorneys’ fees, as well as injunctive relief to remedy the anti-competitive behavior alleged. On March 29, 2002, Microsoft filed its answer to the complaint denying all claims and allegations. On June 17, 2002, the Judicial Panel on Multi-District Litigation transferred the case to the United States District Court for the District of Maryland for all pretrial proceedings. Due to the preliminary status of the matter, it is not possible for the Company at this time to provide a view on its probable outcome or to provide a reasonable estimate as to the amount that might be recovered through this action.

America Online has been named as defendant in several putative class action lawsuits brought by consumers and Internet service providers (“ISP”), alleging certain injuries to have been caused by installation of AOL versions 5.0 and 6.0 software. Subject to the final approval of the court, the parties have entered into settlement agreements covering the consumer and ISP AOL version 5.0 installation claims on terms that are not material to the Company’s financial condition or results of operations. The claims related to AOL version 6.0 remain pending. The remaining cases are in preliminary stages, but the Company believes that they are without merit and intends to defend them vigorously. The Company is unable, however, to predict the outcome of these cases, or reasonably estimate a range of possible loss given their current status.

The Department of Labor has closed its investigation into the applicability of the Fair Labor Standards Act (“FLSA”) to America Online’s Community Leader program without taking any action against the Company. However, putative classes of former and current Community Leader volunteers have brought lawsuits in several states against America Online alleging violations of the FLSA and comparable state statutes on the basis that they were acting as employees rather than volunteers in serving as Community Leaders and are entitled to wages. An additional putative class action lawsuit has been filed against the Company, America Online and AOL Community, Inc. alleging violations of the Employee Retirement Income Security Act (“ERISA”) on the basis that the plaintiffs were acting as employees rather than volunteers and are entitled to pension, welfare or other employee benefits under ERISA. Although the Company does not believe that these lawsuits regarding Community Leader volunteers have any merit and intends to defend against them vigorously, the Company is unable to predict the outcome of the cases, or reasonably estimate a range of possible loss due to the preliminary nature of the matters.

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

the punitive damages portion of the award with accrued interest was stayed by the United States Supreme Court on March 1, 2001 pending the disposition of a certiorari petition with that Court, which was filed by TWE on June 15, 2001. On October 1, 2001, the United States Supreme Court granted TWE’s petition, vacated the decision by the Georgia Court of Appeals affirming the punitive damages award, and remanded the matter to the Georgia Court of Appeals for further consideration. The Georgia Court of Appeals affirmed and reinstated its earlier decision regarding the punitive damage award on March 29, 2002. On April 18, 2002, the defendants filed a petition for certiorari to the Georgia Supreme Court seeking review of the decision of the Georgia Court of Appeals and a decision on whether the court will hear the appeal is expected later in 2002.

On April 8, 2002, three former employees of certain subsidiaries of the Company filed Henry Spann et al. v. AOL Time Warner Inc. et al., a purported class action, in the United States District Court for the Central District of California. Plaintiffs have named as defendants, among others, the Company, Time Warner Entertainment Company, L.P., Warner-Elektra-Atlantic Corporation, WEA Manufacturing Inc., Warner Bros. Records Inc., Atlantic Recording Corporation, various pension plans sponsored by the companies and the administrative committees of those plans. Plaintiffs allege that defendants miscalculated the proper amount of pension benefits owed to them and other class members as required under the plans in violation of ERISA. The Company believes the lawsuit has no merit and intends to defend against it vigorously. Due to its preliminary status, the Company is unable to predict the outcome of the case or reasonably estimate a range of possible loss.

The Company is subject to a number of state and federal class action lawsuits, as well as an action brought by a number of state Attorneys General alleging unlawful horizontal and vertical agreements to fix the prices of compact discs by the major record companies. Although the Company cannot predict the outcomes, the Company does not expect that the ultimate outcomes of these cases will have a material adverse impact on the Company’s consolidated financial statements or results of operations.

The costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims and changes in those matters (including those matters described above), and developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on the Company’s business, financial condition and operating results.

AOL TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

13. ADDITIONAL FINANCIAL INFORMATION

Cash Flows

Additional financial information with respect to cash (payments) and receipts are as follows:

	Six Months Ended June 30,

	2002 Historical			2001 Pro Forma			2001 Historical
	(millions)
Cash payments made for interest	$	(732	)	$	(938	)	$	(705	)
Interest income received		71			113			113

Cash interest expense, net	$	(661	)	$	(825	)	$	(592	)


Cash payments made for income taxes	$	(147	)	$	(229	)	$	(229	)
Income tax refunds received		37			25			25

Cash taxes, net	$	(110	)	$	(204	)	$	(204	)

Other Expense, Net

Other expense, net, consists of:

	Three Months Ended June 30,									Six Months Ended June 30,

	2002 Historical			2001 Pro Forma			2001 Historical			2002 Historical			2001 Pro Forma			2001 Historical
	(millions)
Net investment losses^(a)	$	(269	)	$	(35	)	$	(6	)	$	(850	)	$	(674	)	$	(645	)
Losses on equity investees		(94	)		(109	)		(250	)		(198	)		(203	)		(488	)
Gains related to the exchange of unconsolidated cable television systems at TWE		—			39			39			—			71			71
Losses on asset securitization programs		(11	)		(16	)		(16	)		(22	)		(36	)		(36	)
Miscellaneous		(2	)		—			—			(4	)		(7	)		(7	)

Total other expense, net	$	(376	)	$	(121	)	$	(233	)	$	(1,074	)	$	(849	)	$	(1,105	)

______________

(a)

Includes a noncash pretax charge to reduce the carrying value of certain investments for other-than-temporary declines in value of approximately $364 million and $945 million for the three and six months ended June 30, 2002, respectively and approximately $620 million for the six months ended June 30, 2001 (Note 4).

Other Current Liabilities

Other current liabilities consist of:

	June 30, 2002 Historical		December 31, 2001 Historical
	(millions)
Accrued expenses	$	5,326	$	5,474
Accrued compensation		648		904
Accrued income taxes		154		65

Total other current liabilities	$	6,128	$	6,443

AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(Unaudited)

America Online, Inc. (“America Online”), Time Warner Inc. (“Time Warner”), Time Warner Companies, Inc. (“TW Companies”) and Turner Broadcasting System, Inc. (“TBS” and, together with America Online, Time Warner and TW Companies, the “Guarantor Subsidiaries”) are wholly owned subsidiaries of AOL Time Warner Inc. (“AOL Time Warner”). AOL Time Warner, America Online, Time Warner, TW Companies and TBS have fully and unconditionally, jointly and severally, and directly or indirectly, guaranteed all of the outstanding publicly traded indebtedness of each other. Set forth below are condensed consolidating financial statements of AOL Time Warner, including each of the Guarantor Subsidiaries, presented for the information of each company’s public debtholders. The following condensed consolidating financial statements present the results of operations, financial position and cash flows of (i) America Online, Time Warner, TW Companies and TBS (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the direct and indirect non-guarantor subsidiaries of AOL Time Warner and (iii) the eliminations necessary to arrive at the information for AOL Time Warner on a consolidated basis. These condensed consolidating financial statements should be read in conjunction with the accompanying consolidated financial statements of AOL Time Warner.

Consolidating Statement of Operations
For The Three Months Ended June 30, 2002

	AOL Time Warner			America Online			Time Warner			TW Companies			TBS			Non- Guarantor Subsidiaries			Eliminations			AOL Time Warner Consolidated

	(millions)
Revenues	$	—		$	1,784		$	—		$	—		$	233		$	8,587		$	(29	)	$	10,575

Cost of revenues		—			(1,032	)		—			—			(130	)		(5,035	)		29			(6,168	)
Selling, general and administrative		(10	)		(468	)		(8	)		(4	)		(23	)		(2,055	)		—			(2,568	)
Amortization of goodwill and other intangible assets		—			(5	)		—			—			—			(172	)		—			(177	)
Merger-related costs		—			2			—			—			—			(2	)		—			—

Operating income (loss)		(10	)		281			(8	)		(4	)		80			1,323			—			1,662
Equity in pretax income (loss) of consolidated subsidiaries		831			(49	)		770			703			178			—			(2,433	)		—
Interest (expense) income, net		(150	)		2			(22	)		(97	)		(30	)		(147	)		—			(444	)
Other expense, net		24			(114	)		(3	)		(30	)		(2	)		(196	)		(55	)		(376	)
Minority interest expense		—			—			—			—			—			(147	)		—			(147	)

Income before income taxes		695			120			737			572			226			833			(2,488	)		695
Income tax provision		(301	)		(95	)		(270	)		(208	)		(87	)		(308	)		968			(301	)

Income before cumulative effect of accounting changes		394			25			467			364			139			525			(1,520	)		394

Cumulative effect of accounting change		—			—			—			—			—			—			—			—

Net income	$	394		$	25		$	467		$	364		$	139		$	525		$	(1,520	)	$	394

AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Consolidating Statement of Operations
For The Three Months Ended June 30, 2001

	AOL Time Warner			America Online			Time Warner			TW Companies			TBS			Non- Guarantor Subsidiaries			Eliminations			AOL Time Warner Consolidated

	(millions)
Revenues	$	—		$	1,593		$	—		$	—		$	223		$	7,499		$	(39	)	$	9,276
Cost of revenues		—			(792	)		—			—			(112	)		(4,027	)		39			(4,892	)
Selling, general and administrative		(9	)		(342	)		(8	)		(3	)		(34	)		(1,931	)		—			(2,327	)
Amortization of goodwill and other intangible assets		(84	)		(5	)		—			—			(93	)		(1,599	)		—			(1,781	)
Merger-related costs		—			—			—			—			—			—			—			—

Operating income (loss)		(93	)		454			(8	)		(3	)		(16	)		(58	)		—			276
Equity in pretax income (loss) of consolidated subsidiaries		(237	)		198			(873	)		(556	)		(94	)		—			1,562			—
Interest income (expense), net		(57	)		15			(3	)		(93	)		(38	)		(176	)		—			(352	)
Other income (expense), net		2			(15	)		1			(9	)		(3	)		(153	)		(56	)		(233	)
Minority interest expense		—			—			(6	)		—			—			(70	)		—			(76	)

Income (loss) before income taxes		(385	)		652			(889	)		(661	)		(151	)		(457	)		1,506			(385	)
Income tax provision		(349	)		(258	)		(151	)		(131	)		(78	)		(324	)		942			(349	)

Net income (loss)	$	(734	)	$	394		$	(1,040	)	$	(792	)	$	(229	)	$	(781	)	$	2,448		$	(734	)

	AOL Time Warner			America Online (predecessor to AOL Time Warner)			Time Warner			TW Companies			TBS			Non- Guarantor Subsidiaries			Eliminations			AOL Time Warner Consolidated

	(millions)
Revenues	$	—		$	3,605		$	—		$	—		$	431		$	16,377		$	(74	)	$	20,339

Cost of revenues		—			(2,024	)		—			—			(230	)		(9,818	)		74			(11,998	)
Selling, general and administrative		(17	)		(943	)		(17	)		(8	)		(71	)		(3,964	)		—			(5,020	)
Amortization of goodwill and other intangible assets		—			(10	)		—			—			—			(333	)		—			(343	)
Merger-related costs		(28	)		(72	)		—			—			—			(7	)		—			(107	)


Operating income (loss)		(45	)		556			(17	)		(8	)		130			2,255			—			2,871

Equity in pretax income (loss) of consolidated subsidiaries		973			(172	)		825			780			347			—			(2,753	)		—
Interest income (expense), net		(242	)		11			(53	)		(198	)		(59	)		(282	)		—			(823	)
Other expense, net		15			(146	)		(5	)		(108	)		(2	)		(747	)		(81	)		(1,074	)
Minority interest expense		—			—			—			—			—			(273	)		—			(273	)


Income before income taxes		701			249			750			466			416			953			(2,834	)		701
Income tax provision		(308	)		(144	)		(283	)		(175	)		(160	)		(364	)		1,126			(308	)


Income before cumulative effect of accounting changes		393			105			467			291			256			589			(1,708	)		393

Cumulative effect of accounting change		(54,239	)		—			(54,239	)		(42,066	)		(12,173	)		(52,052	)		160,530			(54,239	)


Net income (loss)	$	(53,846	)	$	105		$	(53,772	)	$	(41,775	)	$	(11,917	)	$	(51,463	)	$	158,822		$	(53,846	)

	AOL Time Warner			America Online			Time Warner			TW Companies			TBS			Non- Guarantor Subsidiaries			Eliminations			AOL Time Warner Consolidated

	(millions)
Revenues	$	—		$	3,202		$	—		$	—		$	420		$	14,838		$	(67	)	$	18,393

Cost of revenues		—			(1,657	)		—			—			(175	)		(8,174	)		67			(9,939	)
Selling, general and administrative		(17	)		(732	)		(16	)		(7	)		(78	)		(3,848	)		—			(4,698	)
Amortization of goodwill and other intangible assets		(167	)		(10	)		—			—			(149	)		(3,230	)		—			(3,556	)
Merger-related costs		—			(67	)		—			—			—			(4	)		—			(71	)

Operating income (loss)		(184	)		736			(16	)		(7	)		18			(418	)		—			129
Equity in pretax income (loss) of consolidated subsidiaries		(1,587	)		371			(2,070	)		(1,370	)		(299	)		—			4,955			—
Interest income (expense), net		(56	)		56			(24	)		(222	)		(86	)		(339	)		—			(671	)
Other expense, net		—			(613	)		(27	)		(33	)		(8	)		(368	)		(56	)		(1,105	)
Minority interest expense		—			—			—			—			—			(180	)		—			(180	)

Income (loss) before income taxes		(1,827	)		550			(2,137	)		(1,632	)		(375	)		(1,305	)		4,899			(1,827	)
Income tax provision		(276	)		(214	)		(159	)		(140	)		(126	)		(492	)		1,131			(276	)

Net income (loss)	$	(2,103	)	$	336		$	(2,296	)	$	(1,772	)	$	(501	)	$	(1,797	)	$	6,030		$	(2,103	)

AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Consolidating Balance Sheet
June 30, 2002

	AOL Time Warner			America Online			Time Warner		TW Companies			TBS			Non- Guarantor Subsidiaries			Eliminations			AOL Time Warner Consolidated

	(millions)
ASSETS
Current assets
Cash and equivalents	$	1,054		$	15		$	—	$	1,300		$	16		$	564		$	(1,240	)	$	1,709
Receivables, net		840			353			7		9			132			4,477			(822	)		4,996
Inventories		—			—			—		—			164			1,504			—			1,668
Prepaid expenses and other current assets		10			208			—		—			5			1,579			—			1,802

Total current assets		1,904			576			7		1,309			317			8,124			(2,062	)		10,175
Noncurrent inventories and film costs		—			—			—		—			301			3,105			12			3,418
Investments in amounts due to and from consolidated subsidiaries		108,626			13,606			89,391		71,086			18,220			—			(300,929	)		—
Investments, including available-for-sale securities		68			1,938			269		(11	)		93			3,878			(949	)		5,286
Property, plant and equipment		50			1,122			7		—			76			11,859			—			13,114
Intangible assets subject to amortization		—			—			—		—			—			7,335			—			7,335
Intangible assets not subject to amortization		—			—			—		—			641			37,181			—			37,822
Goodwill and other intangible assets		9,829			22,031			—		—			2,821			45,424			—			80,105
Other assets		119			498			1		47			91			2,097			—			2,853

Total assets	$	120,596		$	39,771		$	89,675	$	72,431		$	22,560		$	119,003		$	(303,928	)	$	160,108

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	10		$	9		$	2	$	—		$	4		$	2,100		$	—		$	2,125
Participations payable		—			—			—		—			—			1,407			—			1,407
Royalties and programming costs payable		—			—			—		—			12			1,561			—			1,573
Deferred revenue		—			818			—		—			1			670			—			1,489
Debt due within one year		—			—			—		—			—			947			(860	)		87
Other current liabilities		461			980			29		154			142			4,428			(66	)		6,128

Total current liabilities		471			1,807			31		154			159			11,113			(926	)		12,809
Long-term debt		12,255			1,571			1,469		6,024			788			7,068			(1,240	)		27,935
Debt due to (from) affiliates		(797	)		—			—		—			1,647			955			(1,805	)		—
Deferred income taxes		10,848			(4,066	)		14,914		12,799			2,195			14,994			(40,835	)		10,849
Deferred revenue		—			33			—		—			—			1,085			—			1,118
Other liabilities		103			(4	)		411		—			241			3,732			—			4,483
Minority interests		—			—			—		—			—			5,198			—			5,198

Shareholders’ equity
Due (to) from AOL Time Warner and subsidiaries		—			5,771			8,507		2,658			(1,906	)		(13,893	)		(1,137	)		—
Other shareholders’ equity		97,716			34,659			64,343		50,796			19,436			88,751			(257,985	)		97,716

Total shareholders’ equity		97,716			40,430			72,850		53,454			17,530			74,858			(259,122	)		97,716

Total liabilities and shareholders’ equity	$	120,596		$	39,771		$	89,675	$	72,431		$	22,560		$	119,003		$	(303,928	)	$	160,108

AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Consolidating Balance Sheet
December 31, 2002

	AOL Time Warner			America online			Time Warner		TW Companies		TBS			Non- Guarantor Subsidiaries			Eliminations			AOL Time Warner Consolidated

	(millions)
ASSETS
Current assets
Cash and equivalents	$	(10	)	$	41		$	—	$	1,837	$	86		$	499		$	(1,734	)	$	719
Receivables, net		36			555			19		10		114			5,320			—			6,054
Inventories		—			—			—		—		170			1,621			—			1,791
Prepaid expenses and other current assets		15			277			—		—		6			1,412			—			1,710

Total current assets		41			873			19		1,847		376			8,852			(1,734	)		10,274
Noncurrent inventories and film costs		—			—			—		—		267			3,211			12			3,490
Investments in amounts due to and from consolidated subsidiaries		159,460			2,635			174,094		135,182		34,071			—			(505,442	)		—
Investments, including available-for-sale securities		—			2,667			268		96		94			4,654			(893	)		6,886
Property, plant and equipment		47			1,037			7		—		83			11,510			—			12,684
Intangible assets subject to amortization		—			—			—		—		—			7,289			—			7,289
Intangible assets not subject to amortization		—			—			—		—		641			37,067			—			37,708
Goodwill and other intangible assets		9,759			134			—		—		6,720			110,811			—			127,424
Other assets		97			393			69		47		83			2,115			—			2,804

Total assets	$	169,404		$	7,739		$	174,457	$	137,172	$	42,335		$	185,509		$	(508,057	)	$	208,559

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	18		$	73		$	1	$	—	$	16		$	2,149		$	—		$	2,257
Participations payable		—			—			—		—		—			1,253			—			1,253
Royalties and programming costs payable		—			—			—		—		—			1,515			—			1,515
Deferred revenue		—			744			—		—		1			711			—			1,456
Debt due within one year		—			—			—		—		—			48			—			48
Other current liabilities		248			1,074			34		154		167			4,806			(40	)		6,443

Total current liabilities		266			1,891			35		154		184			10,482			(40	)		12,972
Long-term debt		5,697			1,488			2,066		6,040		791			8,445			(1,735	)		22,792
Debt due to affiliates		—			—			—		—		1,647			158			(1,805	)		—
Deferred income taxes		11,260			(4,106	)		15,366		13,285		2,162			15,446			(42,153	)		11,260
Deferred revenue		—			70			—		—		—			984			—			1,054
Other liabilities		110			10			376		—		198			4,125			—			4,819
Minority interests		—			—			—		—		—			3,591			—			3,591

Shareholders’ equity
Due (to) from AOL Time Warner and subsidiaries		—			912			10,685		4,928		(1,620	)		(12,836	)		(2,069	)		—
Other shareholders’ equity		152,071			7,474			145,929		112,765		38,973			155,114			(460,255	)		152,071

Total shareholders’ equity		152,071			8,386			156,614		117,693		37,353			142,278			(462,324	)		152,071

Total liabilities and shareholders’ equity	$	169,404		$	7,739		$	174,457	$	137,172	$	42,335		$	185,509		$	(508,057	)	$	208,559

AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Consolidating Statement of Cash Flows
For The Six Months Ended June 30, 2002

	AOL Time Warner			America Online			Time Warner			TW Companies			TBS			Non- Guarantor Subsidiaries			Eliminations			AOL Time Warner Consolidated

	(millions)
OPERATIONS
Net income (loss)	$	(53,846	)	$	105		$	(53,772	)	$	(41,775	)	$	(11,917	)	$	(51,463	)	$	158,822		$	(53,846	)
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change		54,239			—			54,239			42,066			12,173			52,052			(160,530	)		54,239
Depreciation and amortization		7			270			1			—			12			1,245			—			1,535
Amortization of film costs		—			—			—			—			—			1,067			—			1,067
Loss on writedown of investments		—			145			—			103			—			706			—			954
Net gain on sale of investments		—			(35	)		—			—			—			(59	)		—			(94	)
Excess (deficiency) of distributions over equity in pretax income of consolidated subsidiaries		(546	)		148			(490	)		(572	)		(215	)		—			1,675			—
Change in investment in segment		2,463			—			3,132			2,529			308			—			(8,432	)		—
AOL Europe capitalization		—			(5,710	)		—			—			—			5,710			—			—
Equity in losses of investee companies after distributions		—			58			—			5			—			164			—			227
Changes in operating assets and liabilities, net of acquisitions		(708	)		349			(331	)		(717	)		(125	)		(749	)		2,193			(88	)

Cash provided (used) by operations		1,609			(4,670	)		2,779			1,639			236			8,673			(6,272	)		3,994


INVESTING ACTIVITIES
Investments and acquisitions		—			(75	)		—			—			—			(5,862	)		—			(5,937	)
Change in investment in segment		(6,381	)		—			(4	)		53			—			—			6,332			—
Capital expenditures		—			(217	)		—			—			(20	)		(1,277	)		—			(1,514	)
Change in due to/from parent		—			—			—			—			—			(3	)		3			—
Investment proceeds		—			75			—			—			—			146			—			221

Cash provided (used) by investing activities		(6,381	)		(217	)		(4	)		53			(20	)		(6,996	)		6,335			(7,230	)


FINANCING ACTIVITIES
Borrowings		8,676			20			3,100			—			—			2,296			(686	)		13,406
Debt repayments		(2,959	)		—			(3,700	)		—			—			(3,501	)		1,180			(8,980	)
Change in due to/from parent		—			4,858			(2,178	)		(2,229	)		(286	)		(105	)		(60	)		—
Redemption of mandatorily
redeemable preferred securities of subsidiary		—			—			—			—			—			(255	)		—			(255	)
Proceeds from exercise of stock option and dividend reimbursement plans		215			—			—			—			—			—			—			215
Repurchases of common stock		(102	)		—			—			—			—			—			—			(102	)
Dividends paid and partnership distributions		—			—			—			—			—			(47	)		—			(47	)
Principal payments on capital leases		—			(17	)		—			—			—			—			—			(17	)
Change in investment in segment		—			—			3			—			—			—			(3	)		—
Other		6			—			—			—			—			—			—			6

Cash provided (used) by financing activities		5,836			4,861			(2,775	)		(2,229	)		(286	)		(1,612	)		431			4,226


INCREASE (DECREASE) IN CASH AND EQUIVALENTS		1,064			(26	)		—			(537	)		(70	)		65			494			990

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		(10	)		41			—			1,837			86			499			(1,734	)		719
CASH AND EQUIVALENTS AT END OF PERIOD	$	1,054		$	15		$	—		$	1,300		$	16		$	564		$	(1,240	)	$	1,709

AOL TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Consolidating Statement of Cash Flows
For The Six Months Ended June 30, 2001

	AOL Time Warner			America Online			Time Warner			TW Companies			TBS			Non- Guarantor Subsidiaries			Eliminations			AOL Time Warner Consolidated

	(millions)
OPERATIONS

Net income (loss)	$	(2,103	)	$	336		$	(2,296	)	$	(1,772	)	$	(501	)	$	(1,797	)	$	6,030		$	(2,103	)
Adjustments for noncash and nonoperating items:
Depreciation and amortization		174			167			1			—			151			3,990			—			4,483
Amortization of film costs		—			—			—			—			—			1,066			—			1,066
Loss on writedown of investments		—			624			—			—			—			50			—			674
Gain on sale of investments		—			(33	)		—			—			—			—			—			(33	)
Excess (deficiency) of distributions over equity in pretax income of consolidated subsidiaries		(2,638	)		(4,471	)		(3,331	)		7,213			891			—			2,336			—
Equity in losses of other investee companies after distributions		—			11			—			30			—			543			—			584
Changes in operating assets and liabilities, net of acquisitions		6,220			4,140			(658	)		(5,848	)		(546	)		(2,895	)		(2,815	)		(2,402	)

Cash provided (used) by operations		1,653			774			(6,284	)		(377	)		(5	)		957			5,551			2,269


INVESTING ACTIVITIES
Acquisition of Time Warner Inc. cash and equivalents		—			—			(1	)		198			40			453			—			690
Investments and acquisitions		—			(316	)		—			—			—			(902	)		—			(1,218	)
Advances to parents and consolidated subsidiaries		—			—			—			(1,689	)		—			3,774			(2,085	)		—
Capital expenditures		—			(303	)		—			—			(28	)		(1,503	)		—			(1,834	)
Investment proceeds		—			1,607			—			—						80						1,687

Cash provided (used) by investing activities		—			988			(1	)		(1,491	)		12			1,902			(2,085	)		(675	)


FINANCING ACTIVITIES
Borrowings		3,967			—			1,380			—			—			3,914			(3,016	)		6,245
Debt repayments		—			—			(1,380	)		(337	)		—			(6,320	)		203			(7,834	)
Change in due to/from parent		(4,597	)		(4,243	)		6,289			5,252			26			740			(3,467	)		—
Redemption of mandatorily redeemable preferred securities of subsidiary		—			—			—			—			—			(575	)		—			(575	)
Proceeds from exercise of stock option and dividend reimbursement plans		727			—			—			—			—			—			—			727
Repurchases of common stock		(1,376	)		—			—			—			—			—			—			(1,376	)
Dividends paid and partnership distributions		—			—			(4	)		—			—			(49	)		—			(53	)
Other		19			—			—			—			—			—			—			19

Cash provided (used) by financing activities		(1,260	)		(4,243	)		6,285			4,915			26			(2,290	)		(6,280	)		(2,847	)


INCREASE (DECREASE) IN CASH AND EQUIVALENTS		393			(2,481	)		—			3,047			33			569			(2,814	)		(1,253	)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		—			2,530			—			—			—			80			—			2,610


CASH AND EQUIVALENTS AT END OF PERIOD	$	393		$	49			—		$	3,047		$	33		$	649		$	(2,814	)	$	1,357

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of Time Warner Entertainment Company, L.P.’s (“TWE” or the “Company”) financial condition, changes in financial condition and results of operations. The MD&A is organized as follows:

Overview. This section provides a general description of TWE’s businesses, as well as recent developments that the Company believes are important in understanding the results of operations, as well as to anticipate future trends in those operations.

Results of operations. This section provides an analysis of the Company’s results of operations for the three and six months ended June 30, 2002 relative to the comparable periods in 2001. This analysis is presented on both a consolidated and segment basis. In addition, a brief description is provided of transactions and events that impact the comparability of the results being analyzed.

Financial condition and liquidity. This section provides an analysis of the Company’s financial condition and cash flows as of and for the six months ended June 30, 2002.

Caution concerning forward-looking statements and risk factors. This section discusses how certain forward-looking statements made by the Company throughout MD&A and in the consolidated financial statements are based on management’s present expectations about future events and are inherently susceptible to uncertainty and changes in circumstances.

OVERVIEW

Description of Business

AOL Time Warner Inc. (“AOL Time Warner”) is the world’s leading media and entertainment company. AOL Time Warner was formed in connection with the merger of America Online, Inc. (“America Online”) and Time Warner Inc. (“Time Warner”) which was consummated on January 11, 2001 (the “Merger”). As a result of the Merger, America Online and Time Warner each became a wholly owned subsidiary of AOL Time Warner.

A majority of AOL Time Warner’s interests in filmed entertainment, television production, broadcast network programming and cable television systems, and a portion of its interests in cable television programming, are held through TWE. AOL Time Warner owns general and limited partnership interests in TWE consisting of 72.36% of the pro rata priority capital (“Series A Capital”) and residual equity capital (“Residual Capital”), and 100% of the junior priority capital (“Series B Capital”). The remaining 27.64% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by MediaOne TWE Holdings, Inc., a subsidiary of AT&T Corp. (“AT&T”). Due to the Company’s 100% ownership of the Series B Capital, AOL Time Warner’s economic interest in TWE exceeds 72.36%. The preceding ownership percentages reflect AT&T’s exercise of a one-time option to acquire additional interests in the Series A Capital and Residual Capital as discussed in more detail below under “Recent Developments”.

TWE classifies its business interests into three fundamental areas: Cable , consisting principally of interests in cable television systems; Filmed Entertainment , consisting principally of interests in filmed entertainment and television production; and Networks , consisting principally of interests in cable television and broadcast network

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

programming. TWE also manages the cable properties owned by AOL Time Warner and the combined cable television operations are conducted under the name of Time Warner Cable.

Use of EBITDA

TWE evaluates operating performance based on several factors, including its primary financial measure of operating income (loss) before noncash depreciation of tangible assets and amortization of intangible assets (“EBITDA”). TWE considers EBITDA an important indicator of the operational strength and performance of its businesses, including the ability to provide cash flows to service debt and fund capital expenditures. In addition, EBITDA eliminates the uneven effect across all business segments of considerable amounts of noncash depreciation of tangible assets and amortization of intangible assets recognized in business combinations accounted for by the purchase method. As such, the following comparative discussion of the results of operations of TWE includes, among other factors, an analysis of changes in business segment EBITDA. However, EBITDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) and other measures of financial performance reported in accordance with generally accepted accounting principles.

Recent Developments

Ownership Interest in TWE

During the second quarter of 2002, AT&T exercised a one-time option to increase its ownership in the Series A Capital and Residual Capital of TWE. As a result, on May 31, 2002, AT&T’s interest in the Series A Capital and Residual Capital of TWE increased by approximately 2.13% to approximately 27.64% and AOL Time Warner’s corresponding interest in the Series A and Residual Capital of TWE decreased by approximately 2.13% to approximately 72.36%. This transaction had no impact on the TWE financial statements as it represents a transaction between its partners.

AT&T has the right, during 60-day exercise periods occurring once every 18 months, to request that TWE incorporate and register its stock in an initial public offering. If AT&T exercises such right, TWE can decline to incorporate and register its stock, in which case AT&T may cause TWE to purchase AT&T’s interest at the price at which an appraiser believes such stock could be sold in an initial public offering, subject to certain adjustments. In February 2001, AT&T delivered to TWE a notice requesting that TWE reconstitute itself as a corporation and register AT&T’s partnership interests for public sale. In June 2002, AT&T and TWE engaged Banc of America Securities LLC (“Banc of America”) to perform appraisals and make other determinations under the TWE Partnership Agreement. In July 2002, AOL Time Warner and AT&T agreed to temporarily suspend the registration rights process so that they can pursue discussion of an alternative transaction. For the time being, AOL Time Warner and AT&T have asked Banc of America not to deliver the determinations. The Company cannot at this time predict the outcome or effect, if any, of these discussions or the registration rights process, if resumed.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Restructuring of TWE-Advance/Newhouse Partnership and Road Runner

As of June 30, 2002, the TWE-Advance/Newhouse Partnership (“TWE-A/N”) was owned approximately 64.8% by TWE, the managing partner, 33.3% by the Advance/Newhouse Partnership (“Advance/Newhouse”) and 1.9% indirectly by AOL Time Warner. As of June 30, 2002, TWE-A/N owned cable television systems (or interests therein) serving approximately 7.0 million subscribers, of which 5.9 million subscribers were served by consolidated, wholly owned cable television systems and 1.1 million subscribers were served by unconsolidated, partially owned cable television systems. The financial position and operating results of TWE-A/N are currently consolidated by TWE, and the partnership interest owned by Advance/Newhouse is reflected in the consolidated financial statements of TWE as minority interest.

As of June 30, 2002, Road Runner, a high-speed cable modem Internet service provider, was owned by TWI Cable Inc. (a wholly owned subsidiary of AOL Time Warner), TWE and TWE-A/N, with TWE owning approximately 67% on a fully attributed basis (i.e., after considering the portion attributable to the minority partners of TWE-A/N). TWE’s interest in Road Runner is accounted for using the equity method of accounting because of certain approval rights currently held by Advance/Newhouse, a partner in TWE-A/N.

On June 24, 2002, TWE and Advance/Newhouse agreed to restructure TWE-A/N which will result in Advance/Newhouse taking a more active role in the day-to-day operations of certain TWE-A/N cable systems serving approximately 2.1 million subscribers located primarily in Florida (the “Advance/Newhouse Systems”). The restructuring is anticipated to be completed by the end of 2002, upon the receipt of certain regulatory approvals. On August 1, 2002 (the “Debt Closing Date”), Advance/Newhouse and its affiliates arranged for a new credit facility to support the Advance/Newhouse Systems and repaid approximately $780 million of TWE-A/N’s senior indebtedness. As of the Debt Closing Date, Advance/Newhouse assumed management responsibilities for the Advance/Newhouse Systems, to the extent permitted under applicable government regulations, and accordingly, TWE will deconsolidate the financial position and operating results of these systems effective in the third quarter of 2002. Additionally, all prior period results associated with the Advance/Newhouse Systems will be reflected as a discontinued operation beginning in the third quarter of 2002. Under the new TWE-A/N Partnership Agreement, effective as of the Debt Closing Date, Advance/Newhouse’s partnership interest tracks only the performance of the Advance/Newhouse Systems, including associated liabilities, while TWE retains substantially all of the interests in the other TWE-A/N assets and liabilities. As part of the restructuring of TWE-A/N, on the Debt Closing Date, AOL Time Warner acquired Advance/Newhouse’s interest in Road Runner. As a result, beginning in the third quarter of 2002, TWE will consolidate the financial position and results of operations of Road Runner with the financial position and results of operations of TWE’s Cable segment, retroactive to the beginning of the year. See footnote 4 to the accompanying consolidated financial statements for more information regarding the impact of the deconsolidation of the Advance/Newhouse Systems and the consolidation of Road Runner on the revenues, EBITDA and operating income of the Cable segment and consolidated TWE.

Exclusive of any gain or loss associated with these transactions, the impact of the TWE-A/N restructuring on TWE’s consolidated net income will be substantially mitigated because the earnings of TWE-A/N attributable to Advance/Newhouse’s current one-third interest are reflected as minority interest expense in the accompanying consolidated statement of operations. Additionally, because TWE had previously accounted for its investment in Road Runner using the equity method of accounting, and TWE will not acquire an additional ownership in Road Runner as part of the restructuring, the consolidation of Road Runner will not impact TWE’s net income.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

As of June 30, 2002, the Advance/Newhouse Systems had total assets of approximately $2.7 billion and had been allocated approximately $780 million of debt, which, upon the deconsolidation of the Advance/Newhouse Systems, will no longer be included in the consolidated assets and liabilities of TWE. Additionally, as of June 30, 2002, Road Runner had total assets of approximately $180 million and no debt, which, upon the consolidation of Road Runner, will be included in the consolidated assets of TWE.

RESULTS OF OPERATIONS

Transactions Affecting Comparability of Results of Operations

Pro Forma Item

TWE’s results for 2002 have been impacted by certain transactions and events that cause them not to be comparable to the results reported in 2001. In order to make the 2001 operating results more comparable to the 2002 presentation and make an analysis of 2002 and 2001 more meaningful, the following discussion of results of operations and changes in financial condition and liquidity is based on pro forma financial information for 2001 that has been adjusted for the item discussed in the following paragraph.

New Accounting Standard for Goodwill and Other Intangible Assets . During 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”), which requires that, effective January 1, 2002, goodwill, including the goodwill included in the carrying value of investments accounted for using the equity method of accounting, and certain other intangible assets deemed to have an indefinite useful life, cease amortizing (Note 3). FAS 142 does not require retroactive restatement for all periods presented, however, the pro forma information for 2001 assumes that FAS 142 was in effect beginning January 1, 2001.

New Accounting Standard

In addition to the pro forma adjustment previously discussed, in the first quarter of 2002, the Company adopted new accounting guidance that requires retroactive restatement of all periods presented to reflect the new accounting provisions; therefore, this adjustment impacts both pro forma and historical results. This adjustment is discussed below.

Reimbursement of “Out-of-Pocket” Expenses

In November 2001, the FASB Staff issued as interpretive guidance Emerging Issues Task Force (“EITF”) Topic No. D-103, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (“Topic D-103”). Topic D-103 requires that reimbursements received for out-of-pocket expenses be classified as revenue on the income statement and was effective for TWE in the first quarter of 2002. The new guidance requires retroactive restatement of all periods presented to reflect the new accounting provisions. This change in revenue classification impacts TWE’s Cable segment, resulting in an increase in both revenues and costs of approximately $61 million on both a pro forma and historical basis in the second quarter of 2001 and $120 million on both a pro forma and historical basis for the first six months of 2001.

Other Significant Nonrecurring Item

The Company adopted, effective January 1, 2002, new accounting rules for goodwill and certain intangible assets. Among the requirements of the new rules is that goodwill and certain intangible assets be assessed for

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

impairment using fair value measurement techniques. During the first quarter of 2002, the Company completed its impairment review and recorded a $22 billion noncash pretax charge for the impairment of goodwill, all of which was generated in the Merger. The charge reflects the decline in AOL Time Warner’s stock price since the Merger was announced in January 2000, is nonoperational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated financial statements (Note 3). In order to enhance comparability, the Company compares current year results to the prior year exclusive of this charge.

Revenue and EBITDA by business segment are as follows (in millions):

	Three months Ended June 30

	Revenues									EBITDA

	2002 Historical			2001^{(a) (b)} Pro Forma			2001^(b) Historical			2002 Historical			2001^(a) Pro Forma			2001 Historical

Cable	$	1,812		$	1,523		$	1,523		$	768		$	667		$	667
Filmed Entertainment		2,063			1,590			1,590			220			161			161
Networks		846			745			745			188			156			156
Corporate		—			—			—			(20	)		(20	)		(20	)
Intersegment elimination		(154	)		(169	)		(169	)		—			—			—

Total revenues and EBITDA	$	4,567		$	3,689		$	3,689		$	1,156		$	964		$	964
Depreciation and amortization		—			—			—			(366	)		(301	)		(931	)

Total revenues and operating income	$	4,567		$	3,689		$	3,689		$	790		$	663		$	33

	Six months Ended June 30

	Revenues									EBITDA

	2002 Historical			2001^{(a) (b)} Pro Forma			2001^(b) Historical			2002 Historical			2001^(a) Pro Forma			2001 Historical

Cable	$	3,548		$	2,969		$	2,969		$	1,496		$	1,328		$	1,328
Filmed Entertainment		3,736			3,193			3,193			358			261			261
Networks		1,628			1,469			1,469			357			314			314
Corporate		—			—			—			(40	)		(39	)		(39	)
Intersegment elimination		(318	)		(341	)		(341	)		—			—			—

Total revenues and EBITDA	$	8,594		$	7,290		$	7,290		$	2,171		$	1,864		$	1,864
Depreciation and amortization		—			—			—			(710	)		(578	)		(1,853	)

Total revenues and operating income	$	8,594		$	7,290		$	7,290		$	1,461		$	1,286		$	11

______________

(a)

In order to enhance comparability, pro forma financial information for 2001 assumes that the adoption of FAS 142 had occurred at the beginning of 2001.

(b)

Revenues reflect the provisions of Topic D-103 that were adopted by the Company in the first quarter of 2002, which require retroactive restatement of 2001 to reflect the new accounting provisions. As a result, the impact of Topic D-103 was to increase revenues and costs by equal amounts of approximately $61 million for the second quarter of 2001 and $120 million for the first six months of 2001.

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Consolidated Results

TWE had revenues of $4.567 billion and net income of $483 million in 2002, compared to revenues of $3.689 billion and net income of $434 million on a pro forma basis in 2001 (revenues of $3.689 billion and net loss of $232 million on a historical basis).

Revenues. TWE’s revenues increased to $4.567 billion in 2002, compared to $3.689 billion on both a pro forma and historical basis in 2001. This increase was driven by an increase in Subscription revenues of 15% to $2.176 billion, an increase in Advertising and Commerce revenues of 6% to $333 million and an increase in Content and Other revenues of 39% to $2.058 billion.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

As discussed more fully below, the increase in Subscription revenues was principally due to increases in the number of subscribers and an increase in subscription rates at both the Cable and Networks segments. The increase in Advertising and Commerce revenues was primarily due to increases at the Cable and Networks segments, offset in part by lower results due to the closure of the Studio Stores at the Filmed Entertainment segment. The increase in Content and Other revenues was principally due to improved theatrical and worldwide home video results at the Filmed Entertainment segment.

Depreciation and Amortization. Depreciation and amortization increased to $366 million in 2002 from $301 million on a pro forma basis in 2001 ($931 million on a historical basis). This increase was due to an increase in depreciation, primarily due to higher capital spending at the Cable segment related to the roll-out of digital services over the past three years, as well as increased capital spending that varies based on the number of new subscribers, which is depreciated over a shorter useful life.

Interest Expense, Net. Interest expense, net, decreased to $100 million in 2002, compared to $142 million on both a pro forma and historical basis in 2001, principally as a result of lower market interest rates in 2002 and lower levels of outstanding long-term debt.

Other Expense, Net. Other expense, net, increased to $49 million in 2002, compared to $13 million on a pro forma basis in 2001 ($47 million on a historical basis). Other expense, net, increased primarily due to the absence of prior year pretax gains on the exchange of various unconsolidated cable television systems on a pro forma and historical basis in 2001.

Minority Interest. Minority interest expense increased to $105 million in 2002, compared to $68 million in 2001 ($70 million on a historical basis). Minority interest expense increased principally due to the allocation of higher income to TWE’s minority partners which was partially offset by the absence in 2002 of an allocation of pretax gains related to the exchange of various unconsolidated cable television systems in 2001 at TWE-A/N attributable to the minority owners of TWE-A/N.

Income Tax Expense. As a U.S. partnership, TWE is not subject to U.S. federal income taxation. Income and withholding taxes of $53 million in 2002 and $6 million on both a pro forma and historical basis in 2001 have been provided for the operations of TWE’s domestic and foreign subsidiary corporations.

Net Income (Loss). TWE’s net income increased to $483 million in 2002, compared to $434 million on a pro forma basis in 2001 (net loss of $232 million on a historical basis). TWE’s net income increased due to higher EBITDA and decrease in interest expense, net, offset in part by increases in depreciation expense, minority interest, other expense, net and taxes.

Business Segment Results

Cable. Revenues increased 19% to $1.812 billion in 2002, compared to $1.523 billion on both a pro forma and historical basis in 2001. EBITDA increased 15% to $768 million in 2002 from $667 million on both a pro forma and historical basis in 2001.

Revenues increased due to a 16% increase in Subscription revenues (from $1.402 billion to $1.630 billion) and a 50% increase in Advertising and Commerce revenues (from $121 million to $182 million). The increase in Subscription revenues was due to higher basic cable rates, an increase in subscribers to high-speed data services, an

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

increase in digital cable subscribers and, to a lesser degree, the increase in basic cable subscribers. Digital cable subscribers managed by TWE increased by 54% to 3.9 million and high-speed data subscribers managed by TWE increased by 75% to 2.5 million in 2002 over the prior year comparable period. The increase in Advertising and Commerce revenues was related to advertising purchased by programming vendors to promote their channels, including new channel launches, ($42 million in 2002 versus none in 2001) and the sale of advertising to business segments of AOL Time Warner ($30 million in 2002 versus $8 million in 2001). The Company expects advertising sales to programming vendors to sequentially decline, resulting in declines in such advertising in the second half of 2002 as compared to the prior year.

EBITDA increased principally as a result of the revenue gains, offset in part by increases in programming and other operating costs. The increase in video programming costs of 23% relates to general programming rate increases across both basic and digital services, the addition of new programming services and higher basic and digital subscriber levels. Programming costs are expected to continue to increase as general programming rates increase and digital services continue to be rolled out. Other operating costs increased as a result of increased costs associated with the roll out of new services and higher property taxes associated with the upgrade of cable plants.

Filmed Entertainment. Revenues increased 30% to $2.063 billion in 2002, compared to $1.590 billion on both a pro forma and historical basis in 2001. EBITDA increased 37% to $220 million in 2002, compared to $161 million on both a pro forma and historical basis in 2001.

The revenue increase was primarily related to the worldwide home video release of Harry Potter and the Sorcerer’s Stone, the domestic home video release of Ocean’s Eleven, as well as the continued international theatrical success of those films and the theatrical success of the second quarter release of Scooby Doo, offset in part by reduced commerce revenues related to the closure of its Studio Stores.

EBITDA increased principally due to the strong revenue growth.

Networks. Revenues increased 14% to $846 million in 2002, compared to $745 million on both a pro forma and historical basis in 2001. EBITDA increased 21% to $188 million in 2002 from $156 million on both a pro forma and historical basis in 2001.

Revenues grew primarily due to an increase in Subscription revenues and Content and Other revenues at HBO, as well as an increase in Advertising and Commerce revenues at The WB Network.

For HBO, Subscription revenues benefited from an increase in the number of subscribers and higher rates. Content and Other revenues benefited from higher home video sales of HBO’s original programming and higher licensing and syndication revenue from the broadcast comedy series, Everybody Loves Raymond. For The WB Network, the increase in Advertising and Commerce revenues (from $122 million to $141 million) was driven by higher rates.

EBITDA increased due to improved results at both HBO and The WB Network. For HBO, the increase in EBITDA was principally due to the increase in revenues and reduced costs relating to the finalization of certain licensing agreements, offset in part by reserves established on receivables from Adelphia Communications, a major cable television operator (“Adelphia”), and the write-off of development costs. For The WB Network, the improvement in EBITDA was principally due to the increase in revenues, offset in part by higher programming costs.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Consolidated Results

TWE had revenues of $8.594 billion, income before the cumulative effect of an accounting change of $863 million and a net loss of $20.900 billion in 2002, compared to revenues of $7.290 billion and net income of $767 million on a pro forma basis in 2001 (revenues of $7.290 billion and net loss of $582 million on a historical basis).

Revenues. TWE’s revenues increased to $8.594 billion in 2002, compared to $7.290 billion in 2001. This increase was driven by an increase in Subscription revenues of 15% to $4.285 billion, an increase in Advertising and Commerce revenues of 2% to $628 million and an increase in Content and Other revenues of 25% to $3.681 billion.

As discussed more fully below, the increase in Subscription revenues was principally due to an increase in the number of subscribers and an increase in subscription rates at both the Cable and Networks segments. The increase in Content and Other revenues was principally due to increased theatrical results at the Filmed Entertainment segment. Advertising and Commerce revenues were relatively flat as increases at the Cable and Networks segments were offset by lower results at the Filmed Entertainment segment due to the closure of the Studio Stores.

Depreciation and Amortization. Depreciation and amortization increased to $710 million in 2002 from $578 million on a pro forma basis in 2001 ($1.853 billion on a historical basis). This increase was due to an increase in depreciation, primarily due to higher capital spending at the Cable segment related to the roll-out of digital services over the past three years, as well as increased capital spending that varies based on the number of new subscribers, which is depreciated over a shorter useful life.

Interest Expense, Net. Interest expense, net, decreased to $210 million in 2002, compared to $295 million on both a pro forma and historical basis in 2001, principally as a result of lower market interest rates in 2002 and lower levels of outstanding long-term debt.

Other Expense, Net. Other expense, net, increased to $82 million in 2002, compared to $17 million on a pro forma basis in 2001 ($87 million on a historical basis). Other expense, net, increased primarily due to the absence of prior year pretax gains on the exchange of various unconsolidated cable television systems on a pro forma and historical basis in 2001.

Minority Interest. Minority interest expense increased to $214 million in 2002, compared to $169 million in 2001 ($173 million on a historical basis). Minority interest expense increased principally due to the allocation of higher net income to TWE’s minority partners, which was partially offset by the absence in 2002 of an allocation of pretax gains related to the exchange of various unconsolidated cable television systems in 2001 at TWE-A/N attributable to the minority owners of TWE-A/N.

Income Tax Expense. As a U.S. partnership, TWE is not subject to U.S. federal income taxation. Income and withholding taxes of $92 million in 2002 and $38 million on both a pro forma and historical basis in 2001 have been provided for the operations of TWE’s domestic and foreign subsidiary corporations.

Net Income (Loss) Before the Cumulative Effect of an Accounting Change. TWE’s net income before the cumulative effect of an accounting change increased to $863 million in 2002, compared to $767 million on a pro

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

forma basis in 2001 (net loss of $582 million on a historical basis). TWE’s net income before the cumulative effect of an accounting change increased due to higher EBITDA and decrease in interest expense, net, offset in part by increases in depreciation expense, minority interest, other expense, net and taxes.

Business Segment Results

Cable. Revenues increased 20% to $3.548 billion in 2002, compared to $2.969 billion on both a pro forma and historical basis in 2001. EBITDA increased 13% to $1.496 billion in 2002 from $1.328 billion on both a pro forma and historical basis in 2001. Revenues increased due to a 17% increase in Subscription revenues (from $2.748billion to $3.204 billion) and a 56% increase in Advertising and Commerce revenues (from $221 million to $344 million).

The increase in Subscription revenues was due to higher basic cable rates, an increase in subscribers to high-speed data services, an increase in digital cable subscribers and, to a lesser degree, the increase in basic cable subscribers. Similarly, digital cable subscribers managed by TWE increased by 54% to 3.9 million and high-speed data subscribers managed by TWE increased by 75% to 2.5 million in 2002 over the prior year comparable period. The increase in Advertising and Commerce revenues was primarily related to advertising purchased by programming vendors to promote their channels, including new channel launches ($84 million in 2002 versus $17 million in 2001) and the sale of advertising to business segments of AOL Time Warner ($58 million in 2002 versus $11 million in 2001). The Company expects advertising sales to programming vendors to sequentially decline, resulting in declines in such advertising in the second half of 2002 as compared to the prior year.

EBITDA increased principally as a result of the revenue gains, offset in part by increases in programming and other operating costs. The increase in video programming costs of 27% relates to general programming rate increases across both basic and digital services, the addition of new programming services and higher basic and digital subscriber levels. Programming costs are expected to continue to increase as general programming rates increase and digital services continue to be rolled out. Other operating costs increased as a result of increased costs associated with the roll out of new services and higher property taxes associated with the upgrade of cable plants.

Filmed Entertainment. Revenues increased 17% to $3.736 billion in 2002, compared to $3.193 billion on both a pro forma and historical basis in 2001. EBITDA increased 37% to $358 million in 2002, compared to $261 million on both a pro forma and historical basis in 2001.

The revenue increase was primarily related to the worldwide theatrical and home video release of Harry Potter and the Sorcerer’s Stone and the worldwide theatrical and domestic home video release of Ocean’s Eleven. Warner Bros.’ revenues also benefited from higher worldwide consumer products licensing results, offset in part by reduced commerce revenues related to the closure of its Studio Stores.

EBITDA increased principally due to improvements in the mix of theatrical product, primarily the profitability of Harry Potter and the Sorcerer’s Stone.

Networks. Revenues increased 11% to $1.628 billion in 2002, compared to $1.469 billion on both a pro forma and historical basis in 2001. EBITDA increased 14% to $357 million in 2002 from $314 million on both a pro forma and historical basis in 2001. Revenues grew primarily due to an increase in Subscription revenues and Content and Other revenues at HBO and an increase in Advertising and Commerce revenues at The WB Network. EBITDA increased due to improved results at HBO, offset in part by lower results at The WB Network.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

For HBO, Subscription revenues benefited from an increase in the number of subscribers and higher rates. Content and Other revenues benefited from higher home video sales of HBO’s original programming and higher licensing and syndication revenue from the broadcast comedy series Everybody Loves Raymond. For The WB Network, the increase in Advertising and Commerce revenues was driven by higher rates.

For HBO, the increase in EBITDA was principally due to the increase in revenues and reduced costs relating to the finalization of certain licensing agreements, offset in part by reserves established on receivables from Adelphia and the write-off of development costs. For The WB Network, the EBITDA decline was principally due to higher program license fees, offset in part by higher Advertising and Commerce revenues and a slight decrease in marketing costs.

FINANCIAL CONDITION AND LIQUIDITY
June 30, 2002

Current Financial Condition

At June 30, 2002, TWE had $7.2 billion of debt, $249 million of cash and equivalents (net debt of $7.0 billion, defined as total debt less cash and cash equivalents) and $37.8 billion of partnership capital, compared to $8.1 billion of debt, $250 million of cash and equivalents (net debt of $7.8 billion) and $65.4 billion of partnership capital at December 31, 2001. The Company’s outstanding utilization under its accounts receivable and backlog securitization facilities was approximately $859 million as of June 30, 2002 and $718 million as of December 31, 2001. The Company’s total committed capacity at June 30, 2002, under its securitization facilities was approximately $1.3 billion. Approximately $535 million of committed capacity under the Company’s securitization facilities will mature in the third quarter of 2002. The Company intends to renew these securitization facilities prior to their maturity but there can be no assurance that it will be able to do so.

As discussed in more detail below, management believes that TWE’s operating cash flow, cash and equivalents, borrowing capacity under committed bank credit agreements (including agreements with AOL Time Warner) and availability under its commercial paper program are sufficient to fund its capital and liquidity needs for the foreseeable future.

Cash Flows

Operating Activities

During the first six months of 2002, TWE’s cash provided by operations amounted to $2.308 billion as compared to $1.017 billion on both a pro forma and historical basis in 2001. This year over year growth in cash flow from operations was driven primarily by $883 million of improvements in working capital, an increase in EBITDA and lower income taxes and interest payments. The improvements in working capital are related to reduced working capital needs in the current period compared to increased working capital needs in the prior period. Working capital needs are subject to wide fluctuations based on the timing of cash transactions related to production schedules, the acquisition of programming, collection of sales proceeds and similar items. The current period benefits are largely expected to reverse in the second half of the year.

During the first six months of 2002, cash provided by operations of $2.308 billion reflected $2.171 billion of EBITDA, less $212 million of net interest payments and $78 million of net income taxes paid. Cash flow from operations also reflects a reduction in other working capital requirements of $427 million.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

During the first six months of 2001, cash provided by operations of $1.017 billion on a pro forma basis reflected $1.864 billion of EBITDA, less $295 million of net interest payments and $96 million of net income taxes paid. Cash flow from operations also reflects an increase in other working capital requirements of $456 million.

Investing Activities

Cash used by investing activities was $1.165 billion in the first six months of 2002, compared to $1.673 billion on both a pro forma and historical basis in 2001. The decrease in cash used by investing activities reflects lower acquisition spending and capital expenditures.

During the first six months of 2002, cash used by investing activities of $1.165 billion reflects $281 million of cash used for acquisitions and investments and $905 million of capital expenditures, offset in part by investment proceeds of $21 million.

During the first six months of 2001, cash used by investing activities of $1.673 billion in 2001 reflected $702 million of cash used for acquisitions and investments and $1.003 billion of capital expenditures, offset in part by $32 million of investment proceeds.

Financing Activities

Cash used by financing activities was $1.144 billion for the first six months of 2002, compared to cash provided by financing activities of $643 million on both a pro forma and historical basis in 2001. The reduction in cash from financing activities reflects net repayments on borrowings in 2002.

During the first six months of 2002, cash used by financing activities of $1.144 billion resulted from approximately $827 million of net payments on borrowings and capital distributions of $317 million.

During the first six months of 2001, cash provided by financing activities of $643 million in 2001 primarily resulted from approximately $1.105 billion of net incremental borrowings, offset in part by $462 million of capital distributions.

TWE Cash Flow Restrictions

$10 Billion Revolving Credit Facilities

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

year revolving credit facility and a $4 billion 364-day revolving credit facility, borrowings under which may be extended for a period up to two years following the initial term. The borrowers under the 2002 Credit Agreements include AOL Time Warner, TWE, TWE-A/N and AOL Time Warner Finance Ireland. Borrowings will bear interest at specific rates, generally based on the credit rating for each of the borrowers, which is currently equal to LIBOR plus .625%, including facility fees of .10% and .125% on the total commitments of the 364-day and five-year facilities, respectively. The 2002 Credit Agreements provide same-day funding, multi-currency capability and letter of credit availability. They contain maximum leverage and minimum GAAP net worth covenants of 4.5 times and $50 billion, respectively, for AOL Time Warner and maximum leverage covenant of 5.0 times for TWE and TWE-A/N, but do not contain any ratings-based defaults or covenants, nor an ongoing covenant or representation specifically relating to a material adverse change in the AOL Time Warner’s financial condition or results of operations. Borrowings may be used for general business purposes and unused credit will be available to support commercial paper borrowings (Note 7).

Capital Expenditures

TWE’s capital expenditures amounted to $905 million for the six months ended June 30, 2002, compared to $1.003 billion on a pro forma and historical basis in 2001. Capital expenditures principally relate to the Company’s Cable segment ($851 million in 2002 as compared to $954 million in 2001), which over the past several years has been engaged in a plan to upgrade the technological capability and reliability of its cable television systems and develop new services.

TWE’s Cable segment generally capitalizes expenditures for tangible fixed assets having a useful life of greater than one year. Capitalized costs typically include direct material, direct labor, overhead and interest. Sales and marketing costs, as well as the costs of repairing or maintaining existing fixed assets, are expensed as incurred. Types of capitalized expenditures at the Cable segment include plant upgrades, initial drops, converters and cable modems. With respect to converters and cable modems, the Cable segment capitalizes direct installation charges only upon the initial deployment of such assets. All costs incurred in the re-deployment of these assets are expensed as incurred. Similarly, once a given household has been wired, all costs incurred in subsequent disconnects and reconnects applicable to that household are expensed as incurred. Depreciation on these assets is provided generally using the straight-line method over their estimated useful life. For converters and modems, such life is generally 3-5 years and for plant upgrades, such useful life is up to 16 years. As of June 30, 2002, the total net book value of capitalized labor and overhead costs associated with the installation of converters and modems was approximately $175 million.

Filmed Entertainment Backlog

Backlog represents the amount of future revenue not yet recorded from cash contracts for the licensing of theatrical and television product for pay cable, basic cable, network and syndicated television exhibition. Backlog for Warner Bros. was approximately $3.3 billion at June 30, 2002, compared to approximately $3.5 billion at December 31, 2001 (including amounts relating to the licensing of film product to TWE’s Networks segment of approximately $293 million at June 30, 2002 and approximately $433 million at December 31, 2001).

CAUTION CONCERNING FORWARD–LOOKONG STATEMENTS AND RISK FACTORS

The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This document contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, EBITDA and cash flow. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

terms of similar substance used in connection with any discussion of future operating or financial performance identify such forward-looking statements. Those forward-looking statements are based on management’s present expectations about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and TWE is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of such changes, new information, future events or otherwise.

TWE operates in highly competitive, consumer driven and rapidly changing media and entertainment businesses that are dependent on government regulation, economic, strategic, political and social conditions, consumer demand for their products and services, technological developments and (particularly in view of technological changes) protection of their intellectual property rights. TWE’s actual results could differ materially from management’s expectations because of changes in such factors. Other factors and risks could adversely affect the operations, business or financial results of TWE or its business segments in the future and could also cause actual results to differ from those contained in the forward-looking statements, including those identified in TWE’s other filings with the SEC and the following:

For TWE’s cable business, more aggressive than expected competition from new technologies and other types of video programming distributors, including DBS and DSL; increases in government regulation of basic cable or equipment rates or other terms of service (such as “digital must-carry,” open access or common carrier requirements); government regulation of other services, such as broadband cable modem service; increased difficulty in obtaining franchise renewals; the failure of new equipment (such as digital set-top boxes) or services (such as digital cable, high-speed online services, telephony over cable or video-on-demand) to appeal to enough consumers or to be available at prices consumers are willing to pay, to function as expected and to be delivered in a timely fashion; fluctuations in spending levels by advertisers and consumers; the ability to enter into new program vendor advertising arrangements; and greater than expected increases in programming or other costs.

For TWE’s filmed entertainment businesses generally, their ability to continue to attract and select desirable talent and scripts at manageable costs; general increases in production costs; fragmentation of consumer leisure and entertainment time (and its possible negative effects on the broadcast and cable networks, which are significant customers of these businesses); continued popularity of merchandising; the potential repeal of the Sonny Bono Copyright Term Extension Act; the uncertain impact of technological developments, which may facilitate piracy of the Company’s copyrighted works; and risks associated with foreign currency exchange rates. With respect to feature films, the increasing marketing costs associated with theatrical film releases in a highly competitive marketplace; with respect to television programming, a decrease in demand for television programming provided by non-affiliated producers; and with respect to home video, the ability to maintain relationships with significant customers in the rental and sell-through markets.

For TWE’s network businesses, greater than expected programming or production costs; public and cable operator resistance to price increases (and the negative impact on premium programmers of increases in basic cable rates); increased regulation of distribution agreements; the sensitivity of network advertising to economic cyclicality and to new media technologies; the impact of consolidation among cable and satellite distributors; piracy of programming by means of Internet peer-to-peer file sharing; the impact of personal video recorder “ad-stripping” functions on advertising sales; the development of new technologies that alter the role of programming networks and services; and greater than expected fragmentation of consumer viewership due to an increased number of programming services or the increased popularity of alternatives to television.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

For TWE generally, the risk that lower than expected valuations associated with the cash flows and revenues at the TWE segments may result in the inability of the Company to realize the value of recorded intangible and goodwill at those segments.

In addition, TWE’s overall financial strategy, including growth in operations, maintaining its financial ratios and strong balance sheet, could be adversely affected by increased interest rates, decreased liquidity in the capital markets (including any reduction in its ability to access either the capital markets for debt securities or bank financings), failure to meet earnings expectations, significant acquisitions or other transactions, economic slowdowns and changes in TWE’s plans, strategies and intentions.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET

	June 30, 2002 Historical			December 31, 2001 Historical

	(unaudited)
	(millions)
ASSETS
Current assets
Cash and equivalents	$	249		$	250
Receivables, including $533 and $501 million due from AOL Time Warner, less allowances of $1.120 billion and $910 million		3,136			3,480
Inventories		881			852
Prepaid expenses		340			326


Total current assets		4,606			4,908

Noncurrent inventories and film costs		2,153			2,187
Investments, including available-for-sale securities		2,188			2,308
Property, plant and equipment		8,830			8,573
Intangible assets subject to amortization		2,415			2,464
Intangible assets not subject to amortization		22,352			22,356
Goodwill		12,412			41,004
Other assets		1,284			1,258


Total assets	$	56,240		$	85,058


LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities
Accounts payable	$	2,129		$	2,218
Participations payable		1,151			1,014
Programming costs payable		546			455
Debt due within one year		11			2
Other current liabilities, including $937 million and $1.022 billion due to AOL Time Warner		2,585			2,616


Total current liabilities		6,422			6,305

Long-term debt, including $1.240 and $1.734 billion due to AOL Time Warner		7,206			8,049

Other long-term liabilities, including $28 million and $446 million due to AOL Time Warner		2,486			3,108
Minority interests		2,278			2,191

Partners’ capital
Contributed capital		59,936			66,793
Accumulated other comprehensive income (loss), net		15			(6	)
Partnership deficit		(22,103	)		(1,382	)


Total partners’ capital		37,848			65,405


Total liabilities and partners’ capital	$	56,240		$	85,058

See accompanying notes.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

	Three Months Ended June 30,									Six Months Ended June 30,

	2002 Historical			2001 Pro Forma^(a)			2001 Historical			2002 Historical			2001 Pro Forma^(a)			2001 Historical

	(millions)
Revenues:

Subscriptions	$	2,176		$	1,899		$	1,899		$	4,285		$	3,729		$	3,729
Advertising and commerce		333			314			314			628			613			613
Content and other		2,058			1,476			1,476			3,681			2,948			2,948


Total revenues^(b)		4,567			3,689			3,689			8,594			7,290			7,290

Cost of revenues^(b)		(3,003	)		(2,319	)		(2,319	)		(5,659	)		(4,636	)		(4,636	)
Selling, general and administrative^(b)		(736	)		(671	)		(671	)		(1,399	)		(1,296	)		(1,296	)
Amortization of goodwill and other intangible assets		(38	)		(36	)		(666	)		(75	)		(72	)		(1,347	)


Operating income		790			663			33			1,461			1,286			11
Interest expense, net^(b)		(100	)		(142	)		(142	)		(210	)		(295	)		(295	)
Other expense, net^(b)		(49	)		(13	)		(47	)		(82	)		(17	)		(87	)
Minority interest		(105	)		(68	)		(70	)		(214	)		(169	)		(173	)


Income (loss) before income taxes and cumulative effect of accounting change		536			440			(226	)		955			805			(544	)
Income taxes		(53	)		(6	)		(6	)		(92	)		(38	)		(38	)

Income (loss) before cumulative effect of accounting change		483			434			(232	)		863			767			(582	)
Cumulative effect of accounting change		—			—			—			(21,763	)		—			—


Net income (loss)	$	483		$	434		$	(232	)	$	(20,900	)	$	767		$	(582	)

______________

(a)

In order to enhance comparability, pro forma statements for 2001 are presented supplementally as if FAS 142 had been applied at the beginning of 2001 (Note 1).

(b)

Includes the following income (expenses) resulting from transactions with the partners of TWE and other related companies:

Revenues	$	266		$	234		$	234		$	489		$	441		$	441
Cost of revenues		(167	)		(132	)		(132	)		(294	)		(255	)		(255	)
Selling, general and administrative		(60	)		(45	)		(45	)		(95	)		(81	)		(81	)
Interest expense, net		4			4			4			8			7			7
Other expense, net		—			(10	)		(10	)		—			(5	)		(5	)

See accompanying notes.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
(Unaudited)

	2002 Historical			2001 Pro Forma^(a)			2001 Historical

	(millions)
OPERATIONS
Net income (loss)	$	(20,900	)	$	767		$	(582	)
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change		21,763			—			—
Depreciation and amortization		710			578			1,853
Amortization of film costs		847			830			830
Equity in losses of investee companies after distributions		86			72			142
Changes in operating assets and liabilities		(198	)		(1,230	)		(1,226	)


Cash provided by operations		2,308			1,017			1,017


INVESTING ACTIVITIES
Investments and acquisitions		(281	)		(702	)		(702	)
Capital expenditures		(905	)		(1,003	)		(1,003	)
Investment proceeds		21			32			32


Cash used by investing activities		(1,165	)		(1,673	)		(1,673	)


FINANCING ACTIVITIES
Borrowings		2,301			3,633			3,633
Debt repayments		(3,128	)		(2,528	)		(2,528	)
Capital and other distributions		(317	)		(462	)		(462	)


Cash provided (used) by financing activities		(1,144	)		643			643


DECREASE IN CASH AND EQUIVALENTS		(1	)		(13	)		(13	)

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		250			306			306


CASH AND EQUIVALENTS AT END OF PERIOD	$	249		$	293		$	293

______________

(a)

In order to enhance comparability, pro forma statements for 2001 are presented supplementally as if FAS 142 had been applied at the beginning of 2001 (Note 1)

See accompanying notes.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
Six Months Ended June 30,
(Unaudited)

	2002 Historical			2001 Historical

	(millions)

BALANCE AT BEGINNING OF PERIOD	$	65,405		$	6,926

Allocation of a portion of the purchase price in connection with America Online-Time Warner merger to TWE		—			59,518
Reallocation of TWE goodwill to other segments of AOL Time Warner upon adoption of FAS 142		(6,857	)		—


Balance at beginning of period, adjusted to give effect to the America Online-Time Warner merger and reallocation of goodwill upon adoption of FAS 142		58,548			66,444

Net loss		(20,900	)		(582	)
Other comprehensive income (loss)		21			(14	)

Comprehensive loss		(20,879	)		(596	)

Distributions		174			(867	)
Other		5			83


BALANCE AT END OF PERIOD	$	37,848		$	65,064

See accompanying notes.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

AOL Time Warner Inc. (“AOL Time Warner”) is the world’s leading media and entertainment company. The Company was formed in connection with the merger of America Online, Inc. (“America Online”) and Time Warner Inc. (“Time Warner”) which was consummated on January 11, 2001 (the “Merger”). As a result of the Merger, America Online and Time Warner each became a wholly owned subsidiary of AOL Time Warner.

A majority of AOL Time Warner’s interests in the Filmed Entertainment and Cable segments, and a portion of its interests in the Networks segment, are held through Time Warner Entertainment Company, L.P. (“TWE”). As of June 30, 2002, AOL Time Warner owned general and limited partnership interests in TWE consisting of 72.36% of the pro rata priority capital (“Series A Capital”) and residual equity capital (“Residual Capital”), and 100% of the junior priority capital (“Series B Capital”). The remaining 27.64% limited partnership interests in the Series A Capital and Residual Capital of TWE were held by MediaOne TWE Holdings, Inc., a subsidiary of AT&T Corp. (“AT&T”).

During the second quarter of 2002, AT&T exercised an option to increase its ownership in the Series A Capital and Residual Capital of TWE. As a result, on May 31, 2002, AT&T’s interest in the Series A Capital and Residual Capital of TWE increased by approximately 2.13% to approximately 27.64% and AOL Time Warner’s corresponding interest in the Series A and Residual Capital of TWE decreased by approximately 2.13% to approximately 72.36%. This transaction had no impact on the TWE financial statements as it represents a transaction between its partners.

AT&T has the right, during 60-day exercise periods occurring once every 18 months, to request that TWE incorporate and register its stock in an initial public offering. If AT&T exercises such right, TWE can decline to incorporate and register its stock, in which case AT&T may cause TWE to purchase AT&T’s interest at the price at which an appraiser believes such stock could be sold in an initial public offering, subject to certain adjustments. In February 2001, AT&T delivered to TWE a notice requesting that TWE reconstitute itself as a corporation and register AT&T’s partnership interests for public sale. In June 2002, AT&T and TWE engaged Banc of America Securities LLC (“Banc of America”) to perform appraisals and make other determinations under the TWE Partnership Agreement. In July 2002, AOL Time Warner and AT&T agreed to temporarily suspend the registration rights process so that they can pursue discussion of an alternative transaction. For the time being, AOL Time Warner and AT&T have asked Banc of America not to deliver the determinations. The Company cannot at this time predict the outcome or effect, if any, of these discussions or the registration rights process, if resumed.

TWE, a Delaware limited partnership, classifies its business interests into three fundamental areas: Cable, consisting principally of interests in cable television systems; Filmed Entertainment, consisting principally of

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

interests in filmed entertainment and television production; and Networks, consisting principally of interests in cable television and broadcast network programming.

Each of the business interests within Cable, Filmed Entertainment and Networks 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) Time Warner Cable, currently the second largest operator of cable television systems in the U.S., (2) the unique and extensive film, television and animation libraries of Warner Bros. and trademarks such as the Looney Tunes characters and Batman, (3) HBO and Cinemax, the leading pay-television services and (4) The WB Network, a national broadcasting network launched in 1995 as an extension of the Warner Bros. brand and as an additional distribution outlet for Warner Bros.’s collection of children’s cartoons and television programming.

Basis of Presentation

Interim Financial Statements

The accompanying consolidated 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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements of TWE, included in its Form 10-K for the year ended December 31, 2001, filed on March 27, 2002 (the “2001 Form 10-K”).

Basis of Consolidation

The consolidated financial statements of TWE include 100% of the assets, liabilities, revenues, expenses, income, loss and cash flows of all companies in which TWE has a controlling voting interest, as if TWE and its subsidiaries were a single company. Intercompany transactions between the consolidated companies have been eliminated.

Revenue Classification Changes

In November 2001, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) issued as interpretive guidance EITF Topic No. D-103, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (“Topic D-103”). Topic D-103 requires that reimbursements received for out-of-pocket expenses be classified as revenue on the income statement and was effective for TWE in the first quarter of 2002. The new guidance requires retroactive restatement of all periods presented to reflect the new accounting provisions. This change in revenue classification will impact TWE’s Cable segment, resulting in an increase in both revenues and costs of approximately $61 million on both a pro forma and historical basis for the three months ended June 30, 2001 and an increase in both revenues and costs of approximately $120 million on both a pro forma and historical basis for the six months ended June 30, 2001.

Accounting for Business Combinations

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. The new standards generally were effective for TWE in the first quarter of 2002 and for purchase business combinations consummated after June 30, 2001. Upon adoption of FAS 142 in the first quarter of 2002, TWE recorded a one-time, noncash charge of approximately $22 billion to reduce the carrying value of its goodwill. Such charge is nonoperational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. For additional discussion on the impact of adopting FAS 142, see Note 3.

Reclassifications

Certain reclassifications have been made to the prior year’s financial information to conform to the June 30, 2002 presentation.

2. MERGER AND RESTRUCTURING COSTS

America Online-Time Warner Merger

In connection with the Merger, TWE has reviewed its operations and implemented several plans to restructure its operations (“restructuring plans”). As part of the restructuring plans, TWE recorded a restructuring liability of approximately $301 million during 2001. The restructuring accruals relate to costs to exit and consolidate certain activities at TWE, as well as costs to terminate employees across various business units. Such amounts were recognized as liabilities assumed in the purchase business combination and included in the allocation of the cost to acquire Time Warner. Accordingly, such amounts resulted in additional goodwill being recorded in connection with the Merger.

Of the total restructuring costs, $107 million related to work force reductions and represented employee termination benefits. Because certain employees can defer receipt of termination benefits for up to 24 months, cash payments will continue after the employee has been terminated. Termination payments of approximately $19 million were made in 2001 ($10 million of which was in the second quarter and for the first six months of 2001), an additional $5 million was made in the second quarter of 2002 and approximately $18 million was made for the first six months of 2002. As of June 30, 2002, the remaining liability of approximately $70 million was classified as a current liability in the accompanying consolidated balance sheet.

The restructuring charge also includes approximately $194 million associated with exiting certain activities. Specifically, TWE has exited certain under-performing operations, including the Studio Store operations included in the Filmed Entertainment segment. The restructuring accrual associated with exiting activities specifically includes incremental costs and contractual termination obligations for items such as leasehold termination payments and other facility exit costs incurred as a direct result of these plans, which will not have future benefits. Payments related to exiting activities were approximately $88 million in 2001 ($15 million of which was paid in the second quarter of 2001 and $20 million for the first six months of 2001), an additional $24 million was paid in the second quarter of 2002 and approximately $49 million was paid for the first six months of 2002. In addition, for the second quarter and the first six months of 2002, there were non-cash reductions in the restructuring accrual of approximately $15 million, as actual termination payments were less than amounts originally estimated. As of June 30, 2002, the remaining liability of $42 million was primarily classified as a current liability in the accompanying consolidated balance sheet.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Selected information relating to the restructuring plans follows (in millions):

	Employee Termination			Exit Costs			Total

Initial accruals	$	107		$	194		$	301
Cash paid – 2001		(19	)		(88	)		(107	)

Restructuring liability as of December 31, 2001	$	88		$	106		$	194
Cash paid – 2002		(18	)		(49	)		(67	)
Noncash reductions^(a) – 2002		—			(15	)		(15	)

Restructuring liability as of June 30, 2002	$	70		$	42		$	112

______________

(a)

3. GOODWILL AND INTANGIBLE ASSETS

As discussed in Note 1, in January 2002, TWE adopted FAS 142, which requires companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, FAS 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be reviewed for impairment upon adoption of FAS 142 (January 1, 2002) and annually thereafter. The Company will perform its annual impairment review during the fourth quarter of each year, commencing with the fourth quarter of 2002.

Under FAS 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The Company’s reporting units are generally consistent with the operating segments underlying the segments identified in Note 8 – Segment Information. This methodology differs from TWE’s previous policy, as permitted under accounting standards existing at that time, of using undiscounted cash flows on an enterprisewide basis to determine if goodwill is recoverable.

Upon adoption of FAS 142 in the first quarter of 2002, TWE recorded a one-time, noncash charge of approximately $22 billion to reduce the carrying value of its goodwill. Such charge is nonoperational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. In calculating the impairment charge, the fair value of the impaired reporting units underlying the segments were estimated using either a discounted cash flow methodology or recent comparable transactions.

The FAS 142 goodwill impairment is associated solely with goodwill resulting from the Merger. The amount of the impairment primarily reflects the decline in AOL Time Warner’s stock price since the Merger was announced and valued for accounting purposes in January of 2000. Prior to performing the review for impairment, FAS 142 required that all goodwill deemed to be related to the entity as a whole be assigned to all of the Company’s reporting units, including the reporting units of the acquirer. This differs from the previous accounting rules where goodwill was assigned only to the businesses of the company acquired. As a result, effective January 1, 2002, $6.857 billion of the goodwill generated in the Merger, which was previously allocated to the TWE segments, has been reallocated to other segments of AOL Time Warner.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

A summary of changes in the Company’s goodwill during the first six months of 2002, and total assets at June 30, 2002, by business segment is as follows (in millions):

	Goodwill									Total Assets

	January 1, 2002^{(1) (2)}		Acquisitions & Adjustments		Impairments			June 30, 2002		June 30, 2002

Cable	$	19,048	$	—	$	(16,768	)	$	2,280	$	32,625
Filmed Entertainment		6,165		6		(2,851	)		3,320		12,756
Networks⁽³⁾		8,934		22		(2,144	)		6,812		10,187
Corporate		—		—		—			—		672

Total	$	34,147	$	28	$	(21,763	)	$	12,412	$	56,240

______________

(1)

Reflects the reallocation of goodwill of $6.857 billion to other segments of AOL Time Warner under FAS 142.

(2)

In addition to the goodwill identified above, AOL Time Warner has recognized goodwill associated with deferred tax liabilities related to TWE’s assets and liabilities. Neither the deferred tax liabilities nor the corresponding goodwill are recorded in TWE’s standalone financial statements because TWE is not subject to U.S. Federal income taxation.

(3)

Includes impairments at HBO ($1.933 billion) and The WB Network ($211 million).

As of June 30, 2002 and December 31, 2001, the Company’s intangible assets and related accumulated amortization consisted of the following (in millions):

	As of June 30, 2002							As of December 31, 2001

	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net

Intangible assets subject to amortization:
Film library	$	2,529	$	(207	)	$	2,322	$	2,529	$	(138	)	$	2,391
Customer lists and other intangible assets		230		(137	)		93		204		(131	)		73

Total	$	2,759	$	(344	)	$	2,415	$	2,733	$	(269	)	$	2,464

Intangible assets not subject to amortization:
Cable television franchises	$	21,907	$	(1,644	)	$	20,263	$	21,911	$	(1,644	)	$	20,267
Brands, trademarks and other intangible assets		2,150		(61	)		2,089		2,150		(61	)		2,089

Total	$	24,057	$	(1,705	)	$	22,352	$	24,061	$	(1,705	)	$	22,356

The Company recorded amortization expense of $38 million during the second quarter of 2002 compared to $36 million on a pro forma basis ($666 million on a historical basis) during the second quarter of 2001. The Company recorded amortization expense of $75 million for the first six months of 2002 compared to $72 million on a pro forma basis ($1.347 billion on a historical basis) for the first six months of 2001. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding 5 years are as follows: 2002: $156 million; 2003: $156 million; 2004: $150 million; 2005: $150 million; and 2006: $150 million. As acquisitions and dispositions occur in the future and as purchase price allocations are finalized, these amounts may vary.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

During the first six months of 2002, the Company acquired the following intangible assets (in millions):

			Weighted Average Amortization Period

Customer lists and other intangible assets subject to amortization	$	26		10-15 years
Cable television franchises not subject to amortization		9		Indefinite

Total	$	35

The 2001 results on a historical basis do not reflect the provisions of FAS 142. Had TWE adopted FAS 142 on January 1, 2001, the historical net income (loss) would have been changed to the adjusted amounts indicated below:

	Three Months Ended June 30, 2001			Six Months Ended June 30, 2001

	(millions)
	Net income (loss)			Net income (loss)

As reported – historical basis	$	(232	)	$	(582	)
Add: Goodwill amortization		451			864
Add: Intangible amortization		179			411
Add: Equity investee goodwill amortization		34			70
Minority interest impact		2			4
Income tax impact		—			—

Adjusted	$	434		$	767

4. RESTRUCTURING OF TWE-ADVANCE/NEWHOUSE PARTNERSHIP AND ROAD RUNNER

As of June 30, 2002, the TWE-Advance/Newhouse Partnership (“TWE-A/N”) was owned approximately 64.8% by TWE, the managing partner, 33.3% by the Advance/Newhouse Partnership (“Advance/Newhouse”) and 1.9% indirectly by AOL Time Warner. As of June 30, 2002, TWE-A/N owned cable television systems (or interests therein) serving approximately 7.0 million subscribers, of which 5.9 million subscribers were served by consolidated, wholly owned cable television systems and 1.1 million subscribers were served by unconsolidated, partially owned cable television systems. The financial position and operating results of TWE-A/N are currently consolidated by TWE, and the partnership interest owned by Advance/Newhouse is reflected in the consolidated financial statements of TWE as minority interest.

As of June 30, 2002, Road Runner, a high-speed cable modem Internet service provider, was owned by TWI Cable Inc. (a wholly owned subsidiary of AOL Time Warner), TWE and TWE-A/N, with TWE owning approximately 67% on a fully attributed basis (i.e., after considering the portion attributable to the minority partners of TWE-A/N). TWE’s interest in Road Runner is accounted for using the equity method of accounting because of certain approval rights currently held by Advance/Newhouse, a partner in TWE-A/N.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Advance/Newhouse Systems, to the extent permitted under applicable government regulations, and accordingly, AOL Time Warner and TWE will deconsolidate the financial position and operating results of these systems effective in the third quarter of 2002. Additionally, all prior period results associated with the Advance/Newhouse Systems will be reflected as a discontinued operation beginning in the third quarter of 2002. Under the new TWE-A/N Partnership Agreement, effective as of the Debt Closing Date, Advance/Newhouse’s partnership interest tracks only the performance of the Advance/Newhouse Systems, including associated liabilities, while TWE retains substantially all of the interests in the other TWE-A/N assets and liabilities. As part of the restructuring of TWE-A/N, on the Debt Closing Date, AOL Time Warner acquired Advance/Newhouse’s interest in Road Runner. As a result, beginning in the third quarter of 2002, TWE will consolidate the financial position and results of operations of Road Runner with the financial position and results of operations of TWE’s Cable segment, retroactive to the beginning of the year.

The impact on the TWE Cable segment of consolidating Road Runner is affected by certain transactions between Road Runner and the TWE Cable segment. Specifically, a substantial portion of Road Runner’s revenues are derived from transactions with TWE’s Cable segment. As a result, upon consolidation of Road Runner’s results of operations with the results of operations of the TWE Cable segment, a substantial portion of Road Runner’s revenues will be eliminated. The deconsolidation of the Advance/Newhouse Systems and consolidation of Road Runner will impact the results of operations of TWE’s Cable segment, as follows (in millions):

Cable Segment

	Three Months Ended June 30

	2002									2001 Pro Forma

	Revenue			EBITDA			Operating Income			Revenue			EBITDA			Operating Income

Cable Segment	$	1,812		$	768		$	464		$	1,523		$	667		$	432
TWE-A/N Impact		(363	)		(172	)		(107	)		(304	)		(137	)		(85	)
Road Runner Impact		73			(25	)		(38	)		54			(42	)		(59	)
Intercompany Impact		(44	)		—			—			(27	)		—			—

Pro Forma Cable Segment	$	1,478		$	571		$	319		$	1,246		$	488		$	288

	Six Months Ended June 30

	2002									2001 Pro Forma

	Revenue			EBITDA			Operating Income			Revenue			EBITDA			Operating Income

Cable Segment	$	3,548		$	1,496		$	911		$	2,969		$	1,328		$	882
TWE-A/N Impact		(715	)		(333	)		(205	)		(596	)		(271	)		(171	)
Road Runner Impact		142			(53	)		(79	)		107			(90	)		(127	)
Intercompany Impact		(83	)		—			—			(51	)		—			—

Pro Forma Cable Segment	$	2,892		$	1,110		$	627		$	2,429		$	967		$	584

The impact on TWE’s consolidated operating results of deconsolidating the Advance/Newhouse Systems and consolidating Road Runner is affected by the intercompany transaction between Road Runner and the TWE Cable segment, as noted above, as well as certain transactions with other segments of TWE. For example, TWE’s consolidated results will also be impacted by certain transactions with the Advance/Newhouse Systems that were previously eliminated in consolidation. For example, the Advance/Newhouse Systems purchase cable programming from HBO. Once the Advance/Newhouse Systems are deconsolidated, these programming revenues recognized by the Networks segment will no longer need to be eliminated in consolidation. The impact of the deconsolidation of the Advance/Newhouse Systems and the consolidation of Road Runner, including the impact of the intercompany transactions discussed above, is as follows (in millions):

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

TWE

	Three Months Ended June 30

	2002									2001 Pro Forma

	Revenue			EBITDA			Operating Income			Revenue			EBITDA			Operating Income

TWE	$	4,567		$	1,156		$	790		$	3,689		$	964		$	663
TWE-A/N Impact		(363	)		(172	)		(107	)		(304	)		(137	)		(85	)
Road Runner Impact		73			(25	)		(38	)		54			(42	)		(59	)
Intercompany Impact		(31	)		—			—			(16	)		—			—

Pro Forma TWE	$	4,246		$	959		$	645		$	3,423		$	785		$	519

	Six Months Ended June 30

	2002									2001 Pro Forma

	Revenue			EBITDA			Operating Income			Revenue			EBITDA			Operating Income

TWE	$	8,594		$	2,171		$	1,461		$	7,290		$	1,864		$	1,286
TWE-A/N Impact		(715	)		(333	)		(205	)		(596	)		(271	)		(171	)
Road Runner Impact		142			(53	)		(79	)		107			(90	)		(127	)
Intercompany Impact		(57	)		—			—			(29	)		—			—

Pro Forma TWE	$	7,964		$	1,785		$	1,177		$	6,772		$	1,503		$	988

Exclusive of any gain or loss associated with these transactions, the impact of the TWE-A/N restructuring on TWE’s consolidated net income will be substantially mitigated because the earnings of TWE-A/N attributable to Advance/Newhouse’s current one-third interest are reflected as minority interest expense in the accompanying consolidated statement of operations. Additionally, because TWE had previously accounted for its investment in Road Runner using the equity method of accounting, and TWE will not acquire an additional interest in Road Runner as part of the restructuring, the consolidation of Road Runner will not impact TWE’s net income.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

5. INVENTORIES

Inventories and film costs consist of:

	June 30, 2002		December 31, 2001

	(millions)
Programming costs, less amortization	$	1,302	$	1,285
Merchandise		165		158
Film costs - Theatrical:
Released, less amortization		626		650
Completed and not released		154		285
In production		535		346
Development and pre-production		48		36
Film costs - Television:
Released, less amortization		171		123
Completed and not released		26		95
In production		1		59
Development and pre-production		6		2

Total inventories and film costs^(a)		3,034		3,039
Less current portion of inventory		881		852

Total noncurrent inventories and film costs	$	2,153	$	2,187

_____________

(a)

Does not include $2.322 billion and $2.391 billion of net film library costs as of June 30, 2002 and December 31, 2001, respectively, which are included in intangible assets subject to amortization on the accompanying consolidated balance sheet (Note 3).

6. PARTNERS’ CAPITAL

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 AOL Time Warner for stock options granted to employees of TWE based on the amount by which the market price of AOL Time Warner common stock exceeds the option exercise price on the exercise date. TWE accrues a stock option distribution and a corresponding liability with respect to unexercised options when the market price of AOL 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 AOL Time Warner common stock declines.

During the six months ended June 30, 2002, TWE accrued $222 million of tax-related distributions and reversed previous stock option distribution accruals of $396 million, based on closing prices of AOL Time Warner common stock of $14.71 at June 30, 2002 and $32.10 at December 31, 2001. During the six months ended June 30, 2001, TWE accrued $50 million of tax-related distributions and $817 million of stock option distributions as a result of an increase at that time in the market price of AOL Time Warner common stock. During the six months ended June 30, 2002, TWE paid distributions to the AOL Time Warner General Partners in the amount of $244 million, consisting of $222 million of tax-related distributions and $22 million of stock option related distributions. During the six months ended June 30, 2001, TWE paid the AOL Time Warner General Partners distributions in the amount of $391 million, consisting of $50 million of tax-related distributions and $341 million of stock option related distributions.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

7. LONG–TERM DEBT

In July 2002, AOL Time Warner, together with certain of its consolidated subsidiaries, including TWE, entered into two new, senior unsecured long-term revolving bank credit agreements with an aggregate borrowing capacity of $10 billion (the “2002 Credit Agreements”) and terminated three financing arrangements under certain previously existing bank credit facilities with an aggregate borrowing capacity of $12.6 billion (the “Old Credit Agreements”) which were to expire during 2002. The 2002 Credit Agreements are comprised of a $6 billion five-year revolving credit facility and a $4 billion 364-day revolving credit facility, borrowings under which may be extended for a period up to two years following the initial term. The borrowers under the 2002 Credit Agreement include AOL Time Warner, TWE, TWE-A/N and AOL Time Warner Finance Ireland. The obligations of each of AOL Time Warner and AOL Time Warner Finance Ireland are guaranteed by America Online, Time Warner, TBS and TW Companies, directly or indirectly. The obligation of AOL Time Warner Finance Ireland is guaranteed by AOL Time Warner. The obligations of TWE and TWE-A/N are not guaranteed. Borrowings will bear interest at specific rates, generally based on the credit rating for each of the borrowers, currently equal to LIBOR plus .625% including facility fees of .10% and .125% on the total commitments of the 364-day and five-year facilities, respectively. The 2002 Credit Agreements provide same-day funding, multi-currency capability and letter of credit availability. They contain maximum leverage and minimum GAAP net worth covenants of 4.5 times and $50 billion, respectively, for AOL Time Warner and maximum leverage covenant of 5.0 times for TWE and TWE-A/N, but do not contain any ratings-based defaults or covenants, nor an ongoing covenant or representation specifically relating to a material adverse change in the AOL Time Warner’s financial condition or results of operations. Borrowings may be used for general business purposes and unused credit will be available to support commercial paper borrowings.

8. SEGMENT INFORMATION

TWE classifies its business interests into three fundamental areas: Cable, consisting principally of interests in cable television systems; Filmed Entertainment, consisting principally of interests in filmed entertainment and television production; and Networks, consisting principally of interests in cable television and broadcast network programming.

TWE’s results for 2002 have been impacted by certain transactions and events that cause them not to be comparable to the results reported in 2001. In order to make the 2001 operating results more comparable to the 2002 presentation and make an analysis of 2002 and 2001 more meaningful, supplemental pro forma operating results for 2001 have been presented as if FAS 142 had been applied at the beginning of 2001.

The accounting policies of the business segments are the same as those described in the summary of significant accounting policies under Note 1 in the 2001 Form 10-K. Intersegment sales are accounted for at fair value as if the sales were with third parties.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

	Three Months Ended June 30,									Six Months Ended June 30,

	2002 Historical			2001 Pro Forma			2001 Historical			2002 Historical			2001 Pro Forma			2001 Historical

	(millions)
Revenues^(a)
Cable	$	1,812		$	1,523		$	1,523		$	3,548		$	2,969		$	2,969
Filmed Entertainment.		2,063			1,590			1,590			3,736			3,193			3,193
Networks		846			745			745			1,628			1,469			1,469
Intersegment elimination		(154	)		(169	)		(169	)		(318	)		(341	)		(341	)

Total	$	4,567		$	3,689		$	3,689		$	8,594		$	7,290		$	7,290

___________________

(a)

Revenues reflect the provisions of Topic D-103 that were adopted by the Company in the first quarter of 2002, which require retroactive restatement of 2001 to reflect the new accounting provisions. As a result, the impact of Topic D-103 was to increase revenues and costs by equal amounts of approximately $61 and $120 million for the three months and six months ended June 30, 2001, respectively.

Intersegment Revenues

In the normal course of business, the TWE segments enter into transactions with one another. The most common types of intercompany transactions include:

The Filmed Entertainment segment generating content revenue by licensing television and theatrical programming to the Networks segment;

The Networks segment generating subscription revenues by selling cable network programming to the Cable segment; and

The Cable and Networks segments generating advertising and commerce revenue by cross-promoting the products and services of all TWE segments.

These intercompany transactions are recorded by each segment at fair value as if the transactions were with third parties and, therefore, impact segment performance. While intercompany transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses recognized by the segment that is counterparty to the transaction) are eliminated in consolidation and, therefore, do not themselves impact consolidated results. Revenues recognized by TWE’s segments on intercompany transactions are as follows:

	Three Months Ended June 30 ,						Six Months Ended June 30,

	2002 Historical		2001 Pro Forma		2001 Historical		2002 Historical		2001 Pro Forma		2001 Historical

	(millions)
Intercompany Revenues
Cable	$	2	$	—	$	—	$	3	$	1	$	1
Filmed Entertainment		75		93		93		172		187		187
Networks		77		76		76		143		153		153

Total intercompany revenues	$	154	$	169	$	169	$	318	$	341	$	341

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

	Three Months Ended June 30,									Six Months Ended June 30,

	2002 Historical			2001 Pro Forma			2001 Historical			2002 Historical			2001 Pro Forma			2001 Historical

	(millions)
EBITDA^(a)
Cable	$	768		$	667		$	667		$	1,496		$	1,328		$	1,328
Filmed Entertainment		220			161			161			358			261			261
Networks		188			156			156			357			314			314
Corporate		(20	)		(20	)		(20	)		(40	)		(39	)		(39	)

Total EBITDA	$	1,156		$	964		$	964		$	2,171		$	1,864		$	1,864

______________

(a)

EBITDA represents operating income (loss) before noncash depreciation of tangible assets and amortization of intangible assets. After deducting depreciation and amortization, TWE’s operating income for the three months ended June 30 was $790 million in 2002 and $663 million in 2001 ($33 million on a historical basis). After deducting depreciation and amortization, TWE’s operating income for the six months ended June 30 was $1.461 billion in 2002 and $1.286 billion in 2001 ($11 million on a historical basis).

	Three Months Ended June 30,						Six Months Ended June 30,

	2002 Historical		2001 Pro Forma		2001 Historical		2002 Historical		2001 Pro Forma		2001 Historical

	(millions)
Depreciation of Property, Plant and Equipment
Cable	$	302	$	235	$	235	$	582	$	446	$	446
Filmed Entertainment		18		21		21		36		42		42
Networks		6		8		8		13		16		16
Corporate		2		1		1		4		2		2

Total depreciation	$	328	$	265	$	265	$	635	$	506	$	506

	Three Months EndedJune 30,						Six Months Ended June 30,

	2002 Historical		2001 Pro Forma		2001 Historical		2002 Historical		2001 Pro Forma		2001 Historical

	(millions)
Amortization of Intangible Assets^(a)
Cable	$	2	$	—	$	473	$	3	$	—	$	961
Filmed Entertainment		33		33		97		67		67		195
Networks		3		3		96		5		5		191

Total amortization	$	38	$	36	$	666	$	75	$	72	$	1,347

______________

(a)

Includes amortization relating to business combinations accounted for by the purchase method, substantially all of which arose in the merger of America Online and Time Warner in 2001.

As discussed in Note 3, when FAS 142 was initially applied, all goodwill recognized on the Company’s consolidated balance sheet on that date was reviewed for impairment using the new guidance. Before performing the review for impairment, the new guidance required that all goodwill deemed to relate to the entity as a whole be assigned to all of the Company’s reporting units (generally, the AOL Time Warner operating segments), including the reporting units of the acquirer. This differs from the previous accounting rules, which required goodwill to be assigned only to the businesses of the company acquired. As a result, $6.857 billion of the goodwill generated in the Merger originally allocated to the TWE segments was reallocated on January 1, 2002, to other segments of AOL Time Warner resulting in a change in segment assets. Following are TWE’s assets by business segment, reflecting the January 1, 2002 reallocation of goodwill in accordance with FAS 142:

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

	June 30, 2002 Historical		December 31, 2001 Historical

	(millions)
Assets
Cable	$	32,625	$	56,760
Filmed Entertainment		12,756		16,394
Networks		10,187		11,225
Corporate		672		679

Total assets	$	56,240	$	85,058

9. COMMITMENTS AND CONTINGENCIES

In Six Flags Over Georgia LLC et al. v. Time Warner Entertainment Company et al., following a trial in December 1998, the jury returned a verdict for plaintiffs and against defendants, including TWE, on plaintiffs’ claims for breaches of fiduciary duty. The jury awarded plaintiffs approximately $197 million in compensatory damages and $257 million in punitive damages, and interest began accruing on those amounts at the Georgia annual statutory rate of twelve percent. The Company paid the compensatory damages with accrued interest during the first quarter of 2001. Payment of the punitive damages portion of the award with accrued interest was stayed by the United States Supreme Court on March 1, 2001 pending the disposition of a certiorari petition with that Court, which was filed by TWE on June 15, 2001. On October 1, 2001, the United States Supreme Court granted TWE’s petition, vacated the decision by the Georgia Court of Appeals affirming the punitive damages award, and remanded the matter to the Georgia Court of Appeals for further consideration. The Georgia Court of Appeals affirmed and reinstated its earlier decision regarding the punitive damage award on March 29, 2002. On April 18, 2002, the defendants filed a petition of certiorari to the Georgia Supreme Court seeking review of the decision of the Georgia Court of Appeals and a decision on whether the court will hear the appeal is expected later in 2002.

On April 8, 2002, three former employees of certain subsidiaries of AOL Time Warner Inc. filed Henry Spann et al. v. AOL Time Warner Inc. et al., a purported class action, in the United States District Court for the Central District of California. Plaintiffs have named as defendants, among others, AOL Time Warner Inc., the Company, Warner–Elektra–Atlantic Corporation, WEA Manufacturing Inc., Warner Bros. Records, Atlantic Recording Corporation, various pension plans sponsored by the companies and the administrative committees of those plans. Plaintiffs allege that defendants miscalculated the proper amount of pension benefits owed to them and other class members as required under the plans in violation of the Employee Retirement Income Security Act (“ERISA”). The Company believes the lawsuit has no merit and intends to defend against it vigorously. Due to its preliminary status, the Company is unable to predict the outcome of the case or reasonably estimate a range of possible loss.

TWE is also subject to numerous other legal proceedings. In management’s opinion and considering established reserves, the resolution of these matters will not have a material effect, individually and in the aggregate, on TWE’s consolidated financial statements.

TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

10. ADDITIONAL FINANCIAL INFORMATION

Cash Flows

Additional financial information with respect to cash (payments) and receipts are as follows:

	Six Months Ended June 30,

	2002 Historical			2001 Pro Forma			2001 Historical

	(millions)
Cash payments made for interest	$	(217	)	$	(310	)	$	(310	)
Interest income received		5			15			15

Cash interest expense, net	$	(212	)	$	(295	)	$	(295	)

Cash payments made for income taxes	$	(80	)	$	(98	)	$	(98	)
Income tax refunds received		2			2			2

Cash taxes, net	$	(78	)	$	(96	)	$	(96	)

Other Expense, Net

Other expense, net, consists of:

	Three Months Ended June 30,									Six Months Ended June 30,

	2002 Historical			2001 Pro Forma			2001 Historical			2002 Historical			2001 Pro Forma			2001 Historical

	(millions)
Other investment–related activity, principally losses on equity investees	$	(39	)	$	(46	)	$	(80	)	$	(72	)	$	(75	)	$	(145	)
Gains related to the exchange of unconsolidated cable television systems		—			39			39			—			71			71
Losses on asset securitization programs		(5	)		(5	)		(5	)		(9	)		(11	)		(11	)
Miscellaneous		(5	)		(1	)		(1	)		(1	)		(2	)		(2	)

Total other expense, net	$	(49	)	$	(13	)	$	(47	)	$	(82	)	$	(17	)	$	(87	)

Other Current Liabilities

Other current liabilities consist of:

	June 30, 2002 Historical		December 31, 2001 Historical

Accrued expenses	$	2,007	$	1,940
Accrued compensation		195		275
Deferred revenues		309		350
Accrued income taxes		74		51

Total	$	2,585	$	2,616

Part II. Other Information

Item 1. Legal Proceedings.

Securities Matters

As of August 13, 2002, twenty class action lawsuits have been filed, naming as defendants the Company, certain current and former executives of the Company and, in three instances, America Online. Seventeen of these were filed in the United States District Court for the Southern District of New York, three were filed in the United States District Court for the Eastern District of Virginia and one in the United States District Court for the Eastern District of Texas (the “AOL Time Warner Shareholder Litigation”). The complaints purport to be made on behalf of certain shareholders of the Company and allege that the Company made material misrepresentations and/or omissions of material fact in violation of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. Plaintiffs claim that the Company failed to disclose America Online’s declining advertising revenues and that the Company and America Online inappropriately inflated advertising revenues in a series of transactions. Certain of the lawsuits also allege that certain of the individual defendants and other insiders at the Company improperly sold their personal holdings of AOL Time Warner stock. Three of the lawsuits, in addition to the above allegations, allege that the Company failed to disclose that the Merger was not generating the synergies anticipated at the time of the announcement of the Merger and, further, that the Company inappropriately delayed writing down more than $50 billion of goodwill. The lawsuits seek an unspecified amount in compensatory damages. The Company intends to defend against the lawsuits vigorously. The Company is unable to predict the outcome of the cases or reasonably estimate a range of possible loss.

On July 23, 2002, Pfeiffer v. Case et al. , a shareholder derivative action, was filed in New York State Supreme Court for the County of New York, and on August 7, 2002, Hall v. Case et al., also a shareholder derivative action, was filed in the United States District Court for the Southern District of New York. Both suits name the directors and certain officers of the Company as defendants, as well as the Company as a nominal defendant. The complaints allege that defendants breached their fiduciary duties by causing the Company to issue corporate statements that did not accurately represent America Online had declining advertising revenues, that the Merger was not generating the synergies anticipated at the time of the announcement of the Merger, and that the Company inappropriately delayed writing down more than $50 billion of goodwill, thereby exposing the Company to potential liability for alleged violations of federal securities laws. The lawsuits further allege that certain of the defendants improperly sold their personal holdings of AOL Time Warner securities. The lawsuits request that all proceeds from any improper sales of AOL Time Warner common stock and any improper salaries or payments be returned to the Company. The Company intends to defend against the lawsuits vigorously. The Company is unable to predict the outcome of the case or reasonably estimate a range of possible loss.

Other Matters

Reference is made to Netscape Communications Corporation v. Microsoft Corporation described on page 37 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (the “2001 Form 10-K”). On June 17, 2002, the Judicial Panel on Multi-District Litigation transferred the case to the United States District Court for the District of Maryland for all pretrial proceedings.

Reference is made to the class action lawsuits concerning AOL versions 5.0 and 6.0 software described on page 37 of the 2001 Form 10-K. The parties in the 5.0 software matter have entered into a settlement that is not material to the Company’s financial condition or results of operations to resolve the ISP claims related to 5.0 installations. The settlement is subject to the final approval of the court.

Item 4. Submission of Matters to a Vote of Security Holders.

(a)(b)(c) The Annual Meeting of Stockholders of the Company was held on May 16, 2002 (the “2002 Annual Meeting”). The following matters were voted upon at the 2002 Annual Meeting:

(i) The following individuals were elected directors of the Company for terms expiring in 2003:


	Votes For		Votes Withheld		Broker Non-Votes
Daniel F. Akerson		3,516,395,000		75,793,082		0
James L. Barksdale		3,514,333,841		77,854,241		0
Stephen F. Bollenbach		3,517,640,625		74,547,457		0
Stephen M. Case		3,536,429,335		55,758,747		0
Frank J. Caufield		3,538,752,694		55,149,851		0
Miles R. Gilburne		3,515,680,854		78,221,691		0
Carla A. Hills		3,538,912,000		54,990,545		0
Reuben Mark		3,540,557,177		53,345,368		0
Michael A. Miles		3,525,720,969		68,183,776		0
Kenneth J. Novack		3,538,788,210		55,116,535		0
Richard D. Parsons		3,540,283,246		53,621,499		0
Robert W. Pittman		3,538,381,863		55,522,882		0
Franklin D. Raines		3,518,055,358		75,849,387		0
R.E. Turner		3,539,422,574		54,482,171		0
Francis T. Vincent, Jr.		3,518,011,353		75,893,392		0

(ii) Approval of the appointment of Ernst & Young LLP as independent auditors of the Company for 2002:


Votes For	Votes Against	Abstentions	Broker Non-Votes
3,444,310,213	125,787,620	20,340,714	39,877

(iii) Stockholder proposal regarding China business principles:


Votes For	Votes Against	Abstentions	Broker Non-Votes
163,652,653	2,252,456,926	212,528,294	961,840,551

Item 5. Other Information.

Reference is made to the motion filed on March 19, 2002 by Liberty Media Corporation (“Liberty Media”) with the Federal Trade Commission (“FTC”) regarding the consent decree (the “Turner Consent Decree”) described on page 26 of the 2001 Form 10-K. On July 17, 2002, the FTC rejected Liberty Media’s motion to reopen the Turner Consent Decree and to modify it to eliminate the stock ownership and voting restrictions with respect to Liberty Media.

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 .

	Item #	Description	Date
(i)	5	Reporting entry into a Letter Agreement to restructure the Time Warner Entertainment- Advance/Newhouse Partnership	June 24, 2002
(ii)	5	Reporting entry into two long-term revolving credit facilities	July 8, 2002

AOL TIME WARNER INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, each of the registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		AOL TIME WARNER INC. (Registrant)
		By:	/s/ Wayne H. Pace

		Name:	Wayne H. Pace
		Title:	Executive Vice President and Chief Financial Officer

Dated: August 14, 2002

EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K

	Exhibit No.		Description of Exhibit

	3.		By-laws of the Company as of July 18, 2002.

	10.1		Master Transaction Agreement, dated as of August 1, 2002, by and among Time Warner Entertainment-Advance/Newhouse Partnership, (“TWEAN”), Time Warner Entertainment Company, L.P. (“TWE”), Paragon Communications (“Paragon”), and Advance/Newhouse Partnership (“Advance/Newhouse”).

	10.2		Second Amended and Restated Partnership Agreement, dated as of August 1, 2002, by and among TWEAN, TWE and Paragon.

	10.3		$6 Billion Five-Year Revolving Credit Agreement, dated as of July 8, 2002, among AOL Time Warner Inc., Time Warner Entertainment Company, L.P., Time Warner Entertainment-Advance/Newhouse Partnership, AOL Time Warner Finance Ireland, as Borrowers, the Lenders party thereto from time to time, JPMorgan Chase Bank, as Administrative Agent, Bank of America, N.A. and Citibank, N.A., as Co-Syndication Agents, and ABN AMRO Bank N.V. and BNP Paribas, as Co-Documentation Agents, with associated Guarantees (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated July 8, 2002 (the “July 2002 Form 8-K”)).

	10.4		$4 Billion 364-Day Revolving Credit Agreement, dated as of July 8, 2002, among AOL Time Warner Inc., Time Warner Entertainment Company, L.P., Time Warner Entertainment-Advance/Newhouse Partnership, AOL Time Warner Finance Ireland, as Borrowers, the Lenders party thereto from time to time, JPMorgan Chase Bank, as Administrative Agent, Bank of America, N.A. and Citibank, N.A., as Co-Syndication Agents, and ABN AMRO Bank N.V. and BNP Paribas, as Co-Documentation Agents, with associated Guarantees (incorporated herein by reference to Exhibit 99.2 to the July 2002 Form 8-K).

	10.5		Letter Agreement dated July 18, 2002 between AOL Time Warner Inc. and Robert W. Pittman.

EX-3 3 ex3.txt EXHIBIT 3 EXHIBIT 3 FILED COPY AOL TIME WARNER INC. BY-LAWS ARTICLE I Offices SECTION 1. Registered Office. The registered office of AOL TIME WARNER INC. (hereinafter called the "Corporation") in the State of Delaware shall be at 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801, and the registered agent shall be The Corporation Trust Company, or such other office or agent as the Board of Directors of the Corporation (the "Board") shall from time to time select. SECTION 2. Other Offices. The Corporation may also have an office or offices, and keep the books and records of the Corporation, except as may otherwise be required by law, at such other place or places, either within or without the State of Delaware, as the Board may from time to time determine or the business of the Corporation may require. ARTICLE II Meetings of Stockholders SECTION 1. Place of Meeting. All meetings of the stockholders of the Corporation (the "stockholders") shall be at a place to be determined by the Board of Directors. SECTION 2. Annual Meetings. The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on such date and at such hour as shall from time to time be fixed by the Board. Any previously scheduled annual meeting of the stockholders may be postponed by action of the Board taken prior to the time previously scheduled for such annual meeting of the stockholders. SECTION 3. Special Meetings. Except as otherwise required by law or the Restated Certificate of Incorporation of the Corporation (the "Certificate") and subject to the rights of the holders of any series of Preferred Stock or Series Common Stock or any class or series of stock having a preference over the Common Stock as to dividends or upon dissolution, liquidation or winding up, special meetings of the stockholders for any purpose or purposes may be called by the Chief Executive Officer or a majority of the entire Board. Only such business as is specified in the notice of any special meeting of the stockholders shall come before such meeting. SECTION 4. Notice of Meetings. Except as otherwise provided by law, notice of each meeting of the stockholders, whether annual or special, shall be given not less than 10 days nor more than 60 days before the date of the meeting to each stockholder of record entitled to notice of the meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. Each such notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Notice of any meeting of the stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy without protesting, prior to or at the commencement of the meeting, the lack of proper notice to such stockholder, or who shall waive notice thereof as provided in Article X of these By-laws. Notice of adjournment of a meeting of the stockholders need not be given if the time and place to which it is adjourned are announced at such meeting, unless the adjournment is for more than 30 days or, after adjournment, a new record date is fixed for the adjourned meeting. SECTION 5. Quorum. Except as otherwise provided by law or by the Certificate, the holders of a majority of the votes entitled to be cast by the stockholders entitled to vote generally, present in person or by proxy, shall constitute a quorum at any meeting of the stockholders; provided, however, that in the case of any vote to be taken by classes or series, the holders of a majority of the votes entitled to be cast by the stockholders of a particular class or series, present in person or by proxy, shall constitute a quorum of such class or series. SECTION 6. Adjournments. The chairman of the meeting or the holders of a majority of the votes entitled to be cast by the stockholders who are present in person or by proxy may adjourn the meeting from time to time whether or not a quorum is present. In the event that a quorum does not exist with respect to any vote to be taken by a particular class or series, the chairman of the meeting or the holders of a majority of the votes entitled to be cast by the stockholders of such class or series who are present in person or by proxy may adjourn the meeting with respect to the vote(s) to be taken by such class or series. At any such adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 7. Order of Business. At each meeting of the stockholders, the Chairman of the Board or, in the absence of the Chairman of the Board, the Chief Executive Officer or, in the absence of the Chairman of the Board and the Chief Executive Officer, such person as shall be selected by the Board shall act as chairman of the meeting. The order of business at each such meeting shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the opening and closing of the voting polls. At any annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the annual meeting (i) by or at the direction of the chairman of the meeting or (ii) by any stockholder who is a holder of record at the time of the giving of the notice provided for in this Section 7, who is entitled to vote at the meeting and who complies with the procedures set forth in this Section 7. For business properly to be brought before an annual meeting of stockholders by a stockholder, the stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation (the "Secretary"). To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days nor more than 120 days prior to the first anniversary of the date of the immediately preceding annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the stockholder to be timely must be so delivered or received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made; provided, further, that for the purpose of calculating the timeliness of stockholder notices for the 2001 annual meeting of stockholders, the date of the immediately preceding annual meeting shall be deemed to be May 18, 2000. To be in proper written form, a stockholder's notice to the Secretary shall set forth in writing as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business; (iii) the class or series and number of shares of the Corporation which are beneficially owned by the stockholder; (iv) any material interest of the stockholder in such business; and (v) if the stockholder intends to solicit proxies in support of such stockholder's proposal, a representation to that effect. The foregoing notice requirements shall be deemed satisfied by a stockholder if the stockholder has notified the Corporation of his or her intention to present a proposal at an annual meeting and such stockholder's proposal has been included in a proxy statement that has been prepared by management of the Corporation to solicit proxies for such annual meeting; provided, however, that if such stockholder does not appear or send a qualified representative to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 7. The chairman of an annual meeting may refuse to permit any business to be brought before an annual meeting which fails to comply with the foregoing procedures or, in the case of a stockholder proposal, if the stockholder solicits proxies in support of such stockholder's proposal without having made the representation required by clause (v) of the third preceding sentence. SECTION 8. List of Stockholders. It shall be the duty of the Secretary or other officer who has charge of the stock ledger to prepare and make, at least 10 days before each meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in such stockholder's name. Such list shall be produced and kept available at the times and places required by law. SECTION 9. Voting. Except as otherwise provided by law or by the Certificate, each stockholder of record of any series of Preferred Stock or Series Common Stock shall be entitled at each meeting of the stockholders to such number of votes, if any, for each share of such stock as may be fixed in the Certificate or in the resolution or resolutions adopted by the Board providing for the issuance of such stock, and each stockholder of record of Common Stock shall be entitled at each meeting of the stockholders to one vote for each share of such stock, in each case, registered in such stockholder's name on the books of the Corporation: (1) on the date fixed pursuant to Section 6 of Article VII of these By-laws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting; or (2) if no such record date shall have been so fixed, then at the close of business on the day next preceding the day on which notice of such meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. Each stockholder entitled to vote at any meeting of the stockholders may authorize not in excess of three persons to act for such stockholder by proxy. Any such proxy shall be delivered to the secretary of such meeting at or prior to the time designated for holding such meeting, but in any event not later than the time designated in the order of business for so delivering such proxies. No such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. At each meeting of the stockholders, all corporate actions to be taken by vote of the stockholders (except as otherwise required by law and except as otherwise provided in the Certificate or these By-laws) shall be authorized by a majority of the votes cast by the stockholders entitled to vote thereon who are present in person or represented by proxy, and where a separate vote by class or series is required, a majority of the votes cast by the stockholders of such class or series who are present in person or represented by proxy shall be the act of such class or series. Unless required by law or determined by the chairman of the meeting to be advisable, the vote on any matter, including the election of directors, need not be by written ballot. SECTION 10. Inspectors. The chairman of the meeting shall appoint two or more inspectors to act at any meeting of the stockholders. Such inspectors shall perform such duties as shall be required by law or specified by the chairman of the meeting. Inspectors need not be stockholders. No director or nominee for the office of director shall be appointed such inspector. SECTION 11. Public Announcements. For the purpose of Section 7 of this Article II and Section 3 of Article III, "public announcement" shall mean disclosure (i) in a press release reported by the Dow Jones News Service, Reuters Information Service or any similar or successor news wire service or (ii) in a communication distributed generally to stockholders and in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934 or any successor provisions thereto. ARTICLE III Board of Directors SECTION 1. General Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate directed or required to be exercised or done by the stockholders. SECTION 2. Number, Qualification and Election. Except as otherwise fixed by or pursuant to the provisions of Article IV of the Certificate relating to the rights of the holders of any series of Preferred Stock or Series Common Stock or any class or series of stock having preference over the Common Stock as to dividends or upon dissolution, liquidation or winding up, subject to Section 15 of this Article III, the number of directors constituting the Whole Board shall be determined from time to time by the Board. The term "Whole Board" shall mean the total number of authorized directors, whether or not there exist any vacancies or unfilled previously authorized directorships. The directors, other than those who may be elected by the holders of shares of any series of Preferred Stock or Series Common Stock or any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or upon dissolution, liquidation or winding up pursuant to the terms of Article IV of the Certificate or any resolution or resolutions providing for the issuance of such stock adopted by the Board, shall be elected by the stockholders entitled to vote thereon at each annual meeting of the stockholders, and shall hold office until the next annual meeting of the stockholders and until each of their successors shall have been duly elected and qualified. Each director shall be at least 21 years of age. Directors need not be stockholders of the Corporation. In any election of directors, the persons receiving a plurality of the votes cast, up to the number of directors to be elected in such election, shall be deemed elected. A majority of the members of the Board shall be persons determined by the Board to be eligible to be classified as independent directors. In its determination of a director's eligibility to be classified as an independent director pursuant to this Section 2, the Board shall consider, among such other factors as it may in any case deem relevant, that the director: (i) has not been employed by the Corporation as an executive officer within the past three years; (ii) is not a paid adviser or consultant to the Corporation and derives no financial benefit from any entity as a result of advice or consultancy provided to the Corporation by such entity; (iii) is not an executive officer, director or significant stockholder of a significant customer or supplier of the Corporation; (iv) has no personal services contract with the Corporation; (v) is not an executive officer or director of a tax-exempt entity receiving a significant part of its annual contributions from the Corporation; (vi) is not a member of the immediate family of any director who is not considered an independent director; and (vii) is free of any other relationship that would interfere with the exercise of independent judgment by such director. SECTION 3. Notification of Nominations. Subject to the rights of the holders of any series of Preferred Stock or Series Common Stock or any class or series of stock having a preference over the Common Stock as to dividends or upon dissolution, liquidation or winding up, nominations for the election of directors may be made by the Board or by any stockholder who is a stockholder of record at the time of giving of the notice of nomination provided for in this Section 3 and who is entitled to vote for the election of directors. Any stockholder of record entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if timely written notice of such stockholder's intent to make such nomination is given, either by personal delivery or by United States mail, postage prepaid, to the Secretary. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at an annual meeting of the stockholders, not less than 90 days nor more than 120 days prior to the first anniversary of the date of the immediately preceding annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the stockholder to be timely must be so delivered or received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made; provided, further, that for the purpose of calculating the timeliness of stockholder notices for the 2001 annual meeting of stockholders, the date of the immediately preceding annual meeting shall be deemed to be May 18, 2000 and (ii) with respect to an election to be held at a special meeting of the stockholders for the election of directors, not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees to be elected at such meeting. Each such notice shall set forth: (a) the name and address, as they appear on the Corporation's books, of the stockholder who intends to make the nomination and the name and address of the person or persons to be nominated; (b) the class or series and numbers of shares of the Corporation which are beneficially owned by the stockholder; (c) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote in the election of directors and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (d) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (e) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board; (f) the executed written consent of each nominee to serve as a director of the Corporation if so elected; and (g) if the stockholder intends to solicit proxies in support of such stockholder's nominee(s), a representation to that effect. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure or if the stockholder solicits proxies in favor of such stockholder's nominee(s) without having made the representations required by the immediately preceding sentence. Only such persons who are nominated in accordance with the procedures set forth in this Section 3 shall be eligible to serve as directors of the Corporation. Notwithstanding anything in the immediately preceding paragraph of this Section 3 to the contrary, in the event that the number of directors to be elected to the Board at an annual meeting of the stockholders is increased and there is no public announcement naming all of the nominees for directors or specifying the size of the increased Board made by the Corporation at least 90 days prior to the first anniversary of the date of the immediately preceding annual meeting, a stockholder's notice required by this Section 3 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to or mailed to and received by the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. SECTION 4. Quorum and Manner of Acting. Except as otherwise provided by law, the Certificate or these By-laws, a majority of the Whole Board shall constitute a quorum for the transaction of business at any meeting of the Board, and, except as so provided, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. The chairman of the meeting or a majority of the directors present may adjourn the meeting to another time and place whether or not a quorum is present. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 5. Place of Meeting. Subject to Sections 6 and 7 of this Article III, the Board may hold its meetings at such place or places within or without the State of Delaware as the Board may from time to time determine or as shall be specified or fixed in the respective notices or waivers of notice thereof. SECTION 6. Regular Meetings. No fewer than six regular meetings per year of the Board shall be held at such times as the Board shall from time to time by resolution determine, such meetings to be held seriatim (sequentially) in New York City and Northern Virginia, or at such other locations as the Board may determine. If any day fixed for a regular meeting shall be a legal holiday under the laws of the place where the meeting is to be held, the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day. SECTION 7. Special Meetings. Special meetings of the Board shall be held whenever called by the Chairman of the Board, the Chief Executive Officer or by a majority of the non-employee directors, and shall be held at such place, on such date and at such time as he or they, as applicable, shall fix. SECTION 8. Notice of Meetings. Notice of regular meetings of the Board or of any adjourned meeting thereof need not be given. Notice of each special meeting of the Board shall be given by overnight delivery service or mailed to each director, in either case addressed to such director at such director's residence or usual place of business, at least two days before the day on which the meeting is to be held or shall be sent to such director at such place by telecopy or by electronic transmission or shall be given personally or by telephone, not later than the day before the meeting is to be held, but notice need not be given to any director who shall, either before or after the meeting, submit a waiver of such notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to such director. Unless otherwise required by these By-laws, every such notice shall state the time and place but need not state the purpose of the meeting. SECTION 9. Rules and Regulations. The Board may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate or these By-laws for the conduct of its meetings and management of the affairs of the Corporation as the Board may deem proper. SECTION 10. Participation in Meeting by Means of Communications Equipment. Any one or more members of the Board or any committee thereof may participate in any meeting of the Board or of any such committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other or as otherwise permitted by law, and such participation in a meeting shall constitute presence in person at such meeting. SECTION 11. Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting if all of the members of the Board or of any such committee consent thereto in writing or as otherwise permitted by law and, if required by law, the writing or writings are filed with the minutes or proceedings of the Board or of such committee. SECTION 12. Resignations. Any director of the Corporation may at any time resign by giving written notice to the Board, the Chairman of the Board, the Chief Executive Officer or the Secretary. Such resignation shall take effect at the time specified therein or, if the time be not specified therein, upon receipt thereof; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 13. Vacancies. Subject to the rights of the holders of any series of Preferred Stock or Series Common Stock or any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or upon dissolution, liquidation or winding up, any vacancies on the Board resulting from death, resignation, removal or other cause shall only be filled by the Board, and not by the stockholders, by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board, or by a sole remaining director, and newly created directorships resulting from any increase in the number of directors, which increase shall be subject to Section 15 of this Article III, shall only be filled by the Board, or if not so filled, by the stockholders at the next annual meeting thereof or at a special meeting called for that purpose in accordance with Section 3 of Article II of these By-laws. Any director elected in accordance with the preceding sentence of this Section 13 shall hold office until the next annual meeting of the stockholders and until such director's successor shall have been elected and qualified. SECTION 14. Compensation. Each director, in consideration of such person serving as a director, shall be entitled to receive from the Corporation such amount per annum and such fees (payable in cash or stock-based compensation) for attendance at meetings of the Board or of committees of the Board, or both, as the Board shall from time to time determine. In addition, each director shall be entitled to receive from the Corporation reimbursement for the reasonable expenses incurred by such person in connection with the performance of such person's duties as a director. Nothing contained in this Section 14 shall preclude any director from serving the Corporation or any of its subsidiaries in any other capacity and receiving compensation therefor. SECTION 15. Certain Modifications. Notwithstanding anything to the contrary contained in these By-laws, the following actions taken either directly or indirectly by the Board shall require the affirmative vote of not less than 75% of the Whole Board: (i) any change in the size of the Board; and (ii) any proposal to amend these By-laws to be submitted to the stockholders of the Corporation by the Board. ARTICLE IV Committees of the Board of Directors SECTION 1. Establishment of Committees of the Board of Directors; Election of Members of Committees of the Board of Directors; Functions of Committees of the Board of Directors. (a) The Corporation shall have such committees of the Board as the Board shall determine from time to time in accordance with this Section 1 of Article IV, including the following committees of the Board with the following powers and authority: the nominating and governance committee, the audit and finance committee, the compensation committee, the values and human development committee and the strategy committee. (b) The nominating and governance committee shall have the following powers and authority: (i) evaluating and recommending director candidates to the Board, (ii) assessing Board performance not less frequently than every three years, (iii) recommending director compensation and benefits policies for the Board, (iv) reviewing individual director performance as issues arise, (v) evaluating and recommending to the Board candidates for Chief Executive Officer, (vi) reviewing and recommending to the Board changes to the size and composition of the Board, (vii) periodically reviewing the Corporation's corporate governance profile and (viii) performing such other functions as the Board shall determine in accordance with this Section 1 of Article IV. None of the members of the nominating and governance committee shall be an officer or full-time employee of the Corporation or of any subsidiary or affiliate of the Corporation. (c) The audit and finance committee shall have the following powers and authority: (i) approving the appointment or removal of independent public accountants to audit the books of account, accounting procedures and financial statements of the Corporation and to perform such other duties from time to time as the audit and finance committee may prescribe, (ii) receiving the reports and comments of the Corporation's internal auditors and of the independent public accountants selected by the committee and taking such action with respect thereto as it deems appropriate, (iii) requesting the Corporation's consolidated subsidiaries and affiliated companies to employ independent public accountants to audit their respective books of account, accounting procedures and financial statements, (iv) requesting the independent public accountants to furnish to the compensation committee the certifications required under any present or future stock option, incentive compensation or employee benefit plan of the Corporation, (v) reviewing the adequacy of the Corporation's internal financial controls, (vi) reviewing the accounting principles employed in the Corporation's financial reporting, (vii) reviewing and making recommendations to the Board concerning the financial structure and financial condition of the Corporation and its subsidiaries, including annual budgets, long-term financial plans, corporate borrowings, investments, capital expenditures, long-term commitments and the issuance of stock, (viii) approving such matters that are consistent with the general financial policies and direction from time to time determined by the Board and (ix) performing such other functions as the Board shall determine in accordance with this Section 1 of Article IV. The audit and finance committee shall also have the powers and authority set forth in any audit and finance committee charter adopted by the Board in accordance with this Section 1 of Article IV as may from time to time be required by any rule or regulation to which the Corporation is subject. None of the members of the audit and finance committee shall be an officer or full-time employee of the Corporation or of any subsidiary or affiliate of the Corporation. (d) The compensation committee shall have the following powers and authority: (i) determining and fixing the compensation for all senior officers of the Corporation and its subsidiaries and divisions that the compensation committee shall from time to time consider appropriate, as well as all employees of the Corporation compensated at a rate in excess of such amount per annum as may be fixed or determined from time to time by the Board, (ii) performing the duties of the committees of the Board provided for in any present or future stock option, restricted stock, incentive compensation or employee benefit plan of the Corporation and administering the stock option, restricted stock and stock incentive plans of the Corporation, (iii) delegating, to the extent permitted by law and to the extent it deems appropriate, any of its powers in connection with the administration of the stock option, stock incentive, restricted stock plans and other employee benefit plans of the Corporation, (iv) reviewing the operations of and policies pertaining to any present or future stock option, incentive compensation or employee benefit plan of the Corporation that the compensation committee shall from time to time consider appropriate and (v) performing such other functions as the Board shall determine in accordance with this Section 1 of Article IV. None of the members of the compensation committee shall be an officer or full-time employee of the Corporation or of any subsidiary or affiliate of the Corporation. (e) The values and human development committee shall have the following powers and authority: (i) developing and articulating the Corporation's core values, commitments and social responsibilities, (ii) developing strategies for ensuring the Corporation's involvement in the communities in which it does business, (iii) establishing a strategy for developing the Corporation's human resources and leadership for the future, (iv) finding practical ways to increase workforce diversity at all levels and to evaluate the Corporation's performance in advancing the goal of greater workforce diversity; (v) monitoring and measuring the Corporation's progress in achieving and implementing its goals in the foregoing areas; and (vi) performing such other functions as the Board shall determine in accordance with this Section 1 of Article IV. (f) The strategy committee shall have the following powers and authority: (i) reviewing and making recommendations to the Board concerning the Corporation's strategic plan; (ii) monitoring the Corporation's progress in implementing its strategic plan; (iii) reviewing and making recommendations to the Board concerning the Corporation's annual budget in light of the strategic plan; (iv) receiving reports from management regarding developments and opportunities affecting the Corporation's strategy; (v) reviewing and making recommendations to the Board concerning significant transactions in terms of their effect on the Corporation's strategy; and (vi) performing such other functions as the Board shall determine in accordance with this Section 1 of Article IV. (g) Any modification to the powers and authority of any committee of the Board shall require the affirmative vote of not less than 75% of the Whole Board. (h) In addition, the Board may, with the affirmative vote of not less than 75% of the Whole Board and in accordance with and subject to the General Corporation Law of the State of Delaware (the "DGCL"), from time to time establish additional committees of the Board to exercise such powers and authorities of the Board, and to perform such other functions, as the Board may from time to time determine. (i) The Board may remove a director from a committee, change the size of any committee or terminate any committee or change the chairmanship of a committee only with the affirmative vote of not less than 75% of the Whole Board. (j) The Board may designate one or more directors as new members of any committee to fill any vacancy on a committee and to fill a vacant chairmanship of a committee occurring as a result of a member or chairman leaving the committee, whether through death, resignation, removal or otherwise; provided that any such designation or any designation by the Board of a director as an alternate member of any committee in accordance with Section 141(c)(2) of the DGCL may only be made with the affirmative vote of not less than 75% of the Whole Board. SECTION 2. Procedure; Meetings; Quorum. Regular meetings of committees of the Board, of which no notice shall be necessary, may be held at such times and places as shall be fixed by resolution adopted by a majority of the total number of authorized committee members, whether or not there exist any vacancies or unfilled previously authorized committee seats. Special meetings of any committee of the Board shall be called at the request of any member thereof. Notice of each special meeting of any committee of the Board shall be sent by overnight delivery service, or mailed to each member thereof, in either case addressed to such member at such member's residence or usual place of business, at least two days before the day on which the meeting is to be held or shall be sent to such member at such place by telecopy or by electronic transmission or be given personally or by telephone, not later than the day before the meeting is to be held, but notice need not be given to any member who shall, either before or after the meeting, submit a waiver of such notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of such notice to such member. Unless otherwise required by these By-laws, every such notice shall state the time and place but need not state the purpose of such meeting. Any special meeting of any committee of the Board shall be a legal meeting without any notice thereof having been given, if all the members thereof shall be present thereat and no member shall protest the lack of notice to such member. Notice of any adjourned meeting of any committee of the Board need not be given. Any committee of the Board may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate or these By-laws for the conduct of its meetings as such committee of the Board may deem proper. A majority of the authorized members of any committee of the Board shall constitute a quorum for the transaction of business at any meeting, and the vote of a majority of the members thereof present at any meeting at which a quorum is present shall be the act of such committee. Each committee of the Board shall keep written minutes of its proceedings and shall report on such proceedings to the Board. ARTICLE V Officers SECTION 1. Number; Term of Office. The officers of the Corporation shall be elected by the Board and shall consist of: a Chairman of the Board, a Chief Executive Officer, a Chief Operating Officer, a Chief Financial Officer and one or more Vice Chairmen and Vice Presidents (including, without limitation, Assistant, Executive, Senior and Group Vice Presidents) and a Treasurer, Secretary and Controller and such other officers or agents with such titles and such duties as the Board may from time to time determine, each to have such authority, functions or duties as in these By-laws provided or as the Board may from time to time determine, and each to hold office for such term as may be prescribed by the Board and until such person's successor shall have been chosen and shall qualify, or until such person's death or resignation, or until such person's removal in the manner hereinafter provided. The Chairman of the Board, the Chief Executive Officer and the Vice Chairmen shall be elected from among the directors. One person may hold the offices and perform the duties of any two or more of said officers; provided, however, that no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, the Certificate or these By- laws to be executed, acknowledged or verified by two or more officers. The Board may require any officer or agent to give security for the faithful performance of such person's duties. SECTION 2. Removal. Subject to Section 14 of this Article V, any officer may be removed, either with or without cause, by the Board at any meeting thereof called for the purpose or by any superior officer upon whom such power may be conferred by the Board. SECTION 3. Resignation. Any officer may resign at any time by giving notice to the Board, the Chief Executive Officer or the Secretary. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 4. Chairman of the Board. The Chairman of the Board shall be an officer of the Corporation, subject to the control of the Board, and shall report directly to the Board. The Chairman of the Board shall play an active role in helping to build and lead the Corporation, working closely with the Chief Executive Officer to set the Corporation's strategy, and shall be the co-spokesman for the Corporation along with the Chief Executive Officer. SECTION 5. Chief Executive Officer. The Chief Executive Officer shall have general supervision and direction of the business and affairs of the Corporation, subject to the control of the Board and the provisions of Section 4 of this Article V, and shall report directly to the Board. The Chief Executive Officer shall, if present and in the absence of the Chairman of the Board, preside at meetings of the stockholders and of the Board. SECTION 6. Chief Operating Officer. The Chief Operating Officer shall perform such senior duties in connection with the operations of the Corporation as the Board or the Chief Executive Officer shall from time to time determine, and shall report directly to the Chief Executive Officer. The Chief Operating Officer shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as may be agreed with the Chief Executive Officer or as the Board may from time to time determine. SECTION 7. Vice Chairmen. Any Vice Chairman shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine. SECTION 8. Chief Financial Officer. The Chief Financial Officer shall perform all the powers and duties of the office of the chief financial officer and in general have overall supervision of the financial operations of the Corporation. The Chief Financial Officer shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine. The Chief Financial Officer shall report directly to the Chief Executive Officer. SECTION 9. Vice Presidents. Any Vice President shall have such powers and duties as shall be prescribed by his superior officer or the Board. A Vice President shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine. A Vice President need not be an officer of the Corporation and shall not be deemed an officer of the Corporation unless elected by the Board. SECTION 10. Treasurer. The Treasurer, if one shall have been elected, shall supervise and be responsible for all the funds and securities of the Corporation; the deposit of all moneys and other valuables to the credit of the Corporation in depositories of the Corporation; borrowings and compliance with the provisions of all indentures, agreements and instruments governing such borrowings to which the Corporation is a party; the disbursement of funds of the Corporation and the investment of its funds; and in general shall perform all of the duties incident to the office of the Treasurer. The Treasurer shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine. SECTION 11. Controller. The Controller shall be the chief accounting officer of the Corporation. The Controller shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer, the Chief Financial Officer or as the Board may from time to time determine. SECTION 12. Secretary. It shall be the duty of the Secretary to act as secretary at all meetings of the Board, of the committees of the Board and of the stockholders and to record the proceedings of such meetings in a book or books to be kept for that purpose; the Secretary shall see that all notices required to be given by the Corporation are duly given and served; the Secretary shall be custodian of the seal of the Corporation and shall affix the seal or cause it to be affixed to all certificates of stock of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these By-laws; the Secretary shall have charge of the books, records and papers of the Corporation and shall see that the reports, statements and other documents required by law to be kept and filed are properly kept and filed; and in general shall perform all of the duties incident to the office of Secretary. The Secretary shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine. SECTION 13. Assistant Treasurers, Assistant Controllers and Assistant Secretaries. Any Assistant Treasurers, Assistant Controllers and Assistant Secretaries shall perform such duties as shall be assigned to them by the Board or by the Treasurer, Controller or Secretary, respectively,or by the Chief Executive Officer. An Assistant Treasurer, Assistant Controller or Assistant Secretary need not be an officer of the Corporation and shall not be deemed an officer of the Corporation unless elected by the Board. SECTION 14. Certain Actions. Notwithstanding anything to the contrary contained in these By-laws, until December 31, 2003 the removal of Stephen M. Case from the office of Chairman of the Board, or any modification to the role, duties, authority or reporting line of the Chairman of the Board, shall require the affirmative vote of 75% of the Whole Board. From and after the end of the period set forth in the preceding sentence, any of the actions set forth in the immediately preceding sentence may be taken upon the affirmative vote of the number of directors which shall constitute, under the terms of these By-laws, the action of the Board. SECTION 15. Additional Matters. The Chairman of the Board, the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer of the Corporation shall have the authority to designate employees of the Corporation to have the title of Vice President, Assistant Vice President, Assistant Treasurer, Assistant Controller or Assistant Secretary. Any employee so designated shall have the powers and duties determined by the officer making such designation. The persons upon whom such titles are conferred shall not be deemed officers of the Corporation unless elected by the Board. ARTICLE VI Indemnification SECTION 1. Right to Indemnification. The Corporation, to the fullest extent permitted or required by the DGCL or other applicable law, as the same exists or may hereafter be amended (but, in the case of any such amendment and unless applicable law otherwise requires, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), shall indemnify and hold harmless any person who is or was a director or officer of the Corporation and who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, any action, suit or proceedings by or in the right of the Corporation to procure a judgment in its favor) (a "Proceeding") by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, any employee benefit plan) (a "Covered Entity") against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding; provided, however, that the foregoing shall not apply to a director or officer of the Corporation with respect to a Proceeding that was commenced by such director or officer unless the proceeding was commenced after a Change in Control (as hereinafter defined in Section 4(e) of this Article VI). Any director or officer of the Corporation entitled to indemnification as provided in this Section 1 is hereinafter called an "Indemnitee". Any right of an Indemnitee to indemnification shall be a contract right and shall include the right to receive, prior to the conclusion of any Proceeding, payment of any expenses incurred by the Indemnitee in connection with such Proceeding, consistent with the provisions of the DGCL or other applicable law, as the same exists or may hereafter be amended (but, in the case of any such amendment and unless applicable law otherwise requires, only to the extent that such amendment permits the Corporation to provide broader rights to payment of expenses than such law permitted the Corporation to provide prior to such amendment), and the other provisions of this Article VI. SECTION 2. Insurance, Contracts and Funding. The Corporation may purchase and maintain insurance to protect itself and any director, officer, employee or agent of the Corporation or of any Covered Entity against any expenses, judgments, fines and amounts paid in settlement as specified in Section 1 of this Article VI or incurred by any such director, officer, employee or agent in connection with any Proceeding referred to in Section 1 of this Article VI, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL. The Corporation may enter into contracts with any director, officer, employee or agent of the Corporation or of any Covered Entity in furtherance of the provisions of this Article VI and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided or authorized in this Article VI. SECTION 3. Indemnification Not Exclusive Right. The right of indemnification provided in this Article VI shall not be exclusive of any other rights to which an Indemnitee may otherwise be entitled, and the provisions of this Article VI shall inure to the benefit of the heirs and legal representatives of any Indemnitee under this Article VI and shall be applicable to Proceedings commenced or continuing after the adoption of this Article VI, whether arising from acts or omissions occurring before or after such adoption. SECTION 4. Advancement of Expenses; Procedures; Presumptions and Effect of Certain Proceedings; Remedies. In furtherance, but not in limitation of the foregoing provisions, the following procedures, presumptions and remedies shall apply with respect to advancement of expenses and the right to indemnification under this Article VI: (a) Advancement of Expenses. All reasonable expenses (including attorneys' fees) incurred by or on behalf of the Indemnitee in connection with any Proceeding shall be advanced to the Indemnitee by the Corporation within 20 days after the receipt by the Corporation of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the expenses incurred by the Indemnitee and, if required by law at the time of such advance, shall include or be accompanied by an undertaking by or on behalf of the Indemnitee to repay the amounts advanced if ultimately it should be determined that the Indemnitee is not entitled to be indemnified against such expenses pursuant to this Article VI. (b) Procedure for Determination of Entitlement to Indemnification. (i) To obtain indemnification under this Article VI, an Indemnitee shall submit to the Secretary a written request, including such documentation and information as is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification (the "Supporting Documentation"). The determination of the Indemnitee's entitlement to indemnification shall be made not later than 60 days after receipt by the Corporation of the written request for indemnification together with the Supporting Documentation. The Secretary shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification. (ii) The Indemnitee's entitlement to indemnification under this Article VI shall be determined in one of the following ways: (A) by a majority vote of the Disinterested Directors (as hereinafter defined in Section 4(e) of this Article VI), whether or not they constitute a quorum of the Board, or by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors; (B) by a written opinion of Independent Counsel (as hereinafter defined in Section 4(e) of this Article VI) if (x) a Change in Control shall have occurred and the Indemnitee so requests or (y) there are no Disinterested Directors or a majority of such Disinterested Directors so directs; (C) by the stockholders of the Corporation; or (D) as provided in Section 4(c) of this Article VI. (iii) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 4(b)(ii) of this Article VI, a majority of the Disinterested Directors shall select the Independent Counsel, but only an Independent Counsel to which the Indemnitee does not reasonably object; provided, however, that if a Change in Control shall have occurred, the Indemnitee shall select such Independent Counsel, but only an Independent Counsel to which a majority of the Disinterested Directors does not reasonably object. (c) Presumptions and Effect of Certain Proceedings. Except as otherwise expressly provided in this Article VI, if a Change in Control shall have occurred, the Indemnitee shall be presumed to be entitled to indemnification under this Article VI (with respect to actions or omissions occurring prior to such Change in Control) upon submission of a request for indemnification together with the Supporting Documentation in accordance with Section 4(b)(i) of this Article VI, and thereafter the Corporation shall have the burden of proof to overcome that presumption in reaching a contrary determination. In any event, if the person or persons empowered under Section 4(b) of this Article VI to determine entitlement to indemnification shall not have been appointed or shall not have made a determination within 60 days after receipt by the Corporation of the request therefor, together with the Supporting Documentation, the Indemnitee shall be deemed to be, and shall be, entitled to indemnification unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. The termination of any Proceeding described in Section 1 of this Article VI, or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal proceeding, that the Indemnitee had reasonable cause to believe that such conduct was unlawful. (d) Remedies of Indemnitee. (i) In the event that a determination is made pursuant to Section 4(b) of this Article VI that the Indemnitee is not entitled to indemnification under this Article VI, (A) the Indemnitee shall be entitled to seek an adjudication of entitlement to such indemnification either, at the Indemnitee's sole option, in (x) an appropriate court of the State of Delaware or any other court of competent jurisdiction or (y) an arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association; (B) any such judicial proceeding or arbitration shall be de novo and the Indemnitee shall not be prejudiced by reason of such adverse determination; and (C) if a Change in Control shall have occurred, in any such judicial proceeding or arbitration, the Corporation shall have the burden of proving that the Indemnitee is not entitled to indemnification under this Article VI (with respect to actions or omissions occurring prior to such Change in Control). (ii) If a determination shall have been made or deemed to have been made, pursuant to Section 4(b) or (c) of this Article VI, that the Indemnitee is entitled to indemnification, the Corporation shall be obligated to pay the amounts constituting such indemnification within five days after such determination has been made or deemed to have been made and shall be conclusively bound by such determination unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. In the event that (X) advancement of expenses is not timely made pursuant to Section 4(a) of this Article VI or (Y) payment of indemnification is not made within five days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to Section 4(b) or (c) of this Article VI, the Indemnitee shall be entitled to seek judicial enforcement of the Corporation's obligation to pay to the Indemnitee such advancement of expenses or indemnification. Notwithstanding the foregoing, the Corporation may bring an action, in an appropriate court in the State of Delaware or any other court of competent jurisdiction, contesting the right of the Indemnitee to receive indemnification hereunder due to the occurrence of an event described in sub-clause (A) or (B) of this clause (ii) (a "Disqualifying Event"); provided, however, that in any such action the Corporation shall have the burden of proving the occurrence of such Disqualifying Event. (iii) The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 4(d) that the procedures and presumptions of this Article VI are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Article VI. (iv) In the event that the Indemnitee, pursuant to this Section 4(d), seeks a judicial adjudication of or an award in arbitration to enforce rights under, or to recover damages for breach of, this Article VI, the Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any expenses actually and reasonably incurred by the Indemnitee if the Indemnitee prevails in such judicial adjudication or arbitration. If it shall be determined in such judicial adjudication or arbitration that the Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by the Indemnitee in connection with such judicial adjudication or arbitration shall be prorated accordingly. (e) Definitions. For purposes of this Article VI: (i) "Authorized Officer" means any one of the Chairman of the Board, the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, any Vice President or the Secretary of the Corporation. (ii) "Change in Control" means the occurrence of any of the following: (w) any merger or consolidation of the Corporation in which the Corporation is not the continuing or surviving corporation or pursuant to which shares of the Corporation's Common Stock would be converted into cash, securities or other property, other than a merger of the Corporation in which the holders of the Corporation's Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (x) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Corporation, or the liquidation or dissolution of the Corporation or (y) individuals who would constitute a majority of the members of the Board elected at any meeting of stockholders or by written consent (without regard to any members of the Board elected pursuant to the terms of any series of Preferred Stock) shall be elected to the Board and the election or the nomination for election by the stockholders of such directors was not approved by a vote of at least two-thirds of the directors in office immediately prior to such election. (iii) "Disinterested Director" means a director of the Corporation who is not or was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee. (iv) "Independent Counsel" means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent: (x) the Corporation or the Indemnitee in any matter material to either such party or (y) any other party to the Proceeding giving rise to a claim for indemnification under this Article VI. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing under the law of the State of Delaware, would have a conflict of interest in representing either the Corporation or the Indemnitee in an action to determine the Indemnitee's rights under this Article VI. SECTION 5. Severability. If any provision or provisions of this Article VI shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Article VI (including, without limitation, all portions of any paragraph of this Article VI containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Article VI (including, without limitation, all portions of any paragraph of this Article VI containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or enforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. SECTION 6. Indemnification of Employees Serving as Directors. The Corporation, to the fullest extent of the provisions of this Article VI with respect to the indemnification of directors and officers of the Corporation, shall indemnify any person who is or was an employee of the Corporation and who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed Proceeding by reason of the fact that such employee is or was serving (a) as a director of a corporation in which the Corporation had at the time of such service, directly or indirectly, a 50% or greater equity interest (a "Subsidiary Director") or (b) at the written request of an Authorized Officer, as a director of another corporation in which the Corporation had at the time of such service, directly or indirectly, a less than 50% equity interest (or no equity interest at all) or in a capacity equivalent to that of a director for any partnership, joint venture, trust or other enterprise (including, without limitation, any employee benefit plan) in which the Corporation has an interest (a "Requested Employee"), against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such Subsidiary Director or Requested Employee in connection with such Proceeding. The Corporation may also advance expenses incurred by any such Subsidiary Director or Requested Employee in connection with any such Proceeding, consistent with the provisions of this Article VI with respect to the advancement of expenses of directors and officers of the Corporation. SECTION 7. Indemnification of Employees and Agents. Notwithstanding any other provision or provisions of this Article VI, the Corporation, to the fullest extent of the provisions of this Article VI with respect to the indemnification of directors and officers of the Corporation, may indemnify any person other than a director or officer of the Corporation, a Subsidiary Director or a Requested Employee, who is or was an employee or agent of the Corporation and who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed Proceeding by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation or of a Covered Entity against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding. The Corporation may also advance expenses incurred by such employee or agent in connection with any such Proceeding, consistent with the provisions of this Article VI with respect to the advancement of expenses of directors and officers of the Corporation. ARTICLE VII Capital Stock SECTION 1. Certificates for Shares. The shares of stock of the Corporation shall be represented by certificates, or shall be uncertificated shares that may be evidenced by a book-entry system maintained by the registrar of such stock, or a combination of both. To the extent that shares are represented by certificates, such certificates whenever authorized by the Board, shall be in such form as shall be approved by the Board. The certificates representing shares of stock of each class shall be signed by, or in the name of, the Corporation by the Chairman of the Board and the Chief Executive Officer, or by any Vice President, and by the Secretary or any Assistant Secretary or the Treasurer or any Assistant Treasurer of the Corporation, and sealed with the seal of the Corporation, which may be a facsimile thereof. Any or all such signatures may be facsimiles if countersigned by a transfer agent or registrar. Although any officer, transfer agent or registrar whose manual or facsimile signature is affixed to such a certificate ceases to be such officer, transfer agent or registrar before such certificate has been issued, it may nevertheless be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were still such at the date of its issue. The stock ledger and blank share certificates shall be kept by the Secretary or by a transfer agent or by a registrar or by any other officer or agent designated by the Board. SECTION 2. Transfer of Shares. Transfers of shares of stock of each class of the Corporation shall be made only on the books of the Corporation upon authorization by the registered holder thereof, or by such holder's attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary or a transfer agent for such stock, if any, and if such shares are represented by a certificate, upon surrender of the certificate or certificates for such shares properly endorsed or accompanied by a duly executed stock transfer power (or by proper evidence of succession, assignment or authority to transfer) and the payment of any taxes thereon; provided, however, that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. The person in whose name shares are registered on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation; provided, however, that whenever any transfer of shares shall be made for collateral security and not absolutely, and written notice thereof shall be given to the Secretary or to such transfer agent, such fact shall be stated in the entry of the transfer. No transfer of shares shall be valid as against the Corporation, its stockholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred. SECTION 3. Registered Stockholders and Addresses of Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments a person registered on its records as the owner of shares of stock, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. Each stockholder shall designate to the Secretary or transfer agent of the Corporation an address at which notices of meetings and all other corporate notices may be given to such person, and, if any stockholder shall fail to designate such address, corporate notices may be given to such person by mail directed to such person at such person's post office address, if any, as the same appears on the stock record books of the Corporation or at such person's last known post office address. SECTION 4. Lost, Destroyed and Mutilated Certificates. The holder of any certificate representing any shares of stock of the Corporation shall immediately notify the Corporation of any loss, theft, destruction or mutilation of such certificate; the Corporation may issue to such holder a new certificate or certificates for shares, upon the surrender of the mutilated certificate or, in the case of loss, theft or destruction of the certificate, upon satisfactory proof of such loss, theft or destruction; the Board, or a committee designated thereby, or the transfer agents and registrars for the stock, may, in their discretion, require the owner of the lost, stolen or destroyed certificate, or such person's legal representative, to give the Corporation a bond in such sum and with such surety or sureties as they may direct to indemnify the Corporation and said transfer agents and registrars against any claim that may be made on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. SECTION 5. Regulations. The Board may make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificated or uncertificated shares of stock of each class and series of the Corporation and may make such rules and take such action as it may deem expedient concerning the issue of certificates in lieu of certificates claimed to have been lost, destroyed, stolen or mutilated. SECTION 6. Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than 60 days nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders entitled to notice of or to vote at a meeting of the stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. SECTION 7. Transfer Agents and Registrars. The Board may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. ARTICLE VIII Seal The Board shall approve a suitable corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation and shall be in the charge of the Secretary. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE IX Fiscal Year The fiscal year of the Corporation shall end on the 31st day of December in each year. ARTICLE X Waiver of Notice Whenever any notice whatsoever is required to be given by these By-laws, by the Certificate or by law, the person entitled thereto may, either before or after the meeting or other matter in respect of which such notice is to be given, waive such notice in writing or as otherwise permitted by law, which shall be filed with or entered upon the records of the meeting or the records kept with respect to such other matter, as the case may be, and in such event such notice need not be given to such person and such waiver shall be deemed equivalent to such notice. ARTICLE XI Amendments These By-laws may be altered, amended or repealed, in whole or in part, or new By-laws may be adopted by the stockholders or by the Board at any meeting thereof; provided, however, that notice of such alteration, amendment, repeal or adoption of new By-laws is contained in the notice of such meeting of the stockholders or in the notice of such meeting of the Board and, in the latter case, such notice is given not less than twenty-four hours prior to the meeting. Unless a higher percentage is required by the Certificate, all such amendments must be approved by either the holders of 80% or more of the combined voting power of the outstanding shares of all classes and series of capital stock of the Corporation entitled generally to vote in the election of directors of the Corporation, voting as a single class, or by a majority of the Board; provided, however, that, notwithstanding the foregoing, until December 31, 2003, the Board may not alter, amend or repeal, or adopt new By-laws in conflict with, or recommend approval by the stockholders of any alteration, amendment or repeal, or adoption of new By-laws in conflict with, in either case, (i) any provision of these By-laws which requires a 75% vote of the Whole Board for action to be taken thereunder or (ii) this Article XI, without the affirmative vote of not less than 75% of the Whole Board. ARTICLE XII Miscellaneous SECTION 1. Execution of Documents. The Board or any committee thereof shall designate the officers, employees and agents of the Corporation who shall have power to execute and deliver deeds, contracts, mortgages, bonds, debentures, notes, checks, drafts and other orders for the payment of money and other documents for and in the name of the Corporation and may authorize (including authority to redelegate) by written instrument to other officers, employees or agents of the Corporation. Such delegation may be by resolution or otherwise and the authority granted shall be general or confined to specific matters, all as the Board or any such committee may determine. In the absence of such designation referred to in the first sentence of this Section, the officers of the Corporation shall have such power so referred to, to the extent incident to the normal performance of their duties. SECTION 2. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation or otherwise as the Board or any committee thereof or any officer of the Corporation to whom power in respect of financial operations shall have been delegated by the Board or any such committee or in these By-laws shall select. SECTION 3. Checks. All checks, drafts and other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed on behalf of the Corporation in such manner as shall from time to time be determined by resolution of the Board or of any committee thereof or by any officer of the Corporation to whom power in respect of financial operations shall have been delegated by the Board or any such committee thereof or as set forth in these By-laws. SECTION 4. Proxies in Respect of Stock or Other Securities of Other Corporations. The Board or any committee thereof shall designate the officers of the Corporation who shall have authority from time to time to appoint an agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation or other entity, and to vote or consent in respect of such stock or securities; such designated officers may instruct the person or persons so appointed as to the manner of exercising such powers and rights; and such designated officers may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, such written proxies, powers of attorney or other instruments as they may deem necessary or proper in order that the Corporation may exercise its said powers and rights. SECTION 5. Subject to Law and Certificate of Incorporation. All powers, duties and responsibilities provided for in these By-laws, whether or not explicitly so qualified, are qualified by the provisions of the Certificate and applicable laws. EX-10 4 ex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 EXECUTIION COPY MASTER TRANSACTION AGREEMENT by and among Time Warner Entertainment - Advance/Newhouse Partnership, Time Warner Entertainment Company, L.P., Paragon Communications and Advance/Newhouse Partnership Dated as of August 1, 2002 TABLE OF CONTENTS

i 1.42. Selected Pool .............................................................4 1.43. Selected Subsidiary .......................................................5 1.44. Selection Date ............................................................5 1.45. Services Agreement ........................................................5 1.46. Subsidiary.................................................................5 1.47. System.....................................................................5 1.48. Third Amended and Restated Partnership Agreement ..........................5 1.49. Transaction Agreements.....................................................5 1.50. Transactions...............................................................5 1.51. TWE........................................................................5 1.52. TWE Parties ...............................................................5 1.53. TWEAN .....................................................................5 1.54. TWE Group .................................................................5 ARTICLE II THE EFFECTIVE DATE..................................................6 2.1. Second Amended and Restated Partnership Agreement..........................6 2.2. Guarantee Agreement........................................................6 2.3. Indemnity Agreement........................................................6 ARTICLE III THE DEBT CLOSING....................................................6 3.1. Refinancing................................................................6 3.2. Payments Being Made by Advance/Newhouse....................................6 3.3. Payments Being Made by TWE and to Paragon..................................9 3.4. Services Agreement........................................................10 3.5. Employee Matters Agreement................................................10 3.6. Third Amended and Restated Partnership Agreement..........................10 3.7. Intellectual Property Agreement...........................................11 3.8. Termination of Advance/Newhouse's Participation in Road Runner and TCP....11 3.9. Mutual Resolution of Claims...............................................11 ARTICLE IV THE CLOSING DATE...................................................12 4.1. Closing...................................................................12 4.2. Conditions to Closing.....................................................12 4.3. Closing Deliveries........................................................13 ARTICLE V COVENANTS AND OTHER MATTERS........................................13 5.1. Closing Efforts...........................................................13 5.2. FCC and Franchise Approvals and Other Material Third-Party Consents.......13 5.3. Regulatory Compliance.....................................................14 5.4. Further Assurances........................................................14 5.5. Disclaimer of Representations and Warranties..............................14

ii ARTICLE VI MISCELLANEOUS......................................................15 6.1. Counterparts; Entire Agreement............................................15 6.2. Governing Law.............................................................15 6.3. Assignability.............................................................15 6.4. Third Party Beneficiaries.................................................15 6.5. Notices...................................................................16 6.6. Severability..............................................................17 6.7. Expenses..................................................................17 6.8. Headings..................................................................17 6.9. Waivers of Default........................................................17 6.10. Specific Performance......................................................17 6.11. Amendments................................................................18 6.12. Interpretation............................................................18

EXHIBITS: Exhibit A: Second Amended and Restated Partnership Agreement Exhibit B: Guarantee Agreement Exhibit C: Indemnity Agreement Exhibit D: Debt Assumption Agreement Exhibit E: Terms of Services Agreement Exhibit F: Employee Matters Terms Exhibit G: Intellectual Property Agreement Exhibit H: Form of Contribution Agreement Exhibit I: Form of Amended and Restated Indemnity Agreement Exhibit J: Form of Management Agreement Schedule 1 Terminated Agreements Illustration A Illustration of Assumed Debt Annex A Description of Selected Pool iii MASTER TRANSACTION AGREEMENT THIS MASTER TRANSACTION AGREEMENT, dated as of August 1, 2002, is by and among Time Warner Entertainment - Advance/Newhouse Partnership, a New York general partnership ("TWEAN"), Time Warner Entertainment Company, L.P., a Delaware limited partnership and general partner of TWEAN ("TWE"), Paragon Communications, a Colorado general partnership and general partner of TWEAN ("Paragon"), and Advance/Newhouse Partnership, a New York general partnership and a general partner of TWEAN ("Advance/Newhouse"). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to them in Article I. WHEREAS, TWE, Paragon and Advance/Newhouse are party to the Amended and Restated Partnership Agreement of TWEAN, dated as of February 1, 2001, as amended by the First Amendment thereto, dated as of March 2, 2001 (the "Original Partnership Agreement"); WHEREAS, on June 24, 2002 TWE, Paragon and Advance/Newhouse entered into a letter agreement (including all exhibits, attachments and illustrations thereto, the "Letter Agreement"), which provides for, among other things, a restructuring of TWEAN; and WHEREAS, in accordance with the Letter Agreement, except as otherwise contemplated herein, the parties desire to set forth definitive agreements providing for the transactions contemplated in the Letter Agreement. NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows: ARTICLE I DEFINITIONS For the purpose of this Agreement the following terms shall have the following meanings: 1.1. Advance/Newhouse has the meaning set forth in the Preamble. 1.2. Advance/Newhouse Group means Advance/Newhouse and each of its Affiliates, which, for the avoidance of doubt, shall include the Selected Business but shall not include TWEAN. 1.3. Affiliate has the meaning ascribed thereto in the Partnership Agreement. 1.4. Agreement means this Master Transaction Agreement, including all of the Schedules, Annexes and Exhibits hereto. 1.5. Amended and Restated Indemnity Agreement has the meaning set forth in Section 4.3 hereto. 1.6. A/N Parties has the meaning set forth in Section 3.9 hereto. 1.7. ATW means AOL Time Warner Inc. 1.8. Closing has the meaning set forth in Section 4.1 hereto. 1.9. Closing Contribution means the Contribution described in clause (ii) of the definition of such term. 1.10. Closing Date has the meaning set forth in Section 4.1 hereto. 1.11. Contract means any contract, lease, agreement, covenant, indenture, note, security, instrument, arrangement, commitment or any other binding understanding, whether written or oral. 1.12. Contribution means one or more of the following (as applicable): (i) the conversion of Advance/Newhouse's Prior Partnership Units (as defined in and contemplated by the Partnership Agreement), (ii) the contributions of the Selected Business to the Selected Subsidiary pursuant to the Contribution Agreement and the other Transaction Agreements and (iii) the distribution of the Selected Business to Advance/Newhouse pursuant to Section 8.1 of the Partnership Agreement. 1.13. Contribution Agreement has the meaning set forth in Section 4.3 hereto. 1.14. Debt Assumption Agreement has the meaning set forth in Section 3.2. 1.15. Delayed Transfer Assets has the meaning ascribed such term in the Contribution Agreement. 1.16. Effective Date means the date hereof. 1.17. Effective Time means 12:01 a.m.on the Effective Date. 1.18. Employee Matters Agreement has the meaning set forth in Section 3.5 hereto. 1.19. Franchise means written "franchise" within the meaning of Section 602(8) of the Cable Communications Policy Act of 1984 (47 U.S.C. 'SS' 522(9)). 1.20. Franchising Authority has the meaning that term is given by Section 602(9) of the Cable Communications Policy Act of 1984 (47 U.S.C. 'SS' 522(10)). 1.21. Governmental Authority means any supranational, national, state, municipal or local government, political subdivision or other governmental department, 2 court, commission, board, bureau, agency, instrumentality, or other authority thereof, or any quasi-governmental or private body exercising any regulatory, taxing, importing or other governmental or quasi-governmental authority, whether domestic or foreign. 1.22. Guarantee Agreement has the meaning set forth in Section 2.2 hereto. 1.23. Indemnity Agreement has the meaning set forth in Section 2.3 hereto. 1.24. Insurance Policies means the insurance policies written by insurance carriers under which TWEAN or any of its Affiliates (or such Person's officers) is an insured party. 1.25. Insurance Proceeds means those monies: (a) received by an insured from an insurance carrier; or (b) paid by an insurance carrier on behalf of an insured; in any such case net of any premium adjustments specifically relating to the Insurance Policy under which the Insurance Proceeds are paid and only to the extent directly attributable to those Insurance Proceeds. 1.26. Intellectual Property Agreement has the meaning set forth in Section 3.7 hereto. 1.27. Law means any foreign or domestic law, statute, code, ordinance, rule, regulation, treaty, judicial decision, order, judgment, writ, stipulation, award, injunction or decree enacted, entered or promulgated by a Governmental Authority. 1.28. Letter Agreement has the meaning set forth in the Recitals. 1.29. Management Agreement has the meaning set forth in Section 4.3 hereto. 1.30. Original Partnership Agreement has the meaning set forth in the Recitals. 1.31. Paragon has the meaning set forth in the Preamble. 1.32. Parties means TWE, TWEAN, Paragon and Advance/Newhouse. 1.33. Partnership Agreement means the Second Amended and Restated Partnership Agreement until Closing and thereafter means the Third Amended and Restated Partnership Agreement. 3 1.34. Person means an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability company, a Governmental Authority or any other entity. 1.35. Refinancing Arrangements has the meaning set forth in Section 3.1 hereto. 1.36. Residual Business means TWEAN and all of the businesses, assets and liabilities of TWEAN (whether conducted or owned itself or through direct or indirect divisions, Subsidiaries, joint ventures or other investments), including, without limitation all of the assets and liabilities of TWEAN under the Transaction Agreements, or any of their predecessors or successors, other than the Selected Business (including, without limitation, any assets or liabilities of the Selected Business under the Transaction Agreements). For the avoidance of doubt, references to actions taken by, or to be taken by, the Residual Business shall mean that TWEAN will take such action solely on behalf of and with respect to the Residual Business. 1.37. Road Runner has the meaning set forth in Section 3.8 hereto. 1.38. Road Runner Affiliation Agreement has the meaning set forth in Section 3.8 hereto. 1.39. Road Runner Letter Agreement has the meaning set forth in Section 3.2 hereof. 1.40. Second Amended and Restated Partnership Agreement has the meaning set forth in Section 2.1 hereto. 1.41. Selected Business means (a) prior to the Closing, the Selected Pool and the assets and liabilities of the Selected Business under the Refinancing Arrangements and the Transaction Agreements, (b) on or following the Closing, the Selected Subsidiary and all of the businesses, assets and liabilities granted or contributed to, or otherwise assumed, by the Selected Subsidiary and the A/N Group pursuant to the Refinancing Arrangements and the Transaction Agreements, and including the Delayed Transfer Assets and the Free Cash Flow therefrom, if any, and (c) in the case of either clause (a) and (b), including any Assets (including cash) generated by the Selected Pool on or after the Effective Date, subject to any Liabilities incurred by the Selected Pool on or after the Effective Date. For the avoidance of doubt, references to actions taken by, or to be taken by, the Selected Business shall mean, prior to the Closing Date, that TWEAN or Advance/Newhouse will take such action solely on behalf of and with respect to the Selected Business as provided in the Partnership Agreement and, after the Closing Date, that the Selected Subsidiary will take such action on behalf of itself and any Delayed Transfer Assets. Following the Closing, references to the Selected Business shall be deemed to be references to the Selected Subsidiary and the Delayed Transfer Assets, including Free Cash Flow therefrom, if any. 1.42. Selected Pool has the meaning ascribed such term in Annex A hereto. 4 1.43. Selected Subsidiary means TWEAN Subsidiary, LLC, a Delaware limited liability company of which TWEAN is the sole member, which shall be deemed to include any "Delayed Transfer Assets" held by TWEAN for the benefit of TWEAN Subsidiary, LLC, and any Free Cash Flow therefrom, pursuant to the Contribution Agreement. 1.44. Selection Date means June 24, 2002. 1.45. Services Agreement has the meaning set forth in Section 3.4 hereto. 1.46. Subsidiary of any Person means any corporation or other organization, whether incorporated or unincorporated, of which at least a majority of the equity securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly, owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person that is not directly or indirectly wholly owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person. 1.47. System means a "cable television system" within the meaning of Section 602(7) of the Communications Act of 1934, as amended. 1.48. Third Amended and Restated Partnership Agreement has the meaning set forth in Section 3.6 hereto. 1.49. Transaction Agreements means this Agreement, the Partnership Agreement, the Guarantee Agreement, the Indemnity Agreement, the Debt Assumption Agreement, the Services Agreement, the Contribution Agreement, the Employee Matters Agreement, the Intellectual Property Agreement, the Management Agreement and the Amended and Restated Indemnity Agreement, and all other agreements and instruments delivered in connection therewith. 1.50. Transactions means the transactions contemplated to be consummated by the Transaction Agreements. 1.51. TWE has the meaning set forth in the Preamble. 1.52. TWE Parties has the meaning set forth in Section 3.9 hereto. 1.53. TWEAN has the meaning set forth in the Preamble. 1.54. TWE Group means TWE and each of its Affiliates, which, for the avoidance of doubt, shall include TWEAN but shall not include the Selected Business. 5 ARTICLE II THE EFFECTIVE DATE 2.1. Second Amended and Restated Partnership Agreement. Concurrently with the execution hereof, each of TWE and Paragon has duly executed and delivered to Advance/Newhouse, and Advance/Newhouse has duly executed and delivered to TWE and Paragon, the Second Amended and Restated Partnership Agreement attached hereto as Exhibit A (the "Second Amended and Restated Partnership Agreement"). 2.2. Guarantee Agreement. Concurrently with the execution hereof, Newhouse Programming Holdings Corp., Advance Publications, Inc. and Newhouse Broadcasting Corporation have each duly executed and delivered to TWE the Guarantee Agreement attached hereto as Exhibit B (the "Guarantee Agreement"). 2.3. Indemnity Agreement. Concurrently with the execution hereof, each of the Selected Business and Advance/Newhouse has duly executed and delivered to TWE, and the Residual Business and TWE has duly executed and delivered to Advance/Newhouse, the Indemnity Agreement attached hereto as Exhibit C (the "Indemnity Agreement"). ARTICLE III THE DEBT CLOSING 3.1. Refinancing. Concurrently with the execution hereof, the Advance/Newhouse Group is consummating its own stand-alone financings under one or more credit arrangements secured by the Selected Subsidiary and the Advance/Newhouse Group's rights in respect of the Selected Business (the "Refinancing Arrangements"). 3.2. Payments Being Made by Advance/Newhouse (a) Prior to or concurrently with the execution hereof, Advance/Newhouse shall pay cash to TWEAN (exclusively for the benefit of the Residual Business) by wire transfer of immediately available funds to an account previously designated by TWE: (i) an amount equal to $7,790,000, as payment for a tax contribution required of Advance/Newhouse in accordance with the Original Partnership Agreement for periods ending on or prior to the Effective Date; and (ii) an amount equal to the Unpaid Contribution Amounts (as defined below) in full satisfaction and discharge of its obligations ("Contribution Obligations) to pay the Second Advance/Newhouse Contribution Amount and the Fourth Advance/Newhouse Contribution Amount under and as defined in the Original Partnership Agreement. For purposes hereof "Unpaid Contribution Amounts" equals the sum of all accrued and unpaid principal and interest up to and including the Effective Date under the following promissory notes issued to secure such Contribution Obligations: (A) the promissory note in the aggregate principal amount of $15,042,000 in favor of TWEAN by Advance/Newhouse dated December 31, 1998; and 6 (B) the promissory note in the aggregate principal amount of $13,573,626 in favor of TWEAN by Advance/Newhouse dated February 1, 2001. Upon such payment of the Unpaid Contribution Amounts, such promissory notes shall be canceled. (b) Concurrently with the execution hereof, Advance/Newhouse has executed and delivered to TWEAN the Instrument of Debt Assumption attached hereto as Exhibit D (the "Debt Assumption Agreement"), pursuant to which it is assuming $777,511,000 principal amount of TWEAN's senior bank debt (such assumed debt, the "Assumed Debt"). (c) On the date hereof, immediately after assuming the Assumed Debt as provided in clause (b) of this Section 3.2, Advance/Newhouse shall satisfy and fully discharge all of the Assumed Debt by wiring cash in immediately available funds to the bank account as specified in the Debt Assumption Agreement. (d) Within 60 days following the Effective Date, TWE shall deliver a notice (the "Debt Notice") to Advance/Newhouse setting forth the actual amount (the "Actual Assumption Amount"), together with the calculations thereof, of the sum of the following: (i) one-third of TWEAN's Net Debt (as defined below); plus (ii) $190 million; plus (iii) 33-1/3% multiplied by the sum of (I) the aggregate Priority Return accrued and unpaid as of the Effective Date with respect to the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units, respectively, held by Paragon and TWE and (II) the aggregate number of Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units, respectively, held by Paragon and TWE multiplied by $1000; minus (iv) $51.5 million; minus (v) interest accrued on the amount set forth in clause (iv) of this Section 3.2(d) each applicable date the Partnership funded the indemnified obligations referenced in Sections 8 and 9 of that certain letter agreement, dated September 6, 2000, between Advance/Newhouse, TWE and TWEAN (the "Road Runner Letter Agreement") to, and including, the Effective Date at a rate equal to the rate charged by TWEAN's senior bank lenders on the Effective Date, or, if TWEAN has no senior bank debt on the Effective Date, at a rate equal to the rate charged by ATW's senior bank lenders on the Effective Date. At the request of Advance/Newhouse, TWE shall provide Advance/Newhouse with prompt and complete access to all working papers and relevant supporting documentation, as well as appropriate TWE Cable Division personnel, in each 7 case reasonably necessary in connection with Advance/Newhouse's review of the information set forth in the Debt Notice. If Advance/Newhouse concludes that such notice is not accurate, then Advance/Newhouse may, within 60 days of receipt of the Debt Notice, furnish TWE with a written statement of any discrepancy or discrepancies believed to exist (it being understood for the avoidance of doubt no discrepancy may exist with respect to the amount in clause (ii) or (iv) in Section 3.2(d) (the "Debt Discrepancy Statement"). Advance/Newhouse and TWE shall attempt to jointly resolve any discrepancy set forth in the Debt Discrepancy Statement within 30 days after receipt thereof, which resolution, if achieved shall be final and binding upon the parties and not subject to dispute or review. If they cannot resolve the discrepancy to their mutual satisfaction within such 30-day period, Advance/Newhouse and TWE shall within 10 days following the expiration of such 30-day period, jointly designate a nationally known independent certified public accounting firm to review the Debt Notice, together with the Debt Discrepancy Statement, and any other relevant documents. If Advance/Newhouse and TWE do not agree upon such firm within such 10-day period, then such review shall be performed by a nationally known independent certified public accounting firm selected by two other nationally known independent certified public accounting firms, one selected by TWE and one selected by Advance/Newhouse; provided that if one party fails to notify the other party of its selection within five days of receipt from the other party of its selection, the firm selected by the other party shall perform such review. The cost of retaining such firm shall be borne one-half by Advance/Newhouse and one-half by TWE. Such firm shall report its conclusion as to the Actual Assumption Amount, which shall be binding on the parties hereto and not subject to review or dispute. The Actual Assumption Amount shall be adjusted, if necessary, to reflect any such resolution. (e) As used in clause (d) of this Section 3.2, and as illustrated in the attached Illustration A (it being understood the numbers used therein are hypothetical), the term "Net Debt" shall mean an amount equal to the sum of: (i) all debt of TWEAN as of the Effective Date, including, without limitation, all accrued and unpaid principal and interest accrued under that certain promissory note, dated as of November 1, 2001, issued by TWEAN in favor of Time Warner Inc.; minus (ii) all accrued and unpaid principal, interest and return as of the Effective Date in respect of the promissory note(s) and the preferred interests in Road Runner that were assets of TWEAN as of the Effective Date and which were issued in satisfaction of the funding of liabilities described in Section 8 of the Road Runner Letter Agreement; minus (iii) all cash and cash equivalents of TWEAN as of the Effective Date, taking into account all cash received or disbursed in connection with payments made pursuant to Section 3.2(a) and Section 3.3 hereof, but excluding (in each case to the extent arising from, or principally related to, any Systems of TWEAN in the Selected Business or the Residual Business) the cash receipts of (x) all refunds received by TWEAN on or after the Selection Date with respect to State, Local and Other Taxes (as defined in Annex A hereto) paid after the 8 Selection Date, (y) all Insurance Proceeds received by TWEAN on or after the Selection Date under Insurance Policies existing as of the Selection Date to the extent received as a result of a casualty or loss occurring after the Selection Date and (z) all cash deposits under TWEAN's subscriber, utility, pole rental or similar agreements (the total amount described in this clause (iii), the "Cash Amount"); minus (iv) the amount in excess of $4.5 million, if any, paid in cash prior to the Effective Date by TWEAN in accordance with Section 3.1(h)(vii) of the Partnership Agreement for the costs, fees and expenses for financings (including refinancings of ATW's senior bank debt) consummated after the Selection Date but on or prior to the Effective Date. (f) On the third business day following final resolution of any discrepancy as provided in above, or if no such discrepancy exists, following expiration of the period in which Advance/Newhouse was permitted to deliver a Debt Discrepancy Statement, (a) if the Actual Assumption Amount is greater than the amount of the Assumed Debt, then Advance/Newhouse shall assume additional TWEAN debt selected by TWE in an amount equal to such excess (plus interest thereon calculated from the Effective Date at a rate equal to the rate charged by TWEAN's senior bank lenders on the Effective Date, or, if TWEAN has no senior bank debt on the Effective Date, at a rate equal to the rate charged by ATW's senior bank lenders on the Effective Date) (which shall be considered Assumed Debt for purposes of the Transaction Agreements), shall immediately satisfy and fully discharge such additional Assumed Debt and shall execute and deliver to TWEAN a Debt Assumption Agreement with respect thereto or (b) if the Actual Assumption Amount is less than the amount of the Assumed Debt, then TWEAN shall pay cash to Advance/Newhouse in an amount equal to such deficiency (plus interest thereon calculated from the Effective Date at a rate equal to the rate charged by TWEAN's senior bank lenders on the Effective Date, or, if TWEAN has no senior bank debt on the Effective Date, at a rate equal to the rate charged by ATW's senior bank lenders on the Effective Date). 3.3. Payments Being Made by TWE and to Paragon. (a) Prior to or concurrently with the execution hereof, TWE shall pay cash to TWEAN (exclusively for the benefit of the Residual Business) by wire transfer of immediately available funds to an account previously designated by TWEAN in an amount equal to the sum of all accrued and unpaid principal and interest up to and including the Effective Date under the promissory note, dated December 31, 1998, issued by TWE to TWEAN, in the aggregate principal amount of $352,381,133 as of July 31, 2002, in complete satisfaction and discharge of such note and obligations. (b) Prior to or concurrently with the execution hereof, TWE shall pay cash to TWEAN (exclusively for the benefit of the Residual Business) by wire transfer of immediately available funds to an account previously designated by TWE in an amount equal to $13,070,000, as payment for a tax contribution required of TWE in accordance 9 with the Original Partnership Agreement for periods ending on or prior to the Effective Date. (c) Prior to or concurrently with the execution hereof, TWEAN shall pay cash to Paragon by wire transfer of immediately available funds to an account previously designated by Paragon in an amount equal to $4,560,000, as payment for a tax distribution to Paragon in accordance with the Original Partnership Agreement for periods ending on or prior to the Effective Date. 3.4. Services Agreement. Concurrently with the execution hereof, the Selected Business, Advance/Newhouse and TWE will begin to comply with the terms described on Exhibit E hereto. The parties agree to use good faith efforts prior to Closing to negotiate definitive documentation by the Closing with respect to such binding terms (such binding terms or, to the extent superseded by such documentation, such definitive documentation being referred to herein as the "Services Agreement"). The Parties expressly agree that Exhibit E constitutes a binding agreement among them unless and until definitive documentation superseding such terms is executed and delivered by the Parties, and if such definitive documentation is not executed and delivered with respect to Exhibit E by the Closing, then Exhibit E shall continue to constitute a binding agreement among the Parties with respect to such matters unless and until such definitive documentation is executed and delivered by them. 3.5. Employee Matters Agreement. The terms set forth on Exhibit F hereto (the "Employee Matters Terms") became binding on the parties on the Selection Date and shall continue to be binding on the parties. The parties agree to use good faith efforts prior to Closing to negotiate definitive documentation by the Closing with respect to the Employee Matters Terms (such binding terms or, to the extent superseded by such documentation, such documentation being referred to as the "Employee Matters Agreement"). The Parties expressly agree that the Employee Matters Terms constitute a binding agreement among them unless and until definitive documentation superceding such terms is executed and delivered by the Parties, and if such definitive documentation is not executed and delivered with respect to the Employee Matters Terms by the Closing, then the Employee Matters Terms shall continue to constitute a binding agreement among the Parties with respect to such matters unless and until such definitive documentation is executed and delivered by them. 3.6. Third Amended and Restated Partnership Agreement. The parties agree to use good faith efforts prior to Closing to negotiate definitive documentation providing for a Third Amended and Restated Partnership Agreement reflecting the modifications attributed to "Amendment #2" as contemplated by the Letter Agreement (the Second Amended and Restated Partnership Agreement or, to the extent superseded by such documentation, such documentation being referred to as the "Third Amended and Restated Partnership Agreement"). The Parties expressly agree that the Second Amended and Restated Partnership Agreement constitutes a binding agreement among them unless and until definitive documentation superceding such terms is executed and delivered by the Parties, and if such definitive documentation is not executed and delivered with respect to the Second Amended and Restated Partnership 10 Agreement by the Closing, then the Second Amended and Restated Partnership Agreement shall continue to constitute a binding agreement among the Parties with respect to such matters unless and until such definitive documentation is executed and delivered by them. 3.7. Intellectual Property Agreement. Concurrently with the execution hereof, TWE has duly executed and delivered to the Selected Business and Advance/Newhouse and the Selected Business and Advance/Newhouse have duly executed and delivered to TWE, the Intellectual Property Agreement attached hereto as Exhibit G (the "Intellectual Property Agreement"). 3.8. Termination of Advance/Newhouse's Participation in Road Runner and TCP. As of the Effective Time, all of the Advance/Newhouse Group's right, title and interest (whether equity or debt and whether held directly or indirectly, including through TWEAN) and obligations in and to Road Runner HoldCo LLC, a Delaware limited liability company, or any of its Subsidiaries (collectively, "Road Runner") or Texas Cable Partners, L.P., a Delaware limited partnership, or any of its Subsidiaries (collectively, "TCP"), or any of their respective Assets (as such term is defined on Annex A hereto including, without limitation, (a) any rights to the "Road Runner" name, trademarks, e-mail domain address or other intellectual property owned or used by Road Runner or TCP and (b) any rights with respect to Road Runner or TCP arising out of or granted by any Contract, including, without limitation, under the Amended and Restated Operating Agreement of Road Runner, dated as of May 1, 2001, as amended; under the Road Runner Letter Agreement; and under that certain letter agreement, dated as of May 1, 2001, from Time Warner Cable and TWEAN to Advance/Newhouse; under the Agreement dated as of June 23, 1998 among Time Warner Inc., MediaOne Group Inc., TWE, Advance/Newhouse and TWEAN; shall cease and be of no further force or effect; provided, however, that the Master Affiliation Agreement, dated as of May 1, 2001, between Road Runner and Time Warner Cable, a Division of TWE, as amended (the "Road Runner Affiliation Agreement"), shall remain in full force and effect, including with respect to the Systems comprising the Selected Business, subject to the applicable terms and conditions set forth in the Services Agreement. For the avoidance of doubt, all of TWEAN's right, title and interest (whether equity or debt and whether held directly or indirectly) in Road Runner and TCP shall continue to be held by the Residual Business. 3.9. Mutual Resolution of Claims. Effective at Effective Time, TWEAN, TWE, Paragon, the Residual Business, on their own behalf and on behalf of each of their respective directors, officers, employees, partners, successors and assigns (collectively, the "TWE Parties") do hereby release and forever discharge Advance/Newhouse, its Affiliates, the Selected Business, each of their respective directors, officers, employees, partners, successors and assigns (collectively, the "A/N Parties"), and the A/N Parties do hereby release and forever discharge the TWE Parties, from any and all manner of action or actions, cause and causes of action, suits, debts, sums of money, accounts, covenants, contracts, controversies, agreements, promises, damages, judgments, executions, claims and 11 demands, in law or equity, any such releasing party has had, now has, or hereafter can, shall or may have, against any such released party, or any of them, for, by reason of, based upon, related to, in respect of, or arising out of (i) Restructuring Indebtedness as defined in the Original Partnership Agreement (other than the amounts described in Section 3.2(d)(iii) above); (ii) Excess Tax Amount Indebtedness, as defined in the Original Partnership Agreement; (iii) other than with respect to the rights of Advance/Newhouse under the provision identified in the following proviso, any "true-up" right of Advance/Newhouse regarding affiliated transaction under the Original Partnership Agreement or otherwise; (iv) Section 3.4 of the Original Partnership Agreement (except as contemplated in Exhibit E under the heading "New Affiliated Programming"); (v) Section 8.6 of the Original Partnership Agreement; (vi) any "Value Diminution" provisions in Section 8.1, 8.2 or 8.3 of the Original Partnership Agreement; (vii) true-up claims existing as of the Selection Date; (viii) any obligations of the A/N Parties in respect of employee stock option reimbursements under Section 3.1(h)(i)(A)(3) or Section 3.1(h)(iii) of the Original Partnership Agreement; (ix) any disputes regarding TCP cash; or (x) any of the agreements described on Schedule 1 hereto. ARTICLE IV THE CLOSING DATE 4.1. Closing. The closing of the Closing Contribution (the "Closing") shall take place at the offices Paul, Weiss, Rifkind, Wharton & Garrison, at 10:00 a.m. on the date (the "Closing Date") which is the last day of the month in which the conditions set forth in clauses (a), (b), (c) and (d) of Section 4.2 are satisfied; provided, however, that if the condition set forth in clause (b) is not satisfied by December 31, 2002, such condition shall be deemed waived through no further action of the Parties; provided, that the Closing Date shall not occur earlier than December 31, 2002. 4.2. Conditions to Closing. The respective obligation of each of the Parties to consummate the Closing Contribution shall be subject to the satisfaction as determined by, or waiver by, each of TWE and Advance/Newhouse, of the following conditions: (a) receipt of consents or waivers from the relevant Franchising Authorities, Governmental Authorities or other third parties necessary to transfer the direct or indirect ownership of Franchises for Systems serving at least 70% of the total cable television subscribers of the Selected Business as of the Effective Time; (b) receipt of all material consents or material approvals of all Persons, other than Governmental Authorities, required for or in connection with the execution, delivery and performance of this Agreement and the consummation of the Closing Contribution and the other transactions contemplated by this Agreement; (c) receipt of any required consents or waivers from the Federal Communications Commission to transfer licenses granted by the Federal 12 Communications Commission to Systems, divisions or other business units in the Selected Business; and (d) neither Advance/Newhouse nor TWE shall have effected a restructuring in accordance with Section 8.1 of the Second Amended and Restated Partnership Agreement. 4.3. Closing Deliveries. (a) Contribution Agreement. At the Closing, TWEAN shall duly execute and deliver to the Selected Subsidiary, and the Selected Subsidiary shall duly execute and deliver to TWEAN, the Contribution Agreement substantially in the form attached hereto as Exhibit H (the "Contribution Agreement"). The Contribution Agreement shall become effective as of the Closing. (b) Amended and Restated Indemnity Agreement. At the Closing, each of the Selected Subsidiary and Advance/Newhouse shall duly execute and deliver to TWE, and TWE shall duly execute and deliver to Advance/Newhouse and the Selected Subsidiary, the Amended and Restated Indemnity Agreement substantially in the form attached hereto as Exhibit I (the "Amended and Restated Indemnity Agreement"), pursuant to which the Selected Subsidiary shall be added as an additional indemnitor and indemnitee of the TWE Group, TWEAN shall be added as an additional indemnitor and indemnitee of the Advance/Newhouse Group and the Selected Business and Residual Business shall be removed as parties to the Indemnity Agreement. (c) Intellectual Property Agreement. At the Closing, the Selected Subsidiary shall execute and deliver to TWE the Intellectual Property Agreement and thereby assume all of the Selected Business' right and obligations thereunder. (d) Management Agreement. At the Closing, each of TWE, Paragon and TWEAN shall duly execute and deliver to the Selected Subsidiary and Advance/Newhouse, and the Selected Subsidiary and Advance/Newhouse shall duly execute and deliver to TWE, Paragon and TWEAN, the Management Agreement substantially in the form attached hereto as Exhibit J (the "Management Agreement"). The Management Agreement shall become effective as of the Closing. ARTICLE V COVENANTS AND OTHER MATTERS 5.1. Closing Efforts. Each of the Parties shall cooperate and use its commercially reasonable efforts to cause the Closing to occur as promptly as practicable, including to fulfill or obtain the fulfillment of the conditions to the Closing set forth in Section 4.2 hereof. 5.2. FCC and Franchise Approvals and Other Material Third-Party Consents. Each of the Parties shall use its commercially reasonable efforts, to the extent not previously obtained, to obtain (a) all consents or waivers from the relevant 13 Franchising Authorities, Governmental Authorities or other third parties necessary to transfer the direct or indirect ownership of Franchises for all Systems in the Selected Business, (b) all material consents or material approvals of all Persons, other than Governmental Authorities, required for or in connection with the execution, delivery and performance of this Agreement and the consummation of the Closing Contribution and the other transactions contemplated by this Agreement and (c) any required consents or waivers from the Federal Communications Commission to transfer licenses granted by the Federal Communications Commission to Systems, divisions or other business units in the Selected Business. 5.3. Regulatory Compliance. The Parties agree to effectuate this Agreement, each of the Transaction Agreements and the transactions contemplated hereby and thereby in compliance with all Franchising Authorities, the Federal Communications Commission, other applicable Governmental Authorities and all applicable Laws. The Parties agree to provide to the other Parties, upon request, reasonable access to any books and records if such access if needed (i) to comply with the reporting, disclosure, filing or other requirements imposed on the requesting Party by a Governmental Authority having jurisdiction over the requesting Party or (ii) for use in any other judicial, regulatory or tax proceeding; provided that in the event that any Party determines that any such provision of books and records could be commercially detrimental, violate any Law or agreement, or waive any attorney-client privilege, the Parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence 5.4. Further Assurances. In addition to the actions specifically provided for elsewhere in this Agreement or the Transaction Agreements, but subject to the provisions hereof and thereof, each of the parties hereto shall use its commercially reasonable efforts prior to and following the Closing to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable Laws and agreements to consummate and make effective the transactions contemplated by this Agreement and the Transaction Agreements. 5.5. Disclaimer of Representations and Warranties. (A) EXCEPT AS EXPRESSLY PROVIDED IN A TRANSACTION AGREEMENT, NEITHER TWEAN, ADVANCE/NEWHOUSE, TWE, PARAGON NOR ANY OTHER PERSON MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE TRANSACTIONS (INCLUDING ANY CONSENTS OR APPROVALS REQUIRED IN CONNECTION HEREWITH OR THEREWITH) OR THE BUSINESS, ASSETS, CONDITION OR PROSPECTS (FINANCIAL OR OTHERWISE) OF, OR ANY OTHER MATTER INVOLVING, THE ASSETS, BUSINESSES OR LIABILITIES OF THE SELECTED BUSINESS, OR OF TWEAN, ADVANCE/NEWHOUSE, TWE, PARAGON OR ANY OF ITS SUBSIDIARIES; (B) ALL OF THE ASSETS TO BE TRANSFERRED OR THE LIABILITIES TO BE ASSUMED OR TRANSFERRED IN CONNECTION WITH EACH CONTRIBUTION OR THE OTHER TRANSACTIONS SHALL BE ASSUMED OR TRANSFERRED ON AN "AS IS, WHERE IS BASIS," AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A SPECIFIC PURPOSE 14 OR OTHERWISE ARE HEREBY EXPRESSLY DISCLAIMED, AND (C) NEITHER TWEAN, ADVANCE/NEWHOUSE, TWE, PARAGON NOR ANY OTHER PERSON MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY INFORMATION, DOCUMENTS OR MATERIAL MADE AVAILABLE IN CONNECTION WITH A CONTRIBUTION OR THE OTHER TRANSACTIONS. ARTICLE VI MISCELLANEOUS 6.1. Counterparts; Entire Agreement. (a) This Agreement and each Transaction Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. (b) This Agreement, the Transaction Agreements and the Exhibits, Schedules and Appendices hereto and thereto contain the entire agreement between the parties with respect to the subject matter hereof or thereof, supersede all previous agreements (including, the Letter Agreement and all exhibits, schedules, illustrations and attachments thereto), negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter and there are no agreements or understandings between the parties with respect to such subject matter other than those set forth or referred to herein or therein. 6.2. Governing Law. This Agreement and, unless expressly provided therein, each Transaction Agreement, shall be governed by and construed and interpreted in accordance with the Laws of the State of New York, irrespective of the choice of laws principles of the State of New York, as to all matters, including matters of validity, construction, effect, enforceability, performance and remedies. 6.3. Assignability. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that no party hereto or thereto may assign its respective rights or delegate its respective obligations under this Agreement without the express prior written consent of each of the other parties hereto or thereto. 6.4. Third Party Beneficiaries. Except as set forth in any Transaction Agreement, (i) the provisions of this Agreement and each Transaction Agreement are solely for the benefit of the parties and are not intended to confer upon any Person except the parties any rights or remedies hereunder and (ii) there are no third party beneficiaries of this Agreement or any Transaction Agreement and neither this Agreement nor any Transaction Agreement shall provide any third person with any remedy, claim, liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement or any Transaction Agreement. 15 6.5. Notices. All notices or other communications under this Agreement or any Transaction Agreement shall be in writing and shall be deemed to be duly given when (a) delivered in person or (b) deposited in the United States mail or private express mail, postage prepaid, addressed as follows: If to TWE, Paragon or TWEAN: ---------------------------- 75 Rockefeller Plaza, New York, NY 10019 Attention: General Counsel with a copy to: 290 Harbor Drive Stamford, CT 06902 Attention: General Counsel and: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, NY, 10019 Facsimile: (212) 757-3990 Attention: Robert B. Schumer Kelley D. Parker If to Advance/Newhouse: ----------------------- 6005 Fair Lakes Road East Syracuse, New York 13057 Attention: Robert J. Miron with a copy to Sabin, Bermant & Gould LLP Four Times Square New York, NY, 10036 Facsimile: (212) 381-7218 Attention: Arthur J. Steinhauer and Dow, Lohnes & Albertson 1200 New Hampshire Avenue NW, Suite 800 16 Washington, DC, 20036 Facsimile: (202) 776-2222 Attention: John Byrnes Any party may, by notice to the other party, change the address to which such notices are to be given. 6.6. Severability. If any provision of this Agreement or any Transaction Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or thereof, or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic and legal substance of the transactions contemplated hereby or thereby, as the case may be, is not affected in any manner materially adverse to any party. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the parties. 6.7. Expenses. Except as expressly otherwise provided in this Agreement or any Transaction Agreement, TWE, Paragon, TWEAN and Advance/Newhouse shall each bear its own costs and expenses (including legal, accounting and broker fees and expenses) incurred in connection with this Agreement, the Transaction Agreements and the transactions contemplated hereby or thereby. 6.8. Headings. The Article, Section and paragraph headings contained in this Agreement and in the Transaction Agreements are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement or any Transaction Agreement. 6.9. Waivers of Default. Waiver by any party of any default by the other party of any provision of this Agreement or any Transaction Agreement shall not be deemed a waiver by the waiving party of any subsequent or other default, nor shall it prejudice the rights of the other party. 6.10. Specific Performance. In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement or any Transaction Agreement, the party or parties who are or are to be thereby aggrieved shall have the right to specific performance and injunctive or other equitable relief of its rights under this Agreement or such Transaction Agreement, in addition to any and all other rights and remedies at Law or in equity, and all such rights and remedies shall be cumulative. The parties agree that the remedies at Law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at Law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived. 17 6.11. Amendments. No provisions of this Agreement or any Transaction Agreement shall be deemed waived, amended, supplemented or modified by any party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the party against whom such waiver, amendment, supplement or modification it is sought to be enforced. 6.12. Interpretation. In this Agreement, unless otherwise specified or where the context otherwise requires: (a) a reference to a Recital is to the relevant Recital to this Agreement, to a Section is to the relevant Section of this Agreement and to an Exhibit is to the relevant Exhibit to this Agreement; (b) words importing any gender shall include other genders; (c) words importing the singular only shall include the plural and vice versa; (d) the words "include", "includes" or "including" shall be deemed to be followed by the words "without limitation"; (e) the words "hereof", "herein", "hereunder" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and Article, clause and Exhibit references are to the Articles, clauses and Exhibits to this Agreement unless otherwise specified; (f) references to any Person or any other agreement or document shall include such Person's successors and permitted assigns; (g) the parties hereto have participated jointly in the negotiation and drafting of this Agreement and all Transaction Agreements, and, in the event an ambiguity or question of intent or interpretation arises, this Agreement and each Transaction Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party hereto by virtue of the authorship of any provisions of this Agreement; and (h) Unless otherwise expressly provided herein, any Contract or Law defined or referred to herein or in any Contract that is referred to herein means such Contract or Law as from time to time amended, modified or supplemented, including (in the case of a Contract) by waiver or consent and (in the case of a Law) by succession of comparable successor Laws to all attachments thereto and instruments incorporated therein, and any reference in this Agreement or in any Transaction Agreement to a Law shall be deemed to include any rules and regulations promulgated thereunder. 18 IN WITNESS WHEREOF, the parties have caused this Master Transaction Agreement to be executed by their duly authorized representatives. TIME WARNER ENTERTAINMENT - ADVANCE NEWHOUSE PARTNERSHIP By: Time Warner Entertainment Company, L.P., a general partner By: --------------------------------------- Name: Robert D. Marcus Title: Senior Vice President By: Advance/Newhouse Partnership, a general partner By: Advance Cable Holdings Corp. By: --------------------------------------- Name: S.I. Newhouse, Jr. Title: Vice President By: Newhouse Cable Holdings LLC By: --------------------------------------- Name: S.I. Newhouse, Jr. Title: Vice President TIME WARNER ENTERTAINMENT COMPANY, L.P. By: -------------------------------------------- Name: Robert D. Marcus Title: Senior Vice President 19 PARAGON COMMUNICATIONS By: KBL Communications, Inc., its Managing General Partner By: --------------------------------------- Name: Robert D. Marcus Title: Senior Vice President ADVANCE/NEWHOUSE PARTNERSHIP By: Advance Cable Holdings Corp. By: --------------------------------------- Name: S.I. Newhouse, Jr. Title: Vice President By: Newhouse Cable Holdings LLC By: --------------------------------------- Name: S.I. Newhouse, Jr. Title: Vice President 20 EX-10 5 ex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 SECOND AMENDED AND RESTATED PARTNERSHIP AGREEMENT OF TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE PARTNERSHIP Dated as of August 1, 2002 SECOND AMENDED AND RESTATED PARTNERSHIP AGREEMENT OF TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE PARTNERSHIP TABLE OF CONTENTS
Page ---- SECTION 1 DEFINITIONS............................................................................1 1.1 Terms Defined in this Section..........................................................1 1.2 Terms Defined Elsewhere in this Agreement.............................................15 SECTION 2 THE PARTNERSHIP AND ITS BUSINESS......................................................17 2.1 Formation.............................................................................17 2.2 Partnership Name and Trade Names......................................................18 2.3 Term of the Partnership...............................................................19 2.4 Purposes..............................................................................19 2.5 Principal Office and Other Offices....................................................20 2.6 Foreign Qualification.................................................................20 2.7 Fiscal Year...........................................................................20 2.8 Addresses of the Partners.............................................................20 2.9 Property..............................................................................20 2.10 Certain Compliance Policies...........................................................20 SECTION 3 MANAGEMENT OF THE PARTNERSHIP.........................................................21 3.1 Management Powers.....................................................................21 3.2 Limitations On Management Powers......................................................28 3.3 Financing the Selected Business.......................................................30 SECTION 4 PARTNERSHIP CAPITAL...................................................................30 4.1 Partnership Units.....................................................................30 4.2 Contributions.........................................................................31 SECTION 5 CASH DISTRIBUTIONS; ALLOCATIONS OF PROFITS AND LOSSES; ADJUSTMENTS AND TAX PROCEEDINGS...........................................................................32 5.1 Distributions With Respect to the Residual Business...................................32 5.2 Application of First Amended Agreement................................................37 5.3 Allocations of Net Profit and Net Loss With Respect to the Residual Business..........37 5.4 Section 754 Adjustment................................................................40 5.5 Other Rules Governing Allocations With Respect to the Residual Business...............40 5.6 Tax Allocations With Respect to the Residual Business.................................41
i 5.7 Regulatory Allocations................................................................42 5.8 Allocations With Respect to the Residual Business in Event of Transfer................42 5.9 Other Distributions...................................................................42 5.10 Adjustments...........................................................................43 5.11 Tax Proceedings.......................................................................43 SECTION 6 TRANSFERS OF PARTNERSHIP INTERESTS....................................................44 6.1 Restrictions on Transfer..............................................................44 SECTION 7 FINANCING COVENANTS AND REPRESENTATIONS...............................................46 7.1 Representations, Warranties and Covenants of Advance/Newhouse.........................46 7.2 Representations, Warranties and Covenants of TWE......................................46 SECTION 8 RESTRUCTURING OF PARTNERSHIP AT ELECTION OF EITHER PARTNER............................47 8.1 Restructuring Rights..................................................................47 8.2 Limitations with Respect to the Selected Business.....................................49 8.3 TWE Right of First Offer..............................................................52 8.4 Special Right of First Offer..........................................................56 SECTION 9 [Intentionally Omitted.]..............................................................61 SECTION 10 OTHER BUSINESS ACTIVITIES.............................................................61 10.1 Survival of this Section..............................................................61 10.2 Cable Television Systems..............................................................61 10.3 Programming for Carriage Deals........................................................62 SECTION 11 BOOKS AND RECORDS; INFORMATION RIGHTS; OPERATION OF SELECTED BUSINESS.................62 11.1 Books and Records.....................................................................62 11.2 Tax Return Information................................................................63 11.3 Information Rights....................................................................63 11.4 Bank Accounts.........................................................................63 11.5 Tax Allocations.......................................................................63 SECTION 12 DISSOLUTION...........................................................................64 12.1 Causes of Dissolution.................................................................64 12.2 Effect of Dissolution.................................................................64 12.3 Winding Up and Liquidation............................................................65 SECTION 13 INDEMNIFICATION.......................................................................66 13.1 Indemnification by Partnership........................................................66

ii 13.2 Indemnification by Partners...........................................................67 13.3 Procedures............................................................................68 13.4 Survival..............................................................................69 SECTION 14 REPRESENTATIONS.......................................................................69 14.1 Organization, Standing, and Authority.................................................69 14.2 Absence of Conflicting Agreements.....................................................69 14.3 Claims and Legal Actions..............................................................69 SECTION 15 MISCELLANEOUS.........................................................................69 15.1 Acknowledgments.......................................................................69 15.2 Bill for Partition....................................................................70 15.3 Notices...............................................................................70 15.4 Amendments............................................................................70 15.5 Waivers and Further Assurances; Entire Agreement......................................70 15.6 Severability..........................................................................70 15.7 Specific Enforcement; Attorney's Fees.................................................71 15.8 Counterparts..........................................................................71 15.9 Captions; Gender......................................................................71 15.10 Governing Law; Venue; Disputes........................................................71 15.11 Interpretation........................................................................71 15.12 Binding Effect........................................................................72 15.13 Third Parties.........................................................................72 15.14 Confidentiality.......................................................................72 15.15 Liability of Partners.................................................................72

iii SECOND AMENDED AND RESTATED PARTNERSHIP AGREEMENT OF TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE PARTNERSHIP This Second Amended and Restated Partnership Agreement, dated as of August 1, 2002, by and among Advance/Newhouse Partnership, a New York general partnership (collectively with any of its permitted successors subsequently admitted as a Partner, "Advance/Newhouse"), Time Warner Entertainment Company, L.P., a Delaware limited partnership (collectively with any of its permitted successors subsequently admitted as a Partner, "TWE"), and Paragon Communications, a Colorado general partnership (collectively with any of its permitted successors subsequently admitted as a Partner, "Paragon"), amends and restates in its entirety the Amended and Restated Partnership Agreement, dated as of February 1, 2001, as amended by the First Amendment thereto, dated as of March 2, 2001 (the "First Amended Agreement"), by and among Advance/Newhouse, TWE and Paragon. PRELIMINARY STATEMENT The Partnership was formed pursuant to the Partnership Agreement, dated as of September 9, 1994 (the "Original Agreement"), between Advance/Newhouse and TWE, as amended by the First Amendment thereto, dated as of February 12, 1998, the Second Amendment thereto, dated as of December 31, 1998, and the Third Amendment thereto, dated as of March 1, 1999 (collectively, the "Amendments to the Original Agreement") and the First Amended Agreement. Concurrently herewith, Advance/Newhouse, TWE, Paragon and certain other parties have entered into a Master Transaction Agreement (the "Master Transaction Agreement") providing for, among other things, the restructuring of the Partnership. In accordance therewith, the parties now desire to enter into this Agreement to reflect the restructuring of the Partnership, and to provide for the allocation of profit and loss, cash flow, and other proceeds of the Partnership among the Partners, the respective rights, obligations, and interests of the Partners to each other and to the Partnership, and certain other matters. AGREEMENTS In consideration of the mutual covenants and agreements set forth in this Agreement, the parties, intending to be bound legally, agree as follows. Section 1 DEFINITIONS 1.1 Terms Defined in this Section. As used in this Agreement, the following terms have the following meanings: "Act" means the New York Uniform Partnership Law, as from time to time in effect. 2 "Advance" means Advance Publications, Inc., a New York corporation. "Advance/Newhouse Accountants" means the independent auditors or other auditors selected by Advance/Newhouse. "Advance/Newhouse Group" means Advance/Newhouse and each of its Affiliates. "Affiliate" means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such Person, except that: (i) neither the Partnership nor any Person controlled by the Partnership shall be deemed to be an Affiliate of a Partner or of any Affiliate of such Partner solely by virtue of such Partner's Partnership Interest; (ii) no Partner nor any Affiliate of any Partner shall be deemed to be an Affiliate of the other Partners or of any Affiliate of the other Partners solely by virtue of the Partners' Partnership Interests; (iii) neither Paragon nor USW shall be deemed an Affiliate of TWE, the TWE Cable Division or ATW; (iv) for the avoidance of doubt, the Selected Business shall not be an Affiliate of TWE or any of its Affiliates and the Selected Business shall be deemed to be an Affiliate of Advance/Newhouse and its Affiliates; and (v) for the avoidance of doubt, the Residual Business shall not be an Affiliate of Advance/Newhouse or any of its Affiliates and the Residual Business shall be deemed to be an Affiliate of TWE and its Affiliates. "Agreement" means this Second Amended and Restated Partnership Agreement, as it may be amended, modified, or supplemented from time to time in accordance with its terms. "AOL High Speed Services Agreement" means the High Speed Services Agreement, effective as of January 31, 2001, between America Online, Inc. and Time Warner Cable. "ATW" means AOL Time Warner, Inc. "Capital Account" means an account to be maintained for each of TWE and Paragon which, subject to any contrary requirements of the Code, shall equal the aggregate value of such Partner's Partnership Interest on the Restructuring Effective Date, (A) increased by (i) the amount of cash contributed by such Partner to the Partnership after the Restructuring Effective Date (not including 3 interest amounts paid by such Partner pursuant to Section 5.1(a)(iii)(z) or Section 5.1(b)(iii)(z); (ii) the fair market value without regard to Code Section 7701(g) of property contributed by such Partner to the Partnership after the Restructuring Effective Date (net of liabilities secured by such contributed property that the Partnership is considered to assume or take subject to under Code Section 752); (iii) allocations to it after the Restructuring Effective Date of Gross Profit and Net Profit pursuant to Section 5; (iv) the amount of any liabilities of the Partnership that are assumed by such Partner pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(c); and (v) other additions made in accordance with the Code and the provisions of Treasury Regulations Section 1.704-1(b)(2)(iv); and (B) decreased by (i) the amount of cash distributed to such Partner by the Partnership after the Restructuring Effective Date; (ii) allocations to the Partner after the Restructuring Effective Date of Gross Loss and Net Loss pursuant to Section 5; (iii) the fair market value without regard to Code Section 7701(g) of property distributed to such Partner by the Partnership after the Restructuring Effective Date (net of liabilities secured by such distributed property or that such Partner is considered to assume or take subject to under Code Section 752) (excluding any distribution of or from the Selected Business); (iv) the amount of such Partner's individual liabilities that are assumed by the Partnership after the Restructuring Effective Date pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(c); and (v) other deductions made in accordance with the Code and the provisions of Treasury Regulations Section 1.704-1(b)(2)(iv). Notwithstanding the foregoing, for purposes of determining Capital Accounts, all of the adjustments and distributions required pursuant to the Restructuring Transaction Agreements shall be treated as if they had been made on the Restructuring Effective Date and such adjustments and distributions shall not give rise to any adjustments to Capital Account balances or redetermination of amounts contributed by or distributed to TWE or Paragon. "Capital Contribution" means either a Common Capital Contribution, a Series A Preferred Capital Contribution, a Series B Preferred Capital Contribution or a Series C Preferred Capital Contribution. "Closing" shall have the meaning ascribed to such term in the Master Transaction Agreement. "Closing Date" shall have the meaning ascribed to such term in the Master Transaction Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any subsequent federal law of similar import, and, to the extent applicable, the Treasury Regulations. 4 "Common Capital Contribution" means with respect to each of Paragon and TWE, the excess of (A) the amount of cash contributed by such Partner to the Partnership pursuant to this Agreement plus the fair market value without regard to Code Section 7701(g) of property contributed by such Partner to the Partnership pursuant to this Agreement (net of liabilities that are secured by such contributed property or that either Partner is considered to assume under Code Section 752), over (B) in the case of Paragon, the sum of the Series A Preferred Capital Contribution and the Series B Preferred Capital Contribution and the Series C Preferred Capital Contribution of such Partner and, in the case of TWE, the Series C Preferred Capital Contribution of such Partner. "Common Tax Amount" means, for any year, with respect to TWE or Paragon, the amount obtained by multiplying (a) the Effective Tax Rate for such year by (b) the excess, if any, of (i) the sum of the Net Profit or Gross Profit allocated to such Partner for such year (other than pursuant to Sections 5.3(b)(i), 5.3(b)(ii), 5.3(b)(iii), 5.3(d)(i) and 5.3(d)(ii)), over (ii) the Net Loss or Gross Loss allocated to such Partner for each prior year (other than pursuant to Section 5.3(d)(ii) and 5.3(c)(ii)) but only to the extent that the amounts set forth in this clause (ii) were not used in reducing the Common Tax Amount for such prior year or any intervening year. For purposes of determining the Common Tax Amount, Net Profit, Gross Profit, Net Loss and Gross Loss, shall be calculated without taking into account the items described in clause (i), clause (ii), clause (iii), clause (vi), and clause (vii) of the definition of "Net Profit" and "Net Loss" or, with respect to any year (or portion thereof) prior to the Restructuring Effective Date, the items described in clause (i), clause (ii), clause (iii), clause (vi), clause (vii) and clause (ix) of the definition of "Net Profit" and "Net Loss" of the First Amended Agreement. "Consent Decrees" means the Consent Order dated December 14, 2000 and related decisions and orders of the Federal Trade Commission issued to ATW (or any of its Affiliates or predecessors). "control" (including the terms "controlled by," and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. "Contribution Agreement" has the meaning ascribed to such term in the Master Transaction Agreement. "Controlled Affiliate" means, with respect to any Person, any Affiliate of such Person that is controlled by such Person, directly or indirectly through one or more intermediaries. "Depreciation" means, for each fiscal period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such fiscal period, except that if the Gross Asset Value of an asset differs from its adjusted 5 basis for federal income tax purposes Depreciation shall be determined as set forth in Treasury Regulations Section 1.704-3(d). "Distributable Cash" means, at any time, all cash of the Partnership that, in the judgment of the Managing Partner, can then be distributed to the Partners without violating any contractual restriction to which the Partnership is subject and that is not otherwise necessary for the operation of the Residual Business (including any reserves of such cash established by the Partnership for any Partnership purpose). "DMA" means "Designated Market Area" in the Code of Federal Regulations at 47 C.F.R. 76.55. "EBITDA" means, with respect to each Managed Business, for any period, operating income before interest, income taxes, depreciation and amortization for such period determined in accordance with the prior practices of the Managing Partner with respect to the Residual Business and Advance/Newhouse, with respect to the Selected Business, in each case consistently applied, and/or as the Partners shall otherwise mutually agree; provided that for purposes of determining EBITDA of the Selected Business during any of the four fiscal quarters immediately following the Restructuring Effective Date, EBITDA shall be determined in accordance with the prior practices of the Managing Partner, consistently applied or Advance/Newhouse, consistently applied (whichever produces lower EBITDA). "Effective Tax Rate" means, at any time, and from time to time, the percentage determined by the Managing Partner to be a reasonable estimate of the highest marginal combined Federal, state, and local income tax rate (giving effect to the deduction of state and local income taxes, as applicable, for Federal and state income tax purposes), applicable to corporations doing business in New York City, with respect to taxable income allocated to the Partners by the Partnership for Federal income tax purposes. "Final Determination" means a settlement, compromise or other agreement with the Internal Revenue Service or the relevant state or local Governmental Authorities, whether contained in an Internal Revenue Service Form 870 or other comparable form, or otherwise, or such procedurally later event, such as a closing agreement with the Internal Revenue Service or the relevant state and local Governmental Authorities, an agreement contained in Internal Revenue Service Form 870-D or other comparable form, an agreement that constitutes a determination under Section 1313(a)(4) of the Code, a deficiency notice with respect to which the period for filing a petition with the Tax Court or the relevant state or local tribunal has expired or a decision of any court of competent jurisdiction that is not subject to appeal or as to which the time for appeal has expired. "First Effective Date" means February 12, 1998. "First Transaction Agreement" means the Amended and Restated Transaction Agreement, dated as of October 27, 1997, among Advance, Newhouse, Advance/Newhouse, TWE, TW Holding Co. and the Partnership. 6 "Fourth Effective Date" means February 1, 2001. "Fourth Transaction Agreement" means the Amended and Restated Transaction Agreement, dated as of February 1, 2001, among Advance, Newhouse, Advance/Newhouse, TWE, Paragon and the Partnership. "Franchise" means written "franchise" within the meaning of Section 602(8) of the Cable Communications Policy Act of 1984 (47 U.S.C. 'SS' 522(9)). "Franchising Authority" has the meaning that term is given by Section 602(9) of the Cable Communications Policy Act of 1984 (47 U.S.C. 'SS' 522(10)). "GAAP" means generally accepted accounting principles, consistently applied. "Governmental Authority" means any supranational, national, state, municipal or local government, political subdivision or other governmental department, court, commission, board, bureau, agency, instrumentality, or other authority thereof, or any quasi-governmental or private body exercising any regulatory, taxing, importing or other governmental or quasi-governmental authority, whether domestic or foreign. "Gross Asset Value" means: in the case of any asset held by the Partnership on the Restructuring Effective Date, the gross fair market value of such asset as of the Restructuring Effective Date, and in the case of any asset acquired by the Partnership after the Restructuring Effective Date, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership after the Restructuring Effective Date shall be the gross fair market value of such asset; (ii) The Gross Asset Value of all assets of the Partnership shall be adjusted to equal their respective gross fair market values, as agreed to by TWE and Paragon, as of the following times: (a) the acquisition of an additional interest in the Partnership by TWE or Paragon in exchange for more than a de minimis Common Capital Contribution; (b) the distribution by the Partnership to TWE and Paragon of more than a de minimis amount of Partnership property as consideration for an interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (a) and (b) above shall be made only if TWE and Paragon agree that such adjustments are necessary or appropriate to reflect the relative economic interests of such Partners in the Partnership; (iii) The Gross Asset Value of any asset distributed by the Partnership to TWE or Paragon shall be the gross fair market value of such asset on the date of distribution as determined by such Partner and the Partnership; and 7 (iv) The Gross Asset Value of the assets of the Partnership shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m) and Section 5.4; provided, however, that Gross Asset Value shall not be adjusted pursuant to this paragraph (iv) to the extent that an adjustment was made pursuant to paragraph (ii) of this definition in connection with any transaction that would otherwise have resulted in an adjustment pursuant to this paragraph (iv). If the Gross Asset Value of an asset has been determined or adjusted as described above, other than pursuant to paragraph (iii), of this definition, the Gross Asset Value of such asset shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Profit and Net Loss. "Gross Loss" means, with respect to any year, the items of deduction or loss of the Partnership computed on the same basis that Net Profit and Net Loss are computed for purposes of this Agreement. "Gross Profit" means, with respect to any year, the items of income and gain of the Partnership computed on the same basis that Net Profit and Net Loss are computed for purposes of this Agreement. "Income Tax" shall mean any Tax which is based upon, measured by, or calculated with respect to (i) net income or profits (including, but not limited to, any capital gains or minimum Tax) or (ii) multiple bases (including, but not limited to, corporate franchise, doing business or occupation Taxes), if one or more of the bases upon which such Tax may be calculated is described in clause (i) hereof. "Indebtedness" means (i) debt for money borrowed and similar monetary obligations evidenced by bonds, notes, debentures, or other similar instruments, other than trade accounts payable in the ordinary course of business, (ii) obligations with respect to letters of credit, and (iii) guaranties, endorsements, and other contingent obligations whether direct or indirect in respect of liabilities of others of any of the types described in clauses (i) and (ii) above (other than endorsements for collection or deposit in the ordinary course of business). "Initial Closing Date" means April 1, 1995. "Intellectual Property Agreement" has the meaning ascribed to such term in the Master Transaction Agreement. "Managed Business" means (a) with respect to TWE, the Residual Business, and (b) with respect to Advance/Newhouse, the Selected Business. 8 "Maximum Income Amount" means, for any year, with respect to any Partner, an amount equal to the product of (i) the Tax Adjustment Percentage for such year, and (ii) the Special Income of such Partner for such year. "MSO" means a Person that operates multiple Systems. "Net Profit" and "Net Loss" mean, for each Fiscal Year or other period, an amount equal to the Partnership's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (i) Any income of the Partnership that is exempt from Federal income tax and not otherwise taken into account in computing Net Profit or Net Loss shall be added to such taxable income or loss; (ii) Any expenditures of the Partnership described in Code Section 705(a)(2)(B), or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(i), that are not otherwise taken into account in computing Net Profit or Net Loss shall be subtracted from such taxable income or loss; (iii) If the Gross Asset Value of any asset of the Partnership is adjusted pursuant to paragraph (ii) or (iii) of the definition of Gross Asset Value, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Profit or Net Loss; (iv) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for Federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or other period; (vi) To the extent any adjustment to the adjusted tax basis of any asset of the Partnership pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Partner's interest in the Partnership, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Net Profit and Net Loss; and 9 (vii) For purposes of this Agreement, any deduction for a loss on a sale or exchange of Partnership property that is disallowed to the Partnership under Code Section 267(a)(1) or Code Section 707(b) shall be treated as a Code Section 705(a)(2)(B) expenditure. "Net Tax Amount" means, for any year, with respect to TWE or Paragon, the sum of (i) the Common Tax Amount of such Partner for such year and (ii) the Special Tax Amount of such Partner for such year. "Newhouse" means Newhouse Broadcasting Corporation, a New York corporation. "Non-Income Tax" means any Tax, other than an Income Tax. "Original Contribution Agreement" means the Contribution Agreement, dated as of September 9, 1994, as amended from time to time, among the Partnership, the Partners, Advance and Newhouse. "Other TWE Systems" means the Systems owned by TWE or its Affiliates other than the Partnership Systems. "Paragon Residual Percentage Interest" means 2.85%. "Parents Agreement" means the Agreement dated as of September 9, 1994 among Advance, Newhouse and TWX. "Partners" means Advance/Newhouse, TWE and Paragon and "Partner" means any of such Partners, except as otherwise provided in Section 5A or Section 5. "Partnership" means the partnership created by the Partners pursuant to this Agreement. "Partnership Interest" means, (a) as to TWE or Paragon all of the interest of such Person in the Partnership, which includes only such Person's (i) right to a distributive share of the income, gain, losses, and deductions of the Partnership in accordance with this Agreement, which shall be measured by the number and type of Partnership Units held by such Person under this Agreement, (ii) right to a distributive share of the Residual Business' assets, which shall be measured by the number and type of Partnership Units held by such Person under this Agreement, (iii) other rights and all obligations hereunder, and (iv) rights and responsibilities with respect to the management of the business and affairs of each applicable Managed Business, as provided herein or by law; and (b) as to Advance/Newhouse, all of the interest of such Person in the Partnership, which includes only such Person's (x) right to receive distributions of and from the Selected Business, (y) other rights and all obligations hereunder and (z) rights and responsibilities with respect to the management of the business and affairs of the Selected Business, as provided herein or by law. 10 "Partnership Systems" means all Systems now owned or hereafter acquired, directly or indirectly, by the Partnership, including the Residual Systems and the Selected Systems. "Partnership Unit" means either a "Series SB Common Partnership Unit," a "Series RB Common Partnership Unit", a "Series A Preferred Partnership Unit," a Series B Preferred Partnership Unit", or a "Series C Preferred Partnership Unit," and all "Partnership Interests" associated therewith each as defined in this Agreement. "Person" means any natural person, corporation, general or limited partnership, limited liability company, joint venture, trust, association, unincorporated entity of any kind, or a government or any department or agency thereof. "Preferred Sub-Account" means, with respect to TWE or Paragon, the portion of such Partner's Capital Account that is equal to the aggregate amount of Series A Preferred Capital Contributions, Series B Preferred Capital Contributions and Series C Preferred Capital Contributions made by such Partner, (A) increased by allocations of Net Profit made with respect to such Partner pursuant to Section 5.3(b)(i) or Section 5.3(b)(ii); and (B) decreased by (x) distributions made with respect to such Partner pursuant to Section 5.1(a)(ii), Section 5.1(b)(ii) or Section 5.1(b)(iv), and (y) allocations of Net Loss made with respect to such Partner pursuant to Section 5.3(c)(ii). "Prior Partnership Unit" means a Prior Common Partnership Unit or a Prior Preferred Partnership Unit. "Prior Common Partnership Unit" means a Common Partnership Unit and all "Partnership Interests" associated therewith in each case as defined in the First Amended Agreement. "Prior Preferred Partnership Unit" means a "Series A Preferred Partnership Unit," a "Series B Preferred Partnership Unit" or a "Series C Preferred Partnership Unit," and all "Partnership Interests" associated therewith in each case as defined in the First Amended Agreement. "Priority Return" shall mean the sum of the Series A Priority Return, the Series B Priority Return and the Series C Priority Return. "Refinancing Arrangements" has the meaning ascribed to such term in the Master Transaction Agreement. "Residual Business" has the meaning ascribed to such term in the Master Transaction Agreement. "Residual Percentage Interests" means the Paragon Residual Percentage Interest and the TWE Residual Percentage Interest. 11 "Residual Systems" means all Systems now owned or hereafter acquired, directly or indirectly, by the Residual Business. "Restructuring Effective Date" means the date hereof. "Restructuring Transactions" means the transactions contemplated to be consummated on or prior the Closing Date under the Restructuring Transaction Agreements. "Restructuring Transaction Agreements" means the Master Transaction Agreement, this Agreement and the other Transaction Agreements (as defined in the Master Transaction Agreement). "Road Runner" means Road Runner HoldCo LLC, a Delaware limited liability company. "Second Effective Date" means December 31, 1998. "Second Transaction Agreement" means the Transaction Agreement No. 2, dated as of June 23, 1998, among Advance, Newhouse, Advance/Newhouse, TWE, Paragon and the Partnership. "Selected Business" has the meaning ascribed to such term in the Master Transaction Agreement. "Selected Subsidiary" has the meaning ascribed to such term in the Master Transaction Agreement. "Selected Systems" means all Systems now owned or hereafter acquired, directly or indirectly, by the Selected Business. "Selection Date" means June 24, 2002. "Series A Preferred Capital Contribution" means, with respect to Paragon, a Capital Contribution by Paragon of assets having a fair market value of $1,000 for each Prior Preferred Partnership Unit issued to Paragon pursuant to Section 4.2(b)(i) of the First Amended Agreement. "Series A Preferred Partnership Unit" means Paragon's right to distributions in an amount equal to the Series A Priority Return allocable to the Series A Preferred Capital Contribution of $1,000 and the right to a return of such Series A Preferred Capital Contribution in redemption thereof, all of which shall be payable in accordance with Section 5, together with all allocations of income attributable thereto, as specified in Section 5. "Series A Priority Return" means, with respect to each outstanding Series A Preferred Partnership Unit, a sum equal to 10 1/4 percent for the actual number of days in the period for which the Series A Priority Return is being calculated, cumulative and 12 compounded annually, on the amount of $1,000 plus any accrued and unpaid Series A Priority Return with respect to such Series A Preferred Partnership Unit, commencing on the First Effective Date. "Series B Preferred Capital Contribution" means with respect to Paragon, a Capital Contribution by Paragon of assets having a fair market value of $1,000 for each Prior Preferred Partnership Unit issued to Paragon pursuant to Section 4.2(b)(ii) and 4.2(b)(iii) of the First Amended Agreement. "Series B Preferred Partnership Unit" means, with respect to Paragon, such Partner's right to distributions in an amount equal to the Series B Priority Return allocable to such Partner's Series B Preferred Capital Contribution of $1,000 and the right to a return of such Series B Preferred Capital Contribution in redemption thereof, all of which shall be payable in accordance with Section 5, together with all allocations of income attributable thereto, as specified in Section 5. "Series B Priority Return" means, with respect to each outstanding Series B Preferred Partnership Unit, a sum equal to 2% plus the Partnership's cost of borrowing under its senior credit facility for the actual number of days in the period for which the Series B Priority Return is being calculated, cumulative and compounded annually, on the amount of $1,000 plus any accrued and unpaid Series B Priority Return with respect to such Series B Preferred Partnership Unit, commencing on the (i) Second Effective Date, in the case of Series B Preferred Partnership Units deemed issued on the Second Effective Date or (ii) the Third Effective Date, in the case of Series B Preferred Partnership Units deemed issued on the Third Effective Date. "Series C Preferred Capital Contribution" means with respect to TWE and Paragon, a Capital Contribution by such Partner of assets having a fair market value of $1,000 for each Prior Preferred Partnership Unit issued to such Partner pursuant to Section 4.2(a)(v)(B) or 4.2(b)(iv) of the First Amended Agreement. "Series C Preferred Partnership Unit" means, with respect to TWE and Paragon, such Partner's right to distributions in an amount equal to the Series C Priority Return allocable to such Partner's Series C Preferred Capital Contribution of $1,000 and the right to a return of such Series C Preferred Capital Contribution in redemption thereof, all of which shall be payable in accordance with Section 5, together with all allocations of income attributable thereto, as specified in Section 5. "Series C Priority Return" means, with respect to each outstanding Series C Preferred Partnership Unit, a sum equal to 2% plus the Partnership's cost of borrowing under its Senior Credit facility for the actual number of days in the period for which the Series C Priority Return is being calculated, cumulative and compounded annually, on the amount of $1,000 plus any accrued and unpaid Series C Priority Return with respect to such Series C Preferred Partnership Unit, commencing on the Fourth Effective Date. 13 "Series RB Common Partnership Unit" means the measure of a Partner's right to certain distributions and allocations with respect to the Residual Business, as specified in Section 5A and Section 5. "Series SB Common Partnership Unit" means the measure of a Partner's right to receive distributions and allocations with respect to the Selected Business, as specified in Section 5A and Section 5. "Special Effective Tax Rate" means, at any time, and from time to time, the effective combined rate of Federal, state and local income and franchise tax that the Partnership would be required to pay, if it were a corporation, on its taxable income for such year, for Federal income tax purposes. "Special Income" means, for any year, with respect to TWE or Paragon, the sum of: (i) the excess, if any, of (a) such Partner's distributive share of Depreciation and loss determined as provided in clause (iv) of the definition of Net Profit and Net Loss for such year, over (b) such Partner's distributive share of depreciation, amortization, and other cost recovery deductions and loss for such year for Federal income tax purposes, to the extent such excess results from a difference between the basis for Federal income tax purposes of any assets and the Gross Asset Value of such assets; (ii) the excess, if any, of (a) such Partner's distributive share of gain for Federal income tax purposes for such year, over (b) such Partner's distributive share of gain determined as provided in clause (iv) of the definition of Net Profit and Net Loss for such year, to the extent such excess results from a difference between the basis for Federal income tax purposes of any assets and the Gross Asset Value of such assets; and (iii) any remedial items allocated to such Partner pursuant to Treasury Regulations Section 1.704-3(d) for such year. "Special Tax Amount" means, for any year, with respect to TWE or Paragon, the amount obtained by multiplying (a) the Special Effective Tax Rate for such year, by (b) the excess, if any, of (i) the sum of (x) the sum of the Net Profit and Gross Profit allocated to such Partner pursuant to Sections 5.3(b)(iii) and 5.3(d)(ii) for such year, (y) the Special Income, if any, allocated to such Partner for such year, and (z) to the extent that the Common Tax Amount of such Partner for such year is reduced by any Net Loss or Gross Loss allocated to such Partner for any prior year which was used to reduce such Partner's Special Tax Amount for any prior year, an amount (expressed as a positive number) equal to the sum of such Net Loss and Gross Loss, over (ii) the sum of (x) the Gross Loss allocated to such Partner pursuant to Section 5.3(d)(ii) for the current year, and (y) the Net Loss or Gross Loss allocated to such Partner for the current or prior year (other than pursuant to Section 5.3(c)(ii) and 5.3(d)(ii)) but only to the extent that the amounts set forth in this clause (y) were not used in reducing the Common Tax Amount for the current year or the Special Tax Amount for any prior year. For purposes of determining the Special Tax Amount, Net Profit, Gross Profit, Net Loss and Gross Loss, 14 shall be calculated without taking into account the items described in clause (i), clause (ii), clause (iii), clause (vi), clause (vii), and clause (ix) of the definition of "Net Profit" and "Net Loss" or, with respect to any year (or portion thereof) prior to the Restructuring Effective Date, the items described in clause (i), clause (ii), clause (iii), clause (vi), clause (vii) and clause (ix) of the definition of "Net Profit" and "Net Loss" of the First Amended Agreement. "Subscriber" means a subscriber to basic cable television service on the applicable System. "Subsidiary" means, with respect to any Person, any other Person controlled by such first Person. "System" means a "cable television system" within the meaning of Section 602(7) of the Communications Act of 1934, as amended. "Tax" shall mean all forms of taxes, fees, imposts, levies or other assessments whenever created or imposed, and whether of the United States or elsewhere, and whether imposed by a Governmental Authority, and, without limiting the generality of the foregoing, shall include income, gross receipts, business and occupation, property, sales, use, license, excise, franchise, capital stock, employment, payroll, unemployment insurance, social security, stamp, environmental, value added, alternative or added minimum, ad valorem, trade, recording, withholding, occupation or transfer tax, custom or duty or other like governmental assessment or charge of any kind whatsoever, whether computed on a separate, consolidated, unitary, combined or any other basis, together with any related interest, penalties and additions imposed by any Governmental Authority. "Tax Adjustment Percentage" means, with respect to any year, the amount obtained by dividing (A) the Special Effective Tax Rate for such year by (B) the excess of one (1) over such Special Effective Tax Rate. "Tax Proceeding" means any Tax audit, examination, controversy or litigation with or against any Governmental Authority. "Taxable Income" or "Taxable Loss" means net income or loss of the Partnership as determined for Federal income tax purposes. "TCI Contribution Agreement" has the meaning ascribed thereto in the Second Transaction Agreement. "Third Effective Date" means March 1, 1999. "Third Transaction Agreement" means the Transaction Agreement No. 3, dated as of September 15, 1998 among Advance, Newhouse, Advance/Newhouse, TWE, Paragon and the Partnership. 15 "Transaction Agreements" means, collectively, the First Transaction Agreement, the Second Transaction Agreement, the Third Transaction Agreement and the Fourth Transaction Agreement. "Treasury Regulations" means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "TWE Accountants" means the independent auditors or other auditors selected by TWE. "TWE Cable Division" means the Cable Division of TWE. "TWE Group" means TWE and its Affiliates. "TWE Partnership Agreement" means the Agreement of Limited Partnership, dated as of October 29, 1991, as amended from time to time, among TWI, Itochu Corporation, Toshiba Corporation, USW and certain of their respective subsidiaries. "TWE Residual Percentage Interest" means 97.15%. "TWE Systems" means all Systems now owned or hereafter acquired, directly or indirectly, by TWE or its Affiliates, but shall not include any Systems owned by or beneficially held for the Selected Subsidiary. "TWI" means Time Warner Inc., a Delaware corporation. "USW" means U S WEST, Inc., a Colorado corporation, and its successors and assigns in respect of its interests under the TWE Partnership Agreement. 1.2 Terms Defined Elsewhere in this Agreement. For purposes of this Agreement, the following terms have the meanings set forth in the sections indicated:
Term Section ---- ------- Adjustment Report 11.5 Advance/Newhouse Preamble Advance/Newhouse System Opportunity 10.2(a) Advance/Newhouse Opportunity Notice 10.2(a) Amendments to the Original Agreement Preamble Appraiser 8.4(j) ATW Securities 3.1(h) Cable Company 8.3(h) Closing Price 3.1(h)
16
Term Section ---- ------- Consideration Period 8.4(d) Contribution 8.2 Contribution Entity 8.2 Contribution Entity Certification 8.3(c) Contribution Entity EBITDA 8.2(c) Credit Partner 5.5(f) Eligible Option Holder 3.1(h) Equity for Carriage Programming Opportunity 10.3(a) Executive Committee 3.1(b) Final Restructuring Date 8.1 First Amended Agreement Preamble Fiscal Year 2.7 Intercompany Account 3.3(a) Liquidator 12.3(a) Managed Systems 3.1(h) Managing Partner 3.1(a) Master Transaction Agreement Preamble Newhouse Family Member 6.1(a) NYSE 3.1(h) Offer Notice 8.3(a) Offer Period 8.4(f) Operating Cash Flow 8.2(c) Original Agreement Preamble Other Corporate Security 8.3(b) Paragon Preamble Post-Bid Offer Notice 8.3(a) Pre-Bid Offer Notice 8.3(a) Pre-Closing Operating Costs 3.1(h) Regular Distributions 8.2(c) Required Minimum Price 8.4(e) Residual Business Percentage 12.3(b)
17
Term Section ---- ------- Restructuring Notice 8.1 ROFO Required Minimum Price 8.4(f) ROFO Termination Notice 8.4(d) Selected Business Percentage 12.3(b) Special Distributions 8.2(c) Special ROFO Assets 8.4(a) Special ROFO Asset Value 8.4(c) Special ROFO Event 8.4(a) Special ROFO Notice 8.4(a) Special ROFO Period 8.4(a) Special ROFO Process 8.4(a) Tax Matters Partner 3.1(g) Third Party Programming 3.1(h) Transfer Assets 8.3(a) Transferee 8.2(i) TWE Preamble TWE Cable Expenses 3.1(h) TWE System Opportunity 10.2(b) TWE Opportunity Notice 10.2(b) Valuation Notice 8.4(c) Wholly-Owned Affiliates 3.1(h)
SECTION 2 THE PARTNERSHIP AND ITS BUSINESS 2.1 Formation. (a) Formation of Partnership. The Partnership was initially formed as a general partnership as of September 9, 1994 pursuant to the provisions of the Act. The Partners hereby expressly agree to continue the Partnership. Except as provided in this Agreement, all rights, liabilities, and obligations of the Partners (in their capacities as such), both as among themselves and with respect to Persons not parties to this Agreement, shall be as provided in the Act, and this Agreement shall be construed in accordance with the provisions of the Act. To the extent that the rights or obligations of any Partner are different by reason of any provision of this Agreement from what they 18 would be under the Act in the absence of such provision, this Agreement shall, to the extent permitted by the Act, control. (b) Formation of Subsidiary. The Selected Subsidiary was formed on July 9, 2002 and the Partnership remains its sole member. The Selected Subsidiary shall not engage in any activities prior to the Closing Date other than (i) in connection with seeking to obtain (A) all consents or waivers from the relevant Franchising Authorities, Governmental Authorities or other third parties necessary to transfer the Franchises for all Systems in the Selected Business, (B) any required consents or waivers from the Federal Communications Commission to transfer licenses granted by the Federal Communications Commission to Systems, divisions or other business units in the Selected Business, and (C) all material consents or material approvals of all Persons, other than Governmental Authorities, required for or in connection with the execution, delivery and performance of the Restructuring Transaction Agreements and the consummation of the Restructuring Transactions and (ii) as required in connection with the Refinancing Arrangements (provided that such activities do not otherwise violate this Partnership Agreement). Notwithstanding anything in this Agreement to the contrary, at no time shall the Selected Subsidiary be permitted, or have the power, to become an employer or to establish employee benefit plans or arrangements. 2.2 Partnership Name and Trade Names. (a) Partnership Name; Subsidiary Name. (i) Subject to the following sentence, the name of the Partnership shall continue to be "Time Warner Entertainment-Advance/Newhouse Partnership" or such other name(s) as may from time to time be agreed to by each of the Partners. Within 30 days following the Final Restructuring Date, the name of the Partnership shall be changed to a name selected by TWE and thereafter to such other name(s) as may from time to time be set forth by TWE; provided, however, that such name shall not include "Advance/Newhouse", "Advance", "Newhouse" or any derivation thereof. (ii) Subject to the following sentence, the name of the Selected Subsidiary shall continue to be "TWEAN Subsidiary, LLC" or such other name(s) as may be agreed to by each of the Partners. Following the Closing, the name of the Selected Subsidiary may be changed to such other name(s) as may from time to time be selected by Advance/Newhouse (subject to Intellectual Property Agreement). Within 30 days following the Final Restructuring Date, the name of the Selected Subsidiary shall be changed to a name selected by Advance/Newhouse and thereafter to such other name(s) as may from time to time may be set forth by Advance/Newhouse, in each instance subject to the Intellectual Property Agreement; provided, however, that such name shall not include "Time Warner Entertainment," "TWE" or any derivative thereof. (b) Trade Names. Until Closing, the business of each of the Partnership Systems shall continue to be conducted under the trade names used by the Partnership Systems immediately prior to the Restructuring Effective Date. Within 19 30 days following Closing, the trade names used by the Selected Business shall be changed in accordance with the Intellectual Property Agreement. Each other business of the Partnership shall be conducted under the name of the Partnership or, upon compliance with applicable laws and the Intellectual Property Agreement, any other name that TWE deems appropriate or advisable. (c) Assumed Name Filings. The Partnership and the Selected Subsidiary shall each file any assumed name certificates and similar filings, and any amendments thereto, that TWE or Advance/Newhouse respectively, considers appropriate or advisable. 2.3 Term of the Partnership. The term of the Partnership commenced on September 9, 1994 and, unless the Partnership is earlier terminated pursuant to Section 12 of this Agreement or otherwise, shall continue until December 31, 2045. 2.4 Purposes. (a) Generally. The purposes of the Partnership shall be, to the extent permitted under applicable law, to engage in the business, directly or indirectly through interests in one or more Subsidiaries (including the Selected Subsidiary), of: (i) acquiring, developing, owning, operating, managing, and selling the Systems and other assets from time to time contributed to the Partnership by the Partners; (ii) acquiring, developing, owning, operating, managing and selling additional Systems; (iii) acquiring, developing, owning, operating, managing, and selling, or investing in, businesses related to the operation of Systems, including without limitation programming and information services, personal communications and cable advertising businesses; (iv) developing, owning, operating, managing, and selling residential and business telephony services associated with such Systems, including alternative access services, personal communications services and other similar services; (v) developing, owning, operating, managing, and selling other businesses that utilize broadband distribution facilities, in addition to residential and business telephony services; (vi) managing Systems; (vii) selling at the retail level equipment and other goods used or useful in connection with the businesses described in clauses (i) through (vi) above; (viii) conducting other businesses desired by any of the Partners; and 20 (ix) engaging in all activities and transactions incidental to the foregoing (including owning or leasing real property and incurring Indebtedness). (b) Effect on Powers of Partners. The listing of the purposes of the Partnership in this Section 2.4 shall not be construed to impair the limitations on the powers of the Partners set forth in Section 3.2 or any of the other limitations expressly set forth in this Agreement. 2.5 Principal Office and Other Offices. The principal office of the Partnership shall be located at 290 Harbor Drive, Stamford, Connecticut. The Partnership may maintain other offices at other places as the Managing Partner deems advisable. 2.6 Foreign Qualification. The Partners shall take all necessary actions to cause the Partnership to be authorized to conduct business legally in all appropriate jurisdictions, including registration or qualification of the Partnership in those jurisdictions that provide for registration or qualification. 2.7 Fiscal Year. The Partnership's fiscal year (each, a "Fiscal Year") shall be the calendar year. The Partnership shall have the same Fiscal Year for Income Tax purposes and for financial and partnership accounting purposes. 2.8 Addresses of the Partners. The respective addresses of the Partners are set forth on the signature page to this Agreement. 2.9 Property. Except as otherwise contemplated herein or in the Restructuring Transaction Agreements, all assets and property, whether real, personal, or mixed, tangible or intangible, including contractual rights, owned or possessed by the Partnership shall be held or possessed in the name of the Partnership or in the name of an appropriate nominee, and such assets, property, and rights shall be deemed to be owned or possessed by the Partnership as an entity; and no Partner shall have any separate ownership interest in such assets, property, or rights. Each Partner's interest in the Partnership is personal property for all purposes. 2.10 Certain Compliance Policies. (a) The Partnership will, and each of the Partners will exercise its powers hereunder and under the Restructuring Transaction Agreements (including, without limitation, the Management Agreement) to cause the Partnership to, conduct its business and operations including the Selected Business and the Residual Business in such manner as to comply with the Consent Decrees, to the extent applicable, and any other laws and regulations applicable to the TWE Cable Division and its Affiliates. (b) TWE will provide Advance/Newhouse with copies of all reports submitted by TWE or its Affiliates with respect to the Consent Decrees (redacted as necessary with respect to matters not applicable to the Selected Business) and will notify Advance/Newhouse sufficiently in advance of any new consent decrees applicable to the TWE Cable Division and its Affiliates so that Advance/Newhouse may protect its interest 21 and, if it so chooses, to cause the consummation of a restructuring under Section 8.1 before the Selected Business becomes subject to such new consent decree. (c) Any litigation, compromise or regulatory activity (including lobbying) by the Selected Business will be conducted by Advance/Newhouse in its own name and will not be attributed to the Partnership or any member of the TWE Group. Any litigation, compromise or regulatory activity (including lobbying) by the Residual Business will not be attributed to the Selected Subsidiary or any member of the A/N Group. SECTION 3 MANAGEMENT OF THE PARTNERSHIP 3.1 Management Powers. (a) Generally. On and after the Restructuring Effective Date until the Closing Date, TWE will continue as Managing Partner of the Partnership ("Managing Partner") with exclusive management rights in respect of the conduct of the Partnership and the Residual Business; provided that Advance/Newhouse will, to the extent permitted by law, be entitled to exercise exclusive management rights in respect of the conduct of the Selected Business; and provided further that TWE Cable will continue to manage programming matters for the Selected Subsidiary and the Selected Business and provide other services to the Selected Subsidiary and the Selected Business on the terms and conditions set forth in the Services Agreement. From and after the Closing Date, TWE will continue as Managing Partner with exclusive management rights with respect to the Partnership and the Residual Business; provided that the Selected Subsidiary will be managed exclusively by Advance/Newhouse pursuant to the Management Agreement; and provided further that (i) TWE Cable will continue to manage programming matters for the Selected Subsidiary and the Selected Business and provide other services to the Selected Subsidiary and the Selected Business on the terms and conditions set forth in the Services Agreement and (ii) TWE will continue to manage the Delayed Transfer Assets to the extent required by the Contribution Agreement. (b) Rights, Powers, and Duties. The Managing Partner shall be responsible for the management and operations of the Partnership and shall have all powers necessary to manage and control the Partnership, to conduct its business, and to implement any decision of the Partners adopted pursuant to this Agreement, and all powers possessed by general partners under the Act. Notwithstanding the preceding sentence, the exercise by the Managing Partner of any of the powers described in the preceding sentence or listed below in this Section 3.1(b) is subject to Section 3.1(a), Section 3.2 and any other limitations set forth in this Agreement. Except as expressly provided herein, no Partner other than the Managing Partner shall have any right to vote on, or consent to, any action of any nature whatsoever taken or proposed to be taken by the Partnership and no Partner other than the Managing Partner shall give any consent on any matter or take any action as a Partner, including, without limitation, acting on behalf of or binding the Partnership, unless such matter or action shall first have been approved or consented to by the Managing Partner or the Executive Committee. Subject to the 22 foregoing, the powers of the Managing Partner include, without limitation, the power on behalf of the Partnership, for itself or on behalf of any Subsidiary of the Partnership, to: (i) construct, operate, maintain, improve, expand, buy, own, sell, convey, assign, mortgage, finance, refinance, rent, or lease real or personal property, which may be held in the name of the Partnership or any Subsidiary of the Partnership; (ii) enter into, perform, and carry out contracts and agreements of any kind necessary to, in connection with, or incidental to accomplishing the purposes of the Partnership; (iii) negotiate for and conclude agreements for the sale, exchange, or other disposition of all or any part of the property of the Partnership or of any Subsidiary of the Partnership, for property, cash, or on terms, or any combination thereof, or for the purchase or lease of additional property of the Partnership or any Subsidiary of the Partnership; (iv) bring and defend actions in law and equity; (v) execute and modify leases and other agreements (including leases and agreements for terms extending beyond the term of the Partnership or the term of any Subsidiary of the Partnership), and execute and modify options, licenses, or agreements with respect to any of the assets or the business of the Partnership or any Subsidiary; (vi) obtain loans, secured and unsecured, for the Partnership or any Subsidiary of the Partnership and secure the same by mortgaging, assigning for security purposes, pledging, or otherwise hypothecating, all or any part of the property and assets of the Partnership or of any Subsidiary of the Partnership (and in connection therewith to place record title to any such property or assets in the name or names of a nominee or nominees); (vii) prepay in whole or in part, refinance, recast, increase, decrease, modify, amend, restate, or extend any such mortgage, security assignment, pledge, or other security instrument, and in connection therewith to execute and deliver, for and on behalf of the Partnership or any Subsidiary of the Partnership, any extensions, renewals, or modifications thereof, any new mortgage, security assignment, pledge, or other security instrument in lieu thereof; (viii) draw, make, accept, endorse, sign, and deliver any notes, drafts, or other negotiable instruments or commercial paper; (ix) establish, maintain, and draw upon checking, savings, and other accounts in the name or any trade name of the Partnership or any Subsidiary of the Partnership in such banks or other financial institutions as the Managing Partner may from time to time select; 23 (x) employ, fix the compensation of, oversee, and discharge agents and employees of the Partnership and of any Subsidiary of the Partnership as the Managing Partner deems advisable in the operation and management of the business of the Partnership, including accountants, attorneys, architects, consultants, engineers, and appraisers, on such terms and for such compensation, as the Managing Partner shall determine; (xi) enter into management agreements with third parties pursuant to which the management, supervision, or control of the business or assets of the Partnership may be delegated to third parties for reasonable compensation; (xii) enter into joint ventures, general or limited partnerships, or other agreements relating to the Partnership's purposes; (xiii) compromise any claim or liability due to the Partnership or any Subsidiary of the Partnership; execute, acknowledge, verify, and file any notifications, applications, statements, and other filings that the Managing Partner considers necessary or desirable to be filed with any state or federal securities administrator or commission; (xiv) execute, acknowledge, verify, and file any and all certificates, documents, and instruments that the Managing Partner considers necessary or desirable to permit the Partnership or any Subsidiary of the Partnership to conduct business in any state; (xv) do any or all of the foregoing, discretionary or otherwise, through agents selected by the Managing Partner and compensated or uncompensated by the Partnership; and (xvi) take any other actions and execute any other contracts, documents, and instruments that the Managing Partner deems appropriate to carry out the intents and purposes of this Agreement. (c) Composition of Executive Committee. A committee (the "Executive Committee") shall be established which shall be composed of from three to six individuals. The Executive Committee shall only have the power to act with regard to those matters set forth in Section 3.2 hereof. Up to three of the members of the Executive Committee shall be designated from time to time by TWE, up to two of the members of the Executive Committee shall be designated from time to time by Advance/Newhouse, and one of the members of the Executive Committee shall be designated from time to time by Paragon. Any member of the Executive Committee may be removed and replaced at any time, and from time to time, by the Partner that originally designated such member. Any Partner, or at least two members of the Executive Committee, may call a special meeting of the Executive Committee upon no less than 48 hours' notice to each member. Each designated member of the Executive Committee shall have one vote. The affirmative vote (or written consent) of all of the voting power of all members of the Executive Committee (whether or not present) shall constitute action by the Executive 24 Committee. Regular or special meetings of the Executive Committee may be held in person or telephonically. Each member of the Executive Committee entitled to vote at any meeting of the Executive Committee may authorize another person to act for him by proxy (provided that such proxy must be signed by such member or his attorney-in-fact and shall be revocable by such member at any time prior to such meeting). (d) Day-to-Day Conduct of Partnership Business. On and after the Restructuring Effective Date, the day-to-day operations of the Residual Business shall be the responsibility of the Managing Partner and the day-to-day operations of the Selected Business shall be the responsibility of Advance/Newhouse. (e) Executive Officers. The Managing Partner may delegate that part of its day-to-day operational responsibility for the Partnership as the Managing Partner deems reasonable and prudent to individuals, who will be the Executive Officers of the Partnership. (f) Fiduciary Obligations. To the greatest extent permitted by law, a Partner shall not be liable to another Partner under this Agreement or the Act with respect to any business of the Partnership (whether the Selected Business or the Residual Business) by reason of any fiduciary or similar duty, provided that this section shall in no way excuse any Partner from the performance of its obligations and liabilities under this Agreement or the other Transaction Agreements.. (g) Tax Matters Partner. The tax matters partner of the Partnership pursuant to Code Section 6231(a)(7) (the "Tax Matters Partner") shall be TWE or any successor tax matters partner designated by TWE. The Tax Matters Partner shall , except as otherwise provided in Section 5.11, have all powers necessary to perform fully its responsibilities under the Code. To the extent and in the same manner as provided by applicable law, the Tax Matters Partner (i) shall furnish the name, address, and taxpayer identification number of each Partner to the Secretary of the Treasury or his delegate and (ii) shall keep each Partner informed of any administrative and judicial proceedings for the adjustment at the Partnership level of any items required to be taken into account by such Partner for income tax purposes. The Tax Matters Partner shall give notice to each Partner of a Partnership audit affecting such Partner. The Tax Matters Partner shall prepare and file, or cause to be prepared and filed, all tax returns (including amended tax returns) filed by the Partnership. The Tax Matters Partner shall be reimbursed by the Partnership for all out-of-pocket costs and expenses incurred by it in connection with any administrative or judicial proceeding with respect to any tax matter involving the Partnership or the Partners in their capacity as Partners; provided, that, with respect to any taxable period (or portion thereof) beginning on or after the Restructuring Effective Date, such reimbursement shall be made only out of cash attributable to the Residual Business, and not the Selected Business. (h) Compensation of Partners and Reimbursement of Expenses. (i) TWE shall be compensated by the Partnership for its services as Managing Partner in an amount equal to (A) the Partnership's pro rata share, 25 based on the ratio of the number of Subscribers served by the Partnership Systems to the total number of Subscribers served by the Partnership Systems and the Other TWE Systems, of the following: (1) TWE Cable Expenses (as defined below), (2) after receipt of evidence reasonably satisfactory to Advance/Newhouse of services received by the TWE Cable Division therefor on or prior to the Closing Date, the management fees payable by TWE to USW pursuant to Section 8(h) of the Admission Agreement, dated as of May 16, 1993, between TWE and USW, attributable to such services, and (3) TWE's obligations under Section 17.7(b) of the TWE Partnership Agreement (or any successor provision) to reimburse ATW with respect to options exercised by employees of TWE's Cable Division (other than (x) Eligible Option Holders (who are covered by paragraph (iii) below) and (y) system-level employees of TWE who perform substantially all of their duties on behalf of one or more Other TWE Systems), and (B) all specific costs and expenses incurred by TWE and its Affiliates on behalf of the Partnership. For purposes of the foregoing, "TWE Cable Expenses" shall mean all expenses incurred in connection with managing and operating the TWE Cable Division (other than direct and identifiable costs or expenses relating to the Other TWE Systems, which would not be appropriately allocated to the Partnership); provided that such expenses shall be calculated net of any management fees received by TWE with respect to the management of partially owned Systems ("Managed Systems"), it being understood that in determining the Partnership's pro rata share of any costs or expenses described in this Section 3.1(h), the Subscribers served by the Managed Systems shall be excluded from the number of Subscribers served by the Partnership Systems and the number of Subscribers served by the Other TWE Systems. By way of example, TWE Cable Expenses include, without limitation, the general costs and expenses incurred by or allocated to the TWE Cable Division in connection with the development of the Full Service Network and telephony service and legal expenses incurred by the TWE Cable Division in connection with legal proceedings (such as "test cases") which generally affect the TWE Cable Division, but do not include expenses incurred in connection with the current operations of NY 1. Notwithstanding the foregoing, to the extent that any TWE Cable Expenses are paid more than one year beyond the end of the year in which such expenses arise, the Partnership shall reimburse TWE for such expenses when such expenses are paid; and to the extent that any TWE Cable Expenses are paid more than one year in advance of the year in which they arise, the Partnership shall reimburse TWE for such expenses when they are paid. The Partnership shall reimburse TWE for all costs and expenses for each calendar month for which TWE is entitled to reimbursement hereunder on the fifteenth day of such month based on TWE's reasonable estimate thereof; provided that any discrepancies between actual costs (as set forth in a certificate signed by an appropriate officer of TWE) and estimated costs and expenses shall be settled quarterly in arrears by payment by the Partnership to TWE of the amount of any underpayment for such quarter or by allocating to the Partnership a credit against future payments required by this paragraph in the amount of any overpayment for such quarter. During the 120 days following Closing, the Advance/Newhouse Accountants shall have the right to audit of TWE's records relevant to reimbursements from the Partnership pursuant to this subparagraph that were charged to the Selected Business. The costs and expenses of such audit shall be borne by Advance/Newhouse. TWE and Advance/Newhouse agree that no adjustment shall be 26 made to any such charge to the Selected Business in the event that the extent of any disagreement between the parties shall be less than $500,000. (ii) Subject to the Services Agreement, TWE, as Managing Partner, shall make all programming and any other service or product decisions with respect to the Partnership Systems, and shall use reasonable best efforts to cause such systems to be included in all programming and other relevant agreements to which the TWE Cable Division or any of its Controlled Affiliates is a party. TWE shall be compensated by the Partnership for such programming as follows (whether or not the Partnership Systems are included within such programming or other agreements): (A) With respect to Third Party Programming (as defined below), the Partnership shall pay TWE for such programming at a net effective rate (taking into account the appropriate economic benefit and/or detriment to TWE, if any, including, without limitation, discounts, credits, marketing support, rate reimbursement, advertising support, channel position fees, rebates, prepayment loans, deductions for unallocated accounts and other incentives) equal to the net effective rate per subscriber paid or accrued for such programming by the TWE Cable Division or its Controlled Affiliate pursuant to the master programming agreement or similar agreement between the provider of such programming and the TWE Cable Division or such Controlled Affiliate. (B) With respect to any other programming, the Partnership shall pay TWE for such programming at a rate equal to the pro rata portion of the costs to TWE or such Affiliate of producing such programming (such pro rata portion to be determined based on the ratio of the number of Subscribers served by the Partnership Systems offering such programming to the total number of Subscribers served by the Partnership Systems and the Other TWE Systems offering such programming, or, in the case of a la carte programming, the ratio of the number of Partnership System Subscribers subscribing to such programming to the number of Subscribers of the Partnership Systems and the Other TWE Systems subscribing to such programming). For the purpose of the foregoing, "Third Party Programming" shall mean (x) any programming purchased by the TWE Cable Division or any of its Controlled Affiliates from any person that is not a Wholly-Owned Affiliate (as defined below) of TWE and (y) any programming (including, without limitation, HBO and Cinemax) purchased by the TWE Cable Division or its Controlled Affiliates from TWE or any of its Wholly-Owned Affiliates (as defined below), provided, with respect to this clause (y), that (1) such programming is offered by TWE or such Affiliate to unaffiliated third parties for use on Systems, and (2) the amount paid by the TWE Cable Division or its Controlled Affiliates for such programming is consistent with the amount paid for such programming by similarly situated third parties and is otherwise consistent with the principles previously agreed to by the parties. "Wholly-Owned Affiliate" of TWE shall mean (x) any division or subdivision of TWE or (y) any direct or indirect subsidiary of TWE all of the capital stock or other equity interests of which are owned, directly or indirectly, by TWE. 27 (iii) Upon exercise by any Eligible Option Holder (as defined below) of options to purchase securities of ATW or any of its Affiliates ("ATW Securities"), the Partnership shall pay to TWE for each share of stock or each $1,000 principal amount of debt securities, as the case may be (such share or $1,000 principal amount being referred to herein as a "unit" of ATW Securities), issuable upon exercise of such options an amount equal to the excess of (A) the Closing Price (as defined below) of a unit of such ATW Securities as of the date of exercise, over (B) either (1) for options issued prior to the Initial Closing Date, the greater of (x) the exercise price paid by such Eligible Option Holder for each such unit of ATW Securities and (y) the Closing Price of a unit of such ATW Securities on the Initial Closing Date, or (2) for options issued after the Initial Closing Date, the exercise price paid by such Eligible Option Holder for each such unit of ATW Securities. For the purpose of this Section 3.1(h)(iii), the term "Eligible Option Holder" shall mean any officer or other employee of the Partnership or of TWE or any of its Subsidiaries who (x) in such capacity performs substantially all of his or her duties on behalf of the Partnership and (y) has been, or from time to time is, issued options to purchase units of ATW Securities; and the term "Closing Price" shall mean, with respect to any ATW Securities on any day, the last reported sale price of a unit of such ATW Securities (regular way) on such day as shown on the New York Stock Exchange ("NYSE") Composite Transaction Tape, or in case no such sale takes place on such day, the average of the closing bid and asked prices of a unit of such ATW Securities on such day on the NYSE, or, if such ATW Securities are not listed or admitted to trading on the NYSE, on the principal national securities exchange on which such ATW Securities are listed or admitted to trading, or, if they are not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices of such ATW Securities on such day as reported by NASDAQ, or if such ATW Securities are not so reported, the average of the closing bid and asked prices of a unit of such ATW Securities on such day as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by ATW for that purpose; provided that in each case, the Closing Price shall be equitably adjusted to take into account any recapitalizations, reclassifications, mergers, consolidations, spin-offs, extraordinary dividends or distributions, subdivisions or combinations or the like affecting the ATW Securities. (iv) Except as expressly provided herein, including without limitation Section 3.1(g), Section 3.1(h) and Section 13.1 of this Agreement, or in the Original Contribution Agreement, no Partner shall be entitled, without the prior written consent of the other Partners, to compensation for its services on behalf of the Partnership or to be reimbursed for any costs or expenses incurred by such Partner or any of its Affiliates, agents, or representatives. (v) Each of the Partners shall bear its own expenses, including fees and expenses of legal counsel, financial advisors, brokers or finders, and consultants incurred by it or its Affiliates in the negotiation and preparation of this Agreement. 28 (vi) Notwithstanding any provision in this Agreement to the contrary, on or prior to the Closing Date, the aggregate payments to be made by the Partnership to TWE for management fees and reimbursement for exercise of options with respect to any Fiscal Year pursuant to Section 3.1(h)(i) and Section 3.1(h)(iii) shall not exceed three percent (3%) of the Partnership's revenues for such Fiscal Year. The limitations set forth in this Section 3.1(h)(vi) shall be applied separately with respect to each Fiscal Year. (vii) The Selected Business will pay cash in respect of all periods ending on or prior to the Closing Date for a portion of all amounts due and owing by the Partnership during such periods that are allocable to the Selected Business, including, without limitation, amounts due under the foregoing provisions of Section 3.1(h) (other than clause (i)(A)(3) or clause (iii) of this Section 3.1(h)), the AOL High Speed Services Agreement and Programming Costs (as defined in the Services Agreement), and Section 3.1(g), such portion to be calculated in the ordinary course of business consistent with past practice (the "Pre-Closing Operating Costs"); provided, that no portion of the costs, expenses or fees incurred by or on behalf of the Partnership in connection with any financing arrangements obtained by it after the Selection Date will be paid by the Selected Business, except for one-third of such costs, fees and expenses for financings obtained prior to the Restructuring Effective Date; provided further that the Selected Business shall not pay more than $1.5 million in the aggregate of such costs, fees and expenses. For the avoidance of doubt, and notwithstanding anything in this Agreement to the contrary, neither Advance/Newhouse nor the Selected Business shall have any liability for any reimbursement obligations (x) pursuant to clause (i)(A)(3) or clause (iii) of this Section 3.1(h) after the Restructuring Effective Date or (y) pursuant to Section 3.1(h) or Section 3.1(g) for any period after the Closing Date (subject to the obligations of the Selected Business after the Closing as provided in the other Transaction Agreements). (viii) For the avoidance of doubt, the amount of financing costs, fees and expenses to be borne by the Selected Business as described in clause (vii) above shall be borne without duplication, by reason of (x) there being reduced deductions to Net Debt under Section 3.2(e)(iii) of the Master Transaction Agreement, to the extent such cost, fee or expense was satisfied with cash payments from the Partnership prior to the Restructuring Effective Date or (y) otherwise, through cash payments from the Selected Business or the Advance/Newhouse Group to TWE for costs, fees and expenses satisfied after the Restructuring Effective Date. (ix) With respect to all amounts owed to TWE by the Partnership under Section 3.1(h) or Section 3.1(g), the Selected Business shall only be responsible for paying the amounts described in clause (vii) and the Residual Business shall be responsible for all remaining amounts. 3.2 Limitations On Management Powers. Notwithstanding any provision in this Agreement or any Restructuring Transaction Agreement to the contrary, and in addition to any other consent or approval that may be required by the express terms of this Agreement, neither the Partnership nor any of its Subsidiaries shall, and neither the 29 Managing Partner nor any Partner individually shall have the authority to, and neither TWE nor Advance/Newhouse shall, with respect to the Managed Business, cause the Partnership or any of its Subsidiaries to, take any of the following actions without (i) the consent of the Partners or (ii) the unanimous consent (in person or by proxy) of all members of the Executive Committee: (a) sell, assign, or otherwise dispose of all or substantially all of the assets of such Managed Business, taken as a whole, except upon the restructuring of the Partnership in accordance with Section 8 or Section 12 of this Agreement; (b) merge or consolidate such Managed Business with any other Person; (c) liquidate or dissolve such Managed Business; (d) admit any new member, or otherwise issue equity in, such Managed Business, or establish the terms and conditions of any such admission or issuance; (e) incur, create, or assume any additional Indebtedness if the ratio of (x) all Indebtedness of such Managed Business (including such additional Indebtedness), to (y) EBITDA of such Managed Business for the last four fiscal quarters, would exceed 5:1; (f) enter into a new line of business that is reasonably expected to require an investment in excess of $50,000,000 without providing three months' prior written notice to the Partners; (g) require capital contributions from any Partner; or (h) commence any bankruptcy or insolvency proceeding, acquiesce in the appointment of a receiver, trustee, custodian or liquidator, admit to the material allegations of a petition filed against such Managed Business in any bankruptcy proceeding or make, execute or deliver any general assignment for the benefit of such Managed Business's creditors. In addition, notwithstanding any provision in this Agreement or any Restructuring Transaction Agreement to the contrary, and in addition to any other consent or approval that may be required by the express terms of this Agreement, neither the Partnership nor the Managing Partner shall have the authority to, and shall not cause the Partnership to, take any of the following actions without (x) the consent of the Partners or (y) the unanimous consent (in person or by proxy) of all members of the Executive Committee: (A) sell, give, assign, hypothecate, pledge, encumber, grant a security interest in or otherwise dispose of (whether by operation of law or otherwise) any equity interest in the Selected Subsidiary (except in accordance with the Consent agreement executed by TWE and Paragon as of the date hereof in connection with the Refinancing 30 Arrangements) or (B) enter into any agreement that would restrict distributions of cash or other assets from the Selected Subsidiary to Advance/Newhouse. 3.3 Financing the Selected Business. From and after the Restructuring Effective Date, (a) the Partnership shall promptly remit to Advance/Newhouse (or to the account established in clause (c) below) any cash amounts thereafter received by the Partnership that should have been received by the Selected Business; (b) Advance/Newhouse shall be solely responsible for providing cash and any other working capital needed by the Selected Business, including for any amounts due and owing to TWE or any of its Affiliates pursuant to the Restructuring Transaction Agreements; and (c) Advance/Newhouse shall have the right to designate a commercial bank account, reasonably acceptable to TWE, for deposit of all cash receipts from the Selected Business, and the Partnership shall authorize the distribution of any positive balance in such account to Advance/Newhouse no later than three business days following Advance/Newhouse's request therefor; provided, however, that such request is accompanied by a representation of Advance/Newhouse that the amount of such distribution does not exceed the balance of such account (after taking into consideration all other pending checks and disbursements therefrom). SECTION 4 PARTNERSHIP CAPITAL 4.1 Partnership Units. All Prior Partnership Units held or receivable by the Partners immediately prior to the execution hereof are hereby converted as follows: (a) TWE and Paragon. (i) TWE's Prior Common Partnership Units are hereby converted into 9715 Series RB Common Partnership Units and TWE's Prior Preferred Partnership Units are hereby converted into 24,415 Series C Preferred Partnership Units (which shall be deemed to have been issued on the Fourth Effective Date); and (ii) Paragon's Prior Common Partnership Units are hereby converted into 285 Series RB Common Partnership Units and Paragon's Prior Preferred Partnership Units are hereby converted into 150,190 Series A Preferred Partnership Units (which shall be deemed to have been issued on the First Effective Date), 30,084 Series B Preferred Partnership Units (which shall be deemed to have been issued on the Second Effective Date), 27,264 Series B Preferred Partnership Units (which shall be deemed to have been issued on the Third Effective Date) and 2,732 Series C Preferred Partnership Units (which shall be deemed to have been issued on the Fourth Effective Date), respectively. (b) Advance/Newhouse. Advance/Newhouse's Prior Partnership Units are hereby converted into 100 Series SB Common Partnership Units. 31 4.2 Contributions. (a) No Further Contributions Required. No Partner shall be required to make further capital contributions. (b) Treatment of Contributions. Any capital contributed to the Partnership by TWE or Paragon after the Restructuring Effective Date, and any capital contributed to the Partnership by any Partner on the Restructuring Effective Date, shall be applied to and used for the exclusive benefit of the Residual Business. Any capital contributed to the Partnership by Advance/Newhouse after the Restructuring Effective Date shall be applied to and used for the exclusive benefit of the Selected Business. SECTION 5A TAX MATTERS RELATING TO RESTRUCTURING TRANSACTIONS 5A.1 Redemption of Advance/Newhouse's Partnership Interest. Advance/Newhouse, TWE and Paragon agree that, as of the Restructuring Effective Date, for all Income Tax Purposes, the Selected Business shall be treated as having been distributed to Advance/Newhouse in complete redemption of its interest in the Partnership. Accordingly, as of the Restructuring Effective Date, Advance/Newhouse shall no longer constitute a partner of the Partnership for all Income Tax purposes, and any reference in Section 5 (other than Section 5.9, 5.10 or 5.11) to "Partner" or "Partners" shall not include Advance/Newhouse. 5A.2 No Partnership Between Selected Business and Residual Business. Advance/Newhouse, TWE and Paragon agree to take the position for all Income Tax purposes that the Selected Business and the Residual Business are not operated as a partnership following the Restructuring Effective Date, unless required to do otherwise as a result of a Final Determination that the Selected Business and Residual Business are operated as a partnership. In furtherance of the foregoing, the parties agree to the following: (i) Distributions to TWE and Paragon, and the Partnership distributions provided in Section 5.1, shall be made only out of cash attributable to the Residual Business (and not the Selected Business), and the allocations provided in Sections 5.3, 5.5 and 5.6 shall be made only with respect to the Residual Business (and not the Selected Business); (ii) Advance/Newhouse shall not be entitled to any distributions of cash from the Partnership under Section 5, except as provided in Section 3.3(c) and Section 5.9; (iii) Advance/Newhouse shall not share in any portion of any item of income, gain, loss, deduction or other tax items attributable to the Residual Business; 32 (iv) All items of income, gain, loss, deduction and other tax items attributable to the Selected Business shall be treated as derived directly by Advance/Newhouse (and not through an interest in the Partnership) for all Income Tax purposes, except as may be required as a result of a Final Determination that the Selected Business and Residual Business are operated as a partnership; and (v) All items of income, gain, loss, deduction and other tax items attributable to the Residual Business shall be allocated between TWE and Paragon pursuant to the provisions of Section 5. 5A.3 Recharacterization as Partnership for Tax Purposes. In the event of a Final Determination that the Selected Business and the Residual Business are operated as a partnership for any Income Tax purpose, the following provisions shall apply: (i) Income, gain, loss, deduction and other tax items attributable to the Selected Business shall be allocated 100% to Advance/Newhouse; and (ii) Income, gain, loss, deduction and other tax items attributable to the Residual Business shall be allocated between TWE and Paragon pursuant to the provisions of Section 5.3. SECTION 5 CASH DISTRIBUTIONS; ALLOCATIONS OF PROFITS AND LOSSES; ADJUSTMENTS AND TAX PROCEEDINGS 5.1 Distributions With Respect to the Residual Business. (a) Distributions Prior to Sixth Anniversary. Except as provided in Sections 5.1(d) and 5.1(e), prior to the sixth anniversary of the First Effective Date, all distributions by the Partnership shall be made as follows: (i) [Intentionally Omitted] (ii) With respect to any Fiscal Year in which Paragon and TWE are expected (based on the Managing Partner's good faith estimate) to be allocated Net Profit pursuant to Section 5.3(b)(ii), the Partnership shall, at least quarterly, distribute (to the extent not prohibited by any applicable contractual restrictions) all Distributable Cash to Paragon and TWE (on a pari passu basis in proportion to the excess amounts calculated for each of them in clauses (A) and (B) below, respectively): (A) until Paragon shall have received distributions, with respect to the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units held by it in an amount equal to the excess of (I) the sum of (x) such estimated Net Profit expected to be allocated to such Partner pursuant to Section 5.3(b)(ii)(A) and (y) the Net Profit allocated to such Partner pursuant to Section 5.3(b)(ii)(A) for all prior Fiscal Years, over (II) the distributions to Paragon pursuant to this Section 5.1(a)(ii)(A) for all prior Fiscal Years, which distributions shall be allocated among the Series A Preferred Partnership Units, the Series B Preferred 33 Partnership Units and the Series C Preferred Partnership Units held by Paragon, pari passu, in proportion to such excess amount calculated for each of them; and (B) until TWE shall have received distributions with respect to the Series C Preferred Partnership Units held by it in an amount equal to the excess of (I) the sum of (x) such estimated Net Profit expected to be allocated to such Partner pursuant to Section 5.3(b)(ii)(B) and (y) the Net Profit allocated to such Partner pursuant to Section 5.3(b)(ii)(B) for all prior Fiscal Years, over (II) the distributions to TWE pursuant to this Section 5.1(a)(ii)(B) for all prior Fiscal Years. (iii) After the Partnership has made distributions with respect to the Series A Preferred Partnership Units, Series B Preferred Partnership Units and Series C Preferred Partnership Units in accordance with clause (ii), the Partnership shall, at least quarterly, distribute (to the extent not prohibited by any applicable contractual restrictions) to the Partners Distributable Cash, in proportion to the respective amounts required to be distributed to each such Partner pursuant to this Section 5.1(a)(iii), in an amount equal to 25 percent of such Partner's Net Tax Amount for the taxable year that includes such calendar quarter (as estimated in good faith by the Managing Partner). The Managing Partner's estimate of such Partner's Net Tax Amount for such year shall be revised prior to each distribution for such year and upon the filing of the Partnership's Federal income tax return for such year, and following such revision, (y) the Partnership shall distribute to such Partner the excess (if any) of the amount that should have been distributed to such Partner pursuant to this Section 5.1(a)(iii) based on such revised estimate, over the amount actually distributed to such Partner pursuant to this Section 5.1(a)(iii), plus interest thereon at the rate paid by the Partnership on its senior Indebtedness, or (z) such Partner shall contribute to the Partnership the excess (if any) of the amount actually distributed to such Partner pursuant to this Section 5.1(a)(iii) over the amount that should have been distributed to such Partner pursuant to this Section 5.1(a)(iii) based on such revised estimate, plus interest thereon at the rate paid by the Partnership on its senior Indebtedness. To the extent there is insufficient available cash to make distributions pursuant to this Section 5.1(a)(iii) at the time required, the Partnership shall pay interest on such shortfall at the rate paid by the Partnership on its senior Indebtedness, and such interest shall be paid out of the Partnership's first available Distributable Cash. (iv) After the Partnership has made the distributions required by clauses (ii) and (iii), any remaining Distributable Cash shall, at least quarterly, be distributed to the Partners in accordance with their Residual Percentage Interests; provided, however, that during the period ending on the third anniversary of the Fourth Effective Date, distributions to any Partner pursuant to this Section 5.1(a)(iv) shall not, without the consent of TWE, exceed an amount which, when added to the distributions to such Partner pursuant to Section 5.1(a)(iii), exceed the sum of (x) such Partner's permitted "operating cash flow distribution," as determined pursuant to Treasury Regulation Section 1.707-4(b), and (y) the amount of Partnership indebtedness incurred by the Partnership during the taxable year that includes such calendar quarter and the proceeds of which are distributed to the Partners, to the extent such indebtedness is 34 included in such Partner's basis in its interest in the Partnership pursuant to Code Section 752 and Treasury Regulation Section 1.707-5(a)(2). (b) Distributions After Sixth Anniversary. Except as provided in Sections 5.1(d) and 5.1(e), on and after the sixth anniversary of the First Effective Date, all distributions by the Partnership shall be made as follows: (i) [Intentionally Omitted] (ii) With respect to any Fiscal Year in which Paragon and TWE are expected (based on the Managing Partner's good faith estimate) to be allocated Net Profit pursuant to Section 5.3(b)(ii), the Partnership shall, at least quarterly, distribute (to the extent not prohibited by any applicable contractual restrictions) all Distributable Cash to Paragon and TWE (on a pari passu basis in proportion to the excess amounts calculated for each of them in clauses (A) and (B) below, respectively): (A) until Paragon shall have received distributions, with respect to the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units held by it in an amount equal to the excess of (I) the sum of (x) such estimated Net Profit expected to be allocated to such Partner pursuant to Section 5.3(b)(ii)(A) and (y) the Net Profit allocated to such Partner pursuant to Section 5.3(b)(ii)(A) for all prior Fiscal Years, over (II) the distributions to Paragon pursuant to this Section 5.1(b)(ii)(A) and Section 5.1(a)(ii)(A) for all prior Fiscal Years, which distributions shall be allocated among the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units held by Paragon, pari passu, in proportion to such excess amount calculated for each of them; and (B) until TWE shall have received distributions with respect to the Series C Preferred Partnership Units held by it in an amount equal to the excess of (I) the sum of (x) such estimated Net Profit expected to be allocated to such Partner pursuant to Section 5.3(b)(ii)(B) and (y) the Net Profit allocated to such Partner pursuant to Section 5.3(b)(ii)(B) for all prior Fiscal Years, over (II) the distributions to TWE pursuant to this Section 5.1(b)(ii)(B) and Section 5.1(a)(ii)(B) for all prior Fiscal Years. (iii) After the Partnership has made distributions with respect to the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units in accordance with clause (ii), the Partnership shall, at least quarterly, distribute (to the extent not prohibited by any applicable contractual restrictions) to the Partners Distributable Cash, in proportion to the respective amounts required to be distributed to each such Partner pursuant to this Section 5.1(b)(iii), in an amount equal to 25 percent of such Partner's Net Tax Amount for the taxable year that includes such calendar quarter (as estimated in good faith by the Managing Partner). The Managing Partner's estimate of such Partner's Net Tax Amount for such year shall be revised prior to each distribution for such year and upon the filing 35 of the Partnership's Federal income tax return for such year, and following such revision, (y) the Partnership shall distribute to such Partner the excess (if any) of the amount that should have been distributed to such Partner pursuant to this Section 5.1(b)(iii) based on such revised estimate, over the amount actually distributed to such Partner pursuant to this Section 5.1(b)(iii), plus interest thereon at the rate paid by the Partnership on its senior Indebtedness, or (z) such Partner shall contribute to the Partnership the excess (if any) of the amount actually distributed to such Partner pursuant to this Section 5.1(b)(iii) over the amount that should have been distributed to such Partner pursuant to this Section 5.1(b)(iii) based on such revised estimate, plus interest thereon at the rate paid by the Partnership on its senior Indebtedness. To the extent there is insufficient available cash to make distributions pursuant to this Section 5.1(b)(iii) at the time required, the Partnership shall pay interest on such shortfall at the rate paid by the Partnership on its senior Indebtedness, and such interest shall be paid out of the Partnership's first available Distributable Cash. (iv) After the Partnership has made the distributions required by clauses (ii) and (iii), the Partnership shall distribute (to the extent not prohibited by any applicable contractual restrictions) any remaining Distributable Cash to Paragon and TWE on a pari passu basis in redemption of outstanding Series A Preferred Partnership Units, Series B Preferred Partnership Units and Series C Preferred Partnership Units, at a redemption price of $1,000 per Series A Preferred Partnership Unit, Series B Preferred Partnership Unit or Series C Preferred Partnership Unit, as the case may be, so that the Partnership shall have redeemed such Series A Preferred Partnership Units, Series B Preferred Partnership Units and Series C Preferred Partnership Units in accordance with the following: (A) Prior to the seventh anniversary of the First Effective Date, the Partnership shall have redeemed one-third of the number of Series A Preferred Partnership Units and Series B Preferred Partnership Units originally issued pursuant to Section 4.2(a)(v)(B) or Section 4.2(b) of the First Amended Agreement; (B) Prior to the eighth anniversary of the First Effective Date, the Partnership shall have redeemed, in the aggregate, two-thirds of the number of Series A Preferred Partnership Units and Series B Preferred Partnership Units, plus one-third of the number of Series C Preferred Partnership Units, in each case that were originally issued pursuant to Sections 4.2(a)(v)(B) and 4.2(b) of the First Amended Agreement; and (C) Prior to the ninth anniversary of the First Effective Date, the Partnership shall have redeemed, in the aggregate, all of the outstanding number of Series A Preferred Partnership Units and Series B Preferred Partnership Units, plus two-thirds of the number of Series C Preferred Partnership Units, in each case that were originally issued pursuant to Sections 4.2(a)(v)(B) and 4.2(b) of the First Amended Agreement; and 36 (D) On and after the tenth anniversary of the First Effective Date, the Partnership shall have redeemed all outstanding Series A Preferred Partnership Units, Series B Preferred Partnership Units and Series C Preferred Partnership Units. Each distribution pursuant to this Section 5.1(b)(iv) shall be made with respect to the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and Series C Preferred Partnership Units, as applicable, held by Paragon and TWE, pari passu, in proportion to the number of each outstanding. (v) After the Partnership shall have made all distributions required by clauses (ii), (iii) and (iv), any remaining Distributable Cash shall, at least quarterly, be distributed to the Partners in accordance with their Residual Percentage Interests. (c) [Intentionally Omitted] (d) Net Proceeds of Sale. Following the sale, exchange, or other disposition of all or substantially all of the assets of the Partnership, or upon the liquidation of the Partnership within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g), and after payment of, or adequate provision for, the debts and obligations of the Partnership, the remaining assets of the Partnership shall be distributed to the Partners (after giving effect to all contributions, distributions, allocations, and other Capital Account adjustments for all taxable years, including the year during which such liquidation occurs) as follows: (i) [Intentionally Omitted] (ii) First, the Priority Return accrued and unpaid as of the date of liquidation shall be distributed to Paragon and TWE in respect of the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units held by each of them, as applicable, on a pari passu basis in proportion to the amounts of such returns; (iii) Second, all outstanding Series A Preferred Partnership Units, Series B Preferred Partnership Units and Series C Partnership Units shall be redeemed at a redemption price of $1,000 per Series A Preferred Partnership Unit, Series B Partnership Unit or Series C Partnership Unit, as the case may be; and (iv) Finally, the remaining assets of the Partnership shall be distributed to the Partners so as to effectuate the agreement among the Partners that the distributions remaining after paying Taxes on the Partners' Special Income and Gross Profit and Gross Loss allocated under Section 5.3(d)(ii) with respect to the year of such distribution are in proportion to their respective Residual Percentage Interests, assuming all Partners are taxed at the Special Effective Tax Rate. (e) Withholding. All amounts withheld pursuant to the Code or any provision of any state or local tax law with respect to any payment or distribution to a 37 Partner shall be treated as amounts distributed to such Partner pursuant to Section 5.1 for all purposes of this Agreement. 5.2 Application of First Amended Agreement. For the avoidance of doubt, any reference to an allocation or distribution for any prior Fiscal Year pursuant to Section 5 (or any subsection thereof) of this Agreement shall include, as appropriate, any allocation or distribution pursuant to Section 5 (or the corresponding section thereof) of the First Amended Agreement. 5.3 Allocations of Net Profit and Net Loss With Respect to the Residual Business. (a) [Intentionally Omitted] (b) Allocations of Net Profit. Except as otherwise provided in Section 5.3(d), after giving effect to the allocations provided in Section 5.5, the Net Profit for each Fiscal Year (or portion thereof) shall be allocated to the Partners as follows: (i) First, Net Profit shall be allocated to Paragon and TWE (on a pari passu basis in proportion to the excess amounts calculated in clauses (A) and (B) below, respectively): (A) until Paragon shall have been allocated, with respect to the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units held by it, Net Profit in an amount equal to the excess, if any, of (I) the aggregate Net Loss allocated to Paragon pursuant to Section 5.3(c)(ii)(A) for all prior Fiscal Years over (II) the aggregate Net Profit allocated to such Partnership Units pursuant to this Section 5.3(b)(i)(A) for all prior Fiscal Years, which allocation shall be divided among the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units held by Paragon, pari passu, in proportion to such excess amount calculated for each of them; and (B) until TWE shall have been allocated, with respect to the Series C Preferred Partnership Units held by it, Net Profit in an amount equal to the excess, if any, of (I) the aggregate Net Loss allocated to TWE pursuant to Section 5.3(c)(ii)(B) for all prior Fiscal Years over (II) the aggregate Net Profit allocated to such Partnership Units pursuant to this Section 5.3(b)(i)(B) for all prior Fiscal Years. (ii) Second, Net Profit shall be allocated to Paragon and TWE (on a pari passu basis in proportion to the excess amounts calculated in clauses (A) and (B) below, respectively): (A) until Paragon shall have been allocated, with respect to the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units held by it, Net Profit in an amount equal to the excess, if any, of (I) the cumulative Series A Priority Return, 38 the cumulative Series B Priority Return and the cumulative Series C Priority Return, in each case accrued through the end of such Fiscal Year (or portion thereof) over (II) the aggregate Net Profit allocated to such Partner pursuant to this Section 5.3(b)(ii)(A) for all prior Fiscal Years, which amount of Net Profit shall be allocated among the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units held by Paragon, pari passu, in proportion to such excess amount calculated for each of them; and (B) until TWE shall have been allocated with respect to the Series C Partnership Units held by it, Net Profit in an amount equal to the excess, if any, of (I) the cumulative Series C Priority Return accrued through the end of such Fiscal Year (or portion thereof) over (II) the aggregate Net Profit allocated to such Partner pursuant to this Section 5.3(b)(ii)(B) for all prior Fiscal Years. (iii) Third, Net Profit shall be allocated to the Partners, in proportion to and to the extent of the amount required to be allocated pursuant to this Section 5.3(b)(iii), until each such Partner has been allocated Net Profit pursuant to this Section 5.3(b)(iii) in an amount equal to the excess of (y) such Partner's aggregate Maximum Income Amount for such Fiscal Year and all prior Fiscal Years, over (z) the aggregate Net Profit allocated to such Partner pursuant to this Section 5.3(b)(iii) for all prior Fiscal Years; and (iv) Thereafter, Net Profit shall be allocated to the Partners in accordance with their Residual Percentage Interests. (c) Allocations of Net Loss. Except as otherwise provided in Section 5.3(d), after giving effect to the allocations provided in Section 5.5, Net Loss for each Fiscal Year (or portion thereof) shall be allocated as follows: (i) First, Net Loss for such Fiscal Year (or portion thereof) shall be allocated to the Partners in accordance with their Residual Percentage Interests until each Partner's Capital Account is reduced to the sum of (x) the excess, if any, of the aggregate Net Profit allocated to such Partner pursuant to Section 5.3(b)(iii) for all prior Fiscal Years, over the aggregate Special Tax Amounts distributed to such Partner pursuant to Sections 5.1(a)(iii) and 5.1(b)(iii) for all prior Fiscal Years, plus (y) the amount of such Partner's Preferred Sub-Account. (ii) Second, Net Loss for such Fiscal Year (or portion thereof) shall be allocated to Paragon and TWE (on a pari passu basis in proportion to the excess amounts calculated in clauses (A) and (B) below, respectively): (A) with respect to the Series A Preferred Partnership Units and the Series B Preferred Partnership Units and the Series C Preferred Partnership Units held by Paragon, until Paragon's Capital Account has been reduced to the excess, if any, of the aggregate Net Profit allocated to Paragon 39 pursuant to Section 5.3(b)(iii) for all prior Fiscal Years, over the aggregate Special Tax Amounts distributed to pursuant to Sections 5.1(a)(iii) and 5.1(b)(iii) for all prior Fiscal Years, which allocation shall be divided among the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units held by Paragon, pari passu, in proportion the amount calculated with respect to each of them; and (B) with respect to the Series C Preferred Partnership Units held by TWE, until TWE's Capital Account has been reduced to the excess, if any, of the aggregate Net Profit allocated to TWE pursuant to Section 5.3(b)(iii) for all prior Fiscal Years, over the aggregate Special Tax Amounts distributed to pursuant to Sections 5.1(a)(iii) and 5.1(b)(iii) for all prior Fiscal Years. (iii) Thereafter, Net Loss for such Fiscal Year (or portion thereof) shall be allocated to the Partners in accordance with their Residual Percentage Interests. (d) Allocation of Gain or Loss Upon Sale. Notwithstanding Section 5.3(b) and Section 5.3(c), in the event of a sale, exchange, or other disposition of all or substantially all of the assets of the Partnership, or upon the liquidation of the Partnership within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g), beginning in the year in which the contract or agreement for such sale is entered into or, if such contract or agreement is entered into on or prior to the date on which the Partnership's Federal income tax return with respect to the prior year is required to be filed (not including any extensions), beginning in such prior year: (i) First, Gross Profit shall be allocated to Paragon and TWE (on a pari passu basis in proportion to the excess amounts calculated in clauses (A) and (B) below, respectively): (A) until Paragon shall have been allocated Gross Profit in an amount equal to the excess, if any, of (I) the sum of (x) the aggregate Net Loss allocated to Paragon pursuant to Section 5.3(c)(ii)(A) for all prior Fiscal Years, and (y) the cumulative Series A Priority Return, Series B Priority Return and Series C Priority Return accrued through the end of such Fiscal Year (or portion thereof), over (II) the aggregate Net Profit allocated to Paragon pursuant to Sections 5.3(b)(i)(A) and Section 5.3(b)(ii)(A) for all prior Fiscal Years, which allocation shall be divided among the Series A Preferred Partnership Units, the Series B Preferred Partnership Units and the Series C Preferred Partnership Units held by Paragon, pari passu, in proportion to such excess amount calculated for each of them; and (B) Until TWE shall have been allocated Gross Profit in an amount equal to the excess, if any, of (I) the sum of (x) the aggregate Net Loss allocated to TWE pursuant to Section 5.3(c)(ii)(B) for all prior Fiscal Years, and (y) the cumulative Series C Priority Return accrued through the end of such Fiscal Year (or portion thereof), over (II) the aggregate Net Profit allocated to TWE 40 pursuant to Sections 5.3(b)(i)(B) and Section 5.3(b)(ii)(B) for all prior Fiscal Years. (ii) Finally, Gross Profit and Gross Loss shall be allocated to the Partners so as to cause the credit balance in each Partner's Capital Account to equal, as nearly as possible, the amount each Partner would receive in a distribution on dissolution, if the distribution were made in accordance with Section 5.1(d). In the event that such sale or liquidation does not take place within the year following the year of the signing of the contract or agreement, or upon the termination of such contract or agreement, if earlier, allocations of Gross Profit or Gross Loss shall be made to reverse, as rapidly as possible, the effect of any such allocations made pursuant to this Section 5.3(d). 5.4 Section 754 Adjustment. To the extent any adjustment to the adjusted tax basis of any asset of the Partnership pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Treasury Regulations. Any Partner may cause the Partnership to make any election permitted under Code Section 754. 5.5 Other Rules Governing Allocations With Respect to the Residual Business. (a) In the event that the Partnership is entitled to an income tax deduction for the excess of the Closing Price of a unit of TWX Securities on the Initial Closing Date over the exercise price paid by the Eligible Option Holder for such unit of TWX Securities, such deduction and an equal amount of Gross Loss shall be specifically allocated to TWE or Paragon, as appropriate, and TWE or Paragon, as appropriate, shall be deemed to have made a capital contribution to the Partnership in the same amount. (b) In the event that, pursuant to any Final Determination of the Partnership's Taxable Income or Taxable Loss or the Partner's distributive shares thereof, (i) the Partnership's Taxable Income or Taxable Loss is adjusted or (ii) the Partners' distributive shares of the Partnership's Taxable Income or Taxable Loss are adjusted, Gross Profit or Gross Loss shall be allocated to the Partners to reflect the adjustments to the Partnership's Taxable Income or Taxable Loss or the Partners' distributive shares thereof so as to place the Partners as rapidly as possible, in conjunction with any distribution or contribution pursuant to Section 5.1(a)(iii) and Section 5.1(b)(iii), in the same relative positions they would have been in had the Taxable Income or Taxable Loss or distributive shares thereof as adjusted been taken into account originally (including any interest with respect to any deficiency or any refund). 41 (c) In the event that interest is paid by the Partnership to a Partner pursuant to Section 5.1(a)(iii) or Section 5.1(b)(iii), a special allocation of Gross Profit shall be made to such Partner in an amount equal to the amount of such interest. (d) If any fees or other payments deducted for federal income tax purposes by the Partnership are recharacterized by a Final Determination of the Internal Revenue Service as nondeductible distributions to any Partner, then, notwithstanding all other allocation provisions, Gross Profit shall be allocated to such Partner (for each Fiscal Year in which such recharacterization occurs) in an amount equal to the fees or payments recharacterized. (e) All items of Partnership income, gain, loss, deduction, and any other allocations not otherwise provided for shall be allocated among the Partners in the same proportion as they share the Net Profits, Net Losses, Gross Profits or Gross Loss to which such items relate for the Fiscal Year. Any credits against income tax shall be allocated among the Partners in accordance with their Residual Percentage Interests. (f) For any year with respect to which the Partnership is required to pay New York City Unincorporated Business Tax, such tax shall be allocated among the Partners in a manner so that the benefit of any deduction, credit, exemption or exclusion that is available to the Partnership as a result of the activities, income or status of or payments by a particular Partner (a "Credit Partner") shall be allocated entirely to such Credit Partner. The foregoing shall be accomplished by charging the amount of such tax to the Capital Account of any Partner that is not a Credit Partner and by distributing to any Credit Partner an amount that bears the same proportion to such tax as such Credit Partner's Residual Percentage Interest bears to the Residual Percentage Interest of the Partner that is not a Credit Partner. (g) [Intentionally Omitted] (h) In the event that any item or items of income, gain, loss or deduction of the Partnership or any Partner is reallocated between the Partnership and any Partner, then the allocations of the income, gain, loss or deduction of the Company for the year in which such reallocation occurs shall be made in such a fashion that the Capital Accounts of all Partners, after taking into account any deemed contributions or distributions arising in connection with such reallocation, shall be, to the greatest extent possible, in the same amounts as they would have been in had such reallocation not occurred. 5.6 Tax Allocations With Respect to the Residual Business. (a) Income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership, including property purchased with cash contributed to the capital of the Partnership by a Partner shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for Federal income tax purposes and its initial 42 Gross Asset Value in accordance with the remedial allocation method set forth in Treasury Regulations Section 1.704-3(d). (b) If the Gross Asset Value of any asset of the Partnership is adjusted pursuant to paragraph (ii) of the definition of Gross Asset Value, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for Federal income tax purposes and its Gross Asset Value in accordance with Section 704(c) and the Treasury Regulations promulgated thereunder, including Treasury Regulations Sections 1.704-1(b)(4)(i) and 1.704-3(d). (c) Subject to Section 11.5, any election or other decision relating to any allocations pursuant to this Section 5.6 shall be made by the Partnership, upon the approval of such election or other decision by the Managing Partner, in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 5.6 are solely for purposes of Federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Partner's Capital Account or share of Net Profit, Net Loss, other items, or distributions pursuant to any provision of this Agreement. 5.7 Regulatory Allocations. The provisions of Section 5.3 (and Section 5A.3, if applicable), are intended to comply with Treasury Regulations Section 1.704-1(b) and shall be interpreted and applied in a manner consistent with such Treasury Regulation. The Managing Partner shall be authorized to make appropriate amendments to the allocation of items pursuant to Section 5.3 (and Section 5A.3, if applicable) if necessary to comply with Section 704 of the Code or the applicable Treasury Regulations thereunder; provided that, nothing in this Section 5.7 shall affect any amounts to be distributed to the Partners hereunder (including, in the event that Section 5A.3 becomes applicable, distributions to Advance/Newhouse from the Selected Business). 5.8 Allocations With Respect to the Residual Business in Event of Transfer. If any Partnership Units of TWE or Paragon are transferred in accordance with Section 6.1, the Net Profit and Net Loss of the Partnership shall be allocated between the periods before and after the transfer by the closing of the books method. As of the date of such transfer, the transferee shall succeed to the Capital Account, Common Capital Contribution, Series A Preferred Capital Contribution, Series B Preferred Capital Contribution and Series C Preferred Capital Contribution of the transferor Partner, to the extent that the transferor's Capital Account, Common Capital Contribution, Series A Preferred Capital Contribution, Series B Preferred Capital Contribution and Series C Preferred Capital Contribution relate to the transferred interest. This Section shall apply for purposes of computing a Partner's Capital Account and for federal income tax purposes. 5.9 Other Distributions. (a) Pre-Restructuring Effective Date Distributions. With respect to the period ending on the day immediately preceding the Restructuring Effective Date, the 43 Partnership has, on or immediately prior to the satisfaction of Advance/Newhouse's obligations under the Debt Assumption Agreement (as defined in the Master Transaction Agreement) on the Restructuring Effective Date, made certain distributions of cash to Advance/Newhouse, TWE and Paragon in accordance with the provisions of Section 5.1(a)(ii) and (iii) of the First Amended Agreement; provided, that no such distribution was made with respect to Taxes arising as a result of the Restructuring Transactions that would have been reflected in the calculation of Restructuring Indebtedness and/or Excess Tax Amount Indebtedness (as such terms are defined in the First Amended Agreement) pursuant to Section 8.2 of the First Amended Agreement. (b) Permitted Future Payments to Advance/Newhouse. Following the Restructuring Effective Date, the Partnership shall authorize the Selected Business to make payments to Advance/Newhouse out of funds available in the Selected Business as Advance/Newhouse requests in its sole discretion. 5.10 Adjustments. In the event that, following the Restructuring Effective Date, an adjustment is made by any Governmental Authority that results in an increase or decrease in Tax owed by any Partner with respect to its Partnership Interest (as defined in the First Amended and Restated Agreement) for any taxable year (or portion thereof) ending on or prior to the Restructuring Effective Date, the following provisions shall apply: (a) If the adjustment results in an increase in Tax: (i) no Partner shall have any right of reimbursement from any other Partner for such increase in Tax; and (ii) Advance/Newhouse shall have no right to additional distributions, other than from the Selected Business. (b) If the adjustment results in a decrease in Tax: (i) no Partner shall have any obligation to make any payment to any other Partner in respect of such decrease in Tax; and (ii) no Partner shall have any obligation to make contributions to the Partnership. 5.11 Tax Proceedings. The Partners agree as follows: (a) Tax Proceedings Relating to Non-Income Taxes. (i) Advance/Newhouse shall have sole control over any Tax Proceeding relating to Non-Income Taxes of the Selected Business, regardless of the taxable period to which the proceeding relates. 44 (ii) TWE shall have sole control over any Tax Proceeding relating to Non-Income Taxes of the Residual Business, regardless of the taxable period to which the proceeding relates. (b) Tax Proceedings Relating to Income Taxes. (i) TWE shall handle Tax Proceedings of the Partnership relating to Income Taxes for all taxable periods (or portions thereof) ending on or prior to the Restructuring Effective Date, pursuant to its authority as Tax Matters Partner. (ii) Advance/Newhouse shall have sole control over any Tax Proceeding relating to Income Taxes of the Selected Business for any taxable period (or portion thereof) that begins on or after the Restructuring Effective Date. (iii) TWE shall have sole control over any Tax Proceeding relating to Income Taxes of the Residual Business for any taxable period (or portion thereof) that begins on or after the Restructuring Effective Date. (c) Cooperation. (i) Advance/Newhouse agrees to provide such cooperation to TWE as TWE may reasonably request in connection with any Tax Proceeding, including providing TWE with access to those portions of the books and records of the Selected Business that may be relevant to such Tax Proceeding. (ii) TWE agrees to provide such cooperation to Advance/Newhouse as Advance/Newhouse may reasonably request in connection with any Tax Proceeding, including providing Advance/Newhouse with access to those portions of the books and records of the Residual Business that may be relevant to such Tax Proceeding. SECTION 6 TRANSFERS OF PARTNERSHIP INTERESTS 6.1 Restrictions on Transfer. (a) Transfers Generally Prohibited. Except in connection with a restructuring under Section 8.1, until a restructuring is effected in accordance with Section 8.1, no Partner shall, directly or indirectly, sell, transfer, assign, grant a participation in, or otherwise dispose of all or any part of its Partnership Interest (including through the issuance of equity interests in such Partner) unless: (i) the transaction complies with all agreements entered into by the Partnership with third parties to which transfers of Partnership Interests are subject; and (ii) the transferee of the Partner's Partnership Interest is admitted to the Partnership as a Partner and agrees to be bound by all the provisions of this Agreement; and 45 (iii) the transaction is (A) a transfer of all of a Partner's Partnership Interest (1) to a Newhouse Family Member, or to an Affiliate of Advance/Newhouse so long as at least 80% of the equity of such Affiliate is owned directly or indirectly by one or more Newhouse Family Members, in the case of Advance/Newhouse, (2) to a Wholly-Owned Affiliate of TWE, in the case of TWE, or (3) to TWE, ATW or a Wholly-Owned Affiliate of TWE or ATW, in the case of Paragon, (B) a transfer to the partners of TWE pursuant to a liquidation of TWE in which ATW or one or more of its Affiliates receives a majority of the Series RB Common Partnership Units owned by TWE, and ATW or such Affiliates agree to assume all the obligations of Managing Partner of the Partnership hereunder, (C) a transfer in connection with the incorporation of TWE (including any public offering of the stock of the corporate successor of TWE) pursuant to Article XIII of the TWE Partnership Agreement or otherwise, provided that ATW (or its Affiliates) exercises control over the corporate successor to TWE, and such corporate successor agrees to assume all the obligations of Managing Partner of the Partnership hereunder, (D) a transfer in connection with the incorporation of Advance/Newhouse or pursuant to a public offering of partnership units in Advance/Newhouse (or of stock in the corporate successor of Advance/Newhouse) so long as, after giving effect to such public offering, Newhouse Family Members would own directly or indirectly at least 20% of the equity interests, and a majority of the voting interests, in Advance/Newhouse (or its corporate successor); (E) an issuance by TWE of any partnership interest in TWE so long as, after giving effect to such issuance, ATW would directly or indirectly own an interest at least equal to the TWI Minimum Interest (as defined in the TWE Partnership Agreement as in effect on September 9, 1994); (F) a "spinoff" or other distribution of TWE or its corporate successor to the shareholders of ATW; or (G) a pledge by any Partner of all or any portion of its Partnership Interests to a bank or other financial institution in connection with securing a bona fide loan made to such Partner; and (iv) the transferee of such Partner's Partnership Interests is a domestically incorporated corporation, or a partnership or limited liability company, all of the partners or members of which are domestically incorporated corporations, or partnerships or limited liability companies of such type. For the purposes of the foregoing, "Newhouse Family Member" shall mean any Person who is a lineal descendant (including adoptees) of Meyer and Rose Newhouse, or any entity which is wholly-owned directly or indirectly by one or more of such lineal descendants, or any trust established for the sole benefit of one or more of such lineal descendants or their spouses. (b) Ownership. Except as expressly permitted by this Agreement, each Partner shall (i) be the owner of the Partnership Interest indicated in the Partnership's records as being owned by such Partner, and (ii) have sole voting power with respect to its Partnership Interest and will not grant any proxy with respect to such Partnership Interest, enter into any voting trust or other voting agreement or arrangement with respect to such Partnership Interest, or grant any other rights to vote such Partnership Interest; provided, however, that the foregoing shall not limit the ability of a 46 Partner to enter into agreements not inconsistent with this Agreement that restrict such Partner's ability to transfer its Partnership Interest. (c) Transferees Bound. After any sale, assignment, transfer, or other conveyance of a Partnership Interest in accordance with the provisions of this Agreement, the transferred Partnership Interest shall continue to be subject to all of the provisions of this Agreement, including the provisions of this Section 6. SECTION 7 FINANCING COVENANTS AND REPRESENTATIONS 7.1 Representations, Warranties and Covenants of Advance/Newhouse. (a) Advance/Newhouse represents and warrants to the TWE Group that as of the Restructuring Effective Date: (i) the ratio of (A) the sum of all outstanding Indebtedness of Advance/Newhouse, each of its Controlled Affiliates (including the Selected Business) to (B) EBITDA of the Selected Business for the last four fiscal quarters, is not in excess of 5:1. (ii) all financing arrangements entered into by any member of the Advance/Newhouse Group (A) permit the payments required by the Master Transaction Agreement and all Restructuring Transaction Agreements and all transactions contemplated thereby, and (B) are nonrecourse to all members of the TWE Group. (b) Advance/Newhouse hereby covenants and agrees that: (i) the ratio of (i) the sum of all outstanding Indebtedness of Advance/Newhouse, each of its Controlled Affiliates (including the Selected Business) to (ii) EBITDA of the Selected Business for the trailing last four complete fiscal quarters, shall not exceed 5:1; and (ii) all financing arrangements entered into by any member of the Advance/Newhouse Group shall (A) permit the payments required by the Master Transaction Agreement and all Restructuring Transaction Agreements and all transactions contemplated thereby, and (B) be nonrecourse to all members of the TWE Group. 7.2 Representations, Warranties and Covenants of TWE. (a) TWE represents and warrants to the Advance/Newhouse Group that as of the Restructuring Effective Date: (i) the ratio of (A) the sum of all Indebtedness of the Residual Business to (B) EBITDA of the Residual Business for the last four fiscal quarters, is not in excess of 5:1; and 47 (ii) all financing arrangements entered into by any member of the TWE Group (A) permit the payments required by the Master Transaction Agreement and all Restructuring Transaction Agreements and all transactions contemplated thereby, and (B) are nonrecourse to all members of the Advance/Newhouse Group (excluding the Selected Business prior to the Closing, but including the Selected Subsidiary). (b) TWE hereby covenants and agrees that: (i) the ratio of (i) the sum of all Indebtedness of the Residual Business to (ii) EBITDA of the Residual Business for the trailing last four complete fiscal quarters, shall not exceed 5:1; and (ii) all financing arrangements entered into by any member of the TWE Group shall (A) permit the payments required by the Master Transaction Agreement and all Restructuring Transaction Agreements and all transactions contemplated thereby, and (B) be nonrecourse to all members of the Advance/Newhouse Group (excluding the Selected Business prior to the Closing, but including the Selected Subsidiary). (c) The Partners and the Partnership have delivered to JP Morgan Chase Bank, as Collateral Agent, on its own behalf and on behalf of the other Secured Parties, a Consent and Agreement dated as of the Restructuring Effective Date (the "Refinancing Consent") relating to certain matters arising under the Credit Agreement and the Guarantee and Collateral Agreement entered into by Advance/Newhouse and certain of its Affiliates as of the Restructuring Effective Date as part of the Refinancing Arrangements. TWE and Paragon hereby extend to the Advance/Newhouse Group the same agreement set forth in clause 2(a)(vi) of such Refinancing Consent as if the same clause were set forth herein and additionally agree that as so incorporated herein the following clause "(or any subsequent refinancings of such refinanced debt)" shall be deemed to be included after the reference to "Credit Agreement" in such clause. SECTION 8 RESTRUCTURING OF PARTNERSHIP AT ELECTION OF EITHER PARTNER 8.1 Restructuring Rights. Advance/Newhouse or TWE, at any time after the Restructuring Effective Date may, upon written notice (the "Restructuring Notice") to the other Partner, state its intention to cause a restructuring of the Partnership. (a) On the earliest practical date following the delivery of a Restructuring Notice by either Advance/Newhouse or TWE (the date of consummation of restructuring, "Final Restructuring Date"), the Selected Business shall be distributed to Advance/Newhouse in complete liquidation of its Series SB Partnership Units as follows: (i) On the Final Restructuring Date, if such date is prior to the Closing Date, the Partnership shall duly execute and deliver to Advance/Newhouse, and Advance/Newhouse shall duly execute and deliver to the Partnership, a contribution agreement substantially in the form of the Contribution Agreement (including the bill of sale and assignment, instrument of assignment and assumption agreement attached as 48 exhibits thereto); provided, however, that all references to the Selected Subsidiary therein shall be deemed to be references to Advance/Newhouse and all references to Closing Date shall be deemed to be references to the Final Restructuring Date. (ii) On the Final Restructuring Date, if such date is on or following the Closing Date, the Partnership shall execute and deliver to Advance/Newhouse a stock power in blank or other similar form of instrument of assignment, transferring the Partnership's membership interests in the Selected Subsidiary to Advance/Newhouse free and clear of any liens created by the Residual Business and the TWE Group (iii) On the Final Restructuring Date, if such date is on or prior to Closing, each of the Partnership and TWE shall duly execute and deliver to Advance/Newhouse and Advance/Newhouse shall duly execute and deliver to the Partnership and TWE, an employee benefits agreement substantially in the form of the Employee Benefits Agreement; provided that references therein to the Closing Date shall be deemed to be references to the Final Restructuring Date. (iv) On the Final Restructuring Date, if such date is on or prior to Closing, each of the Partnership and TWE shall duly execute and deliver to Advance/Newhouse and Advance/Newhouse shall duly execute and deliver to the Partnership and TWE, an intellectual property agreement substantially in the form of the Intellectual Property Agreement; provided, however, that all references to the Selected Subsidiary therein shall be replaced with Advance/Newhouse and references therein to the Closing Date shall be deemed to be references to the Final Restructuring Date. (v) On the Final Restructuring Date, Advance/Newhouse shall pay cash to TWE by wire transfer of immediately available funds to an account designated by TWE in an amount equal to any accrued and unpaid Pre-Closing Operating Costs. (vi) On the Final Restructuring Date, the Parents Agreement and all restrictions thereunder shall automatically terminate without any further action of the parties. (vii) Consummation of a restructuring pursuant to this Section 8.1 shall be subject to compliance with applicable laws and receipt of all required approvals from Governmental Authorities not previously received. Each Partner will cooperate and use its commercially reasonable efforts to cause the restructuring to occur as promptly as practicable after the delivery of a Restructuring Notice, including obtaining all consents from Franchising Authorities, Governmental Authorities and other Persons required in connection with the restructuring and otherwise consummating the restructuring in compliance with all applicable laws. (b) As of the Final Restructuring Date, Advance/Newhouse shall no longer be deemed a Partner (as defined in this Agreement) and all of its Partnership Interests shall terminate, except for (x) the rights and obligations of Advance/Newhouse 49 under Section 5.11, this Section 8.1, Section 8.2, Section 8.3, Section 8.4, Section 11.3, Section 13 and Section 11.5 and (y) the rights set forth in the last three sentence of Section 3.1(h)(i). 8.2 Limitations with Respect to the Selected Business. Until January 1, 2005, Advance/Newhouse may not contribute or assign (on a beneficial basis or otherwise) any assets in the Selected Business or any rights related thereto (a "Contribution") to a partnership, limited liability company, joint venture or other entity (a "Contribution Entity"); provided that nothing herein shall be deemed to (i) prevent Advance/Newhouse from receiving any securities from a third party or parties in connection with a transaction under Section 8.3 or (ii) prevent any transfers of assets in the Selected Business to any Newhouse Family Member, so long as such transferee remains subject to the same provisions of this Agreement with respect to such transferred assets as does Advance/Newhouse. Following such date, Advance/Newhouse may make such contribution of all or any portion of the assets in the Selected Business, so long as the following terms are adhered to in connection with such contribution: (a) In connection with its contribution of assets in the Selected Business, Advance/Newhouse must receive and maintain at least 33.33% of the common equity interests (which may be characterized, in addition to or in lieu of common stock, as partnership interests, whether limited or general, or limited liability company interests) or other similar interests in a Contribution Entity, but subject to Section 8.2(i) below. (b) Advance/Newhouse shall not receive (except as provided in the provisos hereto), and the Contribution Entity shall be prohibited from providing, any consideration in connection with its contribution of assets in the Selected Business to a Contribution Entity other than common equity in such Contribution Entity; provided that nothing herein shall be deemed to limit receipt by Advance/Newhouse of (i) preferred equity interests in such Contribution Entity in consideration for (A) contributions by Advance/Newhouse of additional capital (not constituting assets in the Selected Business), whether in cash or in property, to a Contribution Entity; or (B) Advance/Newhouse foregoing receipt of distributions from the Contribution Entity that are otherwise permitted hereunder; or (ii) up to an aggregate amount equal to the sum of (x) the Assumed Debt (as defined in and as may be adjusted pursuant to the Master Transaction Agreement) plus (y) one-third of the Cash Amount (as defined in and as may be adjusted pursuant to the Master Transaction Agreement), which consideration may be received in any combination of cash or assumption of Indebtedness by the Contribution Entity. (c) Advance/Newhouse may receive distributions from the Contribution Entity, and the Contribution Entity may be allowed to make distributions to Advance/Newhouse, only as provided in this Section 8.2(c). Advance/Newhouse may receive distributions to the extent of its pro rata share of Operating Cash Flow (as hereinafter defined), it being understood and agreed that such Operating Cash Flow shall be determined on a cumulative basis during the entire period of Advance/Newhouse's ownership interest in the Contribution Entity ("Regular Distributions"). In addition to Regular Distributions, Advance/Newhouse may receive distributions to the extent of its 50 pro-rata ownership share in the Contribution Entity of the cash proceeds of (1) borrowings, (2) issuances of equity in the Contribution Entity, or (3) sales of assets by the Contribution Entity or its Subsidiaries ("Special Distributions"). Special Distributions (measured on a cumulative basis during the entire period of Advance/Newhouse's ownership interest in the Contribution Entity) to Advance/Newhouse out of the proceeds of borrowings or equity issuances or sales of assets of the Contribution Entity to which the right of first offer described in Section 8.3 does not apply shall not exceed Advance/Newhouse's pro-rata share of an amount equal to (x) 2 times (y) Contribution Entity EBITDA for the twelve month period calculated as of the end of the calendar month immediately preceding the date of the distribution; provided that in connection with an asset sale, in calculating Contribution Entity EBITDA pro forma effect shall be given such asset sale by reducing Contribution Entity EBITDA by the amount of Contribution Entity EBITDA generated by such assets during the preceding twelve month period. Special Distributions resulting from asset sales by the Contribution Entity to which the right of first offer applies will not be subject to the limitations set forth in the preceding sentence. For purposes of this Section 8.2(c), "Operating Cash Flow" shall mean, for any applicable period, the Contribution Entity's consolidated (if applicable) net income (x) plus, for such period, depreciation, amortization, decreases in working capital (other than cash) losses on sales of assets, equity losses, dividends or distributions from subsidiaries to the extent of any income of such subsidiaries previously excluded from this definition of Operating Cash Flow under clause (z) of this sentence, (y) minus, for such period, capital expenditures, increases in working capital (other than cash), gains on sales of assets, equity income (except to the extent of dividends or distributions actually received) and (z) minus, for such period, income from subsidiaries to the extent dividends or distributions from such entities are prohibited (by law or agreement), determined in accordance with generally accepted accounting principles consistently applied; and "Contribution Entity EBITDA" shall mean, for any applicable period, the Contribution Entity's consolidated (if applicable) operating income before interest, income taxes, depreciation and amortization for such period, determined in accordance with generally accepted accounting principles consistently applied; provided that if for any portion of any applicable period the Contribution Entity was not in existence, Operating Cash Flow and Contribution Entity EBITDA shall be calculated for such portion of the applicable period based on the results of operations of the assets in the Contribution Entity during such portion of the applicable period. It is understood and agreed that nothing in this Partnership Agreement shall be deemed to limit in any respect borrowings by the Contribution Entity or its subsidiaries for purposes other than distributions to its equity holders. For purposes of this clause (c), (i) borrowings by Advance/Newhouse in anticipation of the contribution of assets to, and which borrowings are assumed by, a Contribution Entity, and recourse borrowings by Advance/Newhouse that become nonrecourse to Advance/Newhouse upon the contribution of assets to the Contribution Entity, shall each be deemed borrowings by the Contribution Entity and the distribution of an equivalent amount to Advance/Newhouse, which shall be subject to the foregoing limitations, and (ii) any sale of assets by Advance/Newhouse or its Affiliate to a Contribution Entity for a price in excess of the fair market value of such assets shall be deemed a distribution of the amount in excess of such fair market value, which shall be subject to the foregoing limitations. 51 (d) Any sale or disposition by the Contribution Entity of assets in the Selected Business shall be subject to the right of first offer set forth in Section 8.3 below, but subject to Section 8.2(i) below. (e) Without the prior written consent of TWE, the equity interest in the Contribution Entity received by Advance/Newhouse shall not be assignable, other than an assignment of such interest, in whole or in part, to a Newhouse Family Member which is subject to the same provisions of this Partnership Agreement with respect to such transferred interest as are applicable to Advance/Newhouse. (f) Advance/Newhouse may pledge or otherwise encumber its equity interest in the Contribution Entity received in respect of the assets in the Selected Business contributed to the Contribution Entity provided that the institution holding such pledge or encumbrance agrees that in the event of foreclosure (or similar exercise of remedies), it may transfer such interest, but the transferee of such interest shall be subject to the same limitations set forth in this Section 8.2 and in Section 8.3 that are applicable to Advance/Newhouse. (g) In the event of any liquidation of the Contribution Entity Advance/Newhouse must receive (except for any properties or assets that have been sold or disposed of by the Contribution Entity without any violation of this Section 8.2) the Systems (and related assets and subscribers) in the Preferred Cluster Area (as defined in the First Amended Agreement) and in respect of other Systems (and related assets and subscribers), either the Systems (and related assets and subscribers) that were in the Selected Business or the Systems (and related assets and subscribers) that were received in exchange for such systems by the Contribution Entity and the governing documents relating to the Contribution Entity shall contain a provision to the effect set forth in this Section 8.2(g). (h) Any such Contribution to a Contribution Entity must be entered into by Advance/Newhouse in good faith as a true joint ownership enterprise of the contributed assets and not a disguised sale of the assets in the Selected Business. (i) Notwithstanding anything to the contrary in the foregoing in this Section 8.4, it is agreed that the Contribution Entity may transfer or assign a portion of the assets in the Selected Business that was initially transferred to it by Advance/Newhouse (alone or together with other assets) to another entity (the "Transferee") in return solely for a common equity interest in such entity, subject to the following limitations: (i) the fair market value of the assets in the Selected Business being contributed to the Transferee shall represent less than fifty percent (50%) of the fair market value of the total assets of the Selected Business owned by the contributing Contribution Entity; 52 (ii) none of the other equity owners in the Transferee is an Affiliate of any of the equity owners of the Contribution Entity or any of the Affiliates of such equity owners; (iii) the indirect, effective ownership interest of Advance/ Newhouse in the common equity of the Transferee (taking into account the ownership of Advance/Newhouse in the Contribution Entity) shall be at least sixteen and six tenths percent (16.6%); and (iv) the Transferee shall be subject to the provisions of Section 8.4 to the same extent as such provisions are applicable to the Contribution Entity. From and after the Closing, the provisions of this Section 8.2 shall become applicable to the Selected Subsidiary as well as to Advance/Newhouse so that the Selected Subsidiary shall also have the rights and obligations under this Section 8.2 as are applicable to Advance/Newhouse. 8.3 TWE Right of First Offer. (a) If at any time Advance/Newhouse or any of its Affiliates that succeed to its interest in the Selected Business (including, without limitation, the Selected Subsidiary) desires to sell or otherwise dispose of all or any portion of the assets of the Selected Business or any direct or indirect equity interest therein, but excluding the transactions referred to in Section 8.3(h) below (the "Transfer Assets"), Advance/Newhouse shall first offer to sell such Transfer Assets on the terms and subject to the conditions set forth in this Section 8.3, by giving written notice thereof to TWE (the "Offer Notice"). Advance/Newhouse may either provide an Offer Notice prior to commencing substantive discussions with or soliciting offers from third parties (a "Pre-Bid Offer Notice") or provide an Offer Notice after commencing substantive discussions or soliciting bids from other parties (a "Post-Bid Offer Notice"); provided it is understood and agreed that Advance/Newhouse may, in connection with a Pre-Bid Offer Notice, consult with and receive advice from investment bankers or other advisors as to what third parties are likely to offer so long as such investment bankers or advisors do not contact potential buyers in connection with providing such advice. It is understood and agreed that for all purposes of this Section 8.3, if substantive discussions with third parties are commenced, but such discussions do not result in offers being solicited, then after the lapse of six months from the date such substantive discussions have ended, such discussions shall no longer be considered to have taken place for purposes of determining if an Offer Notice is a Pre-Bid Offer Notice or a Post-Bid Offer Notice. (b) An Offer Notice shall specify: (i) the price for the Transfer Assets subject to the Offer Notice; (ii) the types of currency (and terms of, if applicable) for payment of such price, which currency may consist only of cash; debt; common stock; preferred stock; convertible preferred stock; or such other corporate security (an "Other Corporate Security") that (1) is generally accepted by the financial community for use in acquisition transactions and (2) may be replicated by ATW using commercially reasonable efforts; and (iii) other material terms of the proposed offer to sell, including, 53 without limitation, whether such transaction is to be tax-advantaged or tax-deferred, which terms shall be such that ATW could comply with or satisfy using commercially reasonable efforts. For purposes of this Section 8.3, commercially reasonable efforts shall include, without limitation, requesting any necessary shareholder, lender, governmental or other third party consents or approvals for the lawful issuance of such securities referred to above or the lawful undertaking of the transactions contemplated hereby that would be customary in comparable transactions. (c) Upon receipt of an Offer Notice, TWE may, within 10 days of receiving such Offer Notice, by written notice to Advance/Newhouse request information regarding the Transfer Assets subject to the Offer Notice reasonably required to enable TWE to evaluate the proposed Offer Notice (unless such information has been provided with or prior to the delivery of the Offer Notice). Within the earlier of: (x) 20 business days following receipt of the Offer Notice if TWE does not request additional information pursuant to the preceding sentence; (y) where the Transfer Assets are not owned by a Contribution Entity, 30 business days following receipt by TWE of written certification from Advance/Newhouse that the information provided by Advance/Newhouse to TWE is all the information that Advance/Newhouse has provided, or will provide, to prospective purchasers of the Transfer Assets (except for updated information to be supplied to maintain the accuracy of the furnished information); or (z) where the Transfer Assets are owned by a Contribution Entity, 30 business days following receipt by TWE of a written certification from Advance/Newhouse (the "Contribution Entity Certification") that TWE has been delivered such information as is reasonably required by TWE to enable TWE to evaluate the proposed Offer Notice and as is reasonably available to Advance/Newhouse or the Contribution Entity (which certification may accompany the Offer Notice in the event such information has been provided with or prior to the Offer Notice), but subject, in the case of clause (z), to Section 8.3(g)(i), TWE shall, by written notice to Advance/Newhouse, either accept or reject the offer set forth in the Offer Notice or make a counter-offer (which counter-offer shall contain a price, the types of currency (and the terms thereof) proposed to be paid and other material terms of the proposed counter-offer; provided, however, that to qualify as a proper counter-offer pursuant to this Section 8.3 any counter-offer by TWE must match the type or types of currency proposed by Advance/Newhouse and in the same proportions as proposed by Advance/Newhouse and, if Advance/Newhouse specifies a tax-advantaged or tax-deferred transaction, such counter-offer must also specify a similar transaction). If TWE disputes a Contribution Entity Certification given by Advance/Newhouse pursuant to Section 8.3(c)(z) that it has delivered to TWE such information as is reasonably required to enable TWE to evaluate the proposed Offer Notice and is reasonably available to Advance/Newhouse or the Contribution Entity, TWE shall give written notice of such dispute to Advance/Newhouse within 3 days of receipt of such certification from Advance/Newhouse. (d) If TWE does not accept, within the time period specified in Section 8.3(c) above, the offer set forth in the Offer Notice, or if TWE makes a proper counter-offer within such time period as set forth in Section 8.3(c) above, then, at the time of the lapse of such period for acceptance or receipt of a written notice of rejection of such offer or a counter-offer from TWE, Advance/Newhouse shall provide a written notice to TWE 54 as to whether Advance/Newhouse had provided a Pre-Bid Offer Notice or a Post-Bid Offer Notice. If a Pre-Bid Offer Notice was provided, the written notice delivered pursuant to this Section 8.3(d) shall contain a representation to the effect that neither Advance/Newhouse nor any investment bankers or advisors acting at the direction of or on behalf of Advance/Newhouse had previously commenced substantive discussions with or solicited bids from other parties in respect of the Transfer Assets subject to the Offer Notice; provided that if Advance/Newhouse must reoffer the Transferred Assets as contemplated pursuant to Sections 8.3(e) or (f) below, such representation shall only apply to solicitation of bids in connection with the most recent reoffer. (e) If TWE does not accept, within the time period set forth in Section 8.3(c) above, the offer set forth in the Offer Notice, then, subject to compliance with the time frames set forth in this Section 8.3(e) for execution of definitive agreements, Advance/Newhouse may sell the Transfer Assets subject to the Offer Notice to a third party that is not an Affiliate of Advance/Newhouse: (i) for the types of currency specified in the Offer Notice and in at least ninety-five percent (95%) of the minimum amount of each such type of currency set forth in the Offer Notice; (ii) in a tax-advantaged or tax-deferred transaction if Advance/Newhouse specified such a transaction in the Offer Notice; (iii) at a price equal to or greater than the greater of (A) the value of TWE's last proper counter-offer pursuant to Section 8.3(c) (if any such proper counter-offer was made) taking into account the amount and types of currency offered by TWE and (B) ninety-five percent (95%) of the price specified by Advance/Newhouse in the Offer Notice (such price, the "Required Minimum Price"); and (iv) on the other material terms specified in the Offer Notice. If Advance/Newhouse does not sign definitive agreements for such a sale pursuant to this Section 8.3(e) within (a) 90 days of TWE's non-acceptance of a Post-Bid Offer Notice or (b) 180 days of TWE's non-acceptance of a Pre-Bid Offer Notice, then the provisions of this Section 8.3 shall again be applicable. (f) If TWE accepts, within the time period set forth in Section 8.3(c) above, the offer set forth in the Offer Notice, or if Advance/Newhouse accepts a counter-offer submitted by TWE, upon such acceptance, the terms of such accepted offer or counter-offer, as the case may be, shall become binding upon the parties. Advance/Newhouse and TWE shall negotiate in good faith to enter into more formal agreements within 45 days of such acceptances (as the case may be), but it is understood and agreed by TWE and Advance/Newhouse that notwithstanding any failure to enter into more formal agreements, the terms of the accepted offer or counter-offer, as the case may be, shall be binding upon the parties and the transaction shall be consummated on the terms set forth in such accepted offer or counter-offer, subject to Section 8.3(g)(ii) below. 55 (g) (i) To the extent that there is a dispute under this Section 8.3 regarding (1) the Contribution Entity Certification as specified in the last sentence of Section 8.3(c) above; (2) the general acceptance of the Other Corporate Security suggested by Advance/Newhouse or replication by ATW of the Other Corporate Security by ATW using commercially reasonable efforts; or (3) the ability of ATW to comply with or satisfy with the other material terms proposed by Advance/Newhouse using commercially reasonable efforts, such dispute shall be conclusively determined by a nationally recognized investment bank selected in the same manner as provided for the selection of the Appraiser in Section 8.4(j) hereof, except that the investment banking firms selected by each party shall be chosen within five business days of delivery of the Offer Notice and such investment banking firms shall be instructed to make the selection of the third investment banking firm within 5 business days after their selection. Such determination by the investment bank so chosen shall be made as soon as practicable in accordance with procedures established by such investment bank, except that in respect of any dispute under clause (1) hereof, such determination shall be made within 30 business days following the Contribution Entity Certification given by Advance/Newhouse pursuant to Section 8.3(c)(z) above. The fees, costs, and expenses of the investment banking firm so selected shall be borne one-half by Advance/Newhouse and one-half by TWE. To the extent that the investment bank determines under clause (1) that additional information must be delivered to TWE, then TWE shall, by written notice to Advance/Newhouse, either accept or reject the offer set forth in the Offer Notice or make a counter-offer (in accordance with and subject to the terms of Section 8.3(c) above), within 30 business days of receipt by TWE of such additional information. If the investment bank determines under clause (1) that no additional information is required to be delivered to TWE, then TWE shall, by written notice to Advance/Newhouse, either accept or reject the offer set forth in the Offer Notice or make a counter-offer (in accordance with and subject to the terms of Section 8.3(c) above), within the later of (x) 30 days following receipt by TWE of the Contribution Entity Certification or (y) 2 business days of such determination by the investment bank. (ii) To the extent that following an acceptance of an offer or counter-offer, as the case may be, under Section 8.3(f) above, the parties fail to enter into more formal agreements, and a dispute arises as to any additional customary matters that must be addressed to complete the transaction that were not addressed in the accepted offer or counter-offer, such dispute shall be resolved (including whether such matter must be addressed and, if so, the terms of how such matter should be addressed) by a nationally recognized investment bank selected in the manner and within the time frames provided in Section 8.3(g)(i) above. Such determination by the investment bank so chosen shall be made as soon as practicable in accordance with procedures established by such investment bank. The fees, costs and expenses of the investment banking firm so selected shall be borne one-half by TWE and one-half by Advance/Newhouse. (iii) To the extent there is a dispute under this Section 8.3 regarding whether Advance/Newhouse is receiving the Required Minimum Price, including any determination of the value of any counter-offer by TWE or the value of an offer by Advance/Newhouse such dispute shall be conclusively determined by a nationally recognized investment bank selected by Advance/ Newhouse, which selection 56 shall be made within 10 business days of notice of a dispute. Such determination by the investment banking firm so chosen shall be made as soon as practicable in accordance with procedures established by such investment bank. The fees, costs and expenses of the investment banking firm so selected shall be borne by Advance/Newhouse. (h) The right of first offer set forth in this Section 8.3 shall not apply to (w) any exchange of Systems (and related assets) in the Selected Business (other than Systems in Preferred Cluster Areas (as defined in the First Amended Agreement) for other cable systems (and related assets) of third parties, including an exchange which contemplates cash or other property being received by Advance/Newhouse to equalize the exchange so long as the cash or other property being received by Advance/Newhouse does not exceed 15 percent (15%) of the total value of the property being exchanged by it; (x) any sale or disposition of used equipment and similar assets that are not necessary to, or any longer useful in, the continued operation of the Systems in the Selected Business and do not constitute a complete System; (y) any contribution or transfer of assets permitted pursuant to Section 8.2 above; or (z) any issuance or transfer of equity in any direct or indirect equity holder of Advance/Newhouse; provided that (i) such equity holder is not a Cable Company (as defined below), (ii) such issuance or transfer is in compliance with the Parents Agreement and (iii) the transferee of such equity interest does not have any direct or indirect equity interest in a Contribution Entity (other than as a result of such issuance or transfer) and, from and after such issuance or transfer, such transferee will not acquire any direct or indirect interest in a Contribution Entity from a Newhouse Family Member (other than as a result of such issuance or transfer). For purposes of the foregoing, a "Cable Company" means Advance/Newhouse or any other entity that directly or indirectly (through the ownership of equity interests) owns assets in the Selected Business if at least a majority of the fair market value of such entity's assets (other than cash, cash equivalents and marketable securities) is comprised of Systems or assets related thereto or a direct or indirect equity interest in an entity owning or operating such assets. (i) TWE may assign its rights under this Section 8.3 to ATW or any of its Affiliates by delivering written notice of such assignment to Advance/Newhouse; provided that no such assignment shall relieve TWE of its obligations under this Section 8.3 and ATW shall use, and shall cause its Affiliates to use, commercially reasonable efforts to prevent such assignment from hindering or delaying consummation of the transactions contemplated under this Section 8.3. From and after the Closing, the provisions of this Section 8.3 shall become applicable to the Selected Subsidiary as well as to Advance/Newhouse so that the Selected Subsidiary shall also have the rights and obligations under this Section 8.3 as are applicable to Advance/Newhouse. 8.4 Special Right of First Offer. (a) Notwithstanding anything to the contrary in Section 8.3, during the 30-day period (the "Special ROFO Period") immediately following each of the first, 57 seventh, thirteenth and nineteenth anniversaries of the date of death of the last to die of Samuel I. Newhouse, Jr. and Donald E. Newhouse (the "Special ROFO Event"), Advance/Newhouse may, if it wishes to sell any Transfer Assets in a transaction otherwise subject to Section 8.3, elect to comply with the special sale process described below (the "Special ROFO Process") for the sale of all or any portion of the Transfer Assets (the "Special ROFO Assets") to TWE by delivering written notice of the exercise of such election to TWE (a "Special ROFO Notice") during such 30-day period. (b) A Special ROFO Notice shall: (i) describe the Special ROFO Assets in reasonable detail; (ii) specify the types of currency (and terms, if applicable) for payment of the Special ROFO Asset Value (as defined below) for the Special ROFO Assets, which currency may consist only of cash; debt; common stock; preferred stock; convertible preferred stock; or Other Corporate Security that (1) is generally accepted by the financial community for use in acquisition transactions and (2) may be replicated by ATW using commercially reasonable efforts; and (iii) specify other material terms of the proposed sale of the Special ROFO Assets to TWE, including, without limitation, whether such transaction is to be tax-advantaged or tax-deferred, which terms shall be such that ATW could comply with or satisfy using commercially reasonable efforts. For purposes of this Section 8.4, commercially reasonable efforts shall include requesting any necessary shareholder, lender, governmental or other third party consents or approvals for the lawful issuance of such securities referred to above or the lawful undertaking of the transactions contemplated hereby that would be customary in comparable transactions. (c) (i) Within 60 days following the delivery by Advance/Newhouse of the Special ROFO Notice to TWE, an appraiser selected in accordance with paragraph (j) below (an "Appraiser") shall determine the Special ROFO Asset Value (as defined below) and shall deliver a written notice (the "Valuation Notice") to each of Advance/Newhouse and TWE setting forth such Special ROFO Asset Value, which shall be final and binding on the parties. "Special ROFO Asset Value" shall mean (including taking into account the matters referred to in this Section 8.4(c)) the fair market value, as of the date of valuation, of the business of the Special ROFO Assets assuming a private market sale of the Special ROFO Assets as an ongoing business to an unrelated third party. The determination of Special ROFO Asset Value shall also take into account (a) the types of currency (and terms of payment, if applicable) and (b) whether such transaction is to be tax-advantaged or tax-deferred, each of the foregoing clauses (a) and (b) as specified in the Special ROFO Notice. It is expressly understood and agreed that the TWE and Advance/Newhouse shall each be entitled to provide the Appraiser with more information than is requested by the Appraiser, in accordance with procedures established by the Appraiser, and that the parties intend for the Appraiser to consider, to the extent it deems appropriate, all such information, provided that it is also understood and agreed that the other party shall be entitled to receive copies of such additional information furnished to the Appraiser, subject to the same confidentiality procedures referenced in this Section 8.4. (ii) Advance/Newhouse shall, and shall cause its Affiliates to, cooperate in furnishing all information that may be requested by the Appraiser in accordance with procedures (including confidentiality protections) established by the 58 Appraiser; provided that the production of third party agreements that contain competitively sensitive information or that are subject to confidentiality restrictions shall be produced to TWE subject to such protections as the Appraiser may determine are adequate to protect the legitimate confidentiality concerns of Advance/Newhouse and its Affiliates taking into account the need for TWE to review such agreements as part of its presentation to the Appraiser. It is agreed that as part of such protections the Appraiser may direct that in lieu of such agreements being produced to TWE directly that such agreement may be delivered to TWE's legal counsel and other advisors. (d) Upon receipt of the Valuation Notice, Advance/Newhouse may, within 20 days of receiving such Valuation Notice (the "Consideration Period"), by written notice to TWE (the "ROFO Termination Notice") terminate the Special ROFO Process. If Advance/Newhouse terminates the Special ROFO Process, then notwithstanding Section 8.4(j), Advance/Newhouse shall pay 100% of the fees, costs and expenses of the Appraiser. If Advance/Newhouse does not so terminate the Special ROFO Process, then the Special ROFO Notice shall be deemed to be an offer to sell the Special ROFO Assets to TWE at a purchase price equal to the Special ROFO Asset Value on the terms and conditions set forth below. (e) If Advance/Newhouse does not deliver a ROFO Termination Notice within the Consideration Period, then TWE may, within 10 days of the expiration of the Consideration Period, by written notice to Advance/Newhouse request information regarding the Special ROFO Assets reasonably required to enable TWE to evaluate the proposal contained in the Special ROFO Notice (unless such information has been provided with or prior to the delivery of the Special ROFO Notice). Within the earlier of: (i) 20 business days following the expiration of the Consideration Period if TWE does not request additional information pursuant to the preceding sentence; (ii) where the Special ROFO Assets are not owned by a Contribution Entity, 30 business days following receipt by TWE of written certification from Advance/Newhouse that the information provided by Advance/Newhouse to TWE is all the information that Advance/Newhouse has provided, or will provide, to a prospective purchaser of the Special ROFO Assets (except for updated information to be supplied to maintain the accuracy of the furnished information); or (iii) where the Special ROFO Assets are owned by a Contribution Entity, 30 business days following receipt by TWE of a written certification from Advance/Newhouse (the "ROFO Contribution Entity Certification") that TWE has been delivered such information as is reasonably required by TWE to enable TWE to evaluate the offer contained in the Special ROFO Notice and as is reasonably available to Advance/Newhouse or the Contribution Entity (which certification may accompany the Special ROFO Notice in the event such information has been provided with or prior to the Special ROFO Notice), but subject, in the case of the foregoing clause (iii), to Section 8.4(h)(i), TWE may, by written notice to Advance/Newhouse, either accept or reject the offer constituted by the Special ROFO Notice. If TWE disputes a ROFO Contribution Entity Certification given by Advance/Newhouse pursuant to Section 8.4(e)(iii) that it has delivered to TWE such information as is reasonably required to enable TWE to evaluate the offer contained in the Special ROFO Notice and is reasonably available to Advance/Newhouse or the Contribution Entity, TWE shall give written notice of such 59 dispute to Advance/Newhouse within 3 days of receipt of such certification from Advance/Newhouse. (f) If TWE does not accept, within the applicable time periods set forth in Section 8.4(e) above (the "Offer Period"), the offer set forth in the Special ROFO Notice, then, subject to compliance with the time frames set forth in this Section 8.4(f) for execution of definitive agreements, Advance/Newhouse may not dispose of the Special ROFO Assets within 180 days of the expiration of the Offer Period, unless it sells the Special ROFO Assets to a third party that is not an Affiliate of Advance/Newhouse: (i) for the types of currency specified in the Special ROFO Notice and in at least ninety-five percent (95%) of the minimum amount of each such type of currency set forth in the Special ROFO Notice; (ii) in a tax-advantaged or tax-deferred transaction if Advance/ Newhouse specified such a transaction in the Special ROFO Notice; (iii) at a price equal to or greater than ninety-five percent (95%) of the Special ROFO Asset Value (such price, the "ROFO Required Minimum Price"); and (iv) on the other material terms specified in the Special ROFO Notice. If Advance/Newhouse does not sign definitive agreements for such a sale pursuant to this Section 8.4(f) within 180 days of the expiration of the Offer Period, then the provisions of Section 8.3 shall again be applicable. (g) If TWE accepts the offer set forth in the Special ROFO Notice in accordance with the provisions of Section 8.4(e) above, upon such acceptance, the terms of such accepted offer shall become binding upon the parties. Advance/Newhouse and TWE shall negotiate in good faith to enter into more formal agreements within 45 days of such acceptances (as the case may be), but it is understood and agreed by TWE and Advance/Newhouse that notwithstanding any failure to enter into more formal agreements, the terms of the accepted offer shall be binding upon the parties and the transaction shall be consummated on the terms set forth in such accepted offer, subject to Section 8.4(h)(ii) below. (h) (i) To the extent that there is a dispute under this Section 8.4 regarding (1) the ROFO Contribution Entity Certification as specified in the last sentence of Section 8.4(e) above; (2) the general acceptance of the Other Corporate Security suggested by Advance/Newhouse or replication by ATW of the Other Corporate Security by ATW using commercially reasonable efforts; or (3) the ability of ATW to comply with or satisfy with the other material terms proposed by Advance/Newhouse using commercially reasonable efforts, such dispute shall be conclusively determined by the Appraiser. Such determination by the Appraiser shall be made as soon as practicable in accordance with procedures established by such Appraiser, except that in respect of any 60 dispute under clause (1) hereof, such determination shall be made within 30 business days following the ROFO Contribution Entity Certification given by Advance/Newhouse pursuant to Section 8.4(e)(iii) above. To the extent that the Appraiser determines under clause (1) that additional information must be delivered to TWE, then TWE shall, by delivery of a written notice to Advance/Newhouse, either accept or reject the offer set forth in the Special ROFO Notice (in accordance with and subject to the terms of Section 8.4(e) above), within 30 business days of receipt by TWE of such additional information. If the Appraiser determines under clause (1) that no additional information is required to be delivered to TWE, then TWE shall, by delivery of a written notice to Advance/Newhouse, either accept or reject the offer set forth in the Special ROFO Notice (in accordance with and subject to the terms of Section 8.4(e) above), within the later of (x) 30 days following receipt by TWE of the ROFO Contribution Entity Certification or (y) 2 business days of such determination by the Appraiser. (ii) To the extent that following an acceptance of an offer under Section 8.4(h) above, the parties fail to enter into more formal agreements, and a dispute arises as to any additional customary matters that must be addressed to complete the transaction that were not addressed in the accepted offer, such dispute shall be resolved (including whether such matter must be addressed and, if so, the terms of how such matter should be addressed) by the Appraiser within the time frames provided in Section 8.4(h)(i) above. Such determination by the Appraiser shall be made as soon as practicable in accordance with procedures established by such Appraiser. The fees, costs and expenses of the Appraiser shall be borne one-half by TWE and one-half by Advance/Newhouse. (iii) To the extent there is a dispute under this Section 8.4 regarding whether Advance/Newhouse is receiving the ROFO Required Minimum Price, such dispute shall be conclusively determined by a nationally recognized investment bank selected by Advance/Newhouse, which selection shall be made within 10 business days of notice of a dispute. Such determination by the investment banking firm so chosen shall be made as soon as practicable in accordance with procedures established by such investment bank. The fees, costs and expenses of the investment banking firm so selected shall be borne by Advance/Newhouse. (i) TWE may assign its rights under this Section 8.4 to ATW or any of its Affiliates by delivering written notice of such assignment to Advance/Newhouse; provided that no such assignment shall relieve TWE of its obligations under this Section 8.4 and ATW shall use, and shall cause its Affiliates to use, commercially reasonable efforts to prevent such assignment from hindering or delaying consummation of the transactions contemplated under this Section 8.4. (j) An "Appraiser" shall be a nationally recognized investment banking firm selected by two other nationally recognized investment banking firms, one selected by Advance/Newhouse and one selected by TWE; provided that if one party fails to notify the other party of its selection within the time period specified below, the Appraiser shall be the investment banking firm selected by the party that has so notified the other party of its selection. Each of Advance/Newhouse and TWE shall notify the 61 other of its selection of an investment banking firm (which notice shall identify such firm) within ten business days following the delivery by Advance/Newhouse of the Special ROFO Notice, and each of TWE and Advance/Newhouse shall instruct the investment banking firms so selected to select the third investment banking firm within twenty business days following delivery of the Special ROFO Notice, as applicable. The fees, costs and expenses of the investment banking firm so selected shall be borne equally by the parties and each party shall bear the fees, costs and expenses of the investment banking firm selected by such party. From and after the Closing, the provisions of this Section 8.4 shall become applicable to the Selected Subsidiary as well as to Advance/Newhouse so that the Selected Subsidiary shall also have the rights and obligations under this Section 8.4 as are applicable to Advance/Newhouse. SECTION 9 [Intentionally Omitted.] SECTION 10 OTHER BUSINESS ACTIVITIES 10.1 Survival of this Section 10. Immediately upon delivery of a Restructuring Notice in accordance with Section 8.1 hereto, all provisions of this Section 10 shall immediately become null and void and of no further force or effect. 10.2 Cable Television Systems. (a) In the event Advance/Newhouse or any of its Affiliates, including the Subsidiary, desire to pursue any opportunity to acquire or make an investment in any business (other than any acquisition, whether direct or indirect, through merger, consolidation or otherwise, of an MSO or all or substantially all of the Systems of an MSO) (i) the majority of the revenues of which are derived from the operation of Systems or (ii) consisting of Systems serving more than 25,000 Subscribers (an "Advance/Newhouse System Opportunity"), and such Advance/Newhouse System Opportunity is entirely within the DMA of the TWE Systems, then Advance/Newhouse shall notify TWE in writing of such Advance/Newhouse System Opportunity and describe such Advance/Newhouse System Opportunity in reasonable detail (an "Advance/Newhouse Opportunity Notice"). TWE or any of its Affiliates shall have the first right, exercisable by delivery of written notice to Advance/Newhouse within 10 business days following delivery of the Advance/Newhouse Opportunity Notice, to pursue such Advance/Newhouse System Opportunity. If either (x) TWE or any such Affiliate does not elect to pursue such Advance/Newhouse System Opportunity within such period, or (y) TWE or any such Affiliate elects to pursue such Advance/Newhouse System Opportunity but fails to consummate the acquisition of, or investment in, such Advance/Newhouse System Opportunity within one year of such election, then Advance/Newhouse or any of its Affiliates shall have the right to pursue such Advance/Newhouse System Opportunity. In the event the Advance/Newhouse System Opportunity is partially within the DMA of the TWE Systems and partially in a geographic area other than the DMA of the TWE Systems, then Advance/Newhouse shall in good faith consider whether a mutually beneficial arrangement involving the other 62 Partners should be explored with respect to such Advance/Newhouse System Opportunity. (b) In the event TWE or any of its Affiliates, including the Partnership (other than the Selected Subsidiary), desire to pursue any opportunity to acquire or make an investment in any business (other than any acquisition, whether direct or indirect, through merger, consolidation or otherwise, of an MSO or all or substantially all of the Systems of an MSO) (i) the majority of the revenues of which are derived from the operation of Systems or (ii) consisting of Systems serving more than 25,000 Subscribers (a "TWE System Opportunity"), and such TWE System Opportunity is entirely within the DMA of the Selected Systems, then TWE shall notify Advance/Newhouse in writing of such TWE System Opportunity and describe such TWE System Opportunity in reasonable detail (a "TWE Opportunity Notice"). The Selected Subsidiary shall have the first right, exercisable by delivery of written notice to TWE within 10 business days following delivery of the TWE Opportunity Notice, to pursue such TWE System Opportunity. If either (x) the Selected Subsidiary does not elect to pursue such TWE System Opportunity within such period, or (y) the Selected Subsidiary elects to pursue such TWE System Opportunity but fails to consummate the acquisition of, or investment in, such TWE System Opportunity within one year of such election, then TWE or any of its Affiliates shall have the right to pursue such TWE System Opportunity. In the event the TWE System Opportunity is partially within the DMA of the Selected Systems and partially in a geographic area other than the DMA of the Selected Systems, then TWE shall in good faith consider whether a mutually beneficial arrangement involving the other Partners should be explored with respect to such TWE System Opportunity. 10.3 Programming for Carriage Deals. In the event the TWE Cable Division or its Controlled Affiliates desire to pursue a transaction to exchange carriage commitments for a third party's programming on Systems in exchange for equity in such third party (an "Equity for Carriage Programming Opportunity"), then TWE and the Selected Subsidiary shall participate in such Equity for Carriage Programming Opportunity pro rata based on the number of Subscribers of the TWE Systems and the Selected Systems, respectively, and, with respect to regional programming, based on the number of Subscribers to the Selected Systems and TWE Systems, respectively, in the region targeted by such programming. SECTION 11 BOOKS AND RECORDS; INFORMATION RIGHTS; OPERATION OF SELECTED BUSINESS 11.1 Books and Records. The books and records of the Residual Business shall be maintained at the location specified in Section 2.5. The Residual Business shall keep current and complete records and books of account in which shall be entered fully and accurately all transactions of the Residual Business. The books and records of the Selected Business shall be maintained at the location specified by Advance/Newhouse. The Selected Business shall keep current and complete records and books of account in which shall be entered fully and accurately all transactions of the Selected Business. 63 11.2 Tax Return Information. As soon as reasonably practicable following the end of the Fiscal Year, but in no event later than July 31 following the end of such Fiscal Year, the Partnership shall furnish to each Partner a preliminary draft Schedule K-1 of the Partnership. As soon as practicable thereafter, the Partnership shall furnish to each Partner a final report of the Net Profit or Net Loss, and distributions, if any, for such Fiscal Year, a schedule setting forth each Partner's Capital Account as at the end of the period covered by such statements and a Schedule K-1 for each Partner, a copy of the Partnership's federal and state tax returns, and other information required by applicable tax regulations or necessary for each Partner to prepare its federal, state, and local tax returns. With respect to the 2002 Fiscal Year, the Partnership shall effect a closing of the books of the Partnership as of the close of business on the day immediately prior to the Restructuring Effective Date, and Advance/Newhouse shall be entitled to receive 2002 Fiscal Year tax return information only with respect to the portion of the 2002 Fiscal Year that ends on the date of such closing of the books. Advance/Newhouse shall not be entitled to any information under this Section 11.2 for any Fiscal Year, or portion thereof, beginning on or after the Restructuring Effective Date. 11.3 Information Rights. Advance/Newhouse shall have full access, at Advance/Newhouse's sole expense, to all premises, properties, financial and accounting records, Contracts, other records and documents, and personnel, of the Selected Business. Furthermore, Advance/Newhouse shall be entitled to receive internal memoranda from the TWE Group's corporate staff to the division presidents of the Selected Business through the Closing Date. Without limiting other rights expressly granted under the Transaction Agreements, after the Restructuring Effective Date, Advance/Newhouse shall have no rights with respect to the premises, properties, financial and accounting records, Contracts, other records and documents, and personnel of the Residual Business; provided, however, that Advance/Newhouse shall have the right to copies of Contracts that bind the Advance/Newhouse Group. 11.4 Bank Accounts. Except as otherwise provided in Section 3.3(c): (a) the Partnership shall maintain bank accounts in such banks or institutions as the Managing Partner from time to time shall select, and such accounts shall be drawn upon by check signed by such person or persons, and in such manner, as may be designated by the Managing Partner; and (b) all moneys of the Partnership shall be deposited in the bank or other financial institution account or accounts of the Partnership. In no event shall Partnership funds be commingled with those of any other Person without the consent of the Managing Partner. 11.5 Tax Allocations. No later than 45 days prior to the filing of the Partnership's federal information return and Schedules K-1 thereto with respect to any Fiscal Year beginning prior to the Restructuring Effective Date, the Managing Partner shall deliver a draft of such return to the Advance/Newhouse Accountants, together with such workpapers as are necessary for the Advance/Newhouse Accountants to review the 64 proposed determinations of Special Income, Maximum Income Amount, and Net Tax Amount of each of the Partners, together with the allocations required by Sections 5.3(b)(iii) and 5.3(d)(ii) of the First Amended Agreement. The Advance/Newhouse Accountants shall promptly review such proposed determinations and allocations and shall deliver, within 30 days after receipt of the draft return and necessary workpapers, a report ("Adjustment Report") setting forth in reasonable detail the determinations and allocations with which such Accountants disagree. Thereafter, the Managing Partner and the Advance/Newhouse Accountants shall endeavor in good faith to agree to such determinations and allocations prior to the filing of the Partnership's information returns. If any dispute cannot be resolved by the Managing Partner and the Advance/Newhouse Accountants within 10 days after the delivery of the Adjustment Report, the disputed matters shall be referred to a mutually satisfactory independent public accounting firm of national stature which has not been employed by any Partner for the two year preceding the date of such referral, such firm to be selected by the TWE Accountants and the Advance/Newhouse Accountants. In settling any disputed matter, such independent public accounting firm shall apply the understanding of the Partners that, until the Restructuring Effective Date, on an annual basis the after-tax positions of the Partners with respect to the contributed assets are to be in proportion to their respective Percentage Interests (assuming all Partners are taxable at the Special Effective Tax Rate). The fees of such firm shall be paid by the Partners in accordance with their Percentage Interests. With respect to the 2002 Fiscal Year, the Partnership shall effect a closing of the books of the Partnership as of the close of business on the day immediately prior to the Restructuring Effective Date, and Advance/Newhouse shall be entitled to review and challenge information relating to the 2002 Fiscal Year only with respect to the portion of the 2002 Fiscal Year that ends on the date of such closing of the books. This Section 11.5 shall not be operative for any Fiscal Year beginning on or after the Restructuring Effective Date. SECTION 12 DISSOLUTION 12.1 Causes of Dissolution. To the extent permitted by the Act, the Partnership shall dissolve upon the first to occur of the following dates or events: (a) the sale, exchange, involuntary conversion, or other disposition of all or substantially all of the assets of the Partnership; (b) the expiration of the term of the Partnership as specified in Section 2.3; or (c) the bankruptcy (within the meaning of Section 1531(5), or any successor provision, of the Act) of any Partner. 12.2 Effect of Dissolution. Upon the dissolution of the Partnership, the Partnership shall cease its regular business operations, except for the taking of such actions as shall be necessary for the performance and discharge of the Partnership's obligations, the winding-up of its affairs, and the liquidation and distribution of its assets in accordance with the provisions of this Agreement. 65 12.3 Winding Up and Liquidation. (a) Triggering of Restructuring. To the extent permitted by law, immediately upon the dissolution of the Partnership a restructuring of the Partnership in accordance with Section 8.1 shall occur; provided that the requirement that either TWE or Advance/Newhouse deliver a Restructuring Notice shall be deemed waived. (i) Following a restructuring described in the preceding sentence, TWE shall act as liquidator (the "TWE Restructuring Liquidator") to wind up the Partnership; provided, however, if TWE is the subject of a bankruptcy proceeding, Paragon shall act as the TWE Restructuring Liquidator. The TWE Restructuring Liquidator shall have full power and authority to sell, assign, and encumber any or all of the Partnership's assets and to wind up and liquidate the affairs of the of the Partnership in an orderly and businesslike manner. (ii) The proceeds of such liquidation of the Partnership shall be applied first to the payment of the debts and liabilities of the Partnership (including any loans made to the Partnership by TWE or Paragon), the expenses of liquidation of the Partnership and the establishment of any reserves that the TWE Restructuring Liquidator deems necessary for potential or contingent liabilities of the Partnership. The remaining assets of the Partnership shall be distributed to TWE and Paragon in accordance with the priority allocation rules established in Section 5.1(d). (b) Alternative Dissolution. If a dissolution and restructuring of the Partnership described in clause (a) of this Section 12.3 is not permitted by applicable law: (i) Liquidator. Upon the dissolution of the Partnership, the Managing Partner shall act as liquidator (the "Liquidator") to wind up the Partnership; provided, however, if the Managing Partner is the subject of a bankruptcy proceeding, Paragon shall act as Liquidator. The Liquidator shall have full power and authority, subject to Section 3.2, to sell, assign, and encumber any or all of the Partnership's assets and to wind up and liquidate the affairs of the Partnership in an orderly and businesslike manner. (ii) Application of Proceeds. The proceeds of liquidation shall be applied first to the payment of the debts and liabilities of the Partnership (including any loans to the Partnership made by any Partner), the expenses of liquidation, and the establishment of any reserves that the Liquidator deems necessary for potential or contingent liabilities of the Partnership (excluding for this purpose the Series A Preferred Partnership Units, the Series B Partnership Units and the Series C Partnership Units). The remaining assets of the Partnership shall be distributed to the Partners as follows: (A) the Selected Business Percentage (as defined below) of such assets to Advance/Newhouse; (B) the Residual Business Percentage (as defined below) of such assets to TWE and Paragon in accordance with the priority allocation rules established in Section 5.1(d); 66 in each case as determined in good faith by the Liquidator. For purposes hereof, (x) the "Selected Business Percentage" means a fraction (expressed as a percentage) (a) the numerator of which is the fair value of the Selected Business, as of the date of dissolution, taking into account all attendant circumstances including, without limitation, all debt and other liabilities attributable to the Selected Business and (b) the denominator of which is the sum of clause (a) in this definition and clause (a) in the definition of Residual Business Percentage. (y) the "Residual Business Percentage" means a fraction (expressed as a percentage) (a) the numerator of which is the fair value of the Residual Business, as of the date of dissolution, taking into account all attendant circumstances including, without limitation, all debt and other liabilities attributable to the Residual Business and (b) the denominator of which is the sum of clause (a) in this definition and clause (a) in the definition of Selected Business Percentage. (iii) Final Accounting. Upon the dissolution and winding up of the Partnership, a proper accounting shall be made from the date of the last previous accounting to the date of winding up. (iv) Statement of Liquidation. Within a reasonable time following the completion of the liquidation of the Partnership, the Liquidator shall submit a statement (which need not be audited) to each Partner setting forth the assets and liabilities of the Partnership as of the date of liquidation and the amount of the distribution to each Partner. (c) Effect of Withdrawal of a Partner. To the extent permitted by the Act, the withdrawal of a Partner, other than the withdrawal of Advance/Newhouse in connection with a restructuring in accordance with Section 8.1 hereof, shall not alter the allocations and distributions to be made to the Partners pursuant to this Agreement. (d) Termination of Partnership. Upon the completion of the distribution of the Partnership's assets and the proceeds of liquidation as provided in this Section 12.3, the Partnership shall be terminated. SECTION 13 INDEMNIFICATION 13.1 Indemnification by Partnership. (a) The Selected Business and Advance/Newhouse shall indemnify and save harmless the Partnership, each Partner (other than Advance/Newhouse), the officers, directors, and stockholders of each Partner (other than Advance/Newhouse) and its Affiliates, and the officers and employees of the Residual Business, from any loss, damage, or expense incurred by any of them by reason of any act or omission to act on 67 behalf of the Selected Business (including any action or omission by the Partner acting as Tax Matters Partner), performed by any of them in good faith and without gross negligence, willful misconduct, or breach of this Agreement. (b) The Residual Business, TWE and Paragon shall indemnify and save harmless the Partnership, each Partner, the officers, directors, and stockholders of each Partner and its Affiliates, and the officers and employees of the Selected Business, from any loss, damage, or expense incurred by any of them by reason of any act or omission to act on behalf of the Residual Business (including any action or omission by the Partner acting as Tax Matters Partner), performed by any of them in good faith and without gross negligence, willful misconduct, or breach of this Agreement. (c) Any reasonable expenses incurred by any indemnified person pursuant to this Section 13.1 in defending any civil or criminal action, suit or proceeding (or the threat thereof), other than a claim, action, suit, or proceeding brought by the Partnership, which is based, in whole or in part, upon any alleged act or omission to act on behalf of the Selected Business or Residual Business, as the case may be, shall be borne and paid by the Selected Business (and Advance Newhouse) or the Residual Business (and TWE and Paragon), as the case may be, in advance of the final disposition of such action, suit, or proceeding (or the threat thereof) upon receipt of a reasonably satisfactory undertaking by or on behalf of the indemnified person to repay to the Selected Business (and Advance Newhouse) or the Residual Business(and TWE and Paragon), as the case may be, the amount of such expenses if it shall ultimately be determined that such person is not entitled to the indemnification provided for under this Section 13.1. Any indemnity under this Section 13.1 shall be provided out of and to the extent of the Selected Business' or Residual Business', as the case may be, assets only. (d) The Selected Business and Advance/Newhouse shall directly compensate the Partnership for the amount of any indemnification to be provided to the Partnership in accordance with this Section 13.1. 13.2 Indemnification by Partners. (a) Advance/Newhouse shall indemnify and save harmless the Residual Business and each other Partner and former Partner, the officers, directors, and stockholders of each other Partner and former Partner, and any of their respective officers, directors, shareholders, partners, employees, agents, and Affiliates, from any loss, damage, or expense incurred by any of them by reason of or resulting from any unauthorized act taken by the Selected Business orAdvance/Newhouse in the name of the Selected Business, the Residual Business, the Partnership or any other Partner. (b) TWE and Paragon shall indemnify and save harmless the Selected Business and each other Partner and former Partner, the officers, directors, and stockholders of each other Partner and former Partner, and any of their respective officers, directors, shareholders, partners, employees, agents, and Affiliates, from any loss, damage, or expense incurred by any of them by reason of or resulting from any 68 unauthorized act taken by the Residual Business, TWE or Paragon in the name of the Residual Business, the Selected Business, the Partnership or any other Partner. (c) Any reasonable expenses incurred by any Person entitled to indemnification pursuant to this Section 13.2 in defending any civil or criminal action, suit, or proceeding (or the threat thereof) by reason of or resulting from any such indemnified matter shall be borne and paid by the indemnifying Partner in advance of the final disposition of such action, suit or proceeding (or the threat thereof) upon receipt of a reasonably satisfactory undertaking by or on behalf of the indemnified Person to repay to the indemnifying Partner the amount of such expenses if it shall ultimately be determined that such Person is not entitled to the indemnification provided for under this Section 13.2. 13.3 Procedures. With respect to the indemnities provided above in this Section 13, an indemnified party shall, with respect to any claim made against such indemnified party for which indemnification is available, notify the indemnifying party in writing of the nature of the claim as soon as practicable but not more than ten days after the indemnified party shall have received notice of the assertion thereof before any court or governmental authority. The failure by an indemnified party to give notice as provided in the foregoing sentence shall not relieve the indemnifying party of its obligations under this Section except to the extent that the failure results in the failure of actual notice to the indemnifying party and the indemnifying party is damaged as a result of the failure to give notice. Upon receipt of notice by an indemnifying party from an indemnified party of the assertion of any such claim, the indemnifying party shall employ counsel reasonably acceptable to the indemnified party and shall assume the defense of such claim. The indemnified party shall have the right to employ separate counsel and to participate in (but not control) any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (a) the employment of counsel by the indemnified party has been authorized by the indemnifying party, (b) the indemnified party shall have been advised by its counsel in writing that there is a conflict of interest between the indemnifying party and the indemnified party in the conduct of the defense of such action (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party), or (c) the indemnifying party shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of such counsel shall be at the expense of the indemnifying party. An indemnifying party shall not be liable for any settlement of an action effected without its written consent (which consent shall not be unreasonably withheld). No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such action. Whether or not the Partnership chooses to defend or prosecute a claim, each Partner shall, to the extent requested by the Partnership and at the Partnership's expense, cooperate in the prosecution or defense of such claim and shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may reasonably be requested in connection therewith. 69 13.4 Survival. The provisions of this Section 13 shall survive the withdrawal of any Partner from the Partnership and the dissolution of the Partnership. SECTION 14 REPRESENTATIONS Each Partner represents and warrants to the other Partners as follows: 14.1 Organization, Standing, and Authority. Such Partner is a partnership duly organized, validly existing, and in good standing under the laws of its state of organization. Such Partner has all requisite power and authority to execute and deliver this Agreement and the documents contemplated hereby, and to perform and comply with all of the terms, covenants, and conditions to be performed and complied with by it hereunder and thereunder. 14.2 Absence of Conflicting Agreements. The execution, delivery, and performance of this Agreement by such Partner (with or without the giving of notice, the lapse of time, or both): (a) do not require the consent of any third party; (b) do not and will not conflict with any provision of the partnership agreement or other organizational document of such Partner; (c) do not and will not conflict with, result in a breach of, or constitute a default under, any law, judgment, order, ordinance, injunction, decree, rule, regulation, or ruling of any court or governmental instrumentality; and (d) do not and will not conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, or accelerate or permit the acceleration of any performance required by the terms of, any agreement, instrument, license, or permit to which either such Partner or any of its Affiliates is a party or by which either such Partner or any of its Affiliates may be bound. 14.3 Claims and Legal Actions. There is no claim, legal action, counterclaim, suit, arbitration, governmental investigation or other legal, administrative, or tax proceeding, in progress or pending, or to the knowledge of such Partner, threatened, against or relating to such Partner or any of its Affiliates, and no order, decree, or judgment has been issued against such Partner or any of its Affiliates, that may impair such Partner's ability to perform and comply with all of the terms, covenants, and conditions to be performed and complied with by it under this Agreement. SECTION 15 MISCELLANEOUS 15.1 Acknowledgments. Each Partner affirms and acknowledges that no representations, warranties, or statements have been made to it by any party to this Agreement other than those expressly set forth in this Agreement or any Restructuring Transaction Agreement and that, in entering into this Agreement, it has not relied upon anything done or said with respect to this Agreement or with respect to the relationship between the parties, other than as expressly set forth in this Agreement or any Restructuring Transaction. 70 15.2 Bill for Partition. Each of the Partners covenants that neither it nor any Person claiming through or under it will file a bill for partition of the Partnership property. 15.3 Notices. All notices and other communications hereunder shall be (a) in writing (except to the extent otherwise expressly provided hereunder); (b) delivered by telecopy, by commercial overnight or same-day delivery service with all delivery costs paid by sender, or by registered or certified mail with postage prepaid, return receipt requested; (c) deemed given on the date and at the time shown on the telecopy confirmation of receipt (if delivered by telecopy), on the date and at the time (if recorded) of delivery by the commercial delivery service, as shown in the records thereof (if delivered by commercial overnight or same-day delivery service), or on the date shown on the return receipt (if delivered by registered or certified mail); and (d) addressed to the parties at their addresses specified on the signature page to this Agreement (or at such other address for a party as shall be specified by like notice). 15.4 Amendments. This Agreement may not be amended nor shall any waiver, change, modification, consent, or discharge be effected, except by an instrument in writing signed by each Partner; provided that Advance/Newhouse hereby agrees to any amendments or modifications to this Agreement necessitated by (i) the distribution by TWE of its Partnership Interest to the partners of TWE (upon a liquidation of TWE otherwise permitted by Section 6.1), (ii) the incorporation of TWE pursuant to Article XIII of the TWE Partnership Agreement or otherwise or (iii) any other amendments altering the arrangements between TWE and Paragon, provided such amendments or modifications do not adversely affect Advance/Newhouse. 15.5 Waivers and Further Assurances; Entire Agreement. Any waiver of any terms or conditions of this Agreement shall be in writing and shall not operate as a waiver of any other breach of such terms or conditions or any other term or condition, nor shall any failure to enforce any provision of this Agreement operate as a waiver of such provision or of any other provision of this Agreement. Each of the Partners agrees to execute all such further instruments and documents and to take all such further action as the other Partners may reasonably require in order to effectuate the terms and purposes of this Agreement. The Partners agree that this Agreement, and the other Restructuring Transaction Agreements, and the other agreements expressly contemplated hereby or thereby constitutes the entire agreement between them with respect to the subject matter of the Partnership and supersedes all prior agreements and understandings between them as to such subject matter, and there are no restrictions, agreements, arrangements, or undertakings, oral or written, between the Partners relating to the Partnership which are not fully expressed or referred to herein or therein. 15.6 Severability. If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the parties to 71 this Agreement shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the greatest extent possible. 15.7 Specific Enforcement; Attorney's Fees. The Partners agree that the remedy at law for damages upon violation of the terms of this Agreement would be inadequate because the Partnership Interests and the business of the Partnership are unique. Therefore, the Partners agree that the provisions of this Agreement may be specifically enforced by any court of competent jurisdiction, and each Partner and its respective transferees agree to submit to the jurisdiction of the court where any such action for specific performance is brought. If any Partner defaults in its performance of any of the terms and conditions of this Agreement and if, as a result of such default, a lawsuit seeking damages, specific performance, or any other remedy is filed by the other Partner, then, in that event, the prevailing party in such a lawsuit shall be entitled to obtain attorney's fees from the losing party in such amount as shall be determined by the court to be reasonable under the circumstances. 15.8 Counterparts. This Agreement may be executed in counterparts each of which shall be deemed an original and all of which together shall constitute one and the same instrument, and in pleading or proving any provision of this Agreement, it shall not be necessary to produce more than one complete set of such counterparts. 15.9 Captions; Gender. Section headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. Whenever used herein the singular number shall include the plural, the plural shall include the singular, and the use of any gender shall include all genders. 15.10 Governing Law; Venue; Disputes. This Agreement shall be governed by the internal laws of the State of New York. Any action, suit or proceeding shall be prosecuted as to any party hereto in the County of New York, State of New York. 15.11 Interpretation. In this Agreement, unless otherwise specified or where the context otherwise requires: (a) a reference to a Recital is to the relevant Recital to this Agreement, to a Section is to the relevant Section of this Agreement and to an Exhibit is to the relevant Exhibit to this Agreement; (b) words importing any gender shall include other genders; (c) words importing the singular only shall include the plural and vice versa; (d) the words "include", "includes" or "including" shall be deemed to be followed by the words "without limitation"; (e) the words "hereof", "herein", "hereunder" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this 72 Agreement as a whole and not to any particular provision of this Agreement, and Article, Schedule, clause and Exhibit references are to the Articles, Schedules, clauses and Exhibits to this Agreement unless otherwise specified; (f) references to any Person or any other agreement or document shall include such Person's successors and permitted assigns; 15.12 Binding Effect. This Agreement shall bind and inure to the benefit of each of the Partners and their successors and permitted assigns. 15.13 Third Parties. None of the provisions of this Agreement shall be for the benefit of, or enforceable by, any creditor of the Partnership or any Person other than a Partner. 15.14 Confidentiality. Each Partner agrees that it shall not, directly or indirectly, without the prior written consent of any other Partner, use for its own benefit (except as a Partner of the Partnership) or disclose to any Person any information, trade secrets, confidential customer information, patents, patent rights, technical data, or know-how relating to the products, processes, methods, equipment, or business practices of the Partnership, except (a) to the extent any of the foregoing is or becomes available to the public other than as a result of disclosure by such Partner or any of its Affiliates or the directors, officers, employees, agents, advisors, and controlling persons of it or any of its Affiliates, (b) subject to the terms of an appropriate confidentiality agreement, as necessary to effect a transaction under Section 6, (c) as may be required by law (including without limitation the federal and state securities laws and the rules and regulations of applicable stock exchanges or comparable market systems), and (d) as any Partner may disclose to its lenders, rating agencies, and business and financial advisors. If any Partner is required by applicable law or regulation or by legal process to disclose any of the foregoing, it will provide any other Partner with prompt notice thereof, to the extent practicable under the circumstances, to enable it to seek an appropriate protective order. 15.15 Liability of Partners. Except as set forth in any other Transaction Agreement, no Partner shall have any liability for the debts or obligations of the Partnership owed to any other Partner or its Affiliates arising under this Agreement. 73 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. ADVANCE/NEWHOUSE PARTNERSHIP 5015 Campuswood Drive East Syracuse, New York 13057 By: Advance Cable Holdings Corp., General Partner By: ----------------------------------- Name: S.I. Newhouse, Jr. Title: Vice President By: Newhouse Cable Holdings LLC, General Partner By: ----------------------------------- Name: S.I. Newhouse, Jr. Title: Vice President TIME WARNER ENTERTAINMENT COMPANY, L.P. 75 Rockefeller Plaza New York, New York 10019 By: ----------------------------------- Name: Robert D. Marcus Title: Senior Vice President PARAGON COMMUNICATIONS 75 Rockefeller Plaza New York, New York 10019 By: KBL COMMUNICATIONS, INC., as General Manager By: ----------------------------------- Name: Robert D. Marcus Title: Senior Vice President STATEMENT OF DIFFERENCES ------------------------ The section symbol shall be expressed as............................... 'SS' EX-10 6 ex10-5.txt EXHIBIT 10.5 Exhibit 10.5 July 18, 2002 Robert W. Pittman 75 Rockefeller Plaza New York, NY 10019 Dear Bob: Reference is made to the Agreement, titled "Employment Agreement" between you and America Online, Inc. ("AOL") dated as of October 29, 1996 (the "Agreement"). AOL assigned and AOL Time Warner Inc. ("AOLTW") assumed all rights and obligations under the Agreement on January 11, 2001, and AOLTW thereby became the "Company" for all purposes of the Agreement, except as described below with respect to the Confidentiality Agreement attached thereto as Exhibit A. Capitalized terms used but not defined in this letter agreement shall have the meanings given such terms in the Agreement. You and the Company wish to modify the provisions of the Agreement as follows: 1. Effective July 18, 2002, you shall resign as the Chief Operating Officer and as a director of AOLTW, as Chief Executive Officer of AOL and as an officer or director of any other subsidiaries or affiliates of AOLTW, but you shall continue to serve as an employee of the Company through September 30, 2002 (the "Termination Date"). Prior to the Termination Date, you will actively assist the Company in the manner reasonably requested by the Chief Executive Officer to effect an orderly transition of your responsibilities. You will continue to receive your base salary and employee benefits through the Termination Date, together with any amounts for expense reimbursement that have been incurred prior to the Termination Date and not yet paid. You acknowledge that you do not currently have a target bonus and that no amount is owed to you as "Annual Bonus" for the period through the Termination Date or thereafter. 2. Commencing on the Termination Date, you will become a consultant to the Company for a term of two years ending on September 30, 2004 (the "Consulting Term"), subject to and in accordance with the terms and conditions of the Consulting Agreement and the Confidentiality Agreement, including the provisions regarding non-competition, except as such terms are modified by this letter agreement. Notwithstanding any provisions Robert W. Pittman Page 2 to the contrary in the Agreement, Consulting Agreement or the Confidentiality Agreement, you agree that you will not receive any cash consideration from the Company during the Consulting Term, and you waive any rights under the terms of the Agreement, the Consulting Agreement or the Confidentiality Agreement to receive any payments during the Consulting Term in the form of cash consideration. As consideration for the services rendered under the Consulting Agreement and the Confidentiality Agreement during the Consulting Term, you will receive the following: a. Consistent with the provisions of the Agreement and the Consulting Agreement, during the Consulting Term, you will continue to receive benefits under the Company's health and welfare benefit plans and other benefits (including financial planning services) that you had received as an executive of the Company, to the extent such benefits are maintained in effect by the Company for its executives, provided that you will not be eligible to receive any additional awards or grants under any stock option or other stock incentive plan, and you shall not accrue vacation time or severance benefits. If you accept full-time employment during the Consulting Term, these benefits will cease upon your commencement of such employment. b. Consistent with the terms of the Agreement, the Consulting Agreement and the applicable stock option agreement, all stock options granted to you by AOL on or before September 1, 1998 (including any such stock options that you previously have transferred by gift) shall remain exercisable during the Consulting Term and for a period of 90 days after the end of the Consulting Term (but not beyond their expiration date). In addition, all stock options granted to you by AOL or AOLTW after September 1, 1998 (i) shall vest effective the Termination Date to the extent such stock options have not vested already and (ii) shall remain exercisable through September 30, 2007 (but not beyond their expiration date). 3. The Company shall, without charge to you, make available to you office facilities and services in either New York City or Dulles, Virginia, at your election, together with secretarial services for six months following the Termination Date. The Company also acknowledges and agrees that you shall have access to your personnel information and records during and after the end of the Consulting Term. Robert W. Pittman Page 3 4. The termination of your employment shall be deemed for all purposes of the Agreement to be a termination without Cause by the Company under Section 9 of the Agreement. You acknowledge and agree that you shall not be entitled to notice and severance under the Company's general employee policies, the payments provided for in the Agreement, as modified by this letter agreement, being in lieu thereof. 5. Subsequent to the Termination Date, you shall remain entitled to the benefit of the indemnification provisions contained on the date hereof in the Certificate of Incorporation and By-laws of the Company, as well as any other indemnification rights or provisions that are applicable to executives of the Company, with respect to your service as an officer and director of the Company and its subsidiaries prior to the Termination Date. 6. For purposes of the Confidentiality Agreement, the references in Sections 14 and 24 to "America Online" shall continue to refer to America Online and the business of America Online rather than referring to AOL Time Warner Inc. and the business of AOL Time Warner Inc., and the limitations imposed upon you during the Consulting Term by Sections 14 and 24 shall continue to apply with respect to and be limited to America Online and the business of America Online rather than applying with respect to AOL Time Warner Inc. and the business of AOL Time Warner Inc. In addition, the provisions regarding non-solicitation of employees of AOL Time Warner Inc. contained in the Confidentiality Agreement will not apply to the three individuals who currently serve as administrative or executive assistants for you. 7. The obligations of the Company contained in this letter agreement are subject to and contingent on your execution of the Release attached hereto as Annex A, and if you do not execute and return the Release to the Company or if you revoke the Release within the time period provided for revocation, then this letter agreement shall terminate and be of no further force and effect. Except as amended by this letter agreement, the Agreement, the Consulting Agreement and the Confidentiality Agreement shall remain in full force and effect. Robert W. Pittman Page 4 Please confirm your agreement with and acceptance of the foregoing by signing the enclosed copy of this letter and returning it to the Company. Very truly yours, AOL Time Warner Inc. By ---------------------------- Richard D. Parsons Agreed and Accepted: - ---------------------------- Robert W. Pittman ANNEX A RELEASE Pursuant to the terms of the Employment Agreement dated as of October 29, 1996, as amended by that certain letter dated the date hereof, between AOL TIME WARNER INC., a Delaware corporation (the "Company"), 75 Rockefeller Plaza, New York, New York 10019 and the undersigned (the "Agreement"), and in consideration of the payments made to me and other benefits to be received by me pursuant thereto, I, Robert W. Pittman, being of lawful age, do hereby release and forever discharge the Company and its officers, directors, shareholders, subsidiaries, agents, and employees, from any and all actions, causes of action, claims, or demands for general, special or punitive damages, attorney's fees, expenses, or other compensation, which in any way relate to or arise out of my employment with the Company or any of its subsidiaries or the termination of such employment, which I may now or hereafter have under any federal, state or local law, regulation or order, including without limitation, under the Age Discrimination in Employment Act, as amended, through and including the date of this Release; provided, however, that the execution of this Release shall not prevent the undersigned from bringing a lawsuit against the Company to enforce its obligations under the Agreement. I acknowledge that I have been given at least 21 days from the day I received a copy of this Release to sign. I understand that I have the right to revoke my consent to this Release for seven days following my signing. This Release shall not become effective or enforceable until the expiration of the seven-day period following the date it is signed by me. I ALSO ACKNOWLEDGE THAT BY SIGNING THIS RELEASE I MAY BE GIVING UP VALUABLE LEGAL RIGHTS AND THAT I HAVE BEEN ADVISED TO CONSULT A LAWYER BEFORE SIGNING. I further state that I have read this document and the Agreement referred to herein, that I know the contents of both and that I have executed the same as my own free act. WITNESS my hand this ______ day of __________, 2002. --------------------------------- Robert W. Pittman ~~-----END PRIVACY-ENHANCED MESSAGE-----~~