SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549


                                 ---------------


                                    FORM 8-K


                                 CURRENT REPORT


                     PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934



         Date of Report (Date of earliest event reported): July 1, 1997



                                 Arch Coal, Inc.
             (Exact name of registrant as specified in its charter)



            Delaware                 1-13105             43-0921172
(State or other jurisdiction       (Commission         (I.R.S. Employer
      of incorporation)            File Number)       Identification No.)


CityPlace One,  Suite 300,  Creve Coeur,  Missouri           63141  
(Address of principal executive offices)                   (Zip code)


       Registrant's telephone number, including area code:(314) 994-2700





Item 1.     Changes in Control of Registrant
            --------------------------------

            Reference  is  made to the  responses  set forth in Items 2 and 5 of
this Current Report on Form 8-K, which are incorporated by reference  herein. In
addition,  pursuant to the Merger Agreement  referred to in the response to Item
2,  immediately  prior to the  effective  time of the Merger  referred to in the
response to Item 2, the Board of Directors of Arch Coal,  Inc.  (the  "Company")
became comprised of Messrs.  John R. Hall (Chairman),  James R. Boyd,  Robert A.
Charpie, Paul W. Chellgren,  Thomas L. Feazell, Juan Antonio Ferrando, Robert L.
Hintz,  Douglas H. Hunt,  Steven F. Leer,  Thomas Marshall,  James L. Parker, J.
Marvin Quin and Ronald Eugene Samples.  Messrs.  Hall, Boyd, Hunt, Leer,  Parker
and Samples were  members of the Board of Directors of the Company  prior to the
Merger and Messrs. Charpie,  Chellgren,  Feazell,  Ferrando, Hintz, Marshall and
Quin were  members of the Board of  Directors of Ashland  Coal,  Inc.  ("Ashland
Coal") prior to the Merger. Messrs. Hall, Boyd, Chellgren,  Feazell and Quin are
current or former  executive  officers of Ashland Inc. Mr. Hunt is a beneficiary
of  one  of the  trusts  included  among  various  trusts  for  the  benefit  of
descendants of H. L. and Lyda Hunt and various  corporations owned by trusts for
the  benefit  of  descendants  of H. L. and Lyda Hunt  (collectively,  the "Hunt
Entities")  and Mr.  Parker is a trustee of certain  trusts,  and an officer and
director of a corporation,  included among the Hunt Entities. Mr. Ferrando is an
executive officer of Carboex International, Ltd. ("Carboex").


Item 2.     Acquisition or Disposition of Assets.
            ------------------------------------

            On July 1, 1997,  pursuant to an Agreement  and Plan of Merger dated
as of April 4, 1997 (the  "Merger  Agreement")  among the  Company,  AMC  Merger
Corporation  and Ashland Coal, AMC Merger  Corporation  was merged with and into
Ashland  Coal,  whereupon  Ashland Coal became a wholly-owned  subsidiary of the
Company (the "Merger").

            Pursuant  to the  Merger  Agreement,  at the  effective  time of the
Merger,  each  outstanding  share of Common Stock,  par value $.01 per share, of
Ashland Coal was converted  into the right to receive one share of Common Stock,
par value $.01 per share,  of the Company  ("Company  Common  Stock"),  and each
share of Class B Preferred Stock and Class C Preferred Stock, par value $100 per
share, of Ashland Coal


                                       2


was converted  into the right to receive  20,500 shares of Company Common Stock.
The  foregoing  conversion  ratios were  determined on the basis of arms' length
negotiations.

          The  Company  is  engaged   in  mining,   processing,  marketing   and
transporting  bituminous coal in the domestic steam market. Prior to the Merger,
the Company operated 17 surface, underground and auger mines in the Appalachian,
Midwestern  and Western coal fields from which it produced  26.9 million tons of
coal in 1996. At December 31, 1996,  the Company  controlled  approximately  one
billion tons of proven and probable  low-sulfur coal reserves,  865 million tons
of which were  located  in the  Appalachian coal  fields in the  eastern  United
States.

          Prior  to  the  Merger,  Ashland  Coal  was  engaged  in  the  mining,
processing and marketing of low-sulfur  bituminous coal primarily in the eastern
United States. Its independent operating  subsidiaries included Coal-Mac,  Inc.,
Hobet  Mining,  Inc.,  Mingo Logan Coal Company and  Tri-State  Terminals,  Inc.
Ashland Coal produced 20.5 million tons of coal in 1996 and at December 31, 1996
controlled approximately 615 million tons of proven and probable low-sulfur coal
reserves in southern West Virginia and eastern Kentucky.

Item 5.     Other Events.
            ------------

            Subject to certain  conditions,  the Private  Securities  Litigation
Reform Act of 1995 provides a safe harbor from  liability in any private  action
that is based on an  alleged  untrue  statement  of a  material  fact or alleged
omission of a material fact necessary to make the statement not  misleading.  To
the extent that the  Company or its  representatives  make oral  forward-looking
statements,  following are important  factors that could cause actual results to
differ materially from those in such forward-looking statements.

Competition

      The coal  industry is highly  competitive  and is affected by many factors
beyond the  Company's  control.  Demand for coal and the prices that the Company
will be able to  obtain  for its coal are  closely  linked  to coal  consumption
patterns of the domestic  electric  utility  industry,  which has  accounted for
approximately  90% of domestic  coal  consumption  in recent  years.  These coal
consumption patterns are influenced by the demand for electricity,  governmental
regulation,  technological developments and the location, availability and price
of  competing  sources of coal,  alternative  fuels such as natural gas, oil and
nuclear,  and alternative energy sources such as hydroelectric  power. In recent
years there has been excess coal  production  capacity in the United States as a
result of increased development of large surface mining operations, particularly
in  the  western  United  States,   and  more  efficient  mining  equipment  and
techniques.  Competition  resulting from excess capacity encourages producers to
reduce prices and to pass  productivity  gains through to customers.  Demand for
the  Company's  low-sulfur  coal and the prices that the Company will be able to
obtain for it will also be affected by the price and availability of high-sulfur
coal, which can be marketed in tandem with emissions allowances in order to meet
federal Clean Air Act requirements.

      Electric  utility  deregulation  is  expected  to  provide  incentives  to
utilities to minimize  their fuel costs and is believed to have caused  electric
utilities to be more aggressive in negotiating  prices with coal  suppliers.  To
the extent utility deregulation affects the Company's customers, some aspects of
deregulation may adversely affect the Company's business and operating results.


                                       3


Potential Fluctuations in Operating Results

      The  Company  may  experience  fluctuations  in  operating  results in the
future,  both on an  annual  and  quarterly  basis,  as a result  of one or more
factors,  including expiration or termination of or sales price redeterminations
or  suspensions  of  deliveries  under coal  supply  agreements,  disruption  of
transportation services,  changes in mine operating conditions,  changes in laws
or  regulations,  work stoppages or other labor  difficulties,  competitive  and
overall  coal  market  conditions,   and  general  economic   conditions.   Such
fluctuations could be significant.

      The Company's mining  operations are subject to factors beyond its control
that can  negatively or positively  affect the level of production and hence the
cost of mining at particular  mines for varying  lengths of time.  These factors
include weather conditions,  equipment repair  requirements,  variations in coal
seam  thickness,  amount of overburden,  rock and other natural  materials,  and
other surface or  subsurface  conditions.  Such  production  factors  frequently
result in significant fluctuations in operating results.

Environmental and Regulatory Matters

      Governmental  authorities  regulate the coal mining industry on matters as
diverse as employee health and safety, air quality  standards,  water pollution,
groundwater  quality  and  availability,  plant  and  wildlife  protection,  the
reclamation  and  restoration of mining  properties,  the discharge of materials
into the  environment  and surface  subsidence from  underground  mining.  These
regulations  have had and will  continue  to have a  significant  effect  on the
Company's mining costs and, thus, its competitive  position vis a vis other coal
producers and providers of alternative  energy sources.  Mining  operations also
require numerous governmental permits or approvals,  the availability and timing
of which can affect the efficiency of operations and mining costs.  In addition,
significant  legislation  mandates  certain  benefits  for certain  retired coal
miners represented by the United Mine Workers of America ("UMWA").

      New legislation,  regulations or orders may be adopted or become effective
which may adversely affect the Company's mining  operations or cost structure or
the ability of the Company's customers to use coal. New legislation, regulations
or orders may also require the Company or its customers to incur increased costs
or to change  operations  significantly.  These  factors  could  have a material
adverse effect on the Company's business and results of operations.


                                       4


Reliance on and Terms of Long-Term Coal Supply Contracts

      The Company sells a substantial portion of its coal production pursuant to
long-term supply contracts,  which will  significantly  affect the stability and
profitability of operations. Most of the long-term supply contracts currently in
effect  allow the Company to sell coal at a higher price than the price at which
such coal could be sold in the spot  market.  The loss of  long-term  contracts,
whether as a result of  expiration,  termination,  suspension of  performance or
otherwise,  could have a material  adverse  effect on the  Company's  results of
operations and business. Such effect would be particularly adverse with  respect
to the loss of  long-term  contracts  that  permit  the  Company to sell coal at
prices  significantly  higher  than  current  market  prices.  The   Company  or
its operating  subsidiaries are currently   party to two such contracts,  one of
which expires in 2012 and provides for the delivery of approximately 1.3 million
tons of  compliance  coal  annually,  and the other of which expires in 2003 and
provides  for the delivery of  approximately  400,000  tons of  low-sulfur  coal
annually.

      The Company's  long-term coal supply  contracts  contain price  adjustment
provisions  which  permit a periodic  increase or decrease in the contract price
to reflect  increases and decreases in  production  costs,  changes in specified
price  indices or items such as taxes or royalties,  and contain price  reopener
provisions,  which provide for an upward or downward  adjustment in the contract
price based on market factors.  The contracts also typically  include  stringent
minimum and  maximum  coal  quality  specifications  and penalty or  termination
provisions  for failure to meet such  specifications,  as well as force  majeure
provisions  allowing  suspension of  performance  or  termination by the parties
during the duration of certain events beyond the control of the affected  party,
including  changes  in  or  the  effectiveness  of  legislation  or  regulations
affecting such party. If the parties to any long-term contracts with the Company
were to modify,  suspend or  terminate  those  contracts,  the Company  could be
adversely affected to the extent that it is unable to find alternative customers
for the affected coal production at the same level of profitability.

      From time to time,  disputes  with  customers  may arise  under  long-term
contracts  relating to, among other things,  coal quality,  pricing and quantity
and  applicability  of certain  contract  terms.  The  Company  may thus  become
involved in arbitration and legal proceedings regarding its long-term contracts.
There can be no assurance that the Company will be able to resolve such disputes
in a satisfactory manner.

                                       5


Dependence on Certain Customers

      During  1996,  combined  coal sales by the  Company  and  Ashland  Coal to
affiliates of The Southern  Company and  affiliates of American  Electric  Power
accounted for approximately 14.6% and 13.1%, respectively, of pro forma combined
revenues from coal sales for such period.  The loss of such customers would have
a material adverse effect on the Company.

Reserve Degradation and Depletion

      The  Company's  profitability  will be  substantially  dependent  upon its
ability to replace  depleted  reserves  with new  reserves  that can be mined at
competitive costs.  There can be no assurance that replacement  reserves will be
available  when  required or whether such  replacement  reserves can be mined at
costs comparable to those  characteristic of the depleting mines.  Exhaustion of
reserves  at  particular  mines can also  have an  adverse  effect on  operating
results  that  is  disproportionate  to the  percentage  of  overall  production
represented by the production of such mines.

      The  reserves at the  Company's  Arch of  Kentucky  Mine No. 37 capable of
being mined by its longwall  operation  are expected to be depleted in the third
quarter of 1997. For the year ended December 31, 1996,  Mine No. 37 produced 4.5
million tons of coal (from both longwall and continuous  miner  sections)  which
accounted for $20.8 million or 37.1% of the Company's operating income and sales
from the mine accounted for 16.4% of the revenues of the Company in 1996.  After
exhaustion of the longwall  reserves,  the decrease in operating  profit will be
mitigated  to some degree by the  continued  operation of two  continuous  miner
sections and by the potential  development of an  underground  mine in the Darby
seam that is in close proximity to the Cave Branch  Preparation  Plant currently
used to process Mine No. 37 coal.

Transportation

      The coal industry depends on rail,  trucking and barge  transportation  to
deliver  shipments  of coal to  customers.  Disruption  of these  transportation
services could  temporarily  impair the Company's  ability to supply coal to its
customers  and thus  adversely  affect  the  Company's  business  and  operating
results. In addition,  transportation  costs are a significant  component of the
total cost of supplying  coal to customers and can affect  significantly  a coal
producer's  competitive  position and profitability.  Increases in the Company's
transportation  costs, or changes in such costs relative to transportation costs
incurred by providers of competing coal or of other fuels, could have an adverse
effect on the Company's business and operating results.


                                       6


Reliance on UMWA-Represented Labor

      UMWA operations accounted for approximately 56% of the total coal produced
by the Company  and Ashland  Coal in 1996.  Certain  competitors  of the Company
employ non-union  laborers.  Due to higher labor costs and the increased risk of
strikes and other work stoppages which may be associated  with union  operations
in the coal industry,  non-union  competitors  may have a competitive  advantage
where they compete with union  operations.  The seven-month  UMWA strike in 1993
adversely  affected  the  operations  of the Company.  If any current  non-union
operations of the Company were to unionize,  the Company  would incur  increased
risk of work stoppages, and possibly higher labor costs.

      The Bituminous  Coal Operators  Association  ("BCOA")  negotiates with the
UMWA on behalf of its  members.  The  Company's  Apogee  Coal  Company and Hobet
Mining,  Inc.  subsidiaries  are  members  of the  BCOA.  The  current  National
Bituminous  Coal Wage Agreement (the "1993 NBCWA"),  which applies to all of the
Company's  employees  represented by the UMWA,  became effective on December 16,
1993 and will  expire on August 1, 1998.  Wage rates and certain  benefits  were
renegotiated  in 1996 for the  remainder  of the  contract.  When the 1993 NBCWA
expires,  no assurance  can be given that it will be  successfully  renegotiated
without a work  stoppage.  In  addition to work  stoppages  which may occur upon
termination  of  a  collective  bargaining   agreement,   union  operations  may
experience unauthorized work stoppages or wildcat strikes from time to time.

Control of the Company by Certain Stockholders

      Ashland Inc.,  the Hunt Entities  collectively  and Carboex  currently own
approximately 54%, an aggregate of 25%, and 5%, respectively, of the outstanding
shares of Company Common Stock. The Restated Certificate of Incorporation of the
Company  (the  "Company  Certificate")  provides  for  cumulative  voting in the
election  of  directors  of the  Company.  As a result  of such  provision,  and
assuming  an  election of 13  directors  and  ownership  of the  percentages  of
outstanding  Company Common Stock  referred to above,  Ashland Inc. and the Hunt
Entities (if the Hunt Entities were to vote their  respective  shares  together)
have the power to elect six and three  directors of the  Company,  respectively.

      Pursuant to a Stockholders  Agreement among the Company,  Ashland Inc. and
Carboex,  the Company has agreed to nominate  for  election as a director of the
Company a person designated by 

                                       7


Carboex,  and Ashland Inc. has agreed to vote its shares of Company Common Stock
in a manner  sufficient to cause the election of such nominee,  in each case for
so long (subject to earlier  termination in certain  circumstances) as shares of
Company  Common  Stock owned by Carboex  represent at least 63% of the shares of
Company  Common  Stock  acquired  by Carboex in the  Merger.  In  addition,  the
Company,  for so long as the Hunt Entities have the  collective  voting power to
elect by cumulative voting one or more persons to serve on the Board, has agreed
to nominate  for  election as  directors  of the Company  that number of persons
designated by certain of the Hunt Entities that could be elected to the Board by
the Hunt Entities by exercise of such cumulative voting power.

      The Company  Certificate requires  the  affirmative  vote  of  the holders
of at least  two-thirds of  outstanding  Company  Common Stock voting thereon to
approve  a  merger  or  consolidation  and  certain  other  fundamental  actions
involving or affecting  control of the Company.  The Company  Bylaws require the
affirmative vote of at least two-thirds of the members of the Board of Directors
of the Company in order to declare  dividends  and to  authorize  certain  other
actions.  As a consequence of the foregoing ownership  structure,  Ashland Inc.,
the Hunt  Entities and Carboex,  acting  together,  have the power to direct the
affairs of the Company and to control or limit these actions as well.

Inherent Uncertainties Relating to Certain Effects of the Merger

      The success of the Merger in enhancing  long-term  stockholder  value will
depend, in part,  on achieving  cost savings and other  benefits  that could be
expected  to be  realized  as a  result  of the  Merger.  As in  every  business
combination,  achieving  such  benefits depends  on  factors  that  may  not  be
within the  control of the Company and  require  the  dedication  of  management
resources,  which may  temporarily  divert full  attention  from the  day-to-day
business of the Company. There can be no assurance that the Company will be able
to realize such cost savings and other benefits,  or do so within any particular
period.

Writedowns Related to Duplicate Facilities

      The Company believes that significant cost savings and other synergies can
be achieved from the Merger. However, realizing these cost savings and synergies
may  result in the  idling or closing of  duplicate  offices,  distribution  and
production  facilities  by the  Company.  Idling or  closing  facilities  of the
Company  may require  significant  charges to expense in order to write down the
applicable  assets to their fair value,  less selling costs,  if any.  Idling or
closing  facilities of Ashland Coal related to the Merger that require writedown
to fair value will be adjusted in the purchase price allocation of

                                       8


Ashland Coal.

Uncertainty as to Market Price of Company Common Stock

      In light of the  considerations set forth above, the Company's status as a
new public company with a short trading history, and the inherent uncertainty of
future  market  prices  of the  stock of any  public  company,  there  can be no
assurance  as to the  prices at which  Company  Common  Stock  will trade in the
future.  Moreover,  factors  such as  fluctuations  in the  Company's  operating
results,  general trends affecting the coal industry,  broad market fluctuations
and general economic and political  conditions may have a significant  effect on
market prices for Company Common Stock.

Shares Eligible for Future Sale

      Immediately  following  the  consummation  of the Merger,  the Company had
outstanding 39,591,454 shares of Company Common Stock. A significant number of
such shares,  including  shares held by certain  holders of Company Common Stock
prior to the  Merger,  are  eligible  for sale  without  restriction  under  the
Securities Act of 1933, as amended (the  "Securities  Act") in the public market
by persons other than  affiliates of the Company.  Sales of shares by affiliates
of Ashland  Coal are subject to Rule 145 of the  Securities  Act (or Rule 144 in
the case of such persons who become  affiliates  of the Company) or as otherwise
permitted  under the Securities  Act. In addition,  certain  stockholders of the
Company have rights to require the Company to register the sale of such holders'
shares of Company Common Stock under the  Securities  Act or, in some cases,  to
register  the sale of  shares  in  other  registration  statements  filed by the
Company in respect of sales of shares by it or by others.

Effects of Authorized but Unissued Preferred Stock

      Pursuant to the Company  Certificate,  the  Company's  authorized  capital
stock  includes  10,000,000  shares  of  preferred  stock,  which  the  Board of
Directors (by action of at least  two-thirds of its  members),  without  further
approval of the  stockholders  of the  Company,  is  authorized  to issue and to
determine the rights and  preferences of the preferred  stock.  These rights and
preferences  could be superior to those of the Company Common Stock.  The rights
of the holders of Company  Common Stock will be subject to, and may be adversely
affected by, any future issuance of preferred  stock.  The issuance of preferred
stock could also have the effect of delaying,  deferring or  preventing a change
in control of the Company.  The Company has no present plans to issue any shares
of preferred stock.


                                       9


Certain Provisions of the Company Certificate and Company Bylaws

      The Company Certificate  provides that the Company shall not amend certain
provisions of the Company Certificate,  nor adopt an agreement or plan of merger
or consolidation,  authorize the sale, lease or exchange of all or substantially
all of property and assets of the Company,  or authorize the  dissolution of the
Company or the  distribution  of all or  substantially  all of the assets of the
Company, except upon the approval of not less than two-thirds of the outstanding
shares of Company Common Stock voting  thereon.  The Restated and Amended Bylaws
of the Company (the "Company  Bylaws") provide that there be an affirmative vote
of not less than  two-thirds  of the members of the Board of  Directors to amend
the supermajority provisions of the Company Bylaws. The Company Bylaws otherwise
permit the amendment or repeal of the Company Bylaws upon the  affirmative  vote
of a majority of the Company's Board of Directors.

      The Company Bylaws  provide that there be an affirmative  vote of not less
than  two-thirds  of the  members of the Board of  Directors  to  authorize  the
issuance of more than 1,000,000  shares of Company Common Stock or any shares of
preferred stock in any one transaction or series of  transactions,  to declare a
dividend or distribution  on any Company stock, to approve the Company's  annual
budget or operating plan (including any unbudgeted capital expenditure in excess
of  $10,000,000),  to elect the Company's  President,  Chief Executive  Officer,
Chief Financial Officer (if any) or Chief Operating Officer (if any), to adopt a
share  purchase  plan of a nature  commonly  referred to as a "poison  pill," to
repurchase or redeem any capital stock of the Company,  to appoint members to or
dissolve the Executive Committee or to amend the supermajority provisions of the
Company Bylaws. The Company Bylaws further provide that in order for nominations
or other  business to be properly  brought before a  stockholders'  meeting by a
stockholder,  the stockholder  must give timely notice thereof in writing to the
Secretary.

Item 7.     Financial Statements, Pro Forma Financial Information and
            Exhibits.
            -----------------------------------------------------

      (a)   The  following  consolidated financial  statements  of Ashland Coal,
Inc. and Subsidiaries are filed as part of this Current Report on Form 8-K:

            Report of Ernst & Young LLP, Independent
                  Auditors

            Consolidated Statements of Income for
                  the years ended December 31, 1996,
                  1995 and 1994

                                       10



            Consolidated Balance Sheets at December 31,
                  1996 and 1995

            Consolidated Statements of Stockholders'
                  Equity for the years ended December 31,
                  1996, 1995 and 1994

            Consolidated Statements of Cash Flows for
                  the years ended December 31, 1996,
                  1995 and 1994

            Notes to Consolidated Financial Statements

            Consolidated Statements of Income for
                  the three month periods ended March 31,
                  1997 and 1996

            Consolidated Balance Sheet at March 31, 1997

            Consolidated  Statements  of Cash Flows for 
                  the three month  periods ended March 31,
                  1997 and 1996

            Notes to Consolidated Financial Statements

      (b)   The following unaudited pro forma financial  information is filed as
part of this Current Report on Form 8-K:

            Unaudited Pro Forma Financial Information

            Unaudited Pro Forma Combined Balance
                  Sheet as of March 31, 1997

            Notes to Unaudited Pro Forma Combined
                  Balance Sheet as of March 31, 1997

            Unaudited Pro Forma Combined Statement
                  of Operations for the year ended
                  December 31, 1996

            Notes to Unaudited Pro Forma Combined
                  Statement of Operations for the
                  year ended December 31, 1996

            Unaudited Pro Forma  Combined  Statement of 
                  Operations for the three months ended 
                  March 31, 1997


                                       11


            Notes to Unaudited Pro Forma  Combined  
                  Statement of Operations for the three 
                  months ended March 31, 1997

      (c)  The following Exhibits are filed with or incorporated by reference as
part of this Current Report on Form 8-K:

      Exhibit No.                   Description
      -----------                   -----------

           2.1                      Agreement and Plan of Merger dated April
                                    4, 1997 among Arch Mineral Corporation,
                                    AMC Merger Corporation and Ashland Coal,
                                    Inc. (incorporated by reference to
                                    Exhibit 2.1 to the Registration Statement
                                    of Arch Mineral Corporation on Form S-4,
                                    Registration No. 333-28149)

           4.1                      Credit Agreement dated as of July 1, 1997 by
                                    and among Arch Coal, Inc., the  banks  party
                                    thereto, PNC Bank, National Association,  as
                                    Administrative  and  Syndication  Agent  and
                                    Morgan Guaranty Trust Company  of  New York,
                                    as Documentation and Syndication Agent.

           23.1                     Consent of Ernst & Young LLP


                                       12




              Report of Ernst & Young LLP, Independent Auditors

To the Stockholders and Board of Directors
Ashland Coal, Inc.

We have audited the  accompanying  consolidated  balance sheets of Ashland Coal,
Inc.  and  subsidiaries  as of  December  31,  1996 and  1995,  and the  related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three  years in the period  ended  December  31,  1996.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these  financial statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of Ashland Coal, Inc.
and subsidiaries at December 31, 1996 and 1995, and the consolidated  results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1996,  in  conformity  with  generally  accepted  accounting
principles. 

                                                           /s/ ERNST & YOUNG LLP

Louisville, Kentucky
January 22, 1997


                                       13



                      CONSOLIDATED STATEMENTS OF INCOME

                     Ashland Coal, Inc. and Subsidiaries

Year Ended December 31, -------------------------- 1996 1995 1994 ---- ---- ---- (In thousands except earnings per share) Revenues: Coal sales $565,174 $618,886 $589,141 Operating revenues 12,030 17,075 21,003 ---------- --------- ---------- 577,204 635,961 610,144 Costs and expenses: Cost of coal sold 508,960 529,618 510,125 Operating expenses 9,559 10,995 11,543 Selling, general, and administrative 26,864 27,901 33,756 expenses ---------- ---------- ---------- 545,383 568,514 555,424 ---------- ---------- ---------- Operating income 31,821 67,447 54,720 Other income (expense): Interest income 417 89 366 Interest expense (17,905) (20,724) (22,238) ---------- ----------- ---------- Income before income taxes 14,333 46,812 32,848 Income tax expense (benefit) (2,180) 5,401 628 ---------- ----------- ---------- Net income 16,513 41,411 32,220 Less preferred stock dividends 2,810 2,810 2,603 ---------- ---------- ---------- Income applicable to $ 13,703 $ 38,601 $ 29,617 common stock ========== ========== ========== Earnings per common share: Primary $ .87 $ 2.22 $ 1.72 Fully diluted $ .86 $ 2.16 $ 1.68
See notes to consolidated financial statements. 14 CONSOLIDATED BALANCE SHEETS Ashland Coal, Inc. and Subsidiaries
December 31, ------------ (In thousands) 1996 1995 ---- ---- Assets Current assets: Cash and cash equivalents $ 834 $ 1,752 Trade accounts receivable 56,743 76,442 Other receivables 6,260 6,890 Inventories 41,394 26,038 Prepaid royalties 17,525 16,622 Deferred income taxes 2,187 3,512 Other 2,177 3,349 ------- ------- Total current assets 127,120 134,605 Other assets: Prepaid royalties 61,040 61,979 Coal supply agreements 27,712 31,498 Other 14,355 18,924 ------- ------- Total other assets 103,107 112,401 Property, plant, and equipment, net 574,850 588,396 ------- ------- Total assets $805,077 $835,402 ======= ======= Liabilities and stockholders' equity Current liabilities: Accounts payable $37,544 $30,595 Accrued expenses 30,599 37,279 Income taxes payable 761 -- Current portion of debt 41,000 42,000 -------- -------- Total current liabilities 109,904 109,874 Long-term debt 135,339 172,975 Accrued postretirement benefits 82,464 78,951 other than pension Other long-term liabilities 55,221 50,493 Deferred income taxes 17,857 25,230 Stockholders' equity: Convertible preferred stock 67,841 67,841 Common stock, $.01 par value, 44,000,000 shares authorized, 13,775,074 issued and 13,518,008 outstanding in 1996 and 13,754,224 issued and 13,567,858 15 December 31, ------------ 1996 1995 ---- ---- (In thousands) outstanding in 1995 138 138 Paid-in capital 109,689 109,257 Retained earnings 232,060 224,574 Less treasury common stock at cost (257,066 shares in 1996 and 186,366 shares in 1995) (5,436) (3,931) ------ ------- Total stockholders' equity 404,292 397,879 ------- ------- Total liabilities and stockholders' equity $805,077 $835,402 ======= =======
See notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Ashland Coal, Inc. and Subsidiaries Three years ended December 31, 1996
Convertible Preferred Common Paid-In Stock Stock Capital ---------- ------- -------- (In thousands) Balance at January 1, 1994 $67,841 $136 $107,087 Net income Cash dividends paid: Common--$.415 per share Preferred--$10,414 (including $2,800 preference dividend) per share Issuance of 35,655 shares of common stock under dividend reinvestment and stock purchase 1 980 plan Issuance of 28,825 shares of common stock under stock incentive plan 644 ------ --- ------- Balance at December 31, 1994 67,841 137 108,711 Net income Cash dividends paid: Common--$.46 per share Preferred--$11,239 (including $2,800 preference dividend) per share Purchase of 185,300 shares of common stock Issuance of 31,240 shares of common stock under stock incentive plan 1 546 ------ --- ------- Balance at December 31, 1995 67,841 138 109,257 Net income Cash dividends paid: Common--$.46 per share Preferred--$11,239 (including $2,800 preference dividend) per share Purchase of 70,700 shares of common stock Issuance of 20,850 shares of common stock under stock 17 Convertible Preferred Common Paid-In Stock Stock Capital ---------- ------- -------- (In thousands) incentive plan 432 ------ --- ------- Balance at December 31, 1996 $67,841 $138 $109,689 ====== === =======
See notes to consolidated financial statements. 18 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued from prior page) Ashland Coal, Inc. and Subsidiaries Three years ended December 31, 1996
Retained Treasury Earnings Stock Total -------- -------- ----- (In thousands) Balance at January 1, 1994 $168,363 $ $343,427 Net income 32,220 32,220 Cash dividends paid: Common--$.415 per share (5,686) (5,686) Preferred--$10,414 (including $2,800 preference dividend) per share (2,603) (2,603) Issuance of 35,655 shares of common stock under dividend reinvestment and stock purchase 981 plan Issuance of 28,825 shares of common stock under stock incentive plan 644 -------- -------- Balance at December 31, 1994 192,294 368,983 Net income 41,411 41,411 Cash dividends paid: Common--$.46 per share (6,321) (6,321) Preferred--$11,239 (including $2,800 preference dividend) per share (2,810) (2,810) Purchase of 185,300 shares of common stock (3,902) (3,902) Issuance of 31,240 shares of common stock under stock incentive plan (29) 518 -------- ------- -------- Balance at December 31, 1995 224,574 (3,931) 397,879 Net income 16,513 16,513 Cash dividends paid: Common--$.46 per share (6,217) (6,217) Preferred--$11,239 (including $2,800 preference dividend) per share (2,810) (2,810) Purchase of 70,700 shares of common stock (1,505) (1,505) 19 Retained Treasury Earnings Stock Total -------- -------- ----- (In thousands) Issuance of 20,850 shares of common stock under stock incentive plan 432 -------- ------- -------- Balance at December 31, 1996 $232,060 $(5,436) $404,292 ======== ======= ========
See notes to consolidated financial statements. 20 CONSOLIDATED STATEMENTS OF CASH FLOWS Ashland Coal, Inc. and Subsidiaries
Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Operating activities: Net income $16,513 $41,411 $32,220 Adjustments to reconcile to cash provided by operating activities: Depreciation and amortiza- tion of property, plant, and equipment 64,699 65,127 58,344 Other amortization 5,480 5,766 13,451 Prepaid royalties expensed 23,738 21,286 19,868 Deferred income taxes (6,048) (7,511) (11,238) (Gain) loss on disposition of assets 3 (477) (1,214) Partnership costs in excess of cash advances 500 689 436 Changes in operating assets and liabilities: Trade accounts receivable 19,699 (14,080) (16,849) Other receivables 630 2,234 (4,657) Inventories (15,356) 4,173 (7,907) Prepaid royalties (3,358) (4,527) (5,070) Other current assets 327 1,200 (1,522) Other assets 3,037 2,336 3,178 Accounts payable and (1,280) (902) 12,816 accrued expenses Income taxes 1,347 (764) 2,381 Accrued postretirement benefits other than pension 3,513 3,755 7,351 Other long-term liabilities 4,587 2,159 3,159 ------- ------- ------- Cash provided by operating activities 118,031 121,875 104,747 Investing activities: Property, plant, and equipment: Purchases (52,628) (58,245) (43,501) Proceeds from sales 3,324 2,249 4,280 Advances on prepaid royalties (20,698) (21,013) (20,490) -------- --------- --------- 21 Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Cash used in investing activities (70,002) (77,009) (59,711) Financing activities: Proceeds from borrowings 904,080 1,007,754 1,315,931 Payments on borrowings (942,870) (1,039,402) (1,353,570) Dividends paid (9,027) (9,131) (8,289) Proceeds from sale of common stock 375 447 1,456 Purchase of common stock (1,505) (3,902) -- ------- -------- --------- Cash used in financing activities (48,947) (44,234) (44,472) -------- --------- --------- Increase (decrease) in cash and cash equivalents (918) 632 564 Balance at beginning of year 1,752 1,120 556 ------- --------- --------- Cash and cash equivalents at end of year $ 834 $ 1,752 $ 1,120 ======= ========= ========= Supplemental cash flow information: Cash paid during the year for income taxes, net of refunds $ 2,521 $ 13,470 $ 9,218 Cash paid during the year for interest, net of amounts capitalized $ 17,746 $ 20,281 $ 22,126
See notes to consolidated financial statements. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ashland Coal, Inc. and Subsidiaries 1. Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Ashland Coal, Inc. and its subsidiaries (the Company or Ashland Coal), which operate in the coal mining industry. The Company's mining operations are conducted in eastern Kentucky and West Virginia, and the coal is marketed primarily in the eastern United States. All subsidiaries are wholly owned. Significant intercompany transactions and accounts have been eliminated in consolidation. Ashland Coal's 17.5% partnership interest in Dominion Terminal Associates is accounted for on the equity method in the consolidated balance sheets. Allocable costs of the partnership for coal loading and storage are included in costs and expenses in the consolidated statements of income. Inventories Inventories are comprised of the following:
1996 1995 ---- ---- (In thousands) Coal $22,320 $ 8,536 Supplies 19,074 17,502 ------ ------ $41,394 $26,038 ====== ======
Coal inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Supplies inventories are valued at the lower of average cost or market. Coal Acquisition Costs and Prepaid Royalties Coal lease rights obtained through acquisition of other companies are capitalized and amortized primarily by the units-of-production method over the estimated recoverable reserves. Rights to leased coal lands are often acquired through royalty 23 payments. Where royalty payments represent prepayments recoupable against future production, they are capitalized, and amounts expected to be recouped within one year are classified as a current asset. As mining occurs on these leases, the prepayment is offset against earned royalties and is included in the cost of coal mined. The Company provides a valuation allowance for royalties estimated to be nonrecoupable. The valuation allowance for prepaid royalties was $6,327,000 and $7,865,000 at December 31, 1996 and 1995, respectively. Coal Supply Agreements Acquisition costs allocated to coal supply agreements (sales contracts) are capitalized and amortized to selling expense on the basis of coal to be shipped over the term of the contract. Accumulated amortization for sales contracts was $37,933,000 and $34,147,000 at December 31, 1996 and 1995, respectively. Exploration Costs Costs related to locating coal deposits and determining the economic mineability of such deposits are expensed as incurred. Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Costs of purchasing rights to coal reserves and of developing new mines or significantly expanding the capacity of existing mines are amortized using the units-of-production method. Plant and equipment are depreciated principally on the straight-line method over the estimated useful lives of the assets, which range from three to 33 years. Interest costs on borrowed funds are capitalized for significant asset construction projects. Capitalized interest costs were $382,000 in 1996, $311,000 in 1995, and $176,000 in 1994. Asset Impairment If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value. Income Taxes Deferred income taxes are based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years during which taxes are expected to be paid or 24 recovered. Revenue Recognition Coal sales revenues include sales to customers of coal produced at Company operations and purchased from other companies. The Company recognizes revenue from coal sales at the time title passes to the customer. Revenues other than from coal sales are included in operating revenues and are recognized in income as services are performed or otherwise earned. Other The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash equivalents (none at December 31, 1996 and 1995) represent highly liquid investments with a maturity of three months or less when purchased. Cash equivalents are recorded at cost, plus accrued interest, which approximates market. The Company accrues amounts to be paid or received under interest-rate swap and cap agreements over the lives of the agreements. Such amounts are recognized as adjustments to interest expense over the lives of agreements, thereby adjusting the effective interest rate on the Company's debt. Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform with the classifications in the 1996 financial statements. 2. Related Parties The financial statements include transactions with Ashland Inc. (Ashland), Saarbergwerke AG (Saarberg), and Carboex International, Ltd. (Carboex) and their affiliates. Ashland owns 7,481,290 shares of the issued and outstanding common stock and the issued and outstanding convertible Class B preferred stock of Ashland Coal, and Carboex owns the issued and outstanding convertible Class C preferred stock of Ashland Coal. Prior to February 8, 1995, Saarberg owned the issued and outstanding convertible Class B preferred stock. On February 8, 1995, Ashland purchased Saarberg's Class B preferred stock for $110,076,000. Ashland now has approximately 57% of the voting power of Ashland Coal in matters other than the election of directors and could elect six members of the 10-member Board of Directors. 25 Revenues include sales of coal to Saarberg and miscellaneous items of income resulting from transactions with Ashland. In addition, Ashland Coal receives certain services from and provides certain services to Ashland for which fees are charged between the companies. Ashland Coal purchases fuel, oil, and other products from Ashland for use in its mining operations. Saarberg and Carboex are the Company's exclusive agents for the purpose of selling metallurgical coal to the steel industry in Europe. Under the terms of the agreement, Ashland Coal pays a 2% commission on all such sales. Transactions with related parties (which include Saarberg prior to February 8, 1995) are summarized below.
1996 1995 1994 ---- ---- ---- (In thousands) Revenues: Saarberg $ -- $ -- $4,124 Ashland and affiliates 7 2,390 1 Service fees: Charges from Ashland 429 428 392 Charges to Ashland 1 5 1 Commissions paid on European sales of metallurgical coal: Carboex 100 125 108 Saarberg and affiliates -- -- 108 Purchases of fuel, oil, and other products from Ashland 5,525 5,996 5,881
Management believes that charges between Ashland Coal and Ashland for services were reasonable and that the other transactions summarized above were concluded on terms equivalent to those prevailing among unaffiliated parties. 3. Dominion Terminal Associates Ashland Coal holds a 17.5% general partnership interest in Dominion Terminal Associates (DTA), which operates a ground storage-to-vessel coal transloading facility in Newport News, Virginia. DTA leases the facility from Peninsula Ports Authority of Virginia (PPAV) for amounts sufficient to meet debt-service requirements. Financing is provided through $132,800,000 of tax-exempt bonds issued by PPAV which mature July 1, 2016. 26 Under the terms of a throughput and handling agreement with DTA, each partner is charged its share of cash operating and debt-service costs in exchange for the right to use its share of the facility's loading capacity and is required to make periodic cash advances to DTA to fund such costs. On a cumulative basis, costs exceeded cash advances by $8,122,000 and $7,622,000 at December 31, 1996 and 1995, respectively (included in other long-term liabilities). Costs and cash advances for the last three years follow:
(In thousands) 1996 1995 1994 ---- ---- ---- Operating and debt service costs charged to costs and expenses $4,031 $3,898 $3,316 Cash advances 3,531 3,209 2,880
Future payments for fixed operating costs and debt service are estimated to approximate $3,300,000 annually through 2015 and $26,000,000 in 2016. 27 4. Income Taxes Significant components of the provision for income tax expense (benefit) are as follows:
(In thousands) 1996 1995 1994 ---- ---- ---- Current: Federal $3,702 $11,793 $11,037 State 166 1,119 829 ----- ------ ------ Total current 3,868 12,912 11,866 ----- ------ ------ Deferred: Federal (5,638) (6,894) (10,253) State (410) (617) (985) ----- ------ ------ Total deferred (6,048) (7,511) (11,238) ----- ------ ------ $(2,180) $ 5,401 $ 628 ====== ====== ======
A reconciliation of the normal statutory federal income tax on Ashland Coal's pretax income with the Company's actual income tax expense (benefit) follows:
(In thousands) 1996 1995 1994 ---- ---- ---- Income tax expense at U.S. $ 5,017 $16,384 $11,497 statutory rate Increase (decrease) in taxes resulting from: Percentage depletion allowance (6,552) (10,431) (10,685) State income taxes, net of effect of federal taxes (302) 110 (446) Nontaxable income, net of nondeductible expenses (414) (590) (53) Other items 71 (72) 315 ------ ------ ------ $ (2,180) $ 5,40 $ 628 ====== ====== ======
Significant components of the Company's deferred tax liabilities and assets that result from carryforwards and 28 temporary differences between the financial statement basis and tax basis of assets and liabilities are summarized as follows:
(In thousands) 1996 1995 ---- ---- Deferred tax liabilities: Acquisition costs allocated to mineral $ 83,908 $ 87,301 reserves Property, plant, and equipment, principally due to differences in lives and methods of depreciation and amortization 26,873 27,613 Prepaid royalties capitalized for financial reporting purposes 19,619 19,537 Acquisition costs allocated to coal supply agreements 2,261 3,110 Other 2,822 3,432 ------- ------- Total deferred tax liabilities 135,483 140,993 ------- ------- Deferred tax assets: Goodwill for tax purposes 34,503 37,586 Postretirement benefits other than pension 32,707 31,228 Alternative minimum tax credit carryforward 29,529 26,971 Costs not deductible until paid or realized 17,722 17,719 Net operating loss carryforwards 557 500 Deferred gains not deferred for tax purposes 2,075 2,141 Other 2,720 3,130 ------- ------- Total deferred tax assets 119,813 119,275 ------- ------- Net deferred tax liability 15,670 21,718 Less current assets (2,187) (3,512) ------- ------- Long-term deferred tax liability $ 17,857 $ 25,230 ======= =======
At December 31, 1996, the Company had $459,000 of federal net operating loss carryforwards, which expire in 2004, and $7,362,000 of state net operating loss carryforwards, which expire from 2001 through 2011, which may be applied against future taxable income. 5. Prepaid Royalties 29 Ashland Coal has entered into various noncancellable royalty lease agreements under which future minimum payments are approximately $23,000,000 in 1997, 1998, and 1999, $22,000,000 in 2000 and 2001, and $190,000,000 in the aggregate thereafter. Coal lands and mineral rights with a carrying value of $1,600,000, prepaid royalties with a carrying value of $25,100,000 (net of the valuation allowance), and future royalty commitments of $2,250,000 at December 31, 1996, represent amounts attributable to coal properties for which there are no immediate plans for significant production. Geological surveys performed by outside consultants indicate that there are sufficient reserves relative to these properties to permit recovery of Ashland Coal's investment. 6. Property, Plant, and Equipment Property, plant, and equipment consists of the following:
(In thousands) 1996 1995 ---- ---- Cost: Land $ 11,361 $ 9,126 Coal lands and mineral rights 439,564 462,465 Buildings and improvements 38,836 38,381 Equipment and processing facilities 410,798 386,624 Other 6,930 7,502 Construction in progress 9,934 5,184 ------- ------- 917,423 909,282 Less accumulated depreciation and amortization 342,573 320,886 ------- ------- $574,850 $588,396 ======= =======
7. Debt and Financing Arrangements Debt consists of the following:
(In thousands) 1996 1995 ---- ---- 9.78% senior unsecured notes, payable in four equal annual installments beginning September 15, 1997 $100,000 $100,000 30 (In thousands) 1996 1995 ---- ---- 9.66% senior unsecured notes, payable in six equal annual installments beginning May 15, 2001 52,900 52,900 8.92% senior unsecured notes, due May 15, 1996 -- 22,100 Indebtedness to banks under revolving credit agreement (rate at December 31, 1996--5.91%; 1995--6.22%) 15,000 30,000 Indebtedness to banks under lines of credit (weighted average rate at at December 31, 1996--7.25%; 1995--6.09%) 6,261 7,315 Other 2,178 2,660 ------- ------- 176,339 214,975 Less current portion 41,000 42,000 ------- ------- Long-term debt $135,339 $172,975 ======= =======
Ashland Coal has a revolving credit agreement, which terminates in 1999, with a group of banks providing for borrowings of up to $500,000,000. The rate of interest on borrowings under this agreement is, at Ashland Coal's option, a money-market rate determined by a competitive bid process, the National Westminster Bank PLC reference rate, a rate based on LIBOR, or a rate based on an average market certificate-of-deposit rate. The provisions of the revolving credit agreement require a facility fee, which is currently computed at the rate of 0.1875% per annum on the amount of the commitment. The rate used to compute the facility fee is redetermined quarterly based upon the Company's ratio of debt to equity and may vary from 0.15% to 0.35% per annum. Certain amounts borrowed under the revolving credit agreement ($6,000,000 in 1996 and $18,200,000 in 1995) are classified as long-term as the Company has the intent and ability to maintain these borrowings on a long-term basis. Ashland Coal periodically establishes uncommitted lines of credit with banks. These agreements generally provide for short-term borrowings at market rates. At December 31, 1996, there were $170,000,000 of such agreements in effect. Aggregate maturities of debt at December 31, 1996, are $41,000,000 in 1997, $31,785,000 in 1998, $25,630,000 in 1999, $25,025,000 in 2000, $8,817,000 in 2001, and $44,082,000 thereafter. Included in these maturities are expected discretionary prepayments of $9,000,000 in 1997 and $6,000,000 in 1998. 31 The credit agreements contain, among other covenants, provisions setting forth certain requirements for current ratio and consolidated net worth and restrictions on the payment of dividends and the creation of additional debt. At December 31, 1996, retained earnings of $73,375,000 were available for dividends. The Company enters into interest-rate swap agreements to modify the interest characteristics of its outstanding debt. At December 31, 1996, the Company had entered into interest-rate swap agreements having a total notional value of $65,000,000. Of this total notional amount, $40,000,000 was used to convert fixed-rate debt to a variable rate. Under these agreements, the Company receives a weighted average fixed rate of 6.59% and was paying a weighted average variable rate at December 31, 1996, of 5.78%. The average remaining life on these swaps at December 31, 1996, was approximately 52 months. During the fourth quarter of 1996 interest rates declined, and the Company chose to reduce its exposure to variable interest rates by entering into $25,000,000 of reverse swap agreements. At December 31, 1996, the Company was obligated to pay a weighted average fixed rate of 6.26% under these agreements and will receive a weighted average variable rate which was 5.78% at that date. The terms and amounts of these swaps coincide with the stated maturities of the fixed-rate debt obligations being converted. The variable rates are adjusted using six month LIBOR. Interest expense for 1996 was reduced by $210,000 under these agreements based on a net average notional position for the year of $24,800,000. The Company's exposure to large interest-rate fluctuations on its variable-rate debt has been mitigated through the purchase of short-term interest-rate caps totaling $35,000,000 as of December 31, 1996. 8. Accrued Black Lung Benefits Ashland Coal is liable under the federal Mine Safety and Health Act of 1977, as amended, to provide for pneumoconiosis (black lung) benefits to eligible employees, former employees, and dependents with respect to claims filed by such persons on or after July 1, 1973. Ashland Coal is also liable under various states' statutes for black lung benefits. Ashland Coal currently provides for federal and state claims through a self-insurance program. Charges are being made to current operations in amounts sufficient to amortize the actuarially computed liability for black lung benefits over three to 16 years (five to 22 years in 1995 and 1994) at an assumed 7% (8% in 1995 and 1994) after-tax investment return. The accrual for black lung benefits (included in other long-term liabilities and in accrued expenses) was $16,222,000 and $15,841,000 at December 31, 1996 and 1995, respectively. 32 9. Accrued Postmining Reclamation and Mine Closing Costs Under the 1977 Surface Mining Control and Reclamation Act, a mine operator is responsible for postmining reclamation on every mine for at least five years after the mine is closed. Ashland Coal performs a substantial amount of reclamation of disturbed acreage as an integral part of its normal mining process. All such costs are expensed as incurred. The remaining costs of reclamation are estimated and accrued as mining progresses. The accrual for such reclamation (included in other long-term liabilities and in accrued expenses) was $2,749,000 and $2,599,000 at December 31, 1996 and 1995, respectively. In addition, the Company accrues the costs of removal at the conclusion of mining of roads, preparation plants, and other facilities and other costs (collectively, closing costs) over the lives of the various mines. Closing costs, in the aggregate, are estimated to be approximately $38,000,000. At December 31, 1996 and 1995, the accrual for closing costs (included in other long-term liabilities and in accrued expenses) was $10,501,000 and $9,418,000, respectively. 10. Accrued Expenses Accrued expenses are comprised of the following:
(In thousands) 1996 1995 ---- ---- Accrued compensation $12,148 $17,800 Accrued taxes 11,206 10,743 Accrued interest 3,928 4,313 Accrued reclamation and mine closing costs 1,025 960 Other 2,292 3,463 ------ ------ $30,599 $37,279 ======= ======
33 11. Capital Stock Convertible preferred stock consists of the following:
(In thousands) Class A, $100 par value, 500 shares authorized, none outstanding $ -- Class B, $100 par value, 250 shares authorized, 150 shares issued and outstanding 33,050 Class C, $100 par value, 250 shares authorized, 100 shares issued and outstanding 34,791 ------- $ 67,841 =======
Holders of shares of Class A, B, and C preferred stock are entitled to receive dividends at such times and in such amounts as shall be equal to the dividends payable on the number of shares of common stock into which each such share of preferred stock is convertible. In addition, holders of Class B and C preferred stock are entitled to receive cumulative dividends in preference to common stock. Such preference dividend is currently $2,800 per share per annum, decreases to $1,400 per share per annum in 1999, and will be zero after 2003. Each share of Class A preferred stock (if issued) is convertible into 13,846 shares of common stock. Each share of Class B and C preferred stock is convertible into shares of common stock as follows: Through August 17, 1998 18,346 shares August 18, 1998--August 17, 2003 19,596 shares Thereafter 20,846 shares
Holders of Class B and C preferred stock, voting cumulatively and together as a class, have the right to elect one director for each 63 shares of such Class B and C preferred stock held by them, up to a maximum of three directors. In 1995 Ashland Coal's Board of Directors authorized the purchase, from time to time, of up to one million shares of the 34 Company's common stock. At December 31, 1996, 256,000 shares had been purchased under this authorization. Shares acquired may be used for general corporate purposes. 12. Earnings Per Share Earnings per share of common stock are based on the weighted average number of common and common equivalent shares outstanding during each year. Shares of common stock issuable under the Company's stock incentive plans are treated as common stock equivalents when dilutive. Fully diluted earnings per share are based on conversion rights that become effective within 10 years of the respective balance sheet date. Computations of earnings per share, using the "two class" method, are as follows:
(In thousands except earnings 1996 1995 1994 per share) ---- ---- ---- Net income $16,513 $41,411 $32,220 Less: Common stock dividends 6,217 6,321 5,686 Preferred stock dividends 2,810 2,810 2,603 ------ ------ ------ Undistributed earnings $ 7,486 $32,280 $23,931 ====== ====== ====== Earnings per common share: Primary: Undistributed earnings $ .41 $ 1.76 $ 1.30 Dividends (except preference .46 .46 .42 dividends) ------- -------- --------- Net income $ .87 $ 2.22 $ 1.72 ======= ======== ========= Fully diluted: Undistributed earnings $ .40 $ 1.70 $ 1.26 Dividends (except preference .46 .46 .42 dividends) ------- -------- --------- Net income $ .86 $ 2.16 $ 1.68 ======= ======== =========
35 Weighted average shares for computing earnings per share were as follows:
(In thousands) 1996 1995 1994 ---- ---- ---- Primary 18,142 18,374 18,338 Fully diluted 18,782 19,002 18,965
13. Stock Incentive Plans On August 8, 1988, the stockholders approved a stock incentive plan (1988 Plan) reserving 750,000 shares of Ashland Coal common stock, and on April 28, 1995, the stockholders approved a new stock incentive plan (1995 Plan) reserving 1,000,000 shares of Ashland Coal common stock, in each case for awards to officers and key employees. The 1988 Plan provides for the granting of incentive stock options (qualified stock options), nonqualified stock options, stock appreciation rights (SARs), and restricted stock awards, and the 1995 Plan provides for granting of those same incentives, as well as merit awards, performance share awards, and phantom stock awards. Stock options generally become exercisable in full or in part one year from date of grant and are granted at a price equal to 100% of the fair market value of the stock on the date of grant. SARs entitle employees to surrender stock options and receive cash or stock in an amount equal to the excess of the market value of the optioned shares over their option price. Unexercised options and any accompanying SARs lapse 10 years after the date of grant. Restricted stock awards may entitle employees to purchase shares at a nominal cost. Such awards entitle employees to vote shares acquired and to receive any dividends thereon, but such shares cannot be sold or transferred and are subject to forfeiture if employees terminate their employment prior to the prescribed period, which can be from one to five years. As of December 31, 1996, no SARs or restricted stock awards have been granted. Merit awards under the 1995 Plan are grants of Ashland Coal stock without restriction and at a nominal cost. Performance share awards are awards which can be earned by the recipient if Ashland Coal meets certain pre-established performance measures. Until earned, the performance shares are nontransferable, and when earned, performance shares are payable in cash, stock, or restricted stock. Phantom stock awards under the 1995 Plan are based on the appreciation of hypothetical underlying shares or the earnings performance of such shares and may be paid in cash or in shares. As of December 31, 1996, no merit, performance share, or phantom stock awards have been granted. 36 Information regarding stock options under these plans is as follows:
1996 ---- (In thousands except per share data) Weighted Common Average Shares Price ------ -------- Options outstanding at January 1 578 $ 24.14 Granted 181 22.25 Exercised (21) 17.99 Forfeited (38) 29.09 ----- Options outstanding at December 31 700 23.56 === Options exercisable at December 31 454 23.59 Options available for grant at December 31 857
1995 ---- (In thousands except per share data) Weighted Common Average Shares Price ------ -------- Options outstanding at January 1 514 $ 23.23 Granted 95 26.13 Exercised (31) 15.24 Forfeited -- -- ---- Options outstanding at December 31 578 24.14 === Options exercisable at December 31 410 23.10 Options available for grant at December 31 1,000
37
1994 ---- (In thousands except per share data) Weighted Common Average Shares Price ------ -------- Options outstanding at January 468 $ 21.75 Granted 96 28.45 Exercised (29) 16.49 Forfeited (21) 23.29 --- Options outstanding at December 31 514 23.23 === Options exercisable at December 31 351 21.11 Options available for grant at December 31 95
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to recognize compensation expense related to the grants of stock or stock options to employees under plans such as the Company's 1988 and 1995 Plans. Companies choosing not to adopt SFAS No. 123 continue to account for such grants using the accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB25), but are required to make certain disclosures about their plans, including pro forma net income and earnings per share under the new method. The Company has elected to continue to follow APB25 for expense recognition and to make the disclosures required by SFAS No. 123. 38 Under SFAS No. 123's transition rules, Ashland Coal has determined the following pro forma amounts:
(In thousands except earnings per share) 1996 1995 ---- ---- Pro forma net income $16,066 $41,169 Pro forma earnings per share: Primary .85 2.20 Fully diluted .83 2.15
For purposes of these pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting periods. The effect of compensation expense from stock options on 1995 pro forma net income reflects only the first year of vesting of 1995 awards. The 1996 pro forma net income reflects the second year of vesting of 1995 awards and the first year of vesting of 1996 awards. Because the Company's option awards are generally not fully vested until after three years from the date of grant, the full effect of recognizing compensation expense in pro forma net income will not be apparent until 1997. The fair values of options granted in 1996 and 1995 were determined to be $862,000 and $642,000, respectively, using the Black-Scholes option pricing model and the following weighted-average assumptions:
1996 1995 ---- ---- Risk-free interest rate 5.44% 7.34% Dividend yield 2% 2% Volatility of the expected market price of the Company's common stock .22 .24 Expected life of options (in years) 4 4
The fair value per option granted was $4.76 in 1996 and $6.72 in 1995. Exercise prices for options outstanding as of December 31, 1996, range from $11 to $34.375, and the weighted-average remaining contractual life at that date was 6.3 years. The table below shows pertinent information on options outstanding at December 31, 1996, priced below $25 per share and priced at $25 per share or more. 39
Option Exercise Price ---------------------- Below $25 $25 or More --------- ----------- Options outstanding (in thousands) 406 294 Weighted-average exercise price $ 20.30 $ 28.06 Weighted-average remaining contractual life (in years) 6.0 6.8 Options currently exercisable (in thousands) 225 229 Weighted-average exercise price of options currently exercisable $ 18.74 $ 28.36
14. Employee Benefit Plans Defined Benefit Pension Plan The Company has a noncontributory defined benefit pension plan covering certain of its salaried and nonunion hourly employees. Benefits for salaried employees generally are based on years of service and the employee's compensation during the three years prior to retirement. For hourly employees, the plan provides for a stated benefit for each year of service. Ashland Coal funds the plan in an amount not less than the minimum statutory funding requirements nor more than the maximum amount that can be deducted for federal income tax purposes. Plan assets consist primarily of equity securities and fixed income securities. The net pension cost of the plan includes the following components:
(In thousands) 1996 1995 1994 ---- ---- ---- Service cost of benefits earned $1,508 $1,185 $1,433 Interest cost on projected benefit 1,290 1,032 863 obligation Actual (return) loss on plan assets (1,111) (1,872) 787 Net amortization 212 1,148 (1,428) ----- ----- ----- Net periodic pension cost $1,899 $1,493 $1,655 ===== ===== =====
The following table sets forth the plan's funded status and amounts recognized in the consolidated balance sheets at December 40 31, 1996 and 1995:
(In thousands) 1996 1995 ---- ---- Actuarial present value of benefit obligation: Vested benefits $ 9,428 $ 9,450 Nonvested benefits 1,227 1,246 ------ ------ Accumulated benefit obligation 10,655 10,696 Effect of projected compensation increases 7,826 7,857 ------ ------ Projected benefit obligation 18,481 18,553 Plan assets at fair value 12,644 8,957 ------ ------ Projected benefit obligation in excess of plan assets 5,837 9,596 Unrecognized transition credit 297 397 Unrecognized prior service cost (7) (8) Unrecognized net loss (1,476) (4,439) ------ ------ Accrued pension liability 4,651 5,546 Less amount included in accrued expenses 63 2,331 ------ ------ Amount included in other long-term liabilities $ 4,588 $ 3,215 ====== ======
The assumptions used in computing the information above were as follows:
1996 1995 1994 ---- ---- ---- Discount rate 7.75% 7.0% 8.5% Expected long-term rate of return on 9.00% 9.0% 9.0% plan assets Future compensation growth rate 5.00% 5.0% 5.0%
Multiemployer Pension and Benefit Plans Under the labor contract with the United Mine Workers of America (UMWA), Ashland Coal made payments of $1,076,000 in 1996, $1,348,000 in 1995, and $1,293,000 in 1994 into a multiemployer defined benefit pension plan trust established for the benefit of 41 union employees. Payments are based on hours worked. Under the Multiemployer Pension Plan Amendments Act of 1980, a contributor to a multiemployer pension plan may be liable, under certain circumstances, for its proportionate share of the plan's unfunded vested benefits (withdrawal liability). Ashland Coal has estimated its share of such amount to be $15,200,000 at December 31, 1996. Ashland Coal is not aware of any circumstances which would require it to reflect its share of unfunded vested pension benefits in its financial statements. The Coal Industry Retiree Health Benefit Act of 1992 (Benefit Act) provides for the funding of medical and death benefits for certain retired members of the UMWA through premiums to be paid by assigned operators (former employers), transfers of monies in 1993 and 1994 from an overfunded pension trust established for the benefit of retired UMWA members, and transfers from the Abandoned Mine Lands Fund (funded by a federal tax on coal production) commencing in 1995. Ashland Coal treats its obligation under the Benefit Act as a participation in a multiemployer plan and recognizes expense as premiums are paid. Ashland Coal recognized $651,000 in 1996, $347,000 in 1995, and $296,000 in 1994 in expense relative to premiums paid pursuant to the Benefit Act. The Company believes that the amount of its obligation under the Benefit Act is not significant. Other Postretirement Benefit Plans Ashland Coal and its subsidiaries currently provide certain postretirement health and life insurance coverage for eligible employees. Generally, covered employees who terminate employment after meeting the eligibility requirements for pension benefits are also eligible for postretirement coverage for themselves and their dependents. The salaried employee postretirement medical and dental plans are contributory, with retiree contributions adjusted periodically, and contain other cost-sharing features such as deductibles and coinsurance. The postretirement medical plan for retirees who were members of the UMWA is not contributory. The Company's current funding policy is to fund the cost of all postretirement health and life insurance benefits as they are paid. The net periodic postretirement benefit cost of these plans includes the following components:
(In thousands) 1996 1995 1994 ---- ---- ---- Service cost $2,628 $2,138 $4,522 Interest cost 3,878 3,859 4,591 42 Amortization of gains (1,193) (1,607) (213) ----- ----- ----- Net periodic postretirement benefit cost $5,313 $4,390 $8,900 ===== ===== =====
Net periodic postretirement benefit cost decreased approximately $4,500,000 (an increase in net income of $2,750,000, or $.15 per share on a primary basis and $.14 per share on a fully diluted basis) in 1995 due to changes in certain actuarial assumptions, including an increase in the discount rate, a decrease in the per capita claims cost, and a decrease in the health care cost trend rate. The following table sets forth the amounts recognized in the consolidated balance sheets at December 31, 1996 and 1995, none of which have been funded:
(In thousands) 1996 1995 ---- ---- Accumulated postretirement benefit obligation: Retirees $19,041 $22,961 Fully eligible active plan participants 5,590 7,114 Other active plan participants 30,667 31,993 ------ ------ 55,298 62,068 Unrecognized net gain 26,678 15,740 Unrecognized gain related to prior service 1,889 2,102 ------ ------ Accrued postretirement obligation 83,865 79,910 Less amount included in accrued expenses 1,401 959 ------ ------ Amount included in accrued postretirement benefits other than pension $82,464 $78,951 ====== ======
The discount rate used in determining the accumulated postretirement benefit obligation was 7.75% and 7% at December 31, 1996 and 1995, respectively. That change and a decrease in the actuarial assumption regarding per capita claims cost were responsible for the reduction in the accumulated postretirement benefit obligation from December 31, 1995, to December 31, 1996. The assumed health care cost trend rate for 1997 is 8.5%, decreasing to 5% in the year 2004. The health care cost trend 43 rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by $8,386,000, or 15.2%, and the net periodic postretirement benefit cost for 1996 by $1,024,000, or 19.3%. Other Plans Ashland Coal sponsors three savings plans which were established to assist eligible employees in providing for their future retirement needs. Ashland Coal's contributions to the plans were $2,107,000 in 1996, $1,928,000 in 1995, and $1,621,000 in 1994. Restructuring Charges In the first quarter of 1996, the Company began restructuring support functions at its West Virginia operations and at its corporate headquarters. The charge to operations for severance pay and other costs related to the restructuring amounted to approximately $4,200,000 during 1996. Changes in Assumptions The assumptions, including discount rates, used in determining the accumulated benefit obligations for pensions and for other postretirement benefits have changed in the past, and it is reasonably possible that changes in those assumptions will occur in the future. Such changes affect not only the accumulated benefit obligations, but also the amount of expense recognized each year. 15. Concentration of Credit Risk and Major Customers Ashland Coal places its cash equivalents in investment-grade short-term investments and limits the amount of credit exposure to any one commercial issuer. Ashland Coal markets its coal principally to electric utilities in the United States and Europe. As of December 31, 1996 and 1995, accounts receivable from electric utilities located in the United States totaled $42,341,000 and $53,836,000, respectively. Accounts receivable from electric utilities located in Europe totaled $7,328,000 as of December 31, 1995. There were no accounts receivable from European electric utilities at the end of 1996. Generally, credit is extended based on an evaluation of the customer's financial condition, and collateral is not required. Credit losses are provided for in the financial statements and historically have been minimal. 44 Ashland Coal is committed under long-term contracts to supply coal that meets certain quality requirements at specified prices. These prices are generally adjusted based on indices. Quantities sold under some of these contracts may vary from year to year within certain limits at the option of the customer. Sales (including spot sales) to major customers were as follows:
(In thousands) 1996 1995 1994 ---- ---- ---- Customer A $86,076 $88,191 $128,978 Customer B 64,403 60,767 60,928 Customer C 4,073 83,938 82,005
In 1996, 1995, and 1994, Ashland Coal had export sales, principally to European customers, of $55,280,000, $78,679,000, and $40,608,000, respectively. 16. Fair Values of Financial Instruments The following methods and assumptions were used by Ashland Coal in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the consolidated balance sheets for cash and cash equivalents approximates their fair value. Debt: The carrying amounts of Ashland Coal's borrowings under its revolving credit agreement and under lines of credit approximate their fair value. The fair values of Ashland Coal's senior notes are estimated using discounted cash flow analyses, based on Ashland Coal's current incremental borrowing rates for similar types of borrowing arrangements. Interest-rate caps and swaps: The fair values of interest-rate caps and swaps are based on quoted market prices, which reflect the present value of the difference between estimated future amounts paid (none for caps) and received. The carrying amounts and fair values of Ashland Coal's financial instruments at December 31, 1996 and 1995, are as follows: 45
1996 1995 ---- ---- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value -------- ------ -------- ------ Cash and cash equivalents $ 834 $ 834 $ 1,752 $ 1,752 Lines of credit 6,261 6,261 7,315 7,315 Revolving credit agreement 15,000 15,000 30,000 30,000 Senior notes 152,900 173,000 175,000 201,000 Interest-rate caps and swaps -- 572 -- 125
17. Sale and Leaseback On January 29, 1993, Ashland Coal sold mining equipment valued at approximately $64,000,000 and leased back the equipment under an operating lease with a term of three years. In May 1995, the lease was amended to extend the term for two years for most of the equipment. The Company purchased the equipment not included in the extension in January 1996 for approximately $4,000,000. The lease provides for annual rental payments of approximately $9,600,000 in 1997 and $2,300,000 in 1998. At the end of the lease term, the Company has the option to purchase the equipment for approximately $28,300,000. Alternatively, the equipment may be sold by the lessor to a third party. In the event of such a sale, the Company will be required to make payment to the lessor in the event, and to the extent, that the proceeds are below $23,700,000. 18. Subsequent Event Ashland Coal and Arch Mineral Corporation (Arch) have reached an agreement in principle calling for the combination of the two companies. The exchange ratio to be used for the transaction will result in the former Ashland Coal and Arch stockholders holding approximately 48 percent and 52 percent of the combined company, respectively. Further terms and conditions of the transaction are continuing to be negotiated. Consummation of the transaction is conditioned upon the negotiation and execution of definitive agreements between the parties, receipt of all necessary governmental and regulatory consents, and approval by the stockholders of both corporations. 19. Commitments and Contingencies Ashland Coal leases mining equipment, land, and various other properties under noncancellable long-term leases, expiring at various dates. Rental expense related to these operating leases 46 amounted to $11,332,000 in 1996, $13,737,000 in 1995, and $14,088,000 in 1994. Minimum annual rentals due in future years under lease agreements in effect at January 1, 1997, are approximately $11,648,000 in 1997, $5,651,000 in 1998, $3,067,000 in 1999, $3,168,000 in 2000, $3,242,000 in 2001, and additional amounts thereafter aggregating $6,639,000 through 2011. Ashland Coal is a party to numerous claims and lawsuits with respect to various matters. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably determinable. The Company estimates that its probable aggregate loss as a result of such claims is $2,100,000 (included in other long-term liabilities) and believes that probable insurance recoveries of $610,000 (included in other assets) related to these claims will be realized. The Company estimates that its reasonably possible aggregate losses from all currently pending litigation could be as much as $4,300,000 (before tax) in excess of the probable loss previously recognized. However, the Company believes it is probable that substantially all of such losses, if any occur, will be insured. After conferring with counsel, it is the opinion of management that the ultimate resolution of these claims, to the extent not previously provided for, will not have a material adverse effect on the consolidated financial condition, results of operations, or liquidity of the Company. 20. Quarterly Financial Information (Unaudited) Quarterly financial data for 1996 and 1995 are summarized below.
Three Months (In thousands except Ended earnings per share) March 31 June 30 -------- ------- 1996: Sales and operating revenues $143,324(2) $138,800 Operating income 6,216(3) 7,640 Net income 1,515 3,090 Earnings per common share:(6) Primary .07 .16 Fully diluted .07 .16 1995: Sales and operating revenues $156,624 $151,614 Operating income 15,175 18,215 Net income 9,041 11,566 Earnings per common share:(6) Primary .49 .62 47 Three Months (In thousands except Ended earnings per share) March 31 June 30 -------- ------- Fully diluted .48 .60
(In thousands except earnings per share) Sept. 30(1) Dec. 31 ----------- ------- 1996: Sales and operating revenues $142,991(2) $152,089 Operating income 6,272 11,693 Net income 2,501 9,407 Earnings per common share:(6) Primary .13 .51 Fully diluted .13 .50 1995: Sales and operating revenues $158,566 $169,157(5) Operating income 15,641(4) 18,416(4) Net income 9,215 11,589 Earnings per common share:(6) Primary .49 .62 Fully diluted .48 .61
- ---------------- (1) The results of the third quarter of each year are frequently adversely affected by lower production and resultant higher costs because of scheduled vacation periods at the Company's large mines in West Virginia. In addition, costs are typically somewhat higher during vacation periods because of maintenance activity carried on during those periods. These adverse effects on the third quarter may make the third quarter not comparable to the other quarters and not indicative of results to be expected for the full year. (2) In the first and third quarters of 1996, the Company and a customer agreed to reduce the tonnage to be delivered in 1996 under a coal supply agreement. As part of these agreed reductions, the customer agreed to make payments to the Company which increased operating revenues in the first and third quarters by $1.1 million and $.8 million, respectively. These agreements increased net income for the first quarter by $.7 million, or $.04 per share on a primary 48 and on a fully diluted basis, and increased net income for the third quarter by $.5 million, or $.03 per share on a primary and on a fully diluted basis. (3) In the first quarter of 1996, the Company provided for a restructuring charge of $3.8 million related to restructuring certain support functions at its West Virginia operations and at corporate. The charge reduced net income for the quarter by $2.6 million, or $.14 per share on a primary and on a fully diluted basis. (4) In the third quarter of 1995, the actuarial estimate of the Company's accumulated obligation for postretirement health and life insurance benefits was revised. As a result of that revision, postretirement benefit expense was reduced $2.3 million in the third quarter and $2.2 million in the fourth quarter. Those changes increased net income for the third quarter by $1.4 million, or $.08 per share on a primary basis and $.07 on a fully diluted basis, and increased net income for the fourth quarter by $1.3 million, or $.07 per share on a primary and on a fully diluted basis. (5) In the fourth quarter of 1995, Ashland Coal and a customer agreed to terminate a coal supply agreement. As part of this termination agreement, the customer agreed to make a payment to the Company, increasing operating revenues by $.9 million and increasing net income for the quarter by $.5 million, or $.03 per share on a primary and on a fully diluted basis. (6) The sum of the quarterly earnings per share amounts may not equal earnings per share for the full year, because per share amounts are computed independently for each quarter and for the year based on the weighted average number of common and common equivalent shares outstanding during each period. 49 ASHLAND COAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)
Three Months ended March 31, ---------------------------- 1997 1996 ---- ---- REVENUES: Coal sales $163,104 $139,193 Operating revenues 3,504 4,131 -------- -------- 166,608 143,324 COSTS AND EXPENSES: Cost of coal sold 136,627 126,731 Operating expenses 3,952 2,397 Selling, general and administrative expenses 7,303 7,980 -------- -------- 147,882 137,108 OPERATING INCOME 18,726 6,216 OTHER INCOME (EXPENSE): Interest income 72 14 Interest expense (4,034) (4,798) -------- -------- INCOME BEFORE INCOME TAXES 14,764 1,432 Income tax expense (benefit) 2,480 (83) -------- -------- NET INCOME $ 12,284 $ 1,515 Earnings per common share: Primary $ .67 $ .07 Fully diluted $ .65 $ .07 Dividends declared per common share $ .115 $ .115
See notes to condensed consolidated financial statements. 50 ASHLAND COAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, December 31, 1997 1996 --------- ------------ (Unaudited) Assets: Current Assets: Cash and cash equivalents $ 11,396 $ 834 Trade accounts receivable 68,676 56,743 Other receivables 6,447 6,260 Inventories 40,366 41,394 Prepaid royalties 16,826 17,525 Deferred income taxes 2,161 2,187 Other 2,666 2,177 -------- -------- 148,541 127,120 OTHER ASSETS: Prepaid royalties 73,393 61,040 Coal supply agreements 26,675 27,712 Other 13,316 14,355 -------- -------- 113,384 103,107 PROPERTY, PLANT AND EQUIPMENT Cost 915,346 917,423 Less accumulated deprecia- tion and amortization 352,597 342,573 -------- -------- $824,674 $805,077 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable $ 52,202 $ 37,544 Accrued expenses 29,670 30,599 Income taxes payable 4,305 761 Current portion of debt 40,762 41,000 ------- ------- 126,939 109,904 LONG-TERM DEBT 128,609 135,339 ACCURED POSTRETIREMENT BENEFITS 83,503 82,464 OTHER LONG-TERM LIABILITIES 55,206 55,221 DEFERRED INCOME TAXES 15,923 17,857 51 March 31, December 31, 1997 1996 --------- ------------ (Unaudited) STOCKHOLDERS' EQUITY: Convertible preferred stock 67,841 67,841 Common stock 138 138 Paid-in capital 109,689 109,689 Retained earnings 242,262 232,060 Treasury stock, at cost (5,436) (5,436) ------- ------- 414,494 404,292 ------- ------- $824,674 $805,077 ======= =======
See notes to condensed consolidated financial statements. 52 ASHLAND COAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended March 31, ---------------------------- 1997 1996 ---- ---- OPERATING ACTIVITIES: Net income $ 12,284 $ 1,515 Adjustments to reconcile to cash provided by operating activities: Depreciation and amortiza- tion of property, plant and equipment 18,060 16,910 Other amortization 1,453 1,353 Prepaid royalties expensed 6,162 5,070 Deferred income taxes (1,910) (2,023) (Gain) loss on disposition of assets 2,018 (636) Partnership costs in excess of cash advances 165 157 Changes in operating assets and liabilities (7,570) 3,593 CASH PROVIDED BY OPERATING ACTIVITIES 30,752 25,939 INVESTING ACTIVITIES: Property, plant and equipment: Purchases (10,853) (14,445) Proceeds from sales 260 920 Advances on prepaid royalties (518) (2,446) CASH USED IN INVESTING ACTIVITIES (11,111) (15,971) FINANCING ACTIVITIES: Proceeds from borrowings 36,891 287,405 Payments on borrowings (43,888) (294,949) Dividends paid (2,082) (2,080) Proceeds from sale of common stock - 338 Purchase of common stock - (1,935) CASH USED IN FINANCING ACTIVITIES (9,079) (10,681) 53 Three Months Ended March 31, ---------------------------- 1997 1996 ---- ---- Increase (decrease) in cash and cash equivalents 10,562 (713) Cash and cash equivalents at beginning of year 834 1,752 Cash and cash equivalents at end of period $11,396 $1,039
See notes to condensed consolidated financial statements. 54 ASHLAND COAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 (Unaudited) NOTE A - GENERAL The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations, but are subject to any year-end audit adjustments which may be necessary. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the Annual Report of Ashland Coal, Inc. ("Ashland Coal" or the "Company") on Form 10-K for the year ended December 31, 1996. Results of operations for the period ended March 31, 1997 are not necessarily indicative of results to be expected for the year ending December 31, 1997. NOTE B - PROPOSED MERGER Ashland Coal and Arch Mineral Corporation ("Arch") have signed a definitive agreement to merge the two companies in a tax-free reorganization, which will be accounted for as a purchase by Arch. After the merger, Ashland coal and Arch stockholders will hold approximately 48 percent and 52 percent of the combined company, respectively. Consummation of the merger, which is subject to approval by Ashland coal's stockholders, is expected to occur about June 30, 1997. NOTE C - INVENTORIES Inventories are comprised of the following:
March 31, 1997 December 31, 1996 -------------- ----------------- (In thousands) Coal $21,821 $22,320 Supplies 18,545 19,074 ------ ------ $40,366 $41,394
NOTE D - DEBT 55 Debt consists of the following:
March 31, 1997 December 31, 1996 -------------- ----------------- (In thousands) 9.78% senior unsecured notes, payable in four equal annual installments beginning September 15, 1997 $100,000 $100,000 9.66% senior unsecured notes, payable in six equal annual installments beginning May 15, 2001 52,900 52,900 Indebtedness to banks under revolving credit agreement 15,000 15,000 Indebtedness to banks under lines of credit - 6,261 Other 1,471 2,178 ------- ------- 169,371 176,339 Less current portion 40,762 41,000 ------- ------- Long-term debt $128,609 $135,339 ======= =======
NOTE E - CHANGE IN ESTIMATE AND NONRECURRING REVENUES AND EXPENSES Cost of coal sold in 1997 was reduced by $1.4 million by a change in the estimate of the Company's liability for postmining reclamation and mine closure. Operating expenses in 1997 include a charge of $2.1 million related to an idled processing facility. A payment of $1.1 million was received from a customer in the quarter ended March 31, 1996 for an agreed reduction of 1996 deliveries under a sales contract and is included in operating revenues. Costs and expenses in 1996 include a charge of $3.8 million for restructuring. NOTE F - COMPUTATION OF EARNINGS PER SHARE 56
Three Months Ended March 31, ---------------------------- 1997 1996 ---- ---- (In thousands, except per share data) Net income $12,284 $ 1,515 Less: Common stock dividends 1,555 1,553 Preferred stock dividends 699 701 ------ ------ Undistributed earnings (loss) 10,030 $ (739) Primary: Average shares and equivalents outstanding: Shares outstanding 13,518 13,522 Shares issuable upon conversion of Preferred Stock 4,587 4,587 Exercise of stock options 57 23 -------- -------- Total 18,162 18,132 Per share amounts: Undistributed earnings (loss) $ .55 $ (.05) Dividends (except pre- ference dividends) .12 .12 -------- ------- Net income $ .67 $ .07 Fully Diluted: Average shares and equivalents outstanding: Shares outstanding 13,518 13,522 Shares issuable upon conversion of pre- ferred stock 5,212 5,212 -------- -------- Total 18,787 18,764 Per share amounts: Undistributed earnings (loss) $ .53 $ (.05) Dividends (except pre- ference dividends) .12 .12 Net income $ .65 $ .07 Because the calculation of primary earnings per share yields 57 a more dilutive result, that amount is shown here.
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). The Company is required to adopt SFAS 128 on December 31,1997, and at that time will present recomputed earnings per share ("EPS") for all prior periods using the methodology specified by SFAS 128. Although the Company has not yet determined the full effect of SFAS 128, it believes that basic EPS as computed under SFAS 128 will be somewhat greater than primary EPS as computed under the prior accounting rules. Basic EPS excludes the dilutive effect of common stock equivalents (such as stock options awarded to the Company's employees), but primary EPS includes that effect. In addition, the Company's convertible preferred stock will be less dilutive under SFAS 128 than under the prior rules. The Company also believes that diluted EPS computed in accordance with SFAS 128 will be slightly higher than fully diluted EPS as computed under the prior accounting rules. NOTE G - CONTINGENCIES Ashland Coal is a party to numerous claims and lawsuits with respect to various matters. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably determinable. The Company estimates that its probable aggregate loss as a result of such claims is $1.8 million (included in other long-term liabilities) and believes that probable insurance recoveries of $.5 million (included in other assets) related to these claims will be realized. The Company estimates that its reasonably possible aggregate losses from all currently pending litigation could be as much as $3.5 million (before tax) in excess of the probable loss previously recognized. However, the Company believes it is probable that substantially all of such losses, if any occur, will be insured. After conferring with counsel, it is the opinion of management that the ultimate resolution of these claims, to the extent not previously provided for, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company. 58 UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial statements give effect to the Merger, the issuance of shares of Company Common Stock to the stockholders of Ashland Coal and the substitution of options to purchase Company Common Stock for Ashland Coal Options pursuant to the Company Incentive Plan. The unaudited pro forma balance sheet is based on the respective balance sheets of the Company and Ashland Coal and has been prepared to reflect the Merger as of March 31, 1997. The unaudited pro forma statements of operations are based upon the respective statements of operations of the Company and Ashland Coal and combine the results of operations of the Company and Ashland Coal for the year ended December 31, 1996 and for the three months ended March 31, 1997, as if the Merger had been consummated on January 1, 1996 and January 1, 1997, respectively. The unaudited pro forma financial statements do not reflect any cost savings or other synergies that may result from the Merger. In the opinion of the management of the Company, all adjustments necessary to present pro forma financial statements have been made. The unaudited pro forma financial statements do not purport to be indicative of the results of operations or financial position that would have occurred had the Merger occurred as of the beginning of the period or as of the date indicated or of the financial position or results of operations that may be obtained in the future. The Merger will be accounted for under the purchase method of accounting. Accordingly, the cost to acquire Ashland Coal will be allocated to the assets acquired and liabilities assumed according to their respective fair values. The final allocation of such cost is dependent upon certain valuations that have not progressed to a stage where there is sufficient information to make a final allocation in the accompanying pro forma financial statements. Accordingly, the cost allocation adjustments are preliminary and have been made solely for the purpose of preparing such pro forma financial statements. Adjustments to the preliminary allocation likely would result in changes to amounts assigned to coal reserves, plant and equipment and coal supply agreements and accordingly could impact depreciation, depletion and amortization charged to future periods. Although not expected to be material, the likely impact of the final allocation is not reasonably known. 59 UNAUDITED PRO FORMA COMBINED BALANCE SHEET March 31, 1997 (in thousands)
Ashland Purchase Company Coal Accounting Historical Historical Adjustments Pro Forma ---------- ---------- ------------ ---------- Assets Current assets: Cash and cash equivalents $ 13,660 $ 11,396 $ $ 25,056 Trade accounts receivable 82,246 68,676 -- 150,922 Other receivables 3,744 6,447 -- 10,191 Inventories 37,422 40,366 -- 77,788 Prepaid royalties 3,897 16,829 -- 20,726 Deferred income taxes 14,500 2,161 -- 16,661 Prepaid expenses and other assets 5,581 2,666 -- 8,247 ------- ------- ------ ------- Total current assets 161,050 148,541 -- 309,591 ------- ------- ------ ------- Property, plant and equipment, net 552,056 562,749 49,821 (1) 1,164,626 ------- ------- ------- --------- Other assets: Prepaid royalties 3,723 73,393 (59,008)(1) 18,108 Coal supply agreements less accumulated amortization 81,254 26,675 96,325 (1) 204,254 Deferred income 64,639 -- (49,655)(2) 14,984 taxes Receivables and 9,885 13,316 (10,046)(1) 13,155 other assets ------- ------- ------- --------- 159,501 113,384 (22,384) 250,501 ------- ------- ------- --------- Total assets $872,607 $824,674 $ 27,437 $1,724,718 ======= ======= ======== ========= 60 Ashland Purchase Company Coal Accounting Historical Historical Adjustments Pro Forma ---------- ---------- ------------ ---------- Liabilities and Stockholders' Equity: Current liabilities: Accounts payable $ 41,728 $ 52,202 $ -- $ 93,930 Accrued expenses 76,309 33,975 4,500 (3) 114,784 Current portion of long-term debt -- 40,762 -- 40,762 ------- ------- ------ -------- Total current liabilities 118,037 126,939 4,500 249,476 Long-term debt 190,537 128,609 20,100 (4) 339,246 Accrued post- retirement benefits 230,114 83,503 (28,567)(5) 285,050 Accrued reclamation and mine closure 95,552 11,720 -- 107,272 Accrued workers' compensation 69,448 22,696 -- 92,144 Deferred income taxes -- 15,923 (15,923)(2) -- Other noncurrent liabilities 27,873 20,790 (933)(6) 47,730 ------- ------- ------- --------- 731,561 410,180 (20,823) 1,120,918 ------- ------- ------- --------- Stockholders' equity: Convertible preferred stock -- 67,841 (67,841)(7) -- Common stock 209 138 49 (8) 396 Paid-in capital 8,392 109,689 352,878 (9) 470,959 Retained earnings 132,445 242,262 (242,262)(10) 132,445 Less: treasury common stock at cost -- (5,436) 5,436 (11) -- ------ ------- ------- --------- Total stock- holders' equity 141,046 414,494 48,260 603,800 ------ ------- ------ --------- Total liabilities and stockholders' equity $872,607 $824,674 $27,437 $1,724,718 ======= ======= ====== =========
61 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET March 31, 1997 (in thousands, except per share data) The purchase price of Ashland Coal and allocation of purchase price are as follows: Ashland Coal Common Stock outstanding at March 31, 1997 (including Ashland Coal preferred stock, as if converted in the Merge 18,643 Purchase price per share. $ 24.50(12) Purchase price of Ashland Coal $456,754 Fair value of options 6,000 Transaction related fees 4,500 ------- Total purchase price $467,254 ======= Historical net book value of Ashland Coal at March 31, 1997 $414,494 Adjustments for valuing Ashland Coal assets and liabilities: Prepaid royalties (59,008) Deferred income taxes (40,254) Other assets (10,046) Coal supply agreements 96,325 Property, plant and equipment 56,343 Long-term debt (current and noncurrent) (20,100) Accrued postretirement benefits other 28,567 than pensions Other long-term liabilities 933 ------- Total purchase price $467,254 =======
- --------------- (1) To adjust prepaid royalties, property, plant and equipment, coal supply agreements and other long-term assets, including interest rate swap agreements, to their estimated fair value. A substantial portion of the excess purchase price has been allocated to coal reserves principally because of higher productivities and technological advances that occurred since the acquisition of the coal reserves combined with the expectation of increased values of compliance and low-sulfur coal due to the Clean Air Act Amendments. The value assigned to coal supply agreements is associated with contracts signed in earlier years when spot market prices were higher versus the current spot market prices. 62 (2) To record deferred income taxes for the book and tax differences of the purchase accounting adjustments, and to reflect the reclassification of deferred income tax liability to deferred income tax asset. (3) To record transaction related fees. (4) To adjust long-term debt to estimated fair value based on current interest rates. (5) To adjust the liability for postretirement benefits other than pensions to equal the accumulated projected benefit obligation. (6) To eliminate the deferred gain on sale and leaseback of assets ($2,119) and to increase the pension liability ($1,186) to equal the projected benefit obligation in excess of plan assets. (7) To reflect the conversion of preferred stock to common stock. (8) To reflect the elimination of $138 of Ashland Coal common stock and the addition of common stock issued by the Company (18,643 shares at $.01 per share). (9) To reflect the elimination of $109,689 of Ashland Coal paid-in capital and the addition of paid-in capital resulting from the common stock and options issued by the Company totaling $462,567. (10) To eliminate retained earnings. (11) To eliminate treasury stock. (12) Represents the average market price of Ashland Coal common stock for several days before and after March 25, 1997, the date the parties agreed to the purchase price. 63 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS Year Ended December 31, 1996 (in thousands, except per share data)
Ashland Company Coal Pro Forma Pro Forma Historical Historical Adjustments Combined ---------- ---------- ------------ --------- Revenues: Coal sales $750,123 $565,174 $ -- $1,315,297 Other revenues 25,682 12,030 -- 37,712 ------- ------- ------ --------- 775,805 577,204 -- 1,353,009 Costs and Expenses: Cost of coal 667,878 508,960 2,346(1) 1,179,184 sales Selling, general and administra- tive expenses 20,435 23,078 -- 43,513 Amortization of coal supply agreements 12,604 3,786 13,933(2) 30,323 Other expenses 18,776 9,559 -- 28,335 ------- ------- ------ Income from operations 56,112 31,821 (16,279) 71,654 Interest Expense, Net: Interest expense (18,783) (17,905) 4,957(3) (31,731) Interest income 1,191 417 -- 1,608 ----- ------ ----- ------ Income before income 38,520 14,333 (11,322) 41,531 taxes Provision (benefit) for income taxes 5,500 (2,180) (4,415)(4) (1,095)(5) ------ ------- ------ -------- Net income 33,020 16,513 (6,907) 42,626 Dividends on preferred stock -- (2,810) 2,810(6) -- ------ ------- ------- -------- Income applicable to common stock $ 33,020 $ 13,703 $ (4,097) $ 42,626 ====== ====== ======= ======== 64 Ashland Company Coal Pro Forma Pro Forma Historical Historical Adjustments Combined ---------- ----------- ------------- --------- Earnings per common share: Primary $ 1.58 $ .87 $ 1.07 ========= ========= ========= Fully diluted $ 1.58 $ .86 $ 1.07 ========= ========= ========= Average shares outstanding 20,948 18,105(7) 39,660 (8)
65 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (1) To record net charges associated with adjusting the fair value of prepaid royalties, property, plant and equipment, and other assets. Additions to property, plant and equipment, including coal reserves, is assumed to be depreciated or depleted over 15 years. (2) To record net charges associated with adjusting the fair value of coal supply agreements with an average life of approximately seven years. (3) To record the reduction in interest expense on $152.9 million of fixed rate long-term debt to reflect current market interest rates (6.75% current rate versus average 9.75% stated rate) and a reduction in amortization of deferred debt issuance cost. (4) To record the tax effect of 39% of the pro forma adjustments. The tax rate of 39% represents the combined federal and state statutory rates. (5) The effective tax rate is substantially less than 39% primarily due to benefits derived from percentage depletion. The purchase price adjustments will not affect percentage depletion. (6) To eliminate dividends related to the Ashland Coal preferred stock. (7) Assumes conversion of preferred stock at a rate of 18,346 per share. (8) Shares outstanding include 20,948 of Company shares outstanding as adjusted for the stock split, 18,643 shares issued to acquire Ashland Coal assuming conversion of preferred stock at a rate of 20,500 per share, and 69 shares related to stock options that are dilutive. 66 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS Three Months Ended March 31, 1997 (in thousands, except per share data)
Ashland Company Coal Pro Forma Pro Forma Historical Historical Adjustments Combined ---------- ---------- ----------- ---------- Revenues: Coal Sales $ 192,328 $ 163,104 $ -- $ 355,432 Other revenues 5,091 3,504 -- 8,595 ------- -------- -------- ------- 197,419 166,608 -- 364,027 Costs and Expenses: Cost of coal sales 171,623 136,627 587 308,837 Selling, general and administra- tive expenses 4,897 2,915 -- 7,812 Amortization of coal supply agreements 2,116 1,037 3,483 6,636 Other expenses 2,470 7,303 -- 9,773 ------- -------- ------- ------- Income from operations 16,313 18,726 (4,070) 30,969 Interest Expense, Net: Interest expense (3,553) (4,034) 1,239 (6,348) Interest income 260 72 -- 332 ------- -------- ------- ------- Income before income taxes 13,020 14,764 (2,831) 24,953 Provision for income taxes 2,600 2,480 (1,104)(4) 3,976(5) ------- -------- ------- ------- Net income 10,420 12,284 (1,727) 20,977 Dividends on preferred stock -- (699) 699 -- ------- -------- ------- ------- Income applicable to common stock $ 10,420 $ 11,585 $ (1,028) $ 20,977 ======== ======== ======== ======= Earnings per common share: 67 Primary $ .50 $ .67 $ 0.53 ========== ========== ============ Fully diluted $ .50 $ .65 $ 0.53 ========== ========== ============ Average shares outstanding 20,948 18,105(7) 39,660(8) ========== ========== ===========
68 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (1) To record net charges associated with adjusting the fair value of prepaid royalties, property, plant and equipment, and other assets. Additions to property, plant and equipment, including coal reserves, is assumed to be depreciated or depleted over 15 years. (2) To record net charges associated with adjusting the fair value of coal supply agreements with an average life of approximately seven years. (3) To record the reduction in interest expense on $152.9 million of fixed rate long-term debt to reflect current market interest rates (6.75% current rate versus average 9.75% stated rate) and a reduction in amortization of deferred debt issuance cost. (4) To record the tax effect of 39% of the pro forma adjustments. The tax rate of 39% represents the combined federal and state statutory rates. (5) The effective tax rate is substantially less than 39% primarily due to benefits derived from percentage depletion. (6) To eliminate dividends related to the Ashland Coal preferred stock. (7) Assumes conversion of preferred stock at a rate of 18,346 per share. (8) Shares outstanding include 20,948 of Company shares outstanding as adjusted for the stock split, 18,643 shares issued to acquire Ashland Coal assuming conversion of preferred stock at a rate of 20,500 per share and 69 shares related to stock options that are dilutive. 69 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: July 15, 1997 ARCH COAL, INC. By: /s/ Jeffry N. Quinn ------------------------------ Jeffry N. Quinn Senior Vice President - Law & Human Resources 70 EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ----------- ----------- ---------- 4.1 Credit Agreement dated as of July 1, 1997 by and among Arch Coal, Inc., the banks party thereto, PNC Bank, National Association, as Administrative and Syndication Agent and Morgan Guaranty Trust Company of New York, as Documentation and Syndication Agent. 23.1 Consent of Ernst & Young LLP 71
                                                                    Exhibit 4.1


                     $500,000,000 REVOLVING CREDIT FACILITY
                                CREDIT AGREEMENT

                                  by and among

                                 ARCH COAL, INC.

                                       and

                             THE BANKS PARTY HERETO

                                       and

     PNC BANK, NATIONAL ASSOCIATION, as Administrative and Syndication Agent

                                       and

                   MORGAN GUARANTY TRUST COMPANY OF NEW YORK,

                                       as

                       Documentation and Syndication Agent



                            Dated as of July 1, 1997





                                TABLE OF CONTENTS


SECTION                                                                   PAGE

1.    CERTAIN DEFINITIONS....................................................1
      1.1   Certain Definitions..............................................1
      1.2   Construction....................................................20
            1.2.1   Number; Inclusion.......................................20
            1.2.2   Determination...........................................20
            1.2.3   Administrative Agent's Discretion and Consent...........21
            1.2.4   Documents Taken as a Whole..............................21
            1.2.5   Headings................................................21
            1.2.6   Implied References to This Agreement....................21
            1.2.7   Persons.................................................21
            1.2.8   Modifications to Documents..............................21
            1.2.9   From, To and Through....................................21
            1.2.10  Shall; Will.............................................22
      1.3   Accounting Principles...........................................22

2.    REVOLVING CREDIT AND SWING LOAN FACILITIES............................22
      2.1   Revolving Credit Commitments....................................22
            2.1.1   Revolving Credit Loans..................................22
            2.1.2   Swing Loan Commitment...................................23
      2.2   Nature of Banks' Obligations With Respect to Revolving
            Credit Loans....................................................23
      2.3   Revolving Credit Facility Fee...................................23
      2.4   Revolving Credit Loan Requests; Swing Loan Requests.............23
            2.4.1   Revolving Credit Loan Requests..........................23
            2.4.2   Swing Loan Requests.....................................24
      2.5   Making Revolving Credit Loans and Swing Loans and Swing
            Notes...........................................................24
            2.5.1   Making Swing Loans......................................25
      2.6   Swing Loan Note.................................................25
      2.7   Use of Proceeds.................................................25
      2.8   Borrowings to Repay Swing Loans.................................25
      2.9   Bid Loan Facility...............................................26
            2.9.1   Bid Loan Requests.......................................26
            2.9.2   Bidding.................................................27
            2.9.3   Accepting Bids..........................................27
            2.9.4   Funding Bid Loans.......................................28
            2.9.5   Several Obligations.....................................29
            2.9.6   Bid Notes...............................................29
            2.9.7   Payments and Prepayments................................29
      2.10  Letter of Credit Subfacility....................................29
            2.10.1  Issuance of Letters of Credit...........................29
            2.10.2  Letter of Credit Fees...................................29
            2.10.3  Disbursements, Reimbursement............................30
            2.10.4  Repayment of Participation Advances.....................31
            2.10.5  Documentation...........................................32


                                       i


            2.10.6  Determinations to Honor Drawing Requests................32
            2.10.7  Nature of Participation and Reimbursement
                    Obligations.............................................32
            2.10.8  Indemnity...............................................34
            2.10.9  Liability for Acts and Omissions........................34
      2.11  Extension by Banks of the Expiration Date.......................35
            2.11.1  Requests; Approval by All Banks.........................35
            2.11.2  Approval by Required Banks..............................35

3.    INTEREST RATES........................................................36
      3.1   Interest Rate Options...........................................36
            3.1.1   Revolving Credit Interest Rate Options..................37
            3.1.2   Rate Quotations.........................................37
            3.1.3   Change in Fees or Interest Rates........................37
      3.2   Revolving Credit Loans Interest Periods.........................38
            3.2.1   Ending Date and Business Day............................38
            3.2.2   Amount of Borrowing Tranche.............................38
            3.2.3   Termination Before Expiration Date......................38
            3.2.4   Renewals................................................38
      3.3   Interest After Default..........................................38
            3.3.1   Letter of Credit Fees, Interest Rate....................39
            3.3.2   Other Obligations.......................................39
            3.3.3   Acknowledgment..........................................39
      3.4   Euro-Rate Unascertainable; Illegality; Increased Costs;
            Deposits Not Available..........................................39
            3.4.1   Unascertainable.........................................39
            3.4.2   Illegality; Increased Costs; Deposits Not Available.....39
            3.4.3   Administrative Agent's and Bank's Rights................40
      3.5   Selection of Interest Rate Options..............................41

4.    PAYMENTS..............................................................41
      4.1   Payments........................................................41
      4.2   Pro Rata Treatment of Banks.....................................41
      4.3   Interest Payment Dates..........................................42
      4.4   Voluntary Prepayments...........................................42
            4.4.1   Right to Prepay.........................................42
            4.4.2   Replacement of a Bank...................................43
            4.4.3   Change of Lending Office................................44
            4.4.4   Voluntary Reduction of Commitments......................44
      4.5   Additional Compensation in Certain Circumstances................44
            4.5.1   Increased Costs or Reduced Return Resulting From
                    Taxes, Reserves, Capital Adequacy Requirements,
                    Expenses, Etc...........................................44
            4.5.2   Indemnity...............................................45
      4.6   Notes...........................................................46
      4.7   Settlement Date Procedures......................................46
                                       ii


5.    REPRESENTATIONS AND WARRANTIES........................................47
      5.1   Representations and Warranties..................................47
            5.1.1   Organization and Qualification..........................47
            5.1.2   Shares of Borrower; Subsidiaries; and Subsidiary
                    Shares..................................................47
            5.1.3   Power and Authority.....................................48
            5.1.4   Validity and Binding Effect.............................48
            5.1.5   No Conflict.............................................48
            5.1.6   Litigation..............................................49
            5.1.7   Financial Statements....................................49
            5.1.8   Use of Proceeds; Margin Stock; Section 20
                    Subsidiaries............................................49
            5.1.9   Full Disclosure.........................................50
            5.1.10  Taxes...................................................50
            5.1.11  Consents and Approvals..................................51
            5.1.12  No Event of Default; Compliance With Instruments........51
            5.1.13  Insurance...............................................51
            5.1.14  Compliance With Laws....................................51
            5.1.15  Investment Companies; Regulated Entities................52
            5.1.16  Plans and Benefit Arrangements..........................52
            5.1.17  Employment Matters......................................53
            5.1.18  Environmental Matters...................................53
            5.1.19  Senior Debt Status......................................53
      5.2   Continuation of Representations.................................53

6.    CONDITIONS OF LENDING AND ISSUANCE OF LETTERS OF CREDIT...............54
      6.1   First Loans and Letters of Credit...............................54
            6.1.1   Officer's Certificate...................................54
            6.1.2   Secretary's Certificate.................................54
            6.1.3   Delivery of Guaranty Agreements.........................55
            6.1.4   Opinion of Counsel......................................55
            6.1.5   Legal Details...........................................55
            6.1.6   Payment of Fees.........................................55
            6.1.7   Consents................................................55
            6.1.8   Officer's Certificate Regarding MACs....................56
            6.1.9   No Violation of Laws....................................56
            6.1.10  No Actions or Proceedings...............................56
            6.1.11  Merger..................................................56
            6.1.12  Financial Projections; Closing Date Balance Sheet.......56
            6.1.13  Payoff of Existing Indebtedness.........................57
      6.2   Each Additional Loan or Letter of Credit........................57
      6.3   Syndication.....................................................57
            6.3.1   Syndication Date Representations and Warranties.........57
            6.3.2   Syndication Cooperation.................................58

7.    COVENANTS.............................................................58
      7.1   Affirmative Covenants...........................................58
            7.1.1   Preservation of Existence, Etc..........................58
            7.1.2   Payment of Liabilities, Including Taxes, Etc............58
   
                                       iii


            7.1.3   Maintenance of Insurance................................59
            7.1.4   Maintenance of Properties and Leases....................59
            7.1.5   Visitation Rights.......................................59
            7.1.6   Keeping of Records and Books of Account.................59
            7.1.7   Plans and Benefit Arrangements..........................59
            7.1.8   Compliance With Laws....................................60
            7.1.9   Use of Proceeds.........................................60
            7.1.10  Operation of Mines......................................60
            7.1.11  Repayment of Certain Indebtedness.......................60
      7.2   Negative Covenants..............................................61
            7.2.1   Indebtedness............................................61
            7.2.2   Liens...................................................61
            7.2.3   Liquidations, Mergers, Consolidations, Acquisitions.....62
            7.2.4   Dispositions of Assets or Subsidiaries..................62
            7.2.5   Affiliate Transactions..................................63
            7.2.6   Subsidiaries, Partnerships and Joint Ventures...........63
            7.2.7   Continuation of or Change in Business...................64
            7.2.8   Plans and Benefit Arrangements..........................64
            7.2.9   Off-Balance Sheet Financing.............................64
            7.2.10  Maximum Leverage Ratio..................................64
            7.2.11  Minimum Interest Coverage Ratio.........................65
            7.2.12  No Restriction on Dividends.............................65
      7.3   Reporting Requirements..........................................65
            7.3.1   Quarterly Financial Statements..........................65
            7.3.2   Annual Financial Statements.............................65
            7.3.3   Certificate of the Borrower.............................66
            7.3.4   Notice of Default.......................................66
            7.3.5   Notice of Litigation....................................66
            7.3.6   Notice of Change in Debt Rating.........................67
            7.3.7   Notices Regarding Plans and Benefit Arrangements........67

8.    DEFAULT...............................................................68
      8.1   Events of Default...............................................68
            8.1.1   Payments Under Loan Documents...........................68
            8.1.2   Breach of Warranty......................................69
            8.1.3   Breach of Negative Covenants or Visitation Rights.......69
            8.1.4   Breach of Other Covenants...............................69
            8.1.5   Defaults in Other Agreements or Indebtedness............69

                                       iv



            8.1.6   Judgments or Orders.....................................69
            8.1.7   Loan Document Unenforceable.............................70
            8.1.8   Uninsured Losses; Proceedings Against Assets............70
            8.1.9   Notice of Lien or Assessment............................70
            8.1.10  Insolvency..............................................70
            8.1.11  Events Relating to Plans and Benefit Arrangements.......70
            8.1.12  Cessation of Business...................................71
            8.1.13  Change of Control.......................................71
            8.1.14  Involuntary Proceedings.................................71
            8.1.15  Voluntary Proceedings...................................72
      8.2   Consequences of Event of Default................................72
            8.2.1   Events of Default Other Than Bankruptcy, Insolvency
                    or Reorganization Proceedings...........................72
            8.2.2   Bankruptcy, Insolvency or Reorganization
                    Proceedings.............................................73
            8.2.3   Set-off.................................................73
            8.2.4   Suits, Actions, Proceedings.............................73
            8.2.5   Application of Proceeds.................................73
            8.2.6   Other Rights and Remedies...............................74
      8.3   Right of Competitive Bid Loan Banks.............................74

9.    THE AGENTS............................................................75
      9.1   Appointment.....................................................75
      9.2   Delegation of Duties............................................75
      9.3   Nature of Duties; Independent Credit Investigation..............75
      9.4   Actions in Discretion of Agents; Instructions From the
            Banks...........................................................76
      9.5   Reimbursement and Indemnification of Agents by the Borrower.....76
      9.6   Exculpatory Provisions; Limitation of Liability.................77
      9.7   Reimbursement and Indemnification of Agents by the Banks........78
      9.8   Reliance by Agents..............................................78
      9.9   Notice of Default...............................................79
      9.10  Notices.........................................................79
      9.11  Banks in Their Individual Capacities............................79
      9.12  Holders of Notes................................................79
      9.13  Equalization of Banks...........................................80
      9.14  Successor Agents................................................80
      9.15  Administrative Agent's Fee......................................81
      9.16  Availability of Funds...........................................81
      9.17  Calculations....................................................82
      9.18  Beneficiaries...................................................82

10.   MISCELLANEOUS.........................................................82
      10.1  Modifications, Amendments or Waivers............................82
            10.1.1  Increase of Revolving Credit Commitment; Extension
                    of Expiration Date......................................82
            10.1.2  Extension of Payment; Reduction of Principal
                    Interest or Fees; Modification of Terms of Payment......83
            10.1.3  Release of Guarantor....................................83
            10.1.4  Miscellaneous...........................................83
      10.2  No Implied Waivers; Cumulative Remedies; Writing Required.......83
      10.3  Reimbursement and Indemnification of Banks by the Borrower;
            Taxes...........................................................84

                                       v


      10.4  Holidays........................................................85
      10.5  Funding by Branch, Subsidiary or Affiliate......................85
            10.5.1  Notional Funding........................................85
            10.5.2  Actual Funding..........................................85
      10.6  Notices.........................................................86
      10.7  Severability....................................................86
      10.8  Governing Law...................................................86
      10.9  Prior Understanding.............................................87
      10.10 Duration; Survival..............................................87
      10.11 Successors and Assigns..........................................87
            10.11.1 Binding Effect; Assignments by Borrower.................87
            10.11.2 Assignments and Participations by Banks Other Than
                    Assignments of Bid Loans Among Designating Banks
                    and Designated Lenders..................................87
            10.11.3 Assignments of Bid Loans Among Designating Banks
                    and Designated Lenders..................................89
            10.11.4 Foreign Assignees and Participants......................90
            10.11.5 Assignments by Banks to Federal Reserve Banks...........90
      10.12 Confidentiality.................................................90
            10.12.1 General.................................................90
            10.12.2 Sharing Information With Affiliates of the Banks........91
      10.13 Counterparts....................................................91
      10.14 Agent's or Bank's Consent.......................................91
      10.15 Exceptions......................................................91
      10.16 CONSENT TO FORUM; WAIVER OF JURY TRIAL..........................92
      10.17 Tax Withholding Clause..........................................92
      10.18 Joinder of Guarantors...........................................93

                                       vi


                       LIST OF SCHEDULES AND EXHIBITS

SCHEDULES

SCHEDULE 1.1(A)        -   PRICING GRID
SCHEDULE 1.1(B)        -   COMMITMENTS OF REVOLVING CREDIT BANKS AND
                           ADDRESSES FOR NOTICES
SCHEDULE 5.1.2         -   CERTAIN INFORMATION REGARDING CAPITALIZATION OF
                           BORROWER AND ITS SUBSIDIARIES
SCHEDULE 5.1.11        -   CONSENTS AND APPROVALS


EXHIBITS

EXHIBIT 1.1(A)         -   ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT 1.1(B)         -   BID NOTE
EXHIBIT 1.1(D)         -   DESIGNATION AGREEMENT
EXHIBIT 1.1(G)(1)      -   GUARANTOR JOINDER AND ASSUMPTION
EXHIBIT 1.1(G)(2)      -   GUARANTY AGREEMENT
EXHIBIT 1.1(R)         -   REVOLVING CREDIT NOTE
EXHIBIT 1.1(S)         -   SWING LOAN NOTE
EXHIBIT 2.4.1          -   COMMITTED LOAN REQUEST
EXHIBIT 2.4.2          -   SWING LOAN REQUEST
EXHIBIT 2.9.1          -   BID LOAN REQUEST
EXHIBIT 4.4.4          -   COMMITMENT REDUCTION NOTICE
EXHIBIT 6.1.4          -   OPINION OF COUNSEL
EXHIBIT 7.3.3          -   QUARTERLY COMPLIANCE CERTIFICATE


                                      vii


                             CREDIT AGREEMENT

      THIS  CREDIT  AGREEMENT  is dated as of July 1,  1997,  and is made by and
among ARCH COAL, INC., a Delaware  corporation (the  "Borrower"),  the BANKS (as
hereinafter defined), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, in its capacity
as documentation and syndication agent, and PNC BANK, NATIONAL  ASSOCIATION,  in
its capacity as  administrative  and syndication  agent for the Banks under this
Agreement.

                                   WITNESSETH:

      WHEREAS,  the  Borrower  has  requested  the Banks to provide a  revolving
credit facility to the Borrower in an aggregate  principal  amount not to exceed
$500,000,000;

      WHEREAS,  the revolving credit facility shall be used to refinance certain
indebtedness under the Existing Credit Facilities,  as hereinafter provided, and
for general corporate purposes; and

      WHEREAS, the Banks are  willing to provide such credit upon the terms  and
conditions hereinafter set forth;

      NOW,  THEREFORE,  the parties  hereto,  in  consideration  of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby, covenant and agree as follows:


                             1. CERTAIN DEFINITIONS

            1.1.  CERTAIN DEFINITIONS.

            In addition to words and terms defined  elsewhere in this Agreement,
the following words and terms shall have the following  meanings,  respectively,
unless the context hereof clearly requires otherwise:

                  ADMINISTRATIVE   AGENT   shall   mean   PNC   Bank,   National
Association, and its successors and assigns.

                  ADMINISTRATIVE  AGENT'S FEE shall have the meaning assigned to
that term in Section 9.15.

                  ADMINISTRATIVE  AGENT'S LETTER shall have the meaning assigned
to that term in Section 9.15.

                  AFFILIATE  as to any Person  shall  mean any other  Person (i)
which  directly or indirectly  controls,  is  controlled  by, or is under common
control with such Person,  (ii) which  beneficially  owns or holds 5% or more of
any class of the voting or other equity interests of such 




Person,  or (iii) 5% or more of any class of voting  interests  or other  equity
interests of which is  beneficially  owned or held,  directly or indirectly,  by
such Person.  Control,  as used in this  definition,  shall mean the possession,
directly or  indirectly,  of the power to direct or cause the  direction  of the
management  or policies of a Person,  whether  through the  ownership  of voting
securities, by contract or otherwise, including the power to elect a majority of
the directors or trustees of a corporation or trust, as the case may be.

                  AGENTS shall mean  collectively the  Administrative  Agent and
Morgan  Guaranty  Trust Company of New York,  and its successors and assigns and
AGENT shall mean either of the Agents, individually.

                  AGREEMENT shall mean this Credit Agreement, as the same may be
supplemented or amended from time to time, including all schedules and exhibits.

                  ANNUAL STATEMENTS shall have the meaning assigned to that term
in Section 5.1.7(i).

                  APPLICABLE  FACILITY FEE RATE shall mean the  percentage  rate
per annum at the  indicated  level (i) of Leverage  Ratio for any period  during
which a Debt Rating is not in effect;  or (ii) of Debt Rating,  for any period a
Debt Rating is in effect,  in either  case as set forth in the  pricing  grid on
SCHEDULE 1.1(A) below the heading  "Facility  Fee." The Applicable  Facility Fee
Rate shall be computed in accordance  with the  parameters set forth on SCHEDULE
1.1(A).

                  APPLICABLE  LETTER OF CREDIT  FEE RATE shall mean the rate per
annum at the  indicated  level of (i) of  Leverage  Ratio for any period  during
which a Debt Rating is not in effect, or (ii) Debt Rating, for any period a Debt
Rating is in effect, in either case as set forth in the pricing grid on Schedule
1.1(A) below the heading "Letter of Credit Fee." The Applicable Letter of Credit
Fee Rate  shall be  computed  in  accordance  with the  parameters  set forth on
Schedule 1.1(A).

                  APPLICABLE  MARGIN shall mean, as  applicable,  the percentage
spread to be added to Euro-Rate under the Revolving  Credit  Euro-Rate Option at
the  indicated  level (i) of Leverage  Ratio for any period  during which a Debt
Rating is not in effect; or (ii) of Debt Rating, for any period a Debt Rating is
in effect,  in either case as set forth in the pricing  grid on SCHEDULE  1.1(A)
below the heading "Revolving Credit Euro-Rate Spread."

                  ASSIGNEE BANK shall have the meaning  assigned to such term in
Section 2.11.2.

                  ASSIGNMENT AND ASSUMPTION  AGREEMENT  shall mean an Assignment
and Assumption  Agreement by and among a Purchasing  Bank, a Transferor Bank and
the  Administrative  Agent,  as agent  and on  behalf  of the  remaining  Banks,
substantially in the form of EXHIBIT 1.1(A).


                                       2



                  AUTHORIZED OFFICER shall mean those individuals, designated by
written  notice to the  Administrative  Agent from the  Borrower,  authorized to
execute  notices,  reports  and other  documents  on behalf of the Loan  Parties
required hereunder. The Borrower may amend such list of individuals from time to
time by giving written notice of such amendment to the Administrative Agent.

                  BANK TO BE TERMINATED  shall have the meaning assigned to such
term in Section 2.11.2.

                  BANKS shall mean each of the  Revolving  Credit Banks and each
of the Designated Lenders.

                  BASE RATE shall mean the greater of (i) the interest  rate per
annum announced from time to time by the  Administrative  Agent at its Principal
Office as its then prime rate,  which rate may not be the lowest rate then being
charged commercial  borrowers by the  Administrative  Agent, or (ii) the Federal
Funds Effective Rate plus 1/2% per annum.

                  BENEFIT  ARRANGEMENT  shall  mean  at any  time  an  "employee
benefit  plan," within the meaning of Section 3(3) of ERISA,  which is neither a
Plan nor a  Multiemployer  Plan and which is maintained,  sponsored or otherwise
contributed to by any member of the ERISA Group.

                  BID shall have the  meaning  assigned  to such term in Section
2.9.2.

                  BID LOAN  BORROWING  DATE shall mean,  with respect to any Bid
Loan, the date for the making thereof which shall be a Business Day.

                  BID LOAN  EURO-RATE  RATE OPTION  shall mean the option of the
Borrower  to  request  that the  Banks  submit  Bids to make Bid  Loans  bearing
interest at a rate per annum quoted by such Banks at the Euro-Rate in effect two
Business  Days before the  Borrowing  Date of such Bid Loan plus a Euro-Rate Bid
Loan Spread.

                  BID LOAN  FIXED  RATE  OPTION  shall  mean the  option  of the
Borrower to request  that the  Revolving  Credit  Banks  submit Bids to make Bid
Loans bearing interest at a fixed rate per annum quoted by such Revolving Credit
Banks as a numerical  percentage  (and not as a spread over another rate such as
the Euro-Rate).

                  BID LOAN  INTEREST  PERIOD shall have the meaning  assigned to
such term in Section 2.9.1.

                  BID LOAN  PROCESSING  FEE shall have the  meaning  assigned to
such term in Section 9.15.

                  BID LOAN REQUEST shall have the meaning  assigned to such term
in Section 2.9.1.



                                       3


                  BID LOANS  shall  mean  collectively  and BID LOAN  shall mean
separately  all of the Bid  Loans or any Bid Loan  made by any of the  Revolving
Credit Banks to the Borrower pursuant to Sections 2.9.

                  BID NOTES  shall  mean  collectively  and BID NOTE  shall mean
separately  all of the Bid Notes of the  Borrower in the form of EXHIBIT  1.1(B)
evidencing the Bid Loans  together with all  amendments,  extensions,  renewals,
replacements, refinancings or refunds thereof in whole or in part.

                  BORROWER shall mean Arch Coal,  Inc., a corporation  organized
and  existing  under  the  laws of the  State  of  Delaware.  The  Borrower  was
originally  incorporated under the name of Arch Mineral Corporation,  a Delaware
corporation and prior to the consummation of the Merger changed its name to Arch
Coal, Inc..

                  BORROWER  SHARES  shall have the  meaning set forth in Section
5.1.2.

                  BORROWING DATE shall mean,  with respect to any Loan, the date
for the making thereof or the renewal or conversion thereof at or to the same or
a different Interest Rate Option, which shall be a Business Day.

                  BORROWING  TRANCHE  shall  mean  specified  portions  of Loans
outstanding  as follows:  (i) any Loans to which either a Euro-Rate  Option or a
Bid Loan Fixed Rate Option  applies  which become  subject to the same  Interest
Rate Option  under the same Loan Request by the Borrower and which have the same
Interest Period shall  constitute one Borrowing  Tranche,  and (ii) all Loans to
which a Base Rate applies shall constitute one Borrowing Tranche.

                  BUSINESS  DAY shall  mean any day  other  than a  Saturday  or
Sunday or a legal holiday on which  commercial  banks are authorized or required
to be closed for business in  Pittsburgh,  Pennsylvania  and New York, New York;
and if the  applicable  Business Day relates to any Loan to which the  Euro-Rate
Option applies,  such day must also be a day on which dealings are carried on in
the London interbank market.

                  CLOSING  DATE shall mean the  Business  Day on which the first
Loan shall be made, which shall be July 1, 1997.

                  COMMERCIAL  LETTER OF CREDIT  shall  mean any Letter of Credit
which is a  commercial  letter of credit  issued in respect of the  purchase  of
goods or services by one or more of the Loan Parties in the  ordinary  course of
their business.
                  COMMITMENT  shall  mean as to any  Revolving  Credit  Bank its
Revolving  Credit  Commitment  and,  in the case of PNC  Bank,  its  Swing  Loan
Commitment,  and  COMMITMENTS  shall mean the aggregate of the Revolving  Credit
Commitments and Swing Loan Commitment of all of the Revolving Credit Banks.


                                       4


                  COMMITTED LOAN shall mean either a Revolving  Credit Loan or a
Swing Loan.

                  COMMITTED  LOAN  INTEREST  PERIOD  shall have the  meaning set
forth in Section 3.2.

                  COMMITTED  LOAN  REQUEST  shall mean a request for a Revolving
Credit  Loan or a Swing  Loan or a  request  to  select,  convert  to or renew a
Revolving  Credit Base Rate Option or  Revolving  Credit  Euro-Rate  Option with
respect to an outstanding Revolving Credit Loan in accordance with Sections 2.4,
3.1 and 3.2.

                  COMMITMENT  REDUCTION  NOTICE shall have the meaning set forth
in Section 4.4.4.

                  CONSOLIDATED  CAPITALIZATION  shall  mean  as of any  date  of
determination, for the Borrower and its Subsidiaries as of such date, determined
and  consolidated  in accordance  with GAAP, the sum of (i) total  stockholders'
equity, and (ii) Consolidated Debt.

                  CONSOLIDATED  DEBT shall mean as of any date of  determination
the aggregate of the following for the Borrower and its Subsidiaries, as of such
date,  determined and consolidated in accordance with GAAP: (i) all indebtedness
for  borrowed   money   (including,   without   limitation,   all   subordinated
indebtedness),  (ii) all amounts  raised under or  liabilities in respect of any
note purchase or acceptance  credit facility,  (iii) all indebtedness in respect
of any other transaction  (including production payments (excluding  royalties),
installment   purchase   agreements,   forward  sale  or  purchase   agreements,
capitalized  leases and  conditional  sales  agreements)  having the  commercial
effect of a  borrowing  of money  entered  into by such  Person to  finance  its
operations  or capital  requirements,  and (iv) the  amount of all  indebtedness
(whether matured or unmatured,  liquidated or unliquidated,  direct or indirect,
absolute or  contingent,  or joint or several) in respect of all  Guarantees  of
indebtedness  for borrowed money. It is expressly  agreed that the amount of the
indebtedness  in respect of the  Guaranty by the Borrower of the Port Bond shall
be  excluded  from the  amount  determined  under  clause  (iv) of the  previous
sentence.  Further,  it is expressly  agreed that the difference  between actual
funded indebtedness and the fair market value of funded indebtedness recorded as
required  by  Accounting  Principles  Board  Opinion No. 16 (as in effect on the
Closing  Date)  will be  excluded  from  Indebtedness  in the  determination  of
Consolidated Debt.

                  CONSOLIDATED EBITDA for any period of determination shall mean
the sum of income  from  operations  before the effect of changes in  accounting
principles and extraordinary items, depreciation,  amortization,  depletion, net
interest  expense  and  income  taxes,  in  each  case of the  Borrower  and its
Subsidiaries  for such period  determined and  consolidated  in accordance  with
GAAP.

                  DEBT  RATING  shall mean the rating of the  Borrower's  senior
unsecured long-term debt by either of Standard & Poor's or Moody's.

                                       5


                  DELIVERY  DATE shall mean the earlier of (i) the date on which
the Borrower delivers its consolidated financial statements pursuant to Sections
7.3.1 and  7.3.2,  or (ii) one  Business  Day  following  the date on which such
financial statements are due to be delivered pursuant to such Sections.

                  DESIGNATED   LENDER   shall  mean  any  Person  who  has  been
designated by a Bank to fund Bid Loans and has executed a Designation  Agreement
and thereby becomes a party to this Agreement pursuant to Section 10.11.3.1.

                  DESIGNATING  BANK shall have the meaning assigned to such term
in Section 10.11.3.1.

                  DESIGNATION  AGREEMENT means a designation  agreement  entered
into by a Bank and a Designated Lender and accepted by the Administrative Agent,
in substantially the form of EXHIBIT 1.1(D).

                  DOLLAR,  DOLLARS,  U.S.  DOLLARS  and the  symbol $ shall mean
lawful money of the United States of America.

                  DRAWING  DATE shall have the meaning  assigned to that term in
Section 2.10.3.2.

                  ENVIRONMENTAL CLAIM shall mean any administrative,  regulatory
or judicial action,  suit, claim, notice of non-compliance or violation,  notice
of  liability  or  potential  liability,  proceeding,  consent  order or consent
agreement  relating in any way to any Environmental Law,  Environmental  Permit,
Regulated  Substances or Hazardous  Substances or arising from alleged injury or
threat of injury to health, safety or the environment.

                  ENVIRONMENTAL  LAW shall  mean any  federal,  state,  local or
foreign statute, law, ordinance, rule, regulation, code, order, judgment, decree
or  judicial  or agency  interpretation,  policy  or  guidance  relating  to the
environment,  health,  safety or any release or disposal of or  contamination by
Hazardous Substances.

                  ENVIRONMENTAL PERMIT shall mean any permit, approval,  license
or other authorization required under any Environmental Law.

                  ERISA shall mean the Employee  Retirement  Income Security Act
of 1974, as the same may be amended or  supplemented  from time to time, and any
successor statute of similar import,  and the rules and regulations  thereunder,
as from time to time in effect.

                  ERISA GROUP  shall mean,  at any time,  the  Borrower  and all
members of a  controlled  group of  corporations  and all  trades or  businesses
(whether or not incorporated) under common control and all other entities which,
together with the Borrower,  are treated as a single  employer under Section 414
of the Internal Revenue Code.


                                       6


                  EURO-RATE shall mean, with respect to the Loans comprising any
Borrowing Tranche to which the Euro-Rate Option applies for any Interest Period,
the interest rate per annum determined by the  Administrative  Agent by dividing
(the resulting  quotient  rounded upward to the nearest 1/100th of 1% per annum)
(i) the rate of interest  determined by the  Administrative  Agent in accordance
with its  usual  procedures  (which  determination  shall be  conclusive  absent
manifest  error) to be the  average of the  London  interbank  offered  rates of
interest per annum for U.S.  Dollars set forth on Telerate  display page 3750 or
such other  display  page on the  Telerate  System as may  replace  such page to
evidence the average of rates quoted by banks designated by the British Bankers'
Association (or appropriate successor or, if the British Bankers' Association or
its successor ceases to provide such quotes, a comparable replacement determined
by the  Administrative  Agent) two (2)  Business  Days prior to the first day of
such  Interest  Period for an amount  comparable to such  Borrowing  Tranche and
having a borrowing  date and a maturity  comparable to such  Interest  Period by
(ii) a  number  equal  to 1.00  minus  the  Euro-Rate  Reserve  Percentage.  The
Euro-Rate may also be expressed by the following formula:

               Telerate page 3750 quoted by British Bankers'
   Euro-Rate = Association or appropriate successor
               ------------------------------------
               1.00 - Euro-Rate Reserve Percentage

The Euro-Rate shall be adjusted with respect to any Euro-Rate Option outstanding
on the effective  date of any change in the Euro-Rate  Reserve  Percentage as of
such effective  date. The  Administrative  Agent shall give prompt notice to the
Borrower and the Banks of the  Euro-Rate as determined or adjusted in accordance
herewith, which determination shall be conclusive absent manifest error.

                  EURO-RATE BID LOAN shall mean any Bid Loan that bears interest
under the Bid Loan Euro-Rate Option.

                  EURO-RATE  BID LOAN SPREAD  shall mean the spread  quoted by a
Revolving  Credit Bank in its Bid to apply to such  Revolving  Credit Bank's Bid
Loan if such  Revolving  Credit  Bank's Bid is accepted.  The Euro-Rate Bid Loan
Spread shall be quoted as a percentage rate per annum and expressed in multiples
of 1/1000th of one percentage point to be either added to (if it is positive) or
subtracted  from (if it is  negative)  the  Euro-Rate in effect two (2) Business
Days  before  the  Borrowing  Date with  respect to such Bid Loan.  Interest  on
Euro-Rate  Bid Loans  shall be  computed  based on a year of 360 days and actual
days elapsed.

                  EURO-RATE  INTEREST  PERIOD  shall  mean the  Interest  Period
applicable to a Euro-Rate Loan.

                  EURO-RATE  OPTION  shall  mean  either  the  Revolving  Credit
Euro-Rate Option or the Bid Loan Euro-Rate Option.

                  EURO-RATE RESERVE PERCENTAGE shall mean the maximum percentage
(expressed as a decimal rounded upward to the nearest 1/100 of 1%) as determined
by the  Administrative  Agent which is in effect during any relevant period,  as
prescribed  by the Board 



                                       7


of Governors of the Federal  Reserve System (or any  successor) for  determining
the reserve requirements (including supplemental, marginal and emergency reserve
requirements)  with respect to eurocurrency  funding  (currently  referred to as
"Eurocurrency Liabilities") of a member bank in such System.

                  EVENT OF DEFAULT  shall mean any of the  events  described  in
Section 8.1 and referred to therein as an "Event of Default."

                  EXISTING CREDIT FACILITIES shall mean: (i) that certain Credit
Agreement among Arch Mineral Corporation,  as borrower, the banks named therein,
and PNC Bank as agent, dated as of November 21, 1994, as amended,  providing for
a  $200,000,000  credit  facility,  and (ii) that  certain  Amended and Restated
Credit Agreement among Ashland Coal, Inc., the banks named therein, and National
Westminster  Bank PLC, as coordinating  and  administrative  agent,  dated as of
November 15, 1994, as amended, providing for a $500,000,000 credit facility.

                  EXPIRATION DATE shall mean,  with respect to the  Commitments,
June 30, 2002.

                  EXTENDING BANK shall have the meaning assigned to such term in
Section 2.11.2.

                  FACILITY FEE shall mean the fee referred to in Section 2.3.

                  FEDERAL FUNDS  EFFECTIVE  RATE for any day shall mean the rate
per annum  (based on a year of 360 days and  actual  days  elapsed  and  rounded
upward to the nearest 1/100 of 1%) announced by the Federal  Reserve Bank of New
York (or any  successor) on such day as being the weighted  average of the rates
on overnight federal funds transactions arranged by federal funds brokers on the
previous trading day, as computed and announced by such Federal Reserve Bank (or
any  successor) in  substantially  the same manner as such Federal  Reserve Bank
computes and announces the weighted  average it refers to as the "Federal  Funds
Effective  Rate" as of the date of this  Agreement;  PROVIDED,  if such  Federal
Reserve  Bank (or its  successor)  does not  announce  such rate on any day, the
"Federal Funds Effective Rate" for such day shall be the Federal Funds Effective
Rate for the last day on which such rate was announced.

                  FIXED  RATE  shall  mean a fixed  interest  rate  quoted  by a
Revolving  Credit Bank in its Bid to apply to such  Revolving  Credit Bank's Bid
Loan  over  the term of such Bid Loan if such  Revolving  Credit  Bank's  Bid is
accepted.

                  FIXED RATE BID LOAN shall mean a Bid Loan that bears  interest
under the Bid Loan Fixed Rate Option.

                  FRONTING  FEE shall have the meaning  assigned to that term in
Section 2.10.2.

                                       8


                  GAAP shall mean Generally  Accepted  Accounting  Principles as
are in effect from time to time,  subject to the  provisions of Section 1.3, and
applied on a consistent basis both as to classification of items and amounts.

                  GOVERNMENTAL ACTS shall have the meaning assigned to that term
in Section 2.10.8.

                  GUARANTOR  shall  mean at any  time  each  of the  Significant
Subsidiaries of the Borrower.

                  GUARANTOR  JOINDER  shall  mean a  joinder  by a  Person  as a
Guarantor under the Guaranty Agreement in the form of EXHIBIT 1.1(G)(1).

                  GUARANTY  of any  Person  shall  mean any  obligation  of such
Person guaranteeing or in effect guaranteeing any liability or obligation of any
other Person in any manner,  whether directly or indirectly,  including any such
liability arising by virtue of partnership  agreements,  including any agreement
to indemnify or hold harmless any other Person,  any  performance  bond or other
suretyship  arrangement  and any other form of assurance  against  loss,  except
endorsement of negotiable or other  instruments for deposit or collection in the
ordinary course of business.

                  GUARANTY  AGREEMENT  shall mean the  Guaranty  and  Suretyship
Agreement in substantially the form of EXHIBIT 1.1(G)(2)  executed and delivered
by each of the  Guarantors  to the  Administrative  Agent for the benefit of the
Banks.

                  HAZARDOUS   SUBSTANCES  shall  mean  petroleum  and  petroleum
products,    byproducts   or   breakdown   products,    radioactive   materials,
asbestos-containing  materials,  radon  gas and any  hazardous  or solid  waste,
hazardous substance or chemical  substance,  as such terms are defined under the
Resource  Conservation  and Recovery Act (42 U.S.C.  Sections 4901 ET SEQ.), the
comprehensive Environmental Response,  Compensation and Liability Act (42 U.S.C.
Sections 9601 ET SEQ.), the Toxic Substances Control Act (15 U.S.C.
Sections 2601 ET SEQ.) or any similar state law.

                  HISTORICAL  STATEMENTS shall have the meaning assigned to that
term in Section 5.1.7(i).

                  INDEBTEDNESS shall mean, as to any Person at any time, any and
all  indebtedness,  obligations  or liabilities  (whether  matured or unmatured,
liquidated or unliquidated, direct or indirect, absolute or contingent, or joint
or  several)  of such  Person for or in respect  of: (i)  borrowed  money,  (ii)
amounts  raised  under  or  liabilities  in  respect  of any  note  purchase  or
acceptance  credit  facility,  (iii)  reimbursement  obligations  (contingent or
otherwise)  under any letter of credit,  currency swap agreement,  interest rate
swap, cap,  collar or floor agreement or other interest rate management  device,
(iv) any other transaction (including production payments (excluding royalties),
installment   purchase   agreements,   forward  sale  or  purchase   agreements,
capitalized  leases and  conditional  sales  agreements)  having the  commercial

                                       9


effect of a  borrowing  of money  entered  into by such  Person to  finance  its
operations or capital requirements (but not including trade payables and accrued
expenses  incurred in the ordinary  course of business which are not represented
by a promissory  note or other evidence of  indebtedness  and which are not more
than thirty (30) days past due), or (v) any Guaranty of any such Indebtedness.

                  INELIGIBLE  SECURITY  shall mean any security which may not be
underwritten  or dealt in by member  banks of the Federal  Reserve  System under
Section  16 of the  Banking  Act of 1933 (12 U.S.C.  Section  24,  Seventh),  as
amended.

                  INSOLVENCY  PROCEEDING shall mean, with respect to any Person,
(a) a case,  action or  proceeding  with  respect to such  Person (i) before any
court  or  any  other   Official   Body   under  any   bankruptcy,   insolvency,
reorganization  or other similar Law now or hereafter in effect, or (ii) for the
appointment   of  a  receiver,   liquidator,   assignee,   custodian,   trustee,
sequestrator,  conservator (or similar  official) of any Loan Party or otherwise
relating to the liquidation,  dissolution,  winding-up or relief of such Person,
or (b)  any  general  assignment  for the  benefit  of  creditors,  composition,
marshaling of assets for creditors,  or other, similar arrangement in respect of
such Person's creditors  generally or any substantial  portion of its creditors;
undertaken under any Law.

                  INTEREST  PERIOD shall mean either a Committed  Loan  Interest
Period or a Bid Loan Interest Period.

                  INTEREST RATE OPTION shall mean any Revolving Credit Euro-Rate
Option,  Bid Loan  Euro-Rate  Option,  Bid Loan Fixed Rate  Option or  Revolving
Credit Base Rate Option.

                  INTERIM  STATEMENTS  shall have the  meaning  assigned to that
term in Section 5.1.7(i).

                  INTERNAL  REVENUE CODE shall mean the Internal Revenue Code of
1986,  as the same may be amended  or  supplemented  from time to time,  and any
successor statute of similar import,  and the rules and regulations  thereunder,
as from time to time in effect.

                  ISSUING  BANK shall mean,  with respect to a Letter of Credit,
including any replacements  therefor or extensions thereof, the Revolving Credit
Bank which is the issuer thereof.

                  INVESTMENTS  shall mean collectively all of the following with
respect to any  person:  (i)  investments  or  contributions  by any of the Loan
Paries or their  Subsidiaries  directly or indirectly in or to the capital of or
other payments to (except in connection with  transactions for the sale of goods
or services for fair value in the ordinary course of business) such person, (ii)
loans by any of the Loan Parties or their  Subsidiaries  to such  person,  (iii)
guaranties  by any Loan Party or any  Subsidiary  of any Loan Party  directly or
indirectly  of the  obligations  of  such  person,  or (iv)  other  obligations,
contingent or otherwise,  of any Loan Party or any  Subsidiary of any Loan Party
to or for the benefit of such person. If the nature of an 



                                       10


Investment  is tangible  property  then the amount of such  Investment  shall be
determined by valuing such  property at fair value in  accordance  with the past
practice of the Loan Parties and such fair values shall be  satisfactory  to the
Administrative Agent, in its sole discretion.

                  LABOR   CONTRACTS   shall  mean  all  employment   agreements,
employment  contracts,  collective  bargaining  agreements and other  agreements
among any Loan Party or Subsidiary of a Loan Party and its employees.

                  LAW shall mean any law (including  common law),  constitution,
statute, treaty, regulation,  rule, ordinance,  opinion, release, ruling, order,
injunction, writ, decree or award of any Official Body.

                  LETTER OF CREDIT shall have the meaning  assigned to that term
in Section 2.10.1.

                  LETTER OF CREDIT  BORROWING  shall mean an extension of credit
resulting  from a drawing  under any Letter of Credit  which shall not have been
reimbursed  on the date  when made and  shall  not have  been  converted  into a
Revolving Credit Loan under Section 2.10.3.2.

                  LETTER OF CREDIT FEE shall have the  meaning  assigned to that
term in Section 2.10.2.

                  LETTERS OF CREDIT  OUTSTANDING  shall mean at any time the sum
of (i) the aggregate  undrawn face amount of  outstanding  Letters of Credit and
(ii)  the  aggregate   amount  of  all  unpaid  and  outstanding   Reimbursement
Obligations.

                  LEVERAGE RATIO shall mean the ratio of  Consolidated  Debt (as
the numerator) to Consolidated Capitalization (as the denominator), expressed as
a percentage.

                  LIEN shall mean any  mortgage,  deed of trust,  pledge,  lien,
security  interest,  charge or other encumbrance or security  arrangement of any
nature whatsoever,  whether  voluntarily or involuntarily  given,  including any
conditional  sale or title retention  arrangement,  and any assignment,  deposit
arrangement  or lease  intended  as, or having the effect of,  security  and any
filed  financing  statement or other notice of any of the foregoing  (whether or
not a lien or other encumbrance is created or exists at the time of the filing).

                  LLC  INTERESTS  shall have the  meaning  given to such term in
Section 5.1.2.

                  LOAN DOCUMENTS shall mean this Agreement,  the  Administrative
Agent's Letter, the Guaranty Agreement, and any other instruments,  certificates
or documents  delivered or contemplated to be delivered  hereunder or thereunder
or in  connection  herewith or  therewith,  as the same may be  supplemented  or
amended from time to time in accordance herewith or therewith, and LOAN DOCUMENT
shall mean any of the Loan Documents.

                                       11


                  LOAN PARTIES shall mean the Borrower and the Guarantors.

                  LOAN  REQUEST  shall  mean  either  a Bid  Loan  Request  or a
Committed Loan Request.

                  LOANS shall mean  collectively  and LOAN shall mean separately
all Revolving  Credit Loans,  Swing Loans and Bid Loans or any Revolving  Credit
Loan, Swing Loan or Bid Loan.

                  MATERIAL ADVERSE CHANGE shall mean any set of circumstances or
events  which  (a) has or could  reasonably  be  expected  to have any  material
adverse effect  whatsoever upon the validity or enforceability of this Agreement
or any  other  Loan  Document,  (b) is or could  reasonably  be  expected  to be
materially adverse to the business, financial condition or results of operations
of the Loan Parties taken as a whole, (c) impairs materially or could reasonably
be expected to impair  materially  the  ability of the Loan  Parties  taken as a
whole to duly and  punctually  pay or perform its  Indebtedness,  or (d) impairs
materially or could  reasonably be expected to impair  materially the ability of
any Agent or any of the Banks, to the extent  permitted,  to enforce their legal
remedies pursuant to this Agreement or any other Loan Document.

                  MERGER shall mean the merger of Ashland Coal, Inc., a Delaware
corporation,  with and into AMC Merger Corporation, a Delaware corporation and a
wholly-owned  Subsidiary  of  the  Borrower,  with  Ashland  Coal,  Inc.  as the
surviving  entity  of  such  transaction,  all in  accordance  with  the  Merger
Agreement and the other Merger Documents.

                  MERGER AGREEMENT shall mean that certain Agreement and Plan of
Merger, dated as of April 4, 1997, by and among Ashland Coal, Inc., Arch Mineral
Corporation and AMC Merger Corporation.

                  MERGER DOCUMENTS shall mean the Merger Agreement and all other
agreements,  consents,  articles of merger,  resolutions,  approvals,  licenses,
assignments,    certificates,   deeds,   assumption   agreements,   instruments,
registrations  or filings with the SEC and other documents in connection with or
relating to the Merger, as the same may hereafter be amended from time to time.

                  MONTH,  with respect to an Interest Period under the Euro-Rate
Option,  shall mean the interval between the days in consecutive calendar months
numerically  corresponding  to the first  day of such  Interest  Period.  If any
Euro-Rate Interest Period begins on a day of a calendar month for which there is
no numerically  corresponding  day in the month in which such Interest Period is
to end,  the final month of such  Interest  Period shall be deemed to end on the
last Business Day of such final month.

                  MOODY'S shall mean Moody's  Investors  Service,  Inc.  and its
successors.


                                       12


                  MORGAN shall mean Morgan  Guaranty  Trust Company of New York,
its successors and assigns.

                  MULTIEMPLOYER  PLAN shall mean any employee benefit plan which
is a "multiemployer  plan" within the meaning of Section 4001(a)(3) of ERISA and
to which  the  Borrower  or any  member  of the  ERISA  Group is then  making or
accruing an obligation to make  contributions or, within the preceding five Plan
years, has made or had an obligation to make such contributions.

                  MULTIPLE EMPLOYER PLAN shall mean a Plan which has two or more
contributing  sponsors (including the Borrower or any member of the ERISA Group)
at least two of whom are not under common  control,  as such a plan is described
in Sections 4063 and 4064 of ERISA.

                  NOTES shall mean the Revolving Credit Notes,  Swing Loan Notes
and Bid Notes, if any.

                  NOTICES  shall  have  the  meaning  assigned  to that  term in
Section 10.6.

                  OBLIGATION  shall mean any  obligation  or liability of any of
the Loan Parties to any Agent or any of the Banks, howsoever created, arising or
evidenced,  whether direct or indirect, absolute or contingent, now or hereafter
existing,  or due or to become due, under or in connection  with this Agreement,
any Notes, the Letters of Credit, the Administrative Agent's Letter or any other
Loan Document.

                  OFFERED AMOUNT shall have the meaning assigned to such term in
Section 2.9.2.

                  OFFICIAL BODY shall mean any national,  federal,  state, local
or other government or political subdivision or any agency,  authority,  bureau,
central bank, commission, department or instrumentality of either, or any court,
tribunal, grand jury or arbitrator, in each case whether foreign or domestic.

                  PARTICIPATION  ADVANCE  shall mean,  with respect to any Bank,
such  Bank's  payment  in  respect  of its  participation  in a Letter of Credit
Borrowing according to its Ratable Share pursuant to Section 2.10.4.

                  PARTNERSHIP  INTERESTS  shall have the  meaning  given to such
term in Section 5.1.2.

                  PBGC  shall  mean the  Pension  Benefit  Guaranty  Corporation
established pursuant to Subtitle A of Title IV of ERISA or any successor.

                  PERMITTED ACQUISITIONS shall have the meaning assigned to such
term in Section 7.2.3.


                                       13


                  PERMITTED LIENS shall mean:

                  (i)     Liens for  taxes,  assessments, or  similar   charges,
incurred  in the  ordinary  course  of  business  and  which are not yet due and
payable;

                  (ii)    Pledges  or  deposits  made in the ordinary  course of
business to secure payment of reclamation liabilities, worker's compensation, or
to   participate  in  any  fund  in  connection   with  worker's   compensation,
unemployment insurance, old-age pensions or other social security programs;

                  (iii)   Liens   of   mechanics,   materialmen,   warehousemen,
carriers,  or other like Liens,  securing  obligations  incurred in the ordinary
course of  business  that are not yet due and  payable  and  Liens of  landlords
securing  obligations  to pay lease payments that are not yet due and payable or
in default;

                  (iv)    Good-faith pledges or  deposits  made in the  ordinary
course of business to secure performance of bids, tenders, contracts (other than
for the repayment of borrowed  money) or leases,  not in excess of the aggregate
amount due thereunder,  or to secure statutory  obligations,  or surety, appeal,
indemnity, performance or other similar bonds required in the ordinary course of
business (it being understood that any appeal or similar bond (other than such a
bond  required  pursuant  to  applicable  Law to secure in the  ordinary  course
payment  of  worker's  compensation  or  reclamation  liabilities)  in an amount
exceeding $50,000,000 shall not be in the ordinary course of business);

                  (v)     Encumbrances  consisting   of  zoning    restrictions,
easements  or  other  restrictions  on the use of real  property,  none of which
materially  impairs the use of such property or the value  thereof,  and none of
which is violated in any material respect by existing or proposed  structures or
land use;

                  (vi)    Liens on  property  leased  by  any   Loan  Party   or
Subsidiary of a Loan Party under capital or operating leases (in either case, as
the  nature of such  lease is  determined  in  accordance  with  GAAP)  securing
obligations of such Loan Party or Subsidiary to the lessor under such leases;

                  (vii)   Purchase Money Security Interests; and

                  (viii)  The  following, (A)  if the validity or amount thereof
is  being  contested  in  good  faith  by  appropriate  and  lawful  proceedings
diligently  conducted so long as levy and execution thereon have been stayed and
continue to be stayed or (B) if a final judgment is entered and such judgment is
discharged  within  thirty (30) days of entry,  and they do not in the aggregate
materially  impair the  ability of any Loan  Party to  perform  its  Obligations
hereunder or under the other Loan Documents:

                        (1)  Claims or Liens for taxes,  assessments  or charges
            due and payable and  subject to interest or penalty,  PROVIDED  that
            the  applicable   Loan  Party   

                                       14


            maintains such reserves or other appropriate  provisions as shall be
            required  by GAAP and pays all such  taxes,  assessments  or charges
            forthwith upon the commencement of proceedings to foreclose any such
            Lien;

                        (2)  Claims, Liens or encumbrances  upon, and defects of
            title to, real or personal  property,  including  any  attachment of
            personal  or  real   property  or  other  legal   process  prior  to
            adjudication of a dispute on the merits;

                        (3)  Claims  or  Liens   of  mechanics,    materialmen,
            warehousemen, carriers, or other statutory nonconsensual Liens; or

                        (4)  Liens  resulting from judgments or orders described
            in Section 8.1.6.

                  PERSON shall mean any  individual,  corporation,  partnership,
limited   liability   company,   association,    joint-stock   company,   trust,
unincorporated organization,  joint venture, government or political subdivision
or agency thereof, or any other entity.

                  PLAN shall mean at any time an employee  pension  benefit plan
(including a Multiple  Employer  Plan,  but not a  Multiemployer  Plan) which is
covered  by Title IV of ERISA or is  subject to the  minimum  funding  standards
under  Section 412 of the Internal  Revenue Code and either (i) is maintained by
any member of the ERISA Group for  employees of any member of the ERISA Group or
(ii) has at any time  within the  preceding  five years been  maintained  by any
entity  which was at such time a member of the ERISA Group for  employees of any
entity which was at such time a member of the ERISA Group.

                  PNC  BANK  shall  mean PNC  Bank,  National  Association,  its
successors and assigns.

                  PORT BOND shall mean collectively, those certain Coal Terminal
Revenue Refunding Bonds (Dominion Terminal Associates  Project),  Series 1987-A,
B, C and D Bonds issued by Peninsula  Ports  Authority of Virginia,  a political
subdivision of the Commonwealth of Virginia,  in the face amount of $89,600,000,
together with any renewals thereof or replacements  therefor so long as the face
amount thereof is not in excess of $89,600,000.

                  POTENTIAL DEFAULT shall mean any event or condition which with
notice,  passage of time or a determination by the  Administrative  Agent or the
Required Banks, or any combination of the foregoing,  would  constitute an Event
of Default.

                  PRINCIPAL  OFFICE  shall mean the main  banking  office of the
Administrative Agent in Pittsburgh, Pennsylvania.

                  PRIVATE PLACEMENT AGREEMENTS shall mean collectively, (a) that
certain Note  Agreement  for  $50,000,000  of 7.79% Senior Notes of Arch Mineral
Corporation,  due January 31, 2003, as amended,  (b) that certain Note Agreement
for  $52,900,000 of 9.66% Senior



                                       15


Notes of Ashland Coal, Inc., due May 15, 2006, as amended,  and (c) that certain
Note Agreement for $100,000,000 of 9.78% Senior Notes of Ashland Coal, Inc., due
September 15, 2000, as amended.

                  PROHIBITED  TRANSACTION shall mean any prohibited  transaction
as defined in Section 4975 of the Internal  Revenue Code or Section 406 of ERISA
for which  neither an  individual  nor a class  exemption has been issued by the
United States Department of Labor.

                  PROPERTY shall mean all real property,  both owned and leased,
of any Loan Party or Subsidiary of a Loan Party.

                  PURCHASE  MONEY  SECURITY   INTEREST  shall  mean  Liens  upon
tangible  personal  property securing loans to any Loan Party or Subsidiary of a
Loan  Party or  deferred  payments  by such  Loan  Party or  Subsidiary  for the
purchase of such tangible personal property.

                  PURCHASING  BANK  shall  mean a  Revolving  Credit  Bank which
becomes a party to this  Agreement  by executing an  Assignment  and  Assumption
Agreement.

                  RATABLE  SHARE  shall  mean the  proportion  that a  Revolving
Credit Bank's  Commitment  (excluding  the Swing Loan  Commitment)  bears to the
Commitments  (excluding  the Swing  Loan  Commitments)  of all of the  Revolving
Credit Banks.

                  REGULATED SUBSTANCES shall mean any substance, the generation,
manufacture, extraction, processing, distribution, treatment, storage, disposal,
transport,  recycling,  reclamation,  use, reuse,  spilling,  leaking,  dumping,
injection,  pumping,  leaching,  emptying,  discharge,  escape, release or other
management or mismanagement of which is regulated by the Environmental Laws.

                  REGULATION U shall mean Regulation U, T, G or X as promulgated
by the Board of Governors of the Federal Reserve System, as amended from time to
time.

                  REIMBURSEMENT  OBLIGATION  shall have the meaning  assigned to
such term in Section 2.10.3.2.

                  REPORTABLE  EVENT shall mean a reportable  event  described in
Section  4043 of ERISA and  regulations  thereunder  with  respect  to a Plan or
Multiemployer Plan.

                  REQUESTED  AMOUNT shall have the meaning assigned to such term
in Section 2.9.1.

                  REQUIRED BANKS shall mean

                  (A) if there  are no  Revolving  Credit  Loans,  Reimbursement
Obligations  or Letter of Credit  Borrowings  outstanding,  Required Banks shall
mean  Revolving  Credit  Banks  whose  Commitments  (excluding  the  Swing  Loan
Commitments) aggregate at least 51% of the Commitments (excluding the Swing Loan
Commitments) of all of the Banks, or

                                       16


                  (B) if   there  are  Revolving  Credit  Loans,   Reimbursement
Obligations,  or Letter of Credit Borrowings  outstanding,  Required Banks shall
mean:

                        (i)   prior  to  a  termination   of   the   Commitments
hereunder pursuant to Section 8.2.1 or 8.2.2, any Revolving Credit Bank or group
of Revolving Credit Banks if the sum of the Committed Loans (excluding the Swing
Loans),  Reimbursement  Obligations  and  Letter  of Credit  Borrowings  of such
Revolving  Credit Banks then  outstanding  aggregates  at least 51% of the total
principal  amount of all of the  Committed  Loans  (excluding  the Swing Loans),
Reimbursement Obligations and Letter of Credit Borrowings then outstanding; and

                        (ii)  after the  earlier of  the  date  on  which  the
Commitments are terminated  hereunder  pursuant to Section 8.2.1 or 8.2.2 or the
date on which Revolving  Credit Loans or any other  Indebtedness of the Borrower
to the Revolving Credit Banks shall have become due and payable pursuant to such
Sections,  "Required Banks" shall mean Banks whose outstanding  Revolving Credit
Loans and Ratable Share in the face amount of outstanding  Letters of Credit and
Reimbursement  Obligations  aggregate at least 51% of the total principal amount
of all of the Revolving  Credit Loans,  Reimbursement  Obligations and Letter of
Credit Borrowings then outstanding.

Reimbursement  Obligations and Letter of Credit Borrowings shall be deemed,  for
purposes  of this  definition,  to be in  favor  of the  Issuing  Bank and not a
participating  Revolving  Credit Bank if such Revolving Credit Bank has not made
its Participation  Advance in respect thereof and shall be deemed to be in favor
of such Revolving Credit Bank to the extent of its  Participation  Advance if it
has made its Participation Advance in respect thereof.

                  REQUIRED SHARE shall have the meaning assigned to such term in
Section 4.7.

                  REVOLVING  CREDIT BANKS shall mean the financial  institutions
named on  SCHEDULE  1.1(B)  and  their  respective  successors  and  assigns  as
permitted hereunder,  each of which is referred to herein as a "Revolving Credit
Bank."

                  REVOLVING CREDIT BASE RATE OPTION shall mean the option of the
Borrower to have Revolving  Credit Loans bear interest at the rate and under the
terms and conditions set forth in Section 3.1.1(i).

                  REVOLVING  CREDIT  COMMITMENT  shall mean, as to any Revolving
Credit Bank at any time,  the amount  initially  set forth  opposite its name on
SCHEDULE 1.1(B) in the column labeled "Amount of Commitment for Revolving Credit
Loans,"  and  thereafter  on  Schedule  I to  the  most  recent  Assignment  and
Assumption Agreement,  and REVOLVING CREDIT COMMITMENTS shall mean the aggregate
Revolving Credit Commitments of all of the Revolving Credit Banks.

                                       17


                  REVOLVING CREDIT EURO-RATE OPTION shall mean the option of the
Borrower to have Revolving  Credit Loans bear interest at the rate and under the
terms and conditions set forth in Section 3.1.1(ii).

                  REVOLVING  CREDIT LOANS shall mean  collectively and REVOLVING
CREDIT LOAN shall mean  separately  all Revolving  Credit Loans or any Revolving
Credit Loan made by the Revolving  Credit Banks or one of the  Revolving  Credit
Banks to the  Borrower  pursuant to Section  2.1 or 2.10.3.  A Bid Loan is not a
Revolving Credit Loan, except that it will be treated as a Revolving Credit Loan
following a termination of the Commitments  hereunder  pursuant to Section 8.2.1
or 8.2.2 as provided in Section 8.3.

                  REVOLVING  CREDIT NOTE shall mean any Revolving Credit Note of
the Borrower in the form of EXHIBIT 1.1(R) issued by the Borrower at the request
of a Bank pursuant to Section 4.6 evidencing the Revolving  Credit Loans to such
Bank,  together  with  all  amendments,   extensions,   renewals,  replacements,
refinancings or refundings thereof in whole or in part.

                  REVOLVING FACILITY USAGE shall mean at any time the sum of the
Revolving Credit Loans outstanding,  the Bid Loans outstanding,  the Swing Loans
outstanding and the Letters of Credit Outstanding.

                  SEC shall mean the Securities  and Exchange  Commission or any
governmental agencies substituted therefor.

                  SECTION 20  SUBSIDIARY  shall mean the  Subsidiary of the bank
holding  company  controlling  any  Bank,  which  Subsidiary  has  been  granted
authority  by the  Federal  Reserve  Board to  underwrite  and  deal in  certain
Ineligible Securities.

                  SETTLEMENT  DATE  shall  mean each  Business  Day on which the
Administrative Agent effects settlement pursuant to Section 4.7.

                  SIGNIFICANT  SUBSIDIARY  shall mean any Subsidiary of Borrower
which at any time (i) has gross  revenues  equal to or in excess of five percent
(5%)  of  the  gross  revenues  of  the  Borrower  and  its  Subsidiaries  on  a
consolidated  basis,  or (ii) has  total  assets  equal to or in  excess of five
percent (5%) of the total assets of the Borrower and its Subsidiaries, in either
case, as determined and consolidated in accordance with GAAP.

                  STANDARD  &  POOR'S  shall  mean  Standard  &  Poor's  Ratings
Services, a division of The McGraw-Hill Companies, Inc., and its successors.

                  STANDBY  LETTER OF CREDIT shall mean a Letter of Credit issued
to  support  obligations  of one or  more of the  Loan  Parties,  contingent  or
otherwise,  which  finance the working  capital and  business  needs of the Loan
Parties incurred in the ordinary course of business.

                                       18


                  SUBSIDIARY  of any  Person  at any  time  shall  mean  (i) any
corporation  or trust of which  50% or more (by  number  of  shares or number of
votes)  of the  outstanding  capital  stock or  shares  of  beneficial  interest
normally  entitled to vote for the election of one or more directors or trustees
(regardless  of any  contingency  which does or may suspend or dilute the voting
rights) is at such time owned  directly or  indirectly  by such Person or one or
more of such Person's Subsidiaries, (ii) any partnership of which such Person is
a general partner or of which 50% or more of the partnership interests is at the
time directly or indirectly owned by such Person or one or more of such Person's
Subsidiaries,  (iii) any  limited  liability  company of which such  Person is a
member or of which 50% or more of the limited  liability company interests is at
the time  directly  or  indirectly  owned by such  Person or one or more of such
Person's  Subsidiaries  or (iv) any  corporation,  trust,  partnership,  limited
liability  company  or other  entity  which is  controlled  or  capable of being
controlled by such Person or one or more of such Person's Subsidiaries.

                  SUBSIDIARY SHARES shall have the meaning assigned to that term
in Section 5.1.2.

                  SUPERMAJORITY REQUIRED BANKS shall mean:

                  (A) if there  are no  Revolving  Credit  Loans,  Reimbursement
Obligations or Letter of Credit Borrowings  outstanding,  Supermajority Required
Banks shall mean Revolving Credit Banks whose  Commitments  (excluding the Swing
Loan Commitments) aggregate at least 80% of the Commitments (excluding the Swing
Loan Commitments) of all of the Banks, or

                  (B) if   there  are  Revolving  Credit  Loans,   Reimbursement
Obligations, or Letter of Credit Borrowings outstanding,  Supermajority Required
Banks shall mean:

                        (i)   prior  to  a  termination   of   the   Commitments
hereunder pursuant to Section 8.2.1 or 8.2.2, any Revolving Credit Bank or group
of Revolving Credit Banks if the sum of the Committed Loans (excluding the Swing
Loans),  Reimbursement  Obligations  and  Letter  of Credit  Borrowings  of such
Revolving  Credit Banks then  outstanding  aggregates at least 80 % of the total
principal  amount of all of the  Committed  Loans  (excluding  the Swing Loans),
Reimbursement Obligations and Letter of Credit Borrowings then outstanding; and

                        (ii)  after  the  earlier  of  the  date  on  which  the
Commitments are terminated  hereunder  pursuant to Section 8.2.1 or 8.2.2 or the
date on which Revolving  Credit Loans or any other  Indebtedness of the Borrower
to the Revolving Credit Banks shall have become due and payable pursuant to such
Sections,  "Supermajority  Required  Banks"  shall mean Banks whose  outstanding
Revolving  Credit  Loans and  Ratable  Share in the face  amount of  outstanding
Letters of Credit and  Reimbursement  Obligations  aggregate at least 80% of the
total  principal  amount of all of the  Revolving  Credit  Loans,  Reimbursement
Obligations and Letter of Credit Borrowings then outstanding.

                                       19


Reimbursement  Obligations and Letter of Credit Borrowings shall be deemed,  for
purposes  of this  definition,  to be in  favor  of the  Issuing  Bank and not a
participating  Revolving  Credit Bank if such Revolving Credit Bank has not made
its Participation  Advance in respect thereof and shall be deemed to be in favor
of such Revolving Credit Bank to the extent of its  Participation  Advance if it
has made its Participation Advance in respect thereof.

                  SWING LOAN COMMITMENT shall mean PNC Bank's commitment to make
Swing Loans to the  Borrower  pursuant to Section  2.4 hereof,  in an  aggregate
principal amount up to $ 25,000,000.

                  SWING LOAN NOTE shall mean the Swing Loan Note of the Borrower
in the form of EXHIBIT  1.1(S)  evidencing  the Swing Loans,  together  with all
amendments,  extensions,  renewals,  replacements,  refinancings  or  refundings
thereof in whole or in part.

                  SWING LOAN  REQUEST  shall mean a request for Swing Loans made
in accordance with Section 2.4.2 hereof.

                  SWING LOANS shall mean  collectively and SWING LOAN shall mean
separately  all Swing  Loans or any Swing Loan made by PNC Bank to the  Borrower
pursuant to Section 2.5.

                  SYNDICATION  DATE  shall mean a date  after the  Closing  Date
which is  selected by the  Administrative  Agent and notice of which is given by
the  Administrative  Agent to the Borrower at least five (5) Business Days prior
thereto.

                  TRANSFEROR BANK shall mean the selling  Revolving  Credit Bank
pursuant to an Assignment and Assumption Agreement.

            1.2.    CONSTRUCTION.

            Unless the context of this Agreement otherwise clearly requires, the
following  rules of  construction  shall apply to this Agreement and each of the
other Loan Documents:

                     1.2.1     NUMBER; INCLUSION.

                        references  to  the  plural  include  the  singular, the
plural,  the part and the whole; "or" has the inclusive  meaning  represented by
the phrase  "and/or," and "including" has the meaning  represented by the phrase
"including without limitation";

                     1.2.2     DETERMINATION.

                        references   to    "determination"    of   or   by   the
Administrative  Agent  or the  Banks  shall  be  deemed  to  include  good-faith
estimates by the Administrative  Agent or the Banks (in the case of quantitative
determinations) and good-faith beliefs by the Administrative  Agent or the Banks
(in the case of  qualitative  determinations)  and such  determination  shall be
conclusive absent manifest error;



                                       20


                     1.2.3     ADMINISTRATIVE AGENT'S DISCRETION AND CONSENT.

                        whenever  the  Administrative  Agent  or the  Banks  are
granted the right herein to act in its or their sole  discretion  or to grant or
withhold consent such right shall be exercised in good faith;

                     1.2.4     DOCUMENTS TAKEN AS A WHOLE.

                        the words "hereof," "herein,"  "hereunder," "hereto" and
similar  terms  in this  Agreement  or any  other  Loan  Document  refer to this
Agreement  or such  other  Loan  Document  as a whole and not to any  particular
provision of this Agreement or such other Loan Document;

                     1.2.5     HEADINGS.

                        the  section  and  other  headings   contained  in  this
Agreement  or such  other  Loan  Document  and the Table of  Contents  (if any),
preceding this Agreement or such other Loan Document are for reference  purposes
only and shall not control or affect the  construction of this Agreement or such
other Loan Document or the interpretation thereof in any respect;

                     1.2.6     IMPLIED REFERENCES TO THIS AGREEMENT.

                        article,  section,  subsection,   clause,  schedule  and
exhibit references are to this Agreement or other Loan Document, as the case may
be, unless otherwise specified;

                     1.2.7     PERSONS.

                        reference   to  any  Person   includes   such   Person's
successors and assigns but, if applicable,  only if such  successors and assigns
are permitted by this Agreement or such other Loan Document, as the case may be,
and reference to a Person in a particular  capacity  excludes such Person in any
other capacity;

                     1.2.8     MODIFICATIONS TO DOCUMENTS.

                        reference to any agreement (including this Agreement and
any other Loan  Document  together  with the  schedules  and exhibits  hereto or
thereto), document or instrument means such agreement, document or instrument as
amended, modified, replaced, substituted for, superseded or restated;

                     1.2.9     FROM, TO AND THROUGH.

                        relative  to the  determination  of any  period of time,
"from" means "from and including,"  "to" means "to but excluding," and "through"
means "through and including"; and

                                       21


                     1.2.10    SHALL; WILL.

                        references  to "shall"  and "will" are  intended to have
the same meaning.

            1.3.   ACCOUNTING PRINCIPLES.

            Except as otherwise provided in this Agreement, all computations and
determinations   as  to  accounting  or  financial  matters  and  all  financial
statements to be delivered pursuant to this Agreement shall be made and prepared
in  accordance  with  GAAP   (including   principles  of   consolidation   where
appropriate),  and all  accounting  or  financial  terms shall have the meanings
ascribed to such terms by GAAP;  PROVIDED,  HOWEVER,  that all accounting  terms
used in Section 7.2  [Negative  Covenants]  (and all  defined  terms used in the
definition  of any  accounting  term used in Section  7.2 shall have the meaning
given to such  terms  (and  defined  terms)  under GAAP as in effect on the date
hereof  applied on a basis  consistent  with those used in preparing  the Annual
Statements referred to in Section 5.1.7(i) [Historical Statements]. In the event
of any change after the date hereof in GAAP,  and if such change would result in
the inability to determine  compliance with the financial covenants set forth in
Section 7.2 based upon the Borrower's regularly prepared financial statements by
reason of the preceding sentence,  then the parties hereto agree to endeavor, in
good faith,  to agree upon an amendment to this Agreement that would adjust such
financial covenants in a manner that would not affect the substance thereof, but
would  allow  compliance  therewith  to be  determined  in  accordance  with the
Borrower's financial statements at that time.


                  2. REVOLVING CREDIT AND SWING LOAN FACILITIES

            2.1.   REVOLVING CREDIT COMMITMENTS.

                     2.1.1     REVOLVING CREDIT LOANS.

                        Subject to  the  terms and conditions hereof and relying
upon the  representations and warranties herein set forth, each Revolving Credit
Bank severally agrees to make Revolving Credit Loans to the Borrower at any time
or from time to time on or after the date hereof to the Expiration Date provided
that (subject to Section  2.9.1 with respect to taking into account  outstanding
Bid Loans)  after  giving  effect to such  Revolving  Credit Loan the  aggregate
amount of  Revolving  Credit  Loans from such  Revolving  Credit  Bank shall not
exceed such  Revolving  Credit Bank's  Revolving  Credit  Commitment  minus such
Revolving  Credit  Bank's  Ratable  Share of the Letters of Credit  Outstanding.
Within  such limits of time and amount and  subject to the other  provisions  of
this  Agreement,  the Borrower may borrow,  repay and reborrow  pursuant to this
Section 2.1.
                                       22



                     2.1.2     SWING LOAN COMMITMENT.

                        Subject to the terms and  conditions  hereof and relying
upon the  representations  and warranties  herein set forth,  PNC Bank agrees to
make Swing Loans (the "Swing Loans") to the Borrower at any time or from time to
time after the date hereof to, but not  including,  the  Expiration  Date, in an
aggregate principal amount of up to but not in excess of $25,000,000 (the "Swing
Loan  Commitment"),  provided that the Revolving  Facility  Usage,  at any time,
shall not exceed the Revolving  Credit  Commitments of all the Revolving  Credit
Banks. Within such limits of time and amount and subject to the other provisions
of this Agreement,  the Borrower may borrow, repay and reborrow pursuant to this
Section 2.1.2.

            2.2.    NATURE OF BANKS' OBLIGATIONS WITH RESPECT TO REVOLVING
CREDIT LOANS.

            Each Revolving Credit Bank shall be obligated to participate in each
request for Revolving  Credit Loans  pursuant to Section 2.4  [Revolving  Credit
Loan Requests, Etc.] in accordance with its Ratable Share. The aggregate of each
Revolving  Credit Bank's  Revolving  Credit Loans  outstanding  hereunder to the
Borrower at any time shall never exceed its Revolving  Credit  Commitment  minus
its Ratable Share of the Letters of Credit Outstanding.  The obligations of each
Revolving Credit Bank hereunder are several. The failure of any Revolving Credit
Bank to perform its  obligations  hereunder  shall not affect the Obligations of
the  Borrower  to any other  party nor shall any other  party be liable  for the
failure of such Revolving Credit Bank to perform its obligations hereunder.  The
Revolving  Credit Banks shall have no obligation to make Revolving  Credit Loans
hereunder on or after the Expiration Date.

            2.3.    REVOLVING CREDIT FACILITY FEE.

            Accruing  from  the date  hereof  until  the  Expiration  Date,  the
Borrower  agrees  to pay to the  Administrative  Agent for the  account  of each
Revolving  Credit  Bank,  as  consideration  for such  Bank's  Revolving  Credit
Commitment hereunder, a nonrefundable facility fee (the "Facility Fee") equal to
the Applicable  Facility Fee Rate computed (on the basis of a year of 365 or 366
days,  as the case may be,  and  actual  days  elapsed)  on the  amount  of such
Revolving  Credit  Bank's  Revolving  Credit  Commitment  as  the  same  may  be
constituted  from time to time. All Facility Fees shall be payable in arrears on
the first Business Day of each July,  October,  January and April after the date
hereof and on the Expiration Date or upon acceleration of the Loans.

            2.4.     REVOLVING CREDIT LOAN REQUESTS; SWING LOAN REQUESTS.

                     2.4.1     REVOLVING CREDIT LOAN REQUESTS.

                        Except as otherwise  provided  herein,  the Borrower may
from time to time prior to the  Expiration  Date  request the  Revolving  Credit
Banks to make  Revolving  Credit  Loans,  or renew or convert the Interest  Rate
Option  applicable to existing  Revolving  Credit Loans  pursuant to Section 3.2
[Interest  Periods],  by delivering to the Administrative  Agent, not later than
10:00 a.m., Pittsburgh time, (i) three (3) Business Days prior to the

                                       23


proposed  Borrowing Date with respect to the making of Revolving Credit Loans to
which the Euro-Rate  Option  applies or the  conversion to or the renewal of the
Euro-Rate  Option for any Revolving  Credit Loans; and (ii) one (1) Business Day
prior to either  the  proposed  Borrowing  Date with  respect to the making of a
Revolving  Credit Loan to which the Revolving Credit Base Rate Option applies or
the last day of the preceding Committed Loan Interest Period with respect to the
conversion  to the Revolving  Credit Base Rate Option for any  Revolving  Credit
Loan, of a duly completed  Committed Loan Request therefor  substantially in the
form of EXHIBIT  2.4.1 or a  Committed  Loan  Request by  telephone  immediately
confirmed in writing by letter,  facsimile or telex in the form of such Exhibit,
it being understood that the  Administrative  Agent may rely on the authority of
any individual making such a telephonic request without the necessity of receipt
of such written  confirmation.  Each Committed Loan Request shall be irrevocable
and shall specify (i) the proposed  Borrowing Date; (ii) the aggregate amount of
the proposed  Revolving  Credit Loans comprising each Borrowing  Tranche,  which
shall be in integral  multiples of $1,000,000  and not less than  $5,000,000 for
each  Borrowing  Tranche to which the Euro-Rate  Option  applies and in integral
multiples of $500,000 and not less than the lesser of  $5,000,000 or the maximum
amount available for Borrowing  Tranches to which the Revolving Credit Base Rate
Option applies;  (iii) whether  Revolving  Credit  Euro-Rate Option or Revolving
Credit  Base Rate Option  shall apply to the  proposed  Revolving  Credit  Loans
comprising the applicable Borrowing Tranche; and (iv) in the case of a Borrowing
Tranche to which the Revolving Credit  Euro-Rate Option applies,  an appropriate
Committed Loan Interest Period for the Loans comprising such Borrowing Tranche.

                     2.4.2     SWING LOAN REQUESTS.

                        Except as otherwise  provided  herein,  the Borrower may
from time to time prior to the Expiration Date request PNC Bank, to make a Swing
Loan by delivery to PNC Bank, not later than 2:00 p.m.  Pittsburgh  time, on the
proposed  Borrowing Date of a duly completed  request therefor  substantially in
the form of EXHIBIT 2.4.2 hereto or a request by telephone immediately confirmed
in writing by letter,  facsimile or telex  (each,  a "Swing Loan  Request"),  it
being  understood  that PNC Bank may  rely on the  authority  of any  individual
making  such a  telephonic  request  without  the  necessity  of receipt of such
written  confirmation.  Each Swing Loan Request shall be  irrevocable  and shall
specify (i) the proposed  Borrowing  Date,  (ii) the term of the proposed  Swing
Loan,  which shall be no less than one day and no longer  than three  days,  and
(iii) the  principal  amount of such Swing  Loan,  which  shall be not less than
$1,000,000 and shall be an integral multiple of $100,000.

            2.5.    MAKING  REVOLVING  CREDIT  LOANS  AND  SWING LOANS AND SWING
                    NOTES.

            The  Administrative  Agent shall,  promptly after receipt by it of a
Loan Request  pursuant to Section 2.4 [Revolving  Credit Loan  Requests,  Etc.],
notify  the  Revolving  Credit  Banks  of  its  receipt  of  such  Loan  Request
specifying:  (i)  the  proposed  Borrowing  Date  and the  time  and  method  of
disbursement of the Revolving  Credit Loans requested  thereby;  (ii) the amount
and type of each such Revolving  Credit Loan and the applicable  Interest Period
(if any); and (iii) the  apportionment  among the Revolving Credit Banks of such
Revolving Credit Loans

                                       24


as determined by the Administrative Agent in accordance with Section 2.2 [Nature
of Banks'  Obligations,  Etc.].  Each  Revolving  Credit  Bank  shall  remit the
principal amount of each Revolving Credit Loan to the Administrative  Agent such
that the Administrative Agent is able to, and the Administrative Agent shall, to
the extent the Revolving  Credit Banks have made funds  available to it for such
purpose and subject to Section 6.2 [Each  Additional  Loan or Letter of Credit],
fund such Revolving Credit Loans to the Borrower in U.S. Dollars and immediately
available funds at the Principal Office prior to 2:00 p.m.,  Pittsburgh time, on
the applicable  Borrowing Date, PROVIDED that if any Revolving Credit Bank fails
to  remit  such  funds to the  Administrative  Agent  in a  timely  manner,  the
Administrative Agent may elect in its sole discretion to fund with its own funds
the Revolving Credit Loans of such Revolving Credit Bank on such Borrowing Date,
and such Revolving  Credit Bank shall be subject to the repayment  obligation in
Section 9.16 [Availability of Funds].

                     2.5.1     MAKING SWING LOANS.

                        PNC Bank  shall,  after  receipt  by it of a Swing  Loan
Request pursuant to Section 2.4.2,  fund such Swing Loan to the Borrower in U.S.
Dollars and immediately  available  funds at the Principal  Office prior to 3:00
p.m., Pittsburgh time, on the Borrowing Date.

            2.6.    SWING LOAN NOTE.

            The obligation of the Borrower to repay the unpaid  principal amount
of the Swing Loans made to it by PNC Bank together  with interest  thereon shall
be evidenced by a demand  promissory note of the Borrower dated the Closing Date
in substantially the form attached hereto as EXHIBIT 1.1(S) payable to the order
of PNC Bank in a face amount equal to the Swing Loan Commitment of PNC Bank.

            2.7.    USE OF PROCEEDS.

            The proceeds of the Loans shall be used to refinance all  principal,
interest,  fees,  obligations and other amounts  outstanding  under the Existing
Credit Facilities, for general corporate purposes and in accordance with Section
7.1.9 [Use of Proceeds].  Notwithstanding any provision of this Agreement to the
contrary,  no  proceeds  of any Loan  shall be used by nor shall  any  Letter of
Credit be issued for the  benefit or the use of,  directly  or  indirectly,  any
Significant  Subsidiary or any Subsidiary of any  Significant  Subsidiary  which
Significant  Subsidiary is not a party to the Guaranty Agreement until such time
as such Significant  Subsidiary has joined the Guaranty  Agreement in accordance
with Section 10.18 [Joinder of Guarantors].

            2.8.    BORROWINGS TO REPAY SWING LOANS.

            PNC Bank may, at its option,  exercisable at any time for any reason
whatsoever,  demand repayment of the Swing Loans, and each Revolving Credit Bank
shall make  available to the  Administrative  Agent,  on behalf of PNC Bank,  an
amount equal to such Bank's Ratable Share 


                                       25


of the aggregate  principal amount of the outstanding Swing Loans,  plus, if PNC
Bank so requests,  accrued interest  thereon,  PROVIDED that no Revolving Credit
Bank shall be obligated in any event to make Revolving Credit Loans in excess of
its Revolving  Credit  Commitment.  Revolving  Credit Loans made pursuant to the
preceding  sentence  shall bear interest at the Base Rate and shall be deemed to
have been properly  requested in accordance with Section 2.4.1 without regard to
any of the requirements of that provision.  PNC Bank shall provide notice to all
of the  Revolving  Credit Banks (which may be  telephonic  or written  notice by
letter,  facsimile or telex) of the amount of such Bank's  Ratable  Share of the
aggregate principal amount of the outstanding Swing Loans, plus accrued interest
thereon, to be made available to the Administrative  Agent on behalf of PNC Bank
under this Section 2.8. The Administrative  Agent shall promptly provide to each
Revolving  Credit Bank notice of the  apportionment  thereof among the Revolving
Credit Banks, and the Revolving Credit Banks shall be unconditionally  obligated
to fund such amount  (whether or not the  conditions  specified in Section 2.4.1
are then satisfied) by the time PNC Bank so requests, which shall not be earlier
than 3:00 p.m.,  Pittsburgh  time,  on the  Business Day next after the date the
Revolving   Credit  Banks  receive  such  notice  of   apportionment   from  the
Administrative Agent.

            2.9.    BID LOAN FACILITY.

                     2.9.1     BID LOAN REQUESTS.

                        Except as otherwise  provided  herein,  the Borrower may
from time to time prior to the Expiration Date request that the Revolving Credit
Banks  make Bid Loans by  delivery  to the  Administrative  Agent not later than
10:00 a.m., Pittsburgh time, of a duly completed request therefor  substantially
in the form of  EXHIBIT  2.9.1  hereto or a  request  by  telephone  immediately
confirmed in writing by letter,  facsimile or telex (each, a "Bid Loan Request")
at least one (1) Business Days prior to the proposed Bid Loan  Borrowing Date if
Borrower is requesting  Fixed Rate Bid Loans and four (4) Business Days prior to
the proposed Bid Loan  Borrowing  Date if Borrower is  requesting  Euro-Rate Bid
Loans.  The  Administrative  Agent may rely on the  authority of any  individual
making a telephonic  request  referred to in the preceding  sentence without the
necessity of receipt of written  confirmation.  Each Bid Loan  Request  shall be
irrevocable  and shall specify (i) the proposed Bid Loan  Borrowing  Date,  (ii)
whether  Borrower  is  electing  the Bid Loan Fixed Rate  Option or the Bid Loan
Euro-Rate  Option,  (iii)  the term of the  proposed  Bid Loan  (the  "Bid  Loan
Interest  Period"),  which may be no less than 7 day(s)  and no longer  than 270
days if Borrower is requesting a Fixed Rate Bid Loan and one, two,  three or six
months (or nine months,  if available) if Borrower is requesting a Euro-Rate Bid
Loan, and (iv) the maximum principal amount (the "Requested Amount") of such Bid
Loan, which shall be not less than $5,000,000 and shall be an integral  multiple
of  $1,000,000.  After giving effect to such Bid Loan and any other Loan made on
or before the Bid Loan  Borrowing  Date,  the aggregate  amount of all Revolving
Credit Loans,  Swing Loans and Bid Loans  outstanding  plus the Letter of Credit
Outstandings  shall not  exceed the  aggregate  amount of the  Revolving  Credit
Commitments of the Revolving Credit Banks.  There shall be at least one Business
Day between  each Bid Loan  Borrowing  Date.  There shall be no requests for Bid
Loans nor any Bid Loans made until the Business Day  following  the  Syndication
Date.



                                       26


                     2.9.2     BIDDING.

                        The  Administrative  Agent  shall promptly after receipt
by it of a Bid Loan  Request  pursuant  to Section  2.9.1  notify the  Revolving
Credit Banks of its receipt of such Bid Loan Request specifying (i) the proposed
Bid Loan  Borrowing  Date,  (ii)  whether the proposed Bid Loan shall be a Fixed
Rate Bid Loan or a Euro-Rate Bid Loan,  (iii) the Bid Loan  Interest  Period and
(iv) the principal  amount of the proposed Bid Loan. Each Revolving  Credit Bank
may  submit a bid (a "Bid") to the  Administrative  Agent not later  than  10:00
a.m.,  Pittsburgh  time, on the proposed Bid Loan  Borrowing Date if Borrower is
requesting a Fixed Rate Bid Loan or three (3) Business  Days before the proposed
Bid Loan  Borrowing  Date if Borrower  is  requesting  a  Euro-Rate  Bid Loan by
telephone (immediately confirmed in writing by letter, facsimile or telex). Each
Bid shall  specify:  (A) the  principal  amount of proposed Bid Loans offered by
such Revolving Credit Bank (the "Offered  Amount") (such Bid Loans may be funded
by such Revolving Credit Bank's  Designated Lender as provided in Section 2.9.4;
however,  such Revolving Credit Bank shall not be required to specify in its Bid
whether such Bid Loans will be funded by such  Designated  Lender) which (i) may
be less than, but shall not exceed, the Requested Amount, (ii) shall be at least
$5,000,000 and shall be an integral  multiple of $1,000,000 and (iii) may exceed
such Revolving Credit Bank's Revolving Credit Commitment, and (B) the Fixed Rate
which shall apply to such  proposed Bid Loan if Borrower  has  requested a Fixed
Rate Bid  Loan or the  Euro-Rate  Bid  Loan  Spread  which  shall  apply to such
proposed Bid Loan if Borrower  has  requested a Euro-Rate  Bid Loan.  If any Bid
omits information  required hereunder,  the Administrative Agent may in its sole
discretion  attempt to notify the Revolving  Credit Bank submitting such Bid. If
the  Administrative  Agent so notifies a Revolving  Credit Bank,  such Revolving
Credit  Bank may  resubmit  its Bid  provided  that it does so prior to time set
forth in this  Section  2.9.2  above  by which  such  Revolving  Credit  Bank is
required to submit its Bid to the Administrative Agent. The Administrative Agent
shall promptly notify the Borrower of the Bids which it timely received from the
Revolving  Credit  Banks.  If the  Administrative  Agent  in its  capacity  as a
Revolving Credit Bank shall, in its sole discretion, make a Bid, it shall notify
the Borrower of such Bid before 9:00 a.m.,  Pittsburgh time, on the proposed Bid
Loan Borrowing Date if Borrower is requesting a Fixed Rate Bid Loan on three (3)
Business  Days before the proposed  Borrowing  Date if Borrower is  requesting a
Euro-Rate Bid Loan.

                     2.9.3     ACCEPTING BIDS.

                        The Borrower  shall  irrevocably  accept  or reject Bids
by  notifying  the  Administrative  Agent of such  acceptance  or  rejection  by
telephone (immediately  confirmed in writing by letter,  facsimile or telex) not
later than 11:00 a.m.,  Pittsburgh time, on the proposed Bid Loan Borrowing Date
if  Borrower is  requesting  a Fixed Rate Bid Loan and three (3)  Business  Days
before the proposed  Borrowing  Date if Borrower is  requesting a Euro-Rate  Bid
Loan. If the Borrower  elects to accept any Bids, its  acceptance  must meet the
following  conditions:  (1) the total  amount  which  Borrower  accepts from all
Revolving  Credit Banks must exceed  $5,000,000 and be in integral  multiples of
$1,000,000 and may not exceed the aggregate  Requested Amount;  (2) the Borrower
must accept Bids based solely on the amount of the Fixed



                                       27


Rates or  Euro-Rate  Bid Loan  Spreads,  as the case may be,  which  each of the
Revolving  Credit Banks quoted in their Bids in ascending order of the amount of
Fixed Rates or Euro-Rate Bid Loan  Spreads;  (3) the Borrower may not borrow Bid
Loans from any Revolving Credit Bank (or such Revolving Credit Bank's Designated
Lender)  on the Bid Loan  Borrowing  Date in an  amount  exceeding  such  Bank's
Offered  Amount;  (4) if two or more  Banks make Bids at the same Fixed Rate (if
Borrower  Requested  a Fixed  Rate Bid Loan) or  Euro-Rate  Bid Loan  Spread (if
Borrower  Requested a Euro-Rate  Bid Loan) and the Borrower  desires to accept a
portion but not all of the Bids at such Fixed Rate or Euro-Rate Bid Loan Spread,
as the case may be, the Borrower shall accept a portion of each Bid equal to the
product  of the  Offered  Amount  of such Bid  times the  fraction  obtained  by
dividing the total amount of Bids which Borrower is accepting at such Fixed Rate
or  Euro-Rate  Bid Loan  Spread,  as the case may be, by the sum of the  Offered
Amounts of the Bids at such Fixed Rate or Euro-Rate  Bid Loan  Spread,  PROVIDED
that the Borrower  shall round the Bid Loans  allocated to each such Bank upward
or downward as the Borrower may select to integral Multiples of $1,000,000.  The
Administrative  Agent shall (i) promptly notify a Revolving Credit Bank that has
made a Bid of the  amount  of its Bid  that  was  accepted  or  rejected  by the
Borrower and (ii) as promptly as practical  notify all of the  Revolving  Credit
Banks  which  submitted  Bids of all Bids  submitted  and those  which have been
accepted.

                     2.9.4     FUNDING BID LOANS.

                        Each  Revolving Credit Bank whose Bid or portion thereof
is accepted shall, or at its option shall cause its Designated  Lender to, remit
the principal amount of its Bid Loan to the Administrative  Agent by 12:00 noon,
Pittsburgh time, on the Borrowing Date. The Administrative Agent shall make such
funds available to the Borrower on or before 1:00 p.m.,  Pittsburgh time, on the
Borrowing Date provided that the conditions  precedent to the making of such Bid
Loan set forth in Section  6.2 have been  satisfied  not later than 10:00  a.m.,
Pittsburgh  time, on the proposed  Borrowing Date. If such conditions  precedent
have not been satisfied  prior to such time, then (i) the  Administrative  Agent
shall not make such funds  available to the Borrower,  (ii) the Bid Loan Request
shall be deemed to be canceled and (iii) the  Administrative  Agent shall return
the amount previously funded to the Administrative Agent by each applicable Bank
no later than the next following  Business Day. The Borrower  shall  immediately
notify  the  Administrative  Agent of any  failure  to  satisfy  the  conditions
precedent to the making of Bid Loans under Section 6.2. The Administrative Agent
may assume that Borrower has satisfied such conditions precedent if the Borrower
(i) has  delivered  to the  Administrative  Agent the  documents  required to be
delivered   under   Section  6.2,   (ii)  the  Borrower  has  not  notified  the
Administrative  Agent  that  the  Loan  Parties  have not  satisfied  any  other
conditions precedent, and (iii) the Administrative Agent has no actual notice of
such a failure.  Any Designated Lender which funds a Bid Loan shall on and after
the time of such funding  become the obligee under such Bid Loan and be entitled
to receive payment  thereof when due. A Revolving  Credit Bank shall be relieved
of its  obligation  to fund a Bid Loan upon the  funding of such Bid Loan by its
Designated Lender and not prior to such time.

                                       28


                     2.9.5     SEVERAL OBLIGATIONS.

                        The  obligations  of the Revolving  Credit Banks to make
Bid Loans after their Bids have been accepted are several.  No Revolving  Credit
Bank shall be responsible for the failure of any other Bank to make any Bid Loan
which another Revolving Credit Bank has agreed to make.

                     2.9.6     BID NOTES.

                        The  obligation  of the Borrower to repay the  aggregate
unpaid  principal  amount of the Bid Loans made to it by each  Revolving  Credit
Bank or its  Designated  Lender,  as the case  may be,  together  with  interest
thereon,  shall be  evidenced by a Bid Note dated as of the Closing Date payable
to the order of such  Revolving  Credit Bank and a Bid Note dated as of the date
of the applicable  Designation Agreement in favor of the Designated Lender named
in such Designation  Agreement in a face amount equal to the aggregate Revolving
Credit Commitments of all of the Banks.

                     2.9.7     PAYMENTS AND PREPAYMENTS.

                        The  Borrower  shall repay each Bid Loan on the last day
of the  Interest  Period with  respect to such Bid Loan.  The  Borrower  may not
prepay the Bid Loans.

            2.10.    LETTER OF CREDIT SUBFACILITY.

                     2.10.1    ISSUANCE OF LETTERS OF CREDIT.

                        Borrower  may request the issuance of a letter of credit
(each a "Letter  of  Credit")  on behalf of  itself  or  another  Loan  Party by
delivering  to the Issuing  Bank  selected by the  Borrower  (with a copy to the
Administrative  Agent) a  completed  application  and  agreement  for letters of
credit  in such form as the  Issuing  Bank may  specify  from time to time by no
later than 10:00 a.m.,  Pittsburgh  time,  at least three (3) Business  Days, or
such shorter  period as may be agreed to by the Issuing  Bank, in advance of the
proposed  date of  issuance.  Each  Letter of  Credit  shall be either a Standby
Letter of Credit or a  Commercial  Letter of  Credit.  Subject  to the terms and
conditions  hereof and in  reliance  on the  agreements  of the other  Revolving
Credit Banks set forth in this Section 2.8, the Issuing Bank will issue a Letter
of Credit provided that each Letter of Credit shall (A) have a maximum  maturity
of twelve  (12)  months from the date of  issuance,  and (B) in no event  expire
later than ten (10) Business Days prior to the Expiration Date and provided that
in no event shall (i) the Letters of Credit Outstanding exceed, at any one time,
$500,000,000 or (ii) the Revolving  Facility Usage exceed,  at any one time, the
Revolving Credit Commitments.

                     2.10.2    LETTER OF CREDIT FEES.

                        Subject  to  the terms and conditions of this Agreement,
any Issuing Bank selected by the Borrower  shall issue the  requested  Letter of
Credit,  provided that the


                                       29


Borrower  and such  Issuing  Bank  agree in  writing  as to the letter of credit
fronting  fee (the  "Fronting  Fee") to be paid by the  Borrower to such Issuing
Bank with respect to each such Letter of Credit.  The Borrower shall also pay to
the  Issuing  Bank for the  Issuing  Bank's  sole  account  the  Issuing  Bank's
then-in-effect  customary fees and administrative  expenses payable with respect
to the Letters of Credit as the Issuing Bank may generally  charge or incur from
time to time in connection  with the  issuance,  maintenance,  modification  (if
any),  assignment  or transfer  (if any),  negotiation,  and  administration  of
Letters of Credit.  The Borrower shall pay to the  Administrative  Agent for the
ratable account of the Revolving Credit Banks a fee (the "Letter of Credit Fee")
equal to the  Applicable  Letter of Credit Fee Rate then in effect  (computed on
the basis of a year of 360 days and  actual  days  elapsed),  which fee shall be
computed on the daily average Letters of Credit Outstanding and shall be payable
quarterly in arrears  commencing  with the first  Business Day of each  January,
April, July and October  following  issuance of each Letter of Credit and on the
Expiration Date.

                     2.10.3    DISBURSEMENTS, REIMBURSEMENT.

                               2.10.3.1    Immediately  upon  the  Issuance   of
each Letter of Credit, each Revolving Credit Bank shall be deemed to, and hereby
irrevocably  and  unconditionally  agrees to,  purchase  from the Issuing Bank a
participation in such Letter of Credit and each drawing  thereunder in an amount
equal to such  Revolving  Credit  Bank's  Ratable  Share of the  maximum  amount
available  to be drawn  under  such  Letter  of  Credit  and the  amount of such
drawing, respectively.

                               2.10.3.2    In the event  of any  request  for  a
drawing under a Letter of Credit by the beneficiary or transferee  thereof,  the
Issuing Bank will  promptly  notify the Borrower and the  Administrative  Agent.
Provided that it shall have received such notice,  the Borrower shall  reimburse
(such obligation to reimburse the Issuing Bank shall sometimes be referred to as
a "Reimbursement  Obligation") the Administrative Agent on behalf of the Issuing
Bank prior to 12:00 noon,  Pittsburgh  time, on each date that an amount is paid
by the  Issuing  Bank  under any Letter of Credit  (each  such date,  a "Drawing
Date") in an amount  equal to the  amount so paid by the  Issuing  Bank.  In the
event the Borrower fails to reimburse the Administrative  Agent on behalf of the
Issuing  Bank for the full amount of any  drawing  under any Letter of Credit by
12:00 noon, Pittsburgh time, on the Drawing Date, the Issuing Bank will promptly
notify the Administrative  Agent and each Revolving Credit Bank thereof, and the
Borrower shall be deemed to have  requested that Revolving  Credit Loans be made
by the Revolving  Credit Banks under the Revolving Credit Base Rate Option to be
disbursed on the Drawing Date under such Letter of Credit, subject to the amount
of the unutilized  portion of the Revolving Credit Commitment and subject to the
conditions set forth in Section 6.2 [Each  Additional  Loan or Letter of Credit]
other than any notice requirements. Any notice given by the Administrative Agent
or the Issuing Bank pursuant to this Section 2.10.3.2 may be oral if immediately
confirmed in writing;  provided that the lack of such an immediate  confirmation
shall not affect the conclusiveness or binding effect of such notice.

                                       30


                               2.10.3.3    Each Revolving Credit Bank shall upon
any notice  pursuant to Section  2.10.3.2 make  available to the  Administrative
Agent,  on behalf of the Issuing Bank, an amount in immediately  available funds
equal  to  its  Ratable  Share  of the  amount  of the  drawing,  whereupon  the
participating Revolving Credit Banks shall (subject to Section 2.10.3.4) each be
deemed to have made a Revolving Credit Loan under the Revolving Credit Base Rate
Option to the Borrower in that amount.  If any Revolving Credit Bank so notified
fails to make  available  to the  Administrative  Agent for the  account  of the
Issuing Bank the amount of such  Revolving  Credit Bank's  Ratable Share of such
amount by no later than 2:00 p.m.,  Pittsburgh  time, on the Drawing Date,  then
interest  shall accrue on such Revolving  Credit Bank's  obligation to make such
payment,  from the Drawing Date to the date on which such Revolving  Credit Bank
makes such payment (i) at a rate per annum equal to the Federal Funds  Effective
Rate during the first three days  following  the Drawing Date and (ii) at a rate
per annum  equal to the rate  applicable  to  Revolving  Credit  Loans under the
Revolving  Credit  Base Rate  Option on and after the fourth day  following  the
Drawing Date; provided,  however, that in the event that a Revolving Credit Bank
does not  timely  receive  notice in order to so fund its  Ratable  Share to the
Administrative  Agent prior to 2:00 p.m.,  Pittsburgh time, on the Drawing Date,
interest,  with respect to the Drawing Date only, shall not accrue as previously
described in this  sentence.  The Issuing Bank will  promptly give notice to the
Administrative  Agent and each other Revolving  Credit Bank of the occurrence of
the Drawing Date, but failure of the Issuing Bank to give any such notice on the
Drawing Date or in sufficient time to enable any Revolving Credit Bank to effect
such payment on such date shall not relieve such Revolving  Credit Bank from its
obligation under this Section 2.10.3.3.

                               2.10.3.4    With respect  to   any   unreimbursed
drawing that is not converted  into  Revolving  Credit Loans under the Revolving
Credit Base Rate Option to the Borrower in whole or in part as  contemplated  by
Section  2.10.3.2,  because of the Borrower's  failure to satisfy the conditions
set forth in Section 6.2 [Each  Additional  Loan or Letter of Credit] other than
any notice requirements or for any other reason, the Borrower shall be deemed to
have incurred  from the Issuing Bank a Letter of Credit  Borrowing in the amount
of such  drawing.  Such Letter of Credit  Borrowing  shall be due and payable on
demand  (together  with  interest) and shall bear interest at the rate per annum
applicable  to the Revolving  Credit Loans under the Revolving  Credit Base Rate
Option.  Each  Revolving  Credit Bank's payment to the  Administrative  Agent on
behalf of the Issuing Bank pursuant to Section  2.10.3.3 shall be deemed to be a
payment in respect of its  participation  in such Letter of Credit Borrowing and
shall  constitute a  Participation  Advance from such  Revolving  Credit Bank in
satisfaction of its participation obligation under this Section 2.10.3.

                     2.10.4    REPAYMENT OF PARTICIPATION ADVANCES.

                               2.10.4.1    Upon  (and  only  upon)  receipt   by
the  Administrative  Agent for the  account of the Issuing  Bank of  immediately
available  funds from the Borrower (i) in  reimbursement  of any payment made by
the Issuing Bank under the Letter of Credit with respect to which any  Revolving
Credit Bank has made a  Participation  Advance to the  Administrative  Agent, or
(ii) in payment of  interest on such a payment  made by the  Issuing  Bank 


                                       31


under such a Letter of Credit, the Administrative Agent on behalf of the Issuing
Bank will pay to each Revolving Credit Bank, in the same funds as those received
by the  Administrative  Agent on behalf of the Issuing Bank,  the amount of such
Revolving Credit Bank's Ratable Share of such funds,  except the  Administrative
Agent  shall  retain  the  amount  of the  Ratable  Share  of such  funds of any
Revolving  Credit Bank that did not make a  Participation  Advance in respect of
such payment by the Issuing Bank.

                               2.10.4.2    If  any   Issuing    Bank   (or   the
Administrative  Agent on behalf of any Issuing  Bank) is required at any time to
return to any Loan Party, or to a trustee, receiver,  liquidator,  custodian, or
any official in any Insolvency  Proceeding,  any portion of the payments made by
any Loan Party to the Issuing Bank or to the  Administrative  Agent on behalf of
any Issuing Bank pursuant to Section 2.10.4.1 in reimbursement of a payment made
under the Letter of Credit or interest or fee  thereon,  each  Revolving  Credit
Bank shall, on demand of the Administrative Agent, on behalf of the Issuing Bank
forthwith return to the Administrative Agent, on behalf of the Issuing Bank, the
amount of its Ratable Share of any amounts so returned by Issuing Bank or by the
Administrative  Agent on behalf of the Issuing Bank plus  interest  thereon from
the date such  demand  is made to the date such  amounts  are  returned  by such
Revolving  Credit Bank to the  Issuing  Bank or to the  Administrative  Agent on
behalf of the  Issuing  Bank,  at a rate per annum  equal to the  Federal  Funds
Effective Rate in effect from time to time.

                     2.10.5    DOCUMENTATION.

                        Each  Loan  Party agrees to be bound by the terms of the
Issuing Bank's  application  and agreement for letters of credit and the Issuing
Bank's  written  regulations  and  customary  practices  relating  to letters of
credit,  though such interpretation may be different from such Loan Party's own.
In the event of a  conflict  between  such  application  or  agreement  and this
Agreement, this Agreement shall govern. It is understood and agreed that, except
in the case of gross  negligence or willful  misconduct,  neither the Agents nor
any  Issuing  Bank shall be liable for any error,  negligence  and/or  mistakes,
whether of omission or commission, in following any Loan Party's instructions or
those  contained in the Letters of Credit or any  modifications,  amendments  or
supplements thereto.

                     2.10.6    DETERMINATIONS TO HONOR DRAWING REQUESTS.

                        In  determining whether to honor any request for drawing
under any Letter of Credit by the beneficiary thereof, the Issuing Bank shall be
responsible only to determine that the documents and certificates required to be
delivered  under such Letter of Credit have been  delivered and that they comply
on their face with the requirements of such Letter of Credit.

                     2.10.7    NATURE OF PARTICIPATION AND REIMBURSEMENT
                               OBLIGATIONS.

                        Each Revolving  Credit  Bank's  obligation in accordance
with  this  Agreement  to make  the  Revolving  Credit  Loans  or  Participation
Advances,  as contemplated


                                       32


by Section  2.10.3,  as a result of a drawing under a Letter of Credit,  and the
Obligations  of the Borrower to  reimburse  the Issuing Bank upon a draw under a
Letter of Credit, shall be absolute, unconditional and irrevocable, and shall be
performed strictly in accordance with the terms of this Section 2.10.7 under all
circumstances, including the following circumstances:

                              (i) any set-off, counterclaim, recoupment, defense
or other right  which such  Revolving  Credit Bank may have  against the Issuing
Bank, either Agent, the Borrower or any other Person for any reason whatsoever;

                              (ii) the  failure  of any Loan  Party or any other
Person to comply,  in  connection  with a Letter of Credit  Borrowing,  with the
conditions  set  forth  in  Section  2.1  [Revolving  Credit  Commitments],  2.4
[Revolving Credit Loan Requests, Etc.], 2.4.2 [Making Revolving Credit Loans] or
6.2 [Each Additional Loan or Letter of Credit] or as otherwise set forth in this
Agreement for the making of a Revolving Credit Loan, it being  acknowledged that
such conditions are not required for the making of a Letter of Credit  Borrowing
and the obligation of the Revolving Credit Banks to make Participation  Advances
under Section 2.10.3;

                              (iii) any lack of  validity or  enforceability  of
any Letter of Credit;

                              (iv) the existence of any claim, set-off,  defense
or other right which any Loan Party or any Revolving Credit Bank may have at any
time against a  beneficiary  or any  transferee  of any Letter of Credit (or any
Persons for whom any such transferee may be acting),  either Agent,  any Issuing
Bank, or any Revolving Credit Bank or any other Person or, whether in connection
with this  Agreement,  the  transactions  contemplated  herein or any  unrelated
transaction  (including  any  underlying  transaction  between any Loan Party or
Subsidiaries  of a Loan Party and the beneficiary for which any Letter of Credit
was procured);

                               (v)  any draft,  demand,   certificate  or  other
document presented under any Letter of Credit proving to be forged,  fraudulent,
invalid or insufficient in any respect or any statement  therein being untrue or
inaccurate in any respect even if the Issuing Bank has been notified thereof;

                              (vi)  payment by the Issuing Bank under any Letter
of Credit  against  presentation  of a  demand,  draft or  certificate  or other
document which does not comply with the terms of such Letter of Credit;

                              (vii)  any   adverse   change  in  the   business,
operations,  properties, assets, condition (financial or otherwise) or prospects
of any Loan Party or Subsidiaries of a Loan Party;

                              (viii) any breach of this  Agreement  or any other
Loan Document by any party thereto;


                                       33


                              (ix)   the  occurrence   or   continuance   of  an
Insolvency Proceeding with respect to any Loan Party;

                               (x)   the  fact  that  an  Event of  Default or a
Potential Default shall have occurred and be continuing;

                              (xi)   the  fact  that  the Expiration  Date shall
have  passed or this  Agreement  or the  Commitments  hereunder  shall have been
terminated; and

                              (xii)  any   other   circumstance   or   happening
whatsoever, whether or not similar to any of the foregoing.

                     2.10.8    INDEMNITY.

                        In  addition  to  amounts payable as provided in Section
9.5 [Reimbursement and Indemnification of Agents by the Borrower],  the Borrower
hereby agrees to protect,  indemnify,  pay and save harmless the Agents and each
Issuing Bank from and against any and all claims, demands, liabilities, damages,
losses,  costs,  charges and expenses  (including  reasonable fees, expenses and
disbursements  of counsel)  which any Agent or any Issuing  Bank may incur or be
subject to as a  consequence,  direct or  indirect,  of (i) the  issuance of any
Letter of Credit,  other than as a result of (A) the gross negligence or willful
misconduct of any Agent or an Issuing Bank as determined by a final  judgment of
a court of competent  jurisdiction or (B) subject to the following  clause (ii),
the  wrongful  dishonor by an Issuing  Bank of a proper  demand for payment made
under any Letter of Credit,  or (ii) the  failure of an Issuing  Bank to honor a
drawing  under any such  Letter  of  Credit as a result of any act or  omission,
whether  rightful  or  wrongful,  of any  present  or future de jure or de facto
government or governmental  authority (all such acts or omissions  herein called
"Governmental Acts").

                     2.10.9    LIABILITY FOR ACTS AND OMISSIONS.

                        As between  any  Loan  Party, each  Issuing Bank and the
Agents,  such Loan  Party  assumes  all risks of the acts and  omissions  of, or
misuse of the Letters of Credit by, the respective beneficiaries of such Letters
of Credit.  In furtherance  and not in limitation of the foregoing,  neither any
Agent nor any Issuing Bank shall be  responsible  for:  (i) the form,  validity,
sufficiency,  accuracy, genuineness or legal effect of any document submitted by
any party in connection  with the application for an issuance of any such Letter
of Credit, even if it should in fact prove to be in any or all respects invalid,
insufficient,  inaccurate,  fraudulent or forged (even if the Issuing Bank shall
have been notified thereof);  (ii) the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign any such Letter of
Credit or the rights or benefits  thereunder or proceeds thereof, in whole or in
part,  which may prove to be invalid or  ineffective  for any reason;  (iii) the
failure of the  beneficiary of any such Letter of Credit,  or any other party to
which  such  Letter of Credit  may be  transferred,  to  comply  fully  with any
conditions  required  in order to draw upon  such  Letter of Credit or any other
claim of any Loan Party against any beneficiary of such Letter of Credit, or any
such  transferee,  or any  dispute  between  or  among  any Loan  Party  and any
beneficiary  of any  Letter  of  Credit  or any 

                                       34


such transferee; (iv) errors, omissions, interruptions or delays in transmission
or delivery of any  messages,  by mail,  cable,  telegraph,  telex or otherwise,
whether or not they be in  cipher;  (v) errors in  interpretation  of  technical
terms;  (vi) any loss or delay in the  transmission or otherwise of any document
required  in order to make a drawing  under any such  Letter of Credit or of the
proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter
of Credit of the proceeds of any drawing under such Letter of Credit;  or (viii)
any  consequences  arising from causes beyond the control of any Issuing Bank or
any Agent,  including any Governmental  Acts, and none of the above shall affect
or impair,  or prevent  the  vesting  of,  any of the  Agents'  rights or powers
hereunder  or of any of the  rights or powers  hereunder  of any  Issuing  Bank.
Nothing in the preceding  sentence  shall:  (x) relieve any Agent from liability
for such Agent's  gross  negligence or willful  misconduct  in  connection  with
actions or  omissions  described  in such  clauses  (i)  through  (viii) of such
sentence, or (y) relieve any Issuing Bank from liability for such Issuing Bank's
gross  negligence or willful  misconduct in connection with actions or omissions
described in such clauses (i) through (viii) of such sentence.

                        In  furtherance  and  extension and not in limitation of
the  specific  provisions  set forth  above,  any action taken or omitted by any
Agent or any  Issuing  Bank under or in  connection  with the  Letters of Credit
issued by it or any documents and certificates delivered thereunder, if taken or
omitted in good  faith,  shall not put any Agent or any  Issuing  Bank under any
resulting liability to the Borrower or any other Bank.

            2.11.    EXTENSION BY BANKS OF THE EXPIRATION DATE.

                     2.11.1    REQUESTS; APPROVAL BY ALL BANKS.

                        Upon or promptly  after  delivery by the Borrower of the
annual financial statements to be provided under Section 7.3.2 [Annual Financial
Statements]  for the fiscal year  ending  December  31,  1997 or any  subsequent
fiscal year,  the Borrower  may request a one-year  extension of the  Expiration
Date by written  notice to the  Administrative  Agent,  (and the  Administrative
Agent shall promptly so notify the Revolving  Credit  Banks),  and the Revolving
Credit Banks agree to respond to the Borrower's  request for an extension within
sixty (60) days  following  receipt of the request ( each such sixty day period,
an "Approval  Period");  provided,  however,  that the failure of any  Revolving
Credit  Bank  to  respond  within  such  time  period  shall  not in any  manner
constitute an agreement by such  Revolving  Credit Bank to extend the Expiration
Date. If all Revolving  Credit Banks elect to extend,  the Expiration Date shall
be extended  for a period of one year.  If one or more  Revolving  Credit  Banks
decline to extend or do not respond to  Borrower's  request,  the  provisions of
Section 2.11.2 shall apply.

                     2.11.2    APPROVAL BY REQUIRED BANKS.

                        In the event that one or more Revolving  Credit Banks do
not agree to extend the Expiration Date or do not respond to Borrower's  request
for an extension  within the Approval  Period (each a "Bank to be  Terminated"),
but the Supermajority Required Banks agree to such extension within the Approval
Period then, on or before the last day of the applicable  Approval  Period,  the
Revolving Credit Banks which have agreed to such extension within the

                                       35


applicable  Approval  Period  (each an  "Extending  Bank")  may,  with the prior
written  approval  of the  Borrower  and the  Administrative  Agent,  either (x)
arrange to reduce the  Commitments  to the aggregate of the  Commitments  of the
Extending  Banks  or (y)  arrange  to have  one or more  other  banks  (each  an
"Assignee Bank") purchase all of the outstanding  Loans, if any, of each Bank to
be Terminated  and succeed to and assume the  Commitments  and all other rights,
interests and obligations of each Bank to be Terminated under this Agreement and
the other Loan Documents. Any such reduction of the Commitments to the aggregate
of the  Commitments  of the  Extending  Banks shall be by an  amendment  to this
Agreement and the other Loan Documents  satisfactory to the Administrative Agent
and each of the Extending  Banks.  Any such purchase and assumption shall be (1)
pursuant  to an  Assignment  and  Assumption  Agreement,  (2)  subject to and in
accordance with Section 10.11 [Successors and Assigns], and (3) if any Committed
Loans are outstanding  under the Revolving Credit Euro-Rate Option or if any Bid
Loans are outstanding to such Bank to be Terminated (or the Designated Lender of
such Bank to be  Terminated),  then  effective  on the last day of the  Interest
Period with respect to such Loans.  The  Borrower  shall pay all amounts due and
payable to each Bank to be Terminated on the effective  date of such  Assignment
and Assumption Agreement.  In the event that any Agent shall become a Bank to be
Terminated, the provisions of this Section 2.11 shall be subject to Section 9.14
[Successor  Agent]. In the event that either (x) the aggregate  Commitments have
not been reduced to the aggregate of the  Commitments of the Extending  Banks or
(y) the  Loans  and  Commitments  of each  Bank to be  Terminated  are not fully
assigned and assumed pursuant to Section 2.11.2 on or before the last day of the
applicable  Approval Period,  then the Expiration Date shall not be extended for
any Bank.


                                3. INTEREST RATES

            3.1.    INTEREST RATE OPTIONS.

            The Borrower shall pay interest in respect of the outstanding unpaid
principal  amount  of the  Revolving  Credit  Loans as  selected  by it from the
Revolving Credit Base Rate Option or Revolving Credit Euro-Rate Option set forth
below  applicable  to the  Revolving  Credit Loans,  it being  understood  that,
subject to the provisions of this Agreement,  the Borrower may select  different
Interest Rate Options and different Interest Periods to apply  simultaneously to
the  Revolving  Credit Loans  comprising  different  Borrowing  Tranches and may
convert to or renew one or more Interest Rate Options with respect to all or any
portion of the Revolving Credit Loans comprising any Borrowing Tranche, PROVIDED
that there shall not be at any one time  outstanding more than six (6) Borrowing
Tranches in the  aggregate  among all of the  Revolving  Credit  Loans  accruing
interest at a Revolving Credit Euro-Rate Option,  and provided further that only
the  Revolving  Credit Base Rate  Option  shall  apply to the Swing  Loans.  The
Borrower  shall pay  interest  in respect of the  outstanding  unpaid  principal
amount of each Bid Loan at the rate specified in the related Bid accepted by the
Borrower with respect to which a Bid Loan is made. If at any time the designated
rate applicable to any Loan exceeds such Bank's highest lawful rate, the rate of
interest on such Loan shall be limited to such Bank's highest lawful rate.



                                       36


                     3.1.1     REVOLVING CREDIT INTEREST RATE OPTIONS.

                        The  Borrower  shall  have the right to select  from the
following  Interest  Rate  Options  applicable  to the  Revolving  Credit  Loans
(subject to the provisions above regarding Swing Loans):

                              (i)   REVOLVING   CREDIT  BASE  RATE   OPTION:   A
fluctuating  rate per annum (computed on the basis of a year of 365 or 366 days,
as the case may be,  and  actual  days  elapsed)  equal to the Base  Rate,  such
interest  rate to change  automatically  from time to time  effective  as of the
effective date of each change in the Base Rate; or

                              (ii)   REVOLVING CREDIT EURO-RATE  OPTION:  A rate
per annum  (computed on the basis of a year of 360 days and actual days elapsed)
equal to the Euro-Rate plus the Applicable Margin.

                     3.1.2     RATE QUOTATIONS.

                        The Borrower  may  call  the  Administrative Agent on or
before the date on which a Revolving  Credit Loan  Request is to be delivered to
receive an indication of the rates then in effect as to Revolving  Credit Loans,
but  it is  acknowledged  that  such  projection  shall  not be  binding  on the
Administrative  Agent or the  Revolving  Credit  Banks  nor  affect  the rate of
interest which thereafter is actually in effect when the election is made.

                     3.1.3     CHANGE IN FEES OR INTEREST RATES.

                        If the Applicable Margin or Applicable Facility Fee Rate
is  increased  or reduced  with respect to any period for which the Borrower has
already  paid  interest  or  Facility  Fees,  the  Administrative   Agent  shall
recalculate the additional interest or Facility Fees due from or to the Borrower
and shall,  within  fifteen (15) Business  Days after the Borrower  notifies the
Administrative  Agent of such  increase or  decrease,  give the Borrower and the
Revolving Credit Banks notice of such recalculation.

                               3.1.3.1      Any additional  interest or Facility
Fees due from the  Borrower  shall be paid to the  Administrative  Agent for the
account of the  Revolving  Credit Banks on the next date on which an interest or
fee payment is due; PROVIDED, HOWEVER, that if there are no Loans outstanding or
if the Loans are due and  payable,  such  additional  interest or Facility  Fees
shall be paid  promptly  after  receipt of written  request for payment from the
Administrative Agent.

                               3.1.3.2      Any interest or Facility Fees refund
due to the Borrower shall be credited  against  payments  otherwise due from the
Borrower on the next interest or fee payment due date or, if the Loans have been
repaid and the Revolving Credit Banks are no longer committed to lend under this
Agreement, the Revolving Credit Banks shall pay the Administrative Agent for the
account of the Borrower such interest or Facility Fee refund


                                       37


not later than five Business Days after written  notice from the  Administrative
Agent to the Banks.

            3.2.     REVOLVING CREDIT LOANS INTEREST PERIODS.

            At any time when the Borrower  shall  select,  convert to or renew a
Revolving Credit Euro-Rate Option,  the Borrower shall notify the Administrative
Agent thereof at least three (3) Business  Days prior to the  effective  date of
such Euro-Rate Option by delivering a Loan Request.  The notice shall specify an
interest  period  (the  "Committed  Loan  Interest  Period")  during  which such
Interest Rate Option shall apply, such Committed Loan Interest Period to be one,
two, three or six Months (or nine months, if available to all Banks);  provided,
however,  that  prior  to the date  which  is the  Business  Day  following  the
Syndication  Date,  all  Revolving  Credit Loans made shall be at the  Revolving
Credit  Base Rate Option  only.  Notwithstanding  the  preceding  sentence,  the
following  provisions shall apply to any selection of, renewal of, or conversion
to a Revolving Credit Euro-Rate Option:

                     3.2.1     ENDING DATE AND BUSINESS DAY.

                        any Interest  Period which would otherwise end on a date
which is not a Business  Day shall be extended to the next  succeeding  Business
Day unless such  Business Day falls in the next  calendar  month,  in which case
such Interest Period shall end on the next preceding Business Day;

                     3.2.2     AMOUNT OF BORROWING TRANCHE.

                        each  Borrowing  Tranche of  Revolving  Credit  Loans to
which the Euro-Rate Option applies shall be in integral  multiples of $1,000,000
and not less than $5,000,000;

                     3.2.3     TERMINATION BEFORE EXPIRATION DATE.

                        the  Borrower  shall not select,  convert to or renew an
Interest Period for any portion of the Loans that would end after the Expiration
Date; and

                     3.2.4     RENEWALS.

                        in  the  case  of  the  renewal  of a  Revolving  Credit
Euro-Rate  Option  at the end of an  Interest  Period,  the first day of the new
Interest Period shall be the last day of the preceding Interest Period,  without
duplication in payment of interest for such day.

            3.3.     INTEREST AFTER DEFAULT.

            To the extent  permitted by Law, upon the  occurrence of an Event of
Default  and until  such time such  Event of  Default  shall  have been cured or
waived:



                                       38


                     3.3.1     LETTER OF CREDIT FEES, INTEREST RATE.

                        the Letter of Credit Fees and the rate of  interest  for
each Loan  otherwise  applicable  pursuant to Section  2.10.2  [Letter of Credit
Fees] or Section 3.1 [Interest Rate Options],  respectively,  shall be increased
by 2.0% per annum; and

                     3.3.2     OTHER OBLIGATIONS.

                        each  other  Obligation  hereunder  if not paid when due
shall bear interest at a rate per annum equal to the sum of the rate of interest
applicable  under the Revolving  Credit Base Rate Option plus an additional 2.0%
per annum from the time such Obligation  becomes due and payable and until it is
paid in full.

                     3.3.3     ACKNOWLEDGMENT.

                        The  Borrower  acknowledges  that the  increase in rates
referred to in this Section 3.3 reflects, among other things, the fact that such
Loans or other  amounts  have become a  substantially  greater  risk given their
default  status and that the Banks are entitled to additional  compensation  for
such risk;  and all such  interest  shall be payable by Borrower  upon demand by
Administrative Agent. Upon the occurrence of an Event of Default, no Loan may be
made, converted to or renewed under the Euro-Rate Option.

            3.4.    EURO-RATE UNASCERTAINABLE; ILLEGALITY; INCREASED COSTS;
                    DEPOSITS NOT AVAILABLE.

                     3.4.1     UNASCERTAINABLE.

                        If, on any date on which a Euro-Rate would otherwise
be determined with respect to Committed Loans or Bid Loans,  the  Administrative
Agent shall have determined that:

                               (i)   adequate  and   reasonable   means  do  not
exist for ascertaining such Euro-Rate, or

                               (ii)   a   contingency    has   occurred    which
materially and adversely affects the London interbank eurodollar market relating
to the Euro-Rate,

then the Administrative Agent shall have the rights specified in Section 3.4.3.

                     3.4.2     ILLEGALITY; INCREASED COSTS; DEPOSITS NOT
                               AVAILABLE.

                        If at any time any Bank shall have determined that:

                               (i)    the  making,  maintenance  or  funding  of
any Loan to which a  Euro-Rate  Option  applies has been made  impracticable  or
unlawful  by  compliance  by  such  Bank  in  good  faith  with  any  Law or any
interpretation or application thereof by any Official



                                       39


Body or with any request or directive of any such  Official Body (whether or not
having the force of Law), or

                               (ii)    such Euro-Rate Option will not adequately
and fairly reflect the cost to such Bank of the  establishment or maintenance of
any such Loan, or

                               (iii)   after  making   all   reasonable efforts,
deposits of the relevant amount in Dollars for the relevant  Interest Period for
a Loan to which a Euro-Rate Option applies,  respectively,  are not available to
such Bank with respect to such Loan, in the London interbank market,

then the  Administrative  Agent and the Banks shall have the rights specified in
Section 3.4.3.

                     3.4.3     ADMINISTRATIVE AGENT'S AND BANK'S RIGHTS.

                        In the case of any  event  specified  in  Section  3.4.1
above,  the  Administrative  Agent  shall  promptly  so notify the Banks and the
Borrower thereof,  and in the case of an event specified in Section 3.4.2 above,
such Bank  shall  promptly  so notify  the  Administrative  Agent and  endorse a
certificate to such notice as to the specific  circumstances of such notice, and
the  Administrative  Agent  shall  promptly  send  copies  of  such  notice  and
certificate  to the  other  Banks and the  Borrower.  Upon such date as shall be
specified  in such notice  (which shall not be earlier than the date such notice
is given),  the obligation of (A) the Banks, in the case of such notice given by
the Administrative  Agent, or (B) such Bank, in the case of such notice given by
such Bank,  to allow the  Borrower  to select,  convert to or renew a  Euro-Rate
Option  shall be  suspended  until the  Administrative  Agent  shall  have later
notified the Borrower, or such Bank shall have later notified the Administrative
Agent,  of the  Administrative  Agent's  or such  Bank's,  as the  case  may be,
determination that the circumstances giving rise to such previous  determination
no longer exist. If at any time the  Administrative  Agent makes a determination
under Section 3.4.1 and the Borrower has previously  notified the Administrative
Agent of its  selection of,  conversion to or renewal of a Euro-Rate  Option and
such Interest Rate Option has not yet gone into effect,  such notification shall
be deemed to provide for the termination of Borrower's Bid Loan Request (without
penalty) for such Loans if the Borrower  has  requested  Bid Loans under the Bid
Loan Euro-Rate Option and such  notification  shall be deemed to provide for the
selection of,  conversion to or renewal of the Revolving Credit Base Rate Option
otherwise available with respect to such Loans if the Borrower has requested the
Committed Loan Euro-Rate Option. If any Bank notifies the  Administrative  Agent
of a  determination  under Section  3.4.2,  the Borrower  shall,  subject to the
Borrower's  indemnification  Obligations under Section 4.5.2 [Indemnity],  as to
any Loan of the Bank to which a Euro-Rate Option applies,  on the date specified
in such notice either convert such Loan to the Revolving Credit Base Rate Option
otherwise  available with respect to such Loan or prepay such Loan in accordance
with Section 4.4 [Voluntary Prepayments]. Absent due notice from the Borrower of
conversion  or  prepayment,  such Loan shall  automatically  be converted to the
Revolving Credit Base Rate Option otherwise  available with respect to such Loan
upon such specified date.


                                       40


            3.5.    SELECTION OF INTEREST RATE OPTIONS.

            If the Borrower  fails to select a new  Interest  Period to apply to
any  Borrowing  Tranche of  Revolving  Credit Loans under the  Revolving  Credit
Euro-Rate Option at the expiration of an existing  Interest Period applicable to
such  Borrowing  Tranche  in  accordance  with the  provisions  of  Section  3.2
[Interest  Periods],  the  Borrower  shall  be  deemed  to have  converted  such
Borrowing  Tranche to the Revolving Credit Base Rate Option  commencing upon the
last day of the existing Interest Period.

                                   4. PAYMENTS

            4.1.    PAYMENTS.

            All payments  and  prepayments  to be made in respect of  principal,
interest,  Facility Fees, Letter of Credit Fees,  Administrative  Agent's Fee or
other fees or amounts due from the Borrower  hereunder shall be payable prior to
11:00 a.m.,  Pittsburgh time, on the date when due without presentment,  demand,
protest or notice of any kind, all of which are hereby  expressly  waived by the
Borrower,  and without  set-off,  counterclaim or other deduction of any nature,
and an action therefor shall immediately  accrue. Such payments shall be made to
the  Administrative  Agent at the  Principal  Office for the account of PNC Bank
with  respect to the Swing Loans and for the ratable  accounts of the  Revolving
Credit Banks with respect to the  Revolving  Credit Loans and for the account of
the  lending  Bank  with  respect  to the  Bid  Loans,  in U.S.  Dollars  and in
immediately  available  funds,  and  the  Administrative  Agent  shall  promptly
distribute such amounts to the Banks in immediately  available  funds,  PROVIDED
that in the event payments are received by 11:00 a.m.,  Pittsburgh  time, by the
Administrative  Agent  with  respect  to the  Loans  and such  payments  are not
distributed  to the Banks (or  applicable  Bank, as the case may be) on the same
day received by the Administrative Agent, the Administrative Agent shall pay the
Banks (or applicable  Bank, as the case may be) the Federal Funds Effective Rate
with  respect  to  the  amount  of  such  payments  for  each  day  held  by the
Administrative  Agent and not  distributed to the Banks (or applicable  Bank, as
the case may be).  The  Administrative  Agent's  and each  Bank's  statement  of
account,  ledger or other  relevant  record  shall,  in the  absence of manifest
error, be conclusive as the statement of the amount of principal of and interest
on the Loans and other amounts owing under this Agreement and shall be deemed an
"account stated."

            4.2.    PRO RATA TREATMENT OF BANKS.

            Each borrowing of Revolving  Credit Loans shall be allocated to each
Revolving Credit Bank according to its Ratable Share (irrespective of the amount
of Bid Loans  outstanding),  and each selection of,  conversion to or renewal of
any Interest Rate Option  applicable to Revolving  Credit Loans and each payment
or  prepayment  by the  Borrower  with  respect to  principal or interest on the
Revolving  Credit Loans or Facility  Fees,  Letter of Credit Fees, or other fees
(except for the  Administrative  Agent's  Fee) or amounts due from the  Borrower
hereunder to the  Revolving  Credit Banks with respect to the  Revolving  Credit
Loans, shall (except as provided in Section 3.4.3 [Agents' and Bank's Rights] in
the case of an event 

                                       41


specified  in Section 3.4  [Euro-Rate  Unascertainable,  Etc.],  4.4  [Voluntary
Prepayments] or 4.5 [Additional  Compensation in Certain Circumstances]) be made
in proportion to the applicable  Revolving  Credit Loans  outstanding  from each
Revolving Credit Bank and, if no such Loans are then outstanding,  in proportion
to the Ratable Share of each Revolving Credit Bank. Each borrowing of a Bid Loan
shall be made according to the provisions in Section 2.9 hereof and each payment
or prepayment by the Borrower of principal, interest, fees or other amounts from
the Borrower  with respect to Bid Loans shall be made to the Banks in proportion
to the  amounts  of such  items due to such  Banks.  Notwithstanding  any of the
foregoing, each borrowing or payment or prepayment by the Borrower of principal,
interest or other amounts from the Borrower with respect to Swing Loans shall be
made by or to PNC Bank according to Section 2.

            4.3.    INTEREST PAYMENT DATES.

            Interest on Committed Loans to which the Revolving  Credit Base Rate
applies  shall be due and payable in arrears on the first  Business  Day of each
July,  October,  January and April  after the date hereof and on the  Expiration
Date or upon acceleration of the Loans.  Interest on Committed Loans (other than
Swing Loans) and Bid Loans to which the Euro-Rate  Option  applies and Bid Loans
to which the Bid Loan Fixed Rate Option  applies shall be due and payable on the
last day of each Interest Period for those Loans and, if such Interest Period is
longer than three (3) Months, also on the 90th day (and if applicable, the 180th
day) of such Interest  Period.  Interest on the principal amount of each Loan or
other  monetary  Obligation  shall  be due and  payable  on  demand  after  such
principal amount or other monetary  Obligation  becomes due and payable (whether
on the stated maturity date, upon acceleration or otherwise).

            4.4.     VOLUNTARY PREPAYMENTS.

                     4.4.1     RIGHT TO PREPAY.

                        The  Borrower  shall have the right at its  option  from
time to time to  prepay  the  Revolving  Credit  Loans in whole or part  without
premium or penalty  (except as provided in Section 4.4.2 below or in Section 4.5
[Additional Compensation in Certain Circumstances]):

                               (i)    at  any   time   with   respect   to   any
Revolving Credit Loan to which the Revolving Credit Base Rate Option applies,

                               (ii)   on  the  last  day  of   the    applicable
Interest  Period with  respect to  Revolving  Credit  Loans to which a Euro-Rate
Option applies,

                               (iii)  on the date specified  in a notice  by any
Revolving Credit Bank pursuant to Section 3.4 [Euro-Rate Unascertainable,  Etc.]
with respect to any Revolving Credit Loan to which a Euro-Rate Option applies.

                        Whenever the Borrower  desires to prepay any part of the
Revolving  Credit Loans or Swing Loans, it shall provide a prepayment  notice to
the



                                       42


Administrative  Agent by 1:00 p.m.  at least one (1)  Business  Day prior to the
date of  prepayment  of the  Revolving  Credit Loans or no later than 1:00 p.m.,
Pittsburgh  time,  on the date of  prepayment  of Swing Loans  setting forth the
following information:

                  (x)   the date, which  shall be a Business Day, on  which  the
            proposed prepayment is to be made;

                  (y)   the application of  the  prepayment  between  the  Swing
            Loans and the Revolving Credit Loans; and

                  (z)   the total principal amount  of  such  prepayment,  which
            shall not be less than $5,000,000 for any Revolving Credit Loan, and
            in  increments  of  $1,000,000  above  $5,000,000  and not less than
            $1,000,000  for Swing Loans,  and in  increments  of $100,000  above
            $1,000,000.

                  All  prepayment  notices shall be  irrevocable.  The principal
amount of the  Revolving  Credit  Loans or Swing  Loans  for which a  prepayment
notice is given,  together  with interest on such  principal  amount except with
respect to Revolving Credit Loans to which the Revolving Credit Base Rate Option
applies,  shall be due and  payable  on the date  specified  in such  prepayment
notice as the date on which the  proposed  prepayment  is to be made.  Except as
provided in Section 3.4.3 [Agents' and Bank's Rights], if the Borrower prepays a
Revolving  Credit Loan but fails to specify  the  applicable  Borrowing  Tranche
which the Borrower is prepaying,  the  prepayment  shall be applied (i) first to
Revolving  Credit Loans to which the Revolving  Credit Base Rate Option applies,
then to Revolving  Credit Loans to which the Revolving  Credit  Euro-Rate Option
applies. Any prepayment hereunder shall be subject to the Borrower's  Obligation
to indemnify the Revolving  Credit Banks under  Section 4.5.2  [Indemnity].  Bid
Loans can not be prepaid by the Borrower.

                     4.4.2     REPLACEMENT OF A BANK.

                        In the event any Bank (i) gives notice under Section 3.4
[Euro-Rate Unascertainable, Etc.] or Section 4.5.1 [Increased Costs, Etc.], (ii)
does not fund  Revolving  Credit  Loans or Bid Loans  because the making of such
Loans would contravene any Law applicable to such Bank, or (iii) becomes subject
to  the  control  of  an  Official   Body  (other  than  normal  and   customary
supervision),  then the  Borrower  shall have the right at its option,  with the
consent of the Administrative  Agent, which shall not be unreasonably  withheld,
to prepay the Loans of such Bank in whole,  together  with all interest  accrued
thereon,  and terminate such Bank's Commitment within ninety (90) days after (w)
receipt of such Bank's  notice  under  Section 3.4  [Euro-Rate  Unascertainable,
Etc.] or 4.5.1  [Increased  Costs,  Etc.],  (x) the date such Bank has failed to
fund Revolving  Credit Loans or Bid Loans because the making of such Loans would
contravene  Law  applicable to such Bank,  (y) the date of obtaining the consent
which such Bank has not  approved,  or (z) the date such Bank became  subject to
the control of an Official Body, as applicable; PROVIDED that the Borrower shall
also pay to such Bank at the time of such prepayment any amounts  required under
Section 4.5 [Additional  Compensation in Certain  Circumstances] and any accrued
interest due on such amount and any related fees; PROVIDED,

                                       43


however,  that the Commitment and any Bid Loan of such Bank shall be provided by
one or more of the  remaining  Banks or a  replacement  bank  acceptable  to the
Administrative  Agent and the Issuing Banks;  PROVIDED,  further,  the remaining
Banks shall have no  obligation  hereunder  to  increase  their  Commitments  or
provide  the  Bid  Loan  of  such  Bank.   Notwithstanding  the  foregoing,  the
Administrative Agent may only be replaced subject to the requirements of Section
9.14  [Successor  Agent] and an Issuing Bank may only be replaced if all Letters
of Credit  issued  by such  Issuing  Bank have  expired  or been  terminated  or
replaced.

                     4.4.3     CHANGE OF LENDING OFFICE.

                        Each Bank agrees that upon the  occurrence  of any event
giving rise to increased  costs or other  special  payments  under Section 3.4.2
[Illegality,  Etc.] or 4.5.1 [Increased Costs,  Etc.] with respect to such Bank,
it will if requested by the Borrower, use reasonable efforts (subject to overall
policy  considerations of such Bank) to designate another lending office for any
Loans  or  Letters  of  Credit  affected  by  such  event,  PROVIDED  that  such
designation  is made on such terms that such Bank and its lending  office suffer
no economic, legal or regulatory  disadvantage,  with the object of avoiding the
consequence  of the event giving rise to the operation of such Section.  Nothing
in this Section  4.4.3 shall affect or postpone  any of the  Obligations  of the
Borrower or any other Loan Party or the rights of any Agent or any Bank provided
in this Agreement.

                     4.4.4     VOLUNTARY REDUCTION OF COMMITMENTS.

                        The Borrower shall have the right, upon not less than
five Business Days' written  irrevocable notice to the Administrative  Agent, to
terminate  the  Commitments  or, from time to time,  to reduce the amount of the
Commitments,  which  notice  shall  specify  the  date  and  amount  of any such
reduction  and  otherwise  be  substantially  in the  form of  EXHIBIT  4.4.4 (a
"Commitment Reduction Notice").  Any such reduction shall be in a minimum amount
equal to  $5,000,000 or an integral  multiple of  $1,000,000 in excess  thereof,
provided,  that the Commitment may not be reduced below the sum of the aggregate
principal amount of all Revolving  Facility Usage. Each reduction of Commitments
shall ratably reduce the Commitments of the Revolving Credit Banks.

            4.5.     ADDITIONAL COMPENSATION IN CERTAIN CIRCUMSTANCES.

                     4.5.1     INCREASED COSTS OR REDUCED RETURN RESULTING FROM
                               TAXES, RESERVES, CAPITAL  ADEQUACY  REQUIREMENTS,
                               EXPENSES, ETC.

                        If any Law, guideline or interpretation or any change in
any Law, guideline or interpretation or application thereof by any Official Body
charged with the interpretation or administration thereof or compliance with any
request or  directive  (whether  or not having the force of Law) of any  central
bank or other Official Body:

                               (i)   subjects  any  Bank to any tax or   changes
the basis of taxation with respect to this Agreement, the Committed Loans or the
Bid Loans or payments by 

                                       44


the Borrower of principal,  interest,  Facility  Fees, or other amounts due from
the  Borrower  hereunder  (except  for taxes on the  overall  net income of such
Bank),

                               (ii)   imposes, modifies  or  deems    applicable
any  reserve,   special  deposit  or  similar  requirement  against  credits  or
commitments to extend credit  extended by, or assets (funded or contingent)  of,
deposits  with or for the  account  of, or other  acquisitions  of funds by, any
Bank, or

                               (iii)  imposes, modifies or deems applicable  any
capital   adequacy  or  similar   requirement  (A)  against  assets  (funded  or
contingent)  of, or letters of credit,  other credits or  commitments  to extend
credit extended by, any Bank, or (B) otherwise  applicable to the obligations of
any Bank under this Agreement,

and the result of any of the  foregoing is to increase  the cost to,  reduce the
income receivable by, or impose any expense  (including loss of margin) upon any
Bank with respect to this  Agreement,  or the making,  maintenance or funding of
any part of the Committed Loans or the Bid Loans (or, in the case of any capital
adequacy  or similar  requirement,  to have the effect of  reducing  the rate of
return on any Bank's capital,  taking into  consideration  such Bank's customary
policies  with respect to capital  adequacy) by an amount which such Bank in its
sole discretion  deems to be material,  such Bank shall from time to time notify
the Borrower and the Administrative Agent of the amount determined in good faith
(using any averaging  and  attribution  methods  employed in good faith) by such
Bank to be  necessary  to  compensate  such  Bank  for  such  increase  in cost,
reduction of income,  additional expense or reduced rate of return.  Such notice
shall set forth in  reasonable  detail  the basis for such  determination.  Such
amount shall be due and payable by the  Borrower to such Bank ten (10)  Business
Days after such notice is given.

                     4.5.2     INDEMNITY.

                        In  addition  to the  compensation  required  by Section
4.5.1  [Increased  Costs,  Etc.], the Borrower shall indemnify each Bank against
all  liabilities,  losses or  expenses  (including  loss of margin,  any loss or
expense incurred in liquidating or employing deposits from third parties and any
loss or expense  incurred in connection with funds acquired by a Bank to fund or
maintain Loans subject to a Euro-Rate  Option or the Bid Loan Fixed Rate Option)
which such Bank sustains or incurs as a consequence of any

                               (i)    payment, prepayment, conversion or renewal
of any Loan to  which a  Euro-Rate  Option  or the Bid Loan  Fixed  Rate  Option
applies on a day other than the last day of the  corresponding  Interest  Period
(whether or not such payment or prepayment is mandatory,  voluntary or automatic
and whether or not such payment or prepayment is then due),

                               (ii)   attempt   by  the   Borrower   to   revoke
(expressly,  by later  inconsistent  notices or  otherwise) in whole or part any
Loan Requests under Section 2.4 [Revolving Credit Loan Requests,  Etc.], Section
2.4.2 [Swing Loan Requests], Section 2.9 [Bid

                                       45


Loan  Facility]  or Section  3.1.3  [Interest  Periods]  or notice  relating  to
prepayments under Section 4.4 [Voluntary Prepayments], or

                               (iii)  default by the Borrower in the performance
or  observance of any covenant or condition  contained in this  Agreement or any
other Loan  Document,  including any failure of the Borrower to pay when due (by
acceleration  or otherwise) any principal of or interest on the Committed  Loans
or the Bid Loans, Facility Fees or any other amount due hereunder; or

                               (iv)   payment or  prepayment  of any Bid Loan on
a day other than the  maturity  date  thereof  (whether  or not such  payment or
prepayment is mandatory or voluntary).

                        If any Bank sustains or incurs any such loss or expense,
it shall from time to time notify the Borrower of the amount  determined in good
faith  by  such  Bank  (which   determination   may  include  such  assumptions,
allocations of costs and expenses and averaging or  attribution  methods as such
Bank shall deem reasonable) to be necessary to indemnify such Bank for such loss
or expense.  Such notice shall set forth in reasonable detail the basis for such
determination. Such amount shall be due and payable by the Borrower to such Bank
ten (10) Business Days after such notice is given.

            4.6.    NOTES.

            Upon the request of any Bank,  the  Revolving  Credit  Loans made by
such Bank may be  evidenced  by a  Revolving  Credit Note in the form of EXHIBIT
1.1(R).

            4.7.    SETTLEMENT DATE PROCEDURES.

            In order to minimize  the  transfer of funds  between the  Revolving
Credit Banks and the  Administrative  Agent, the Borrower may borrow,  repay and
reborrow  Swing  Loans and PNC Bank may make Swing  Loans as provided in Section
2.4 hereof  during the period  between  Settlement  Dates.  Not later than 11:00
a.m.,  on each  Settlement  Date,  the  Administrative  Agent shall  notify each
Revolving  Credit Bank of its Ratable Share of the total of the Revolving Credit
Loans  and the  Swing  Loans  (each a  "Required  Share").  Prior to 2:00  p.m.,
Pittsburgh  time, on such Settlement  Date, each Revolving Credit Bank shall pay
to the  Administrative  Agent the amount  equal to the  difference  between  its
Required  Share and its Revolving  Credit Loans,  and the  Administrative  Agent
shall pay to each  Revolving  Credit Bank its Ratable Share of all payments made
by the Borrower to the Administrative Agent with respect to the Revolving Credit
Loans. The Administrative  Agent shall also effect settlement in accordance with
the foregoing  sentence on the proposed  Borrowing  Dates for  Revolving  Credit
Loans and may at its option effect  settlement on any other  Business Day. These
settlement  procedures  are  established  solely as a matter  of  administrative
convenience,  and  nothing  contained  in this  Section  4.7 shall  relieve  the
Revolving  Credit Banks of their  obligations to fund Revolving  Credit Loans on
dates other than a Settlement Date pursuant to Section 2.1.2. The Administrative
Agent may at any time for any reason  whatsoever  require each Revolving  Credit
Bank to pay immediately to the 



                                       46


Administrative  Agent such Bank's  Ratable  Share of the  outstanding  Revolving
Credit  Loans,  and each  Revolving  Credit  Bank may at any  time  require  the
Administrative  Agent  to pay  immediately  to such  Revolving  Credit  Bank its
Ratable Share of all payments made by the Borrower to the  Administrative  Agent
with respect to the Revolving Credit Loans.


                        5. REPRESENTATIONS AND WARRANTIES

            5.1.     REPRESENTATIONS AND WARRANTIES.

            The Borrower  represents  and warrants to the Agents and each of the
Banks as follows:

                     5.1.1     ORGANIZATION AND QUALIFICATION.

                        Each Loan Party and each  Subsidiary  of each Loan Party
is a  corporation,  partnership  or limited  liability  company duly  organized,
validly  existing and in good  standing  under the laws of its  jurisdiction  of
organization.  Each Loan  Party and each  Subsidiary  of each Loan Party has the
lawful  power to own or lease its  properties  and to engage in the  business it
presently  conducts or proposes to conduct.  Each Loan Party and each Subsidiary
of each Loan Party is duly  licensed or qualified  and in good  standing in each
jurisdiction  where the  property  owned or  leased  by it or the  nature of the
business  transacted  by  it or  both  makes  such  licensing  or  qualification
necessary.

                     5.1.2     SHARES OF BORROWER; SUBSIDIARIES; AND
                               SUBSIDIARY SHARES.

                        SCHEDULE 5.1.2 states the name of each of the Borrower's
Subsidiaries,  its jurisdiction of incorporation,  its authorized capital stock,
the  issued  and  outstanding  shares  (referred  to herein  as the  "Subsidiary
Shares")  and  the  owners  thereof  if it  is a  corporation,  its  outstanding
partnership  interests (the "Partnership  Interests") if it is a partnership and
its outstanding  limited  liability  company  interests,  interests  assigned to
managers  thereof  and  the  voting  rights   associated   therewith  (the  "LLC
Interests") if it is a limited liability company. SCHEDULE 5.1.2 also sets forth
the jurisdiction of incorporation of the Borrower,  its authorized capital stock
(the "Borrower Shares") and the voting rights associated therewith. The Borrower
and each Subsidiary of the Borrower has good and marketable  title to all of the
Subsidiary Shares,  Partnership  Interests and LLC Interests it purports to own,
free and clear in each case of any Lien. All Borrower Shares, Subsidiary Shares,
Partnership  Interests  and LLC  Interests  have been  validly  issued,  and all
Borrower Shares, Subsidiary Shares are fully paid and nonassessable. All capital
contributions and other consideration  required to be made or paid in connection
with the issuance of the Partnership  Interests and LLC Interests have been made
or paid,  as the case may be.  There are no options,  warrants  or other  rights
outstanding to purchase any such Borrower Shares, Subsidiary Shares, Partnership
Interests or LLC Interests except as indicated on SCHEDULE 5.1.2.

                                       47


                     5.1.3     POWER AND AUTHORITY.

                        Each Loan Party has full power to enter  into,  execute,
deliver and carry out this Agreement and the other Loan Documents to which it is
a party,  to incur the  Indebtedness  contemplated  by the Loan Documents and to
perform its Obligations under the Loan Documents to which it is a party, and all
such actions have been duly authorized by all necessary proceedings on its part.
Each person party to the Merger Agreement has full power to enter into, execute,
deliver and perform the Merger  Agreement  to which it is a party,  and all such
actions have been duly authorized by all necessary proceedings on its part.

                     5.1.4     VALIDITY AND BINDING EFFECT.

                        This  Agreement  has been duly and validly  executed and
delivered by each Loan Party,  and each other Loan Document which any Loan Party
is  required  to execute  and deliver on or after the date hereof will have been
duly  executed and delivered by such Loan Party on the required date of delivery
of such Loan Document.  This Agreement and each other Loan Document constitutes,
or will  constitute,  legal,  valid and binding  obligations  of each Loan Party
which is or will be a party  thereto on and after its date of delivery  thereof,
enforceable  against such Loan Party in accordance with its terms, except to the
extent  that  enforceability  of any of such Loan  Document  may be  limited  by
bankruptcy,  insolvency,  reorganization,   moratorium  or  other  similar  laws
affecting  the  enforceability  of creditors'  rights  generally or limiting the
right of specific  performance.  The Merger  Agreement has been duly and validly
executed  and  delivered  by each  person  party  thereto.  The  Merger has been
consummated  in accordance  with the terms of the Merger  Agreement.  The Merger
Agreement  constitutes  the legal,  valid and binding  obligation of each person
party thereto, enforceable against each such person in accordance with the terms
thereof, except to the extent that enforceability of the Merger Agreement may be
limited by bankruptcy, insolvency,  reorganization,  moratorium or other similar
law, affecting the enforceability of creditors' rights generally or limiting the
right of specific performance.

                     5.1.5     NO CONFLICT.

                        Neither the execution and delivery of this  Agreement or
the other Loan Documents by any Loan Party or the Merger Agreement by any person
party  thereto,  nor the  consummation  of the  transactions  herein or  therein
contemplated  or compliance  with the terms and provisions  hereof or thereof by
any of them will  conflict  with,  constitute  a default  under or result in any
breach of (i) the terms and  conditions  of the  certificate  of  incorporation,
bylaws, certificate of limited partnership,  partnership agreement,  certificate
of  formation,  limited  liability  company  agreement  or other  organizational
documents  of any  Loan  Party or in the case of the  Merger  Agreement,  of any
person party thereto or (ii) any Law or any material  agreement or instrument or
order,  writ,  judgment,  injunction  or decree to which any person party to the
Merger  Agreement  or any Loan  Party or any  Subsidiary  of any Loan Party is a
party or by which any of the  foregoing  persons is bound or to which any of the
foregoing  persons is subject,  or result in the creation or  enforcement of any
Lien, charge or encumbrance whatsoever upon any

                                       48


property (now or hereafter acquired) of any person party to the Merger Agreement
or of any Loan  Party or any  Subsidiary  of any Loan  Party  (other  than Liens
granted under the Loan Documents).

                     5.1.6     LITIGATION.

                        There   are   no   actions,   suits,    proceedings   or
investigations  pending  or,  to the  knowledge  of any Loan  Party,  threatened
against  such Loan Party or any  Subsidiary  of such Loan Party at law or equity
before any Official Body which individually or in the aggregate could reasonably
be expected to result in any Material  Adverse Change.  None of the Loan Parties
or any  Subsidiaries  of any Loan  Party is in  violation  of any  order,  writ,
injunction or any decree of any Official Body which could reasonably be expected
to result in any Material Adverse Change.

                     5.1.7     FINANCIAL STATEMENTS.

                               (i)   HISTORICAL STATEMENTS.  The  Borrower   has
delivered  to  the  Administrative  Agent  copies  of its  audited  consolidated
year-end  financial  statements  for and as of the end of the fiscal  year ended
December  31, 1996 (the  "Annual  Statements").  In  addition,  the Borrower has
delivered  to the  Administrative  Agent  copies of its  unaudited  consolidated
interim  financial  statements  for the fiscal year to date and as of the end of
the fiscal quarter ended March 31, 1997 (the "Interim  Statements")  (the Annual
and  Interim  Statements  being  collectively  referred  to as  the  "Historical
Statements"). The Historical Statements were compiled from the books and records
maintained  by the  Borrower's  management,  are correct and complete and fairly
represent  the  consolidated   financial  condition  of  the  Borrower  and  its
Subsidiaries  as of their  dates and the  results of  operations  for the fiscal
periods then ended and have been prepared in accordance  with GAAP  consistently
applied,  subject (in the case of the  Interim  Statements)  to normal  year-end
audit adjustments.

                               (ii)   ACCURACY OF FINANCIAL STATEMENTS.  Neither
the Borrower nor any Subsidiary of the Borrower has any liabilities,  contingent
or otherwise,  or forward or long-term commitments that are not disclosed in the
Historical  Statements or in the notes thereto,  and except as disclosed therein
there are no  unrealized  or  anticipated  losses  from any  commitments  of the
Borrower or any Subsidiary of the Borrower which could reasonably be expected to
cause a Material  Adverse Change.  Since December 31, 1996, no Material  Adverse
Change has occurred.

                     5.1.8     USE OF PROCEEDS; MARGIN STOCK; SECTION 20
                               SUBSIDIARIES.

                               5.1.8.1     GENERAL.

                          The Loan  Parties  intend to use the  proceeds  of the
Loans in accordance with Sections 2.7 and 7.1.9.

                                       49


                               5.1.8.2     MARGIN STOCK.

                          None of the Loan Parties nor any  Subsidiaries  of any
Loan Party engages or intends to engage principally,  or as one of its important
activities,  in the business of extending  credit for the purpose,  immediately,
incidentally  or ultimately,  of purchasing or carrying margin stock (within the
meaning of  Regulation  U). No part of the proceeds of any Loan has been or will
be used,  immediately,  incidentally  or  ultimately,  to  purchase or carry any
margin  stock or to extend  credit to others for the  purpose of  purchasing  or
carrying any margin stock or to refund Indebtedness originally incurred for such
purpose,  or  for  any  purpose  which  entails  a  violation  of  or  which  is
inconsistent with the provisions of the regulations of the Board of Governors of
the Federal Reserve  System.  None of the Loan Parties nor any Subsidiary of any
Loan Party holds or intends to hold margin  stock in such amounts that more than
25% of the reasonable value of the assets of any Loan Party or Subsidiary of any
Loan Party are or will be represented by margin stock.

                               5.1.8.3     SECTION 20 SUBSIDIARIES.

                          The Loan  Parties  do not  intend to use and shall not
use any  portion  of the  proceeds  of the Loans,  directly  or  indirectly  (i)
knowingly to purchase any  Ineligible  Securities  from a Section 20  Subsidiary
during  any period in which such  Section 20  Subsidiary  makes a market in such
Ineligible  Securities,  (ii) knowingly to purchase  during the  underwriting or
placement period Ineligible Securities being underwritten or privately placed by
a Section 20  Subsidiary,  or (iii) to make payments of principal or interest on
Ineligible  Securities   underwritten  or  privately  placed  by  a  Section  20
Subsidiary  and issued by or for the benefit of any Loan Party or any  Affiliate
of any Loan Party.

                     5.1.9     FULL DISCLOSURE.

                          Neither this  Agreement  nor any other Loan  Document,
nor the Merger  Agreement  nor any  certificate,  statement,  agreement or other
documents  furnished  to the  Administrative  Agent  or any  Bank in  connection
herewith or therewith, contains any untrue statement of a material fact or omits
to state a material  fact  necessary in order to make the  statements  contained
herein and therein,  in light of the  circumstances  under which they were made,
not  misleading.  There  is no fact  known to any Loan  Party  which  materially
adversely affects the business,  financial condition or results of operations of
any Loan Party or  Subsidiary  of any Loan Party which has not been set forth in
this Agreement or in the certificates, statements, agreements or other documents
furnished  in writing to the  Administrative  Agent and the Banks prior to or at
the date hereof in connection with the transactions contemplated hereby.

                     5.1.10    TAXES.

                          All  federal,  state,  local  and  other  tax  returns
required to have been filed with respect to each Loan Party and each  Subsidiary
of each Loan Party have been filed,  and payment or adequate  provision has been
made for the  payment of all taxes,  fees,  assessments  and other  governmental
charges which have or may become due pursuant to said returns or to

                                       50


assessments  received,  except to the extent that such taxes, fees,  assessments
and other charges are being  contested in good faith by appropriate  proceedings
diligently   conducted  and  for  which  such  reserves  or  other   appropriate
provisions, if any, as shall be required by GAAP shall have been made. There are
no  agreements  or  waivers   extending  the  statutory  period  of  limitations
applicable  to any federal  income tax return of any Loan Party or Subsidiary of
any Loan Party for any period.

                     5.1.11    CONSENTS AND APPROVALS.

                          No   consent,    approval,    exemption,    order   or
authorization  of, or a  registration  or filing with,  any Official Body or any
other  Person is required by any Law or any  agreement  in  connection  with the
execution,  delivery  and  carrying  out of this  Agreement  and the other  Loan
Documents by any Loan Party,  except as listed on SCHEDULE 5.1.11,  all of which
shall  have been  obtained  or made on or prior to the  Closing  Date  except as
otherwise  indicated on SCHEDULE 5.1.11.  All consents,  approvals,  exemptions,
orders or authorization of, or registration or filing with, any Official Body or
any other Person as required by any Law or any agreement in connection  with the
execution, delivery and carrying out of the Merger in accordance with the Merger
Agreement and the other Merger  Documents have been obtained or made on or prior
to the Closing Date, except as otherwise indicated on SCHEDULE 5.1.11.

                     5.1.12    NO EVENT OF DEFAULT; COMPLIANCE WITH
                               INSTRUMENTS.

                          No  event  has  occurred  and  is  continuing  and  no
condition  exists or will exist after giving  effect to the  borrowings or other
extensions  of credit to be made on the  Closing  Date under or  pursuant to the
Loan Documents which constitutes an Event of Default or Potential Default.  None
of the Loan Parties or any Subsidiaries of any Loan Party is in violation of (i)
any term of its  certificate of  incorporation,  bylaws,  certificate of limited
partnership,  partnership agreement, certificate of formation, limited liability
company  agreement  or  other  organizational  documents  or (ii)  any  material
agreement  or  instrument  to  which  it is a party or by which it or any of its
properties  may be subject or bound  where such  violation  would  constitute  a
Material Adverse Change.

                     5.1.13    INSURANCE.

                          No notice  has been given or claim made and no grounds
exist to cancel or avoid any of such policies or bonds or to reduce the coverage
provided  thereby.  Such  policies  and bonds  provide  adequate  coverage  from
reputable and  financially  sound  insurers in amounts  sufficient to insure the
assets  and risks of each Loan Party and each  Subsidiary  of each Loan Party in
accordance  with prudent  business  practice in the industry of the Loan Parties
and their Subsidiaries.

                     5.1.14    COMPLIANCE WITH LAWS.

                          The  Loan  Parties  and  their   Subsidiaries  are  in
compliance  in all  material  respects  with all  applicable  Laws  (other  than
Environmental Laws which are specifically

                                       51


addressed in Section 5.1.18  [Environmental  Matters]) in all  jurisdictions  in
which any Loan Party or  Subsidiary of any Loan Party is doing  business  except
where the failure to do so would not constitute a Material Adverse Change.

                     5.1.15    INVESTMENT COMPANIES; REGULATED ENTITIES.

                          None of the Loan  Parties or any  Subsidiaries  of any
Loan Party is an  "investment  company"  registered or required to be registered
under  the  Investment  Company  Act  of  1940  or  under  the  "control"  of an
"investment  company" as such terms are defined in the Investment Company Act of
1940 and shall not become such an "investment  company" or under such "control."
None of the Loan Parties or any Subsidiaries of any Loan Party is subject to any
other  Federal or state  statute or  regulation  limiting  its  ability to incur
Indebtedness for borrowed money.

                     5.1.16    PLANS AND BENEFIT ARRANGEMENTS.

                               (i)   The Borrower and each  other  member of the
ERISA Group are in  compliance  in all  material  respects  with any  applicable
provisions  of  ERISA  with  respect  to all  Benefit  Arrangements,  Plans  and
Multiemployer  Plans.  There has been no Prohibited  Transaction with respect to
any Benefit  Arrangement  or any Plan or, to the best knowledge of the Borrower,
with respect to any  Multiemployer  Plan or Multiple  Employer Plan, which could
result in any  material  liability  of the  Borrower or any other  member of the
ERISA Group.  The  Borrower  and all other  members of the ERISA Group have made
when due any and all payments  required to be made under any agreement  relating
to a  Multiemployer  Plan or a  Multiple  Employer  Plan  or any Law  pertaining
thereto. With respect to each Plan and Multiemployer Plan, the Borrower and each
other  member of the ERISA Group (i) have  fulfilled  in all  material  respects
their  obligations  under the minimum funding  standards of ERISA, (ii) have not
incurred any liability to the PBGC, and (iii) have not had asserted against them
any penalty for failure to fulfill the minimum  funding  requirements  of ERISA.
All Plans,  Benefit  Arrangements and Multiemployer Plans have been administered
in accordance with their terms and applicable Law.

                               (ii)   No  event  requiring   notice  to the PBGC
under Section  302(f)(4)(A)  of ERISA has occurred or is reasonably  expected to
occur with respect to any Plan,  and no amendment with respect to which security
is required  under Section 307 of ERISA has been made or is reasonably  expected
to be made to any Plan.

                               (iii)  Neither the  Borrower nor any other member
of the ERISA Group has  incurred  or  reasonably  expects to incur any  material
withdrawal  liability under ERISA to any Multiemployer Plan or Multiple Employer
Plan.  Neither  the  Borrower  nor any other  member of the ERISA Group has been
notified  by  any  Multiemployer  Plan  or  Multiple  Employer  Plan  that  such
Multiemployer  Plan or Multiple  Employer  Plan has been  terminated  within the
meaning of Title IV of ERISA and,  to the best  knowledge  of the  Borrower,  no
Multiemployer  Plan or  Multiple  Employer  Plan is  reasonably  expected  to be
reorganized or terminated, within the meaning of Title IV of ERISA.


                                       52


                     5.1.17    EMPLOYMENT MATTERS.

                        Each of the Loan Parties and each of their  Subsidiaries
is in  substantial  compliance  with  the  Labor  Contracts  and all  applicable
federal,  state and local labor and employment  Laws including  those related to
equal employment  opportunity and affirmative action,  labor relations,  minimum
wage, overtime,  child labor, medical insurance continuation,  worker adjustment
and  relocation  notices,  immigration  controls  and  worker  and  unemployment
compensation,  where the failure to comply would  constitute a Material  Adverse
Change.  There are no  outstanding  grievances,  arbitration  awards or  appeals
therefrom  arising out of the Labor Contracts or current or threatened  strikes,
picketing, handbilling or other work stoppages or slowdowns at facilities of any
of the Loan  Parties  or any of  their  Subsidiaries  which  in any  case  would
constitute a Material Adverse Change.

                     5.1.18    ENVIRONMENTAL MATTERS.

                       The Loan Parties and their Subsidiaries are and have been
in substantial  compliance with all Environmental Laws, except where the failure
to so comply could not  reasonably  be expected to result in a Material  Adverse
Change.  Neither any  property of any Loan Party or any  Subsidiary  of any Loan
Party nor their respective  operations  conducted  thereon violates any order of
any court of governmental  authority made pursuant to Environmental  Laws except
for noncompliance with respect thereto which could not reasonably be expected to
result  in a  Material  Adverse  Change . There  are no  threatened  or  pending
Environmental  Claims against any Loan Party or any Subsidiary of any Loan Party
which  could  reasonably  be expected  to result in a Material  Adverse  Change.
Neither any Loan Party nor any  Subsidiary  of any Loan Party has  received  any
notice  from any  governmental  or  regulatory  authority  regarding  actual  or
contingent liability in connection with any release or threatened release of any
Hazardous  Substance into the environment  which actual or contingent  liability
could reasonably be expected to result in a Material Adverse Change.

                     5.1.19    SENIOR DEBT STATUS.

                        The Obligations of each Loan Party under this Agreement,
the  Guaranty  Agreement  and each of the other Loan  Documents to which it is a
party do rank and will rank at least PARI PASSU in priority of payment  with all
other Indebtedness of such Loan Party except  Indebtedness of such Loan Party to
the extent secured by Permitted Liens.  There is no Lien upon or with respect to
any of the  properties  or income of any Loan  Party or  Subsidiary  of any Loan
Party which secures  indebtedness or other  obligations of any Person except for
Permitted Liens.

            5.2.     CONTINUATION OF REPRESENTATIONS.

            The  Borrower  makes  the  representations  and  warranties  in this
Section 5 on the date hereof and on the Closing Date and each date thereafter on
which a Loan is made or a Letter of Credit is issued as  provided in and subject
to Sections 6.1 and 6.2.

                                       53



           6. CONDITIONS OF LENDING AND ISSUANCE OF LETTERS OF CREDIT

      The obligation of each Bank to make Loans and of the Issuing Bank to issue
Letters of Credit hereunder is subject to the performance by the Borrower of its
Obligations  to be  performed  hereunder  at or prior to the  making of any such
Loans or  issuance  of such  Letters  of Credit and to the  satisfaction  of the
following further conditions:

            6.1.     FIRST LOANS AND LETTERS OF CREDIT.

            On the Closing Date:

                     6.1.1     OFFICER'S CERTIFICATE.

                        The  representations  and  warranties  of  the  Borrower
contained  in  Section  5 and of each  Loan  Party  in each  of the  other  Loan
Documents  shall be true and  accurate on and as of the Closing  Date (with each
such  representation  and  warranty  to be  made  after  giving  effect  to  the
consummation of the Merger) with the same effect as though such  representations
and warranties had been made on and as of such date (except  representations and
warranties which relate solely to an earlier date or time, which representations
and  warranties  shall be true and  correct on and as of the  specific  dates or
times  referred to therein),  and each of the Loan Parties shall have  performed
and complied with all covenants and conditions  hereof and thereof,  no Event of
Default or Potential  Default  shall have  occurred and be  continuing  or shall
exist; and there shall be delivered to the Administrative  Agent for the benefit
of each Bank a certificate  of the Borrower dated the Closing Date and signed by
the  Chief  Executive  Officer,  President  or Chief  Financial  Officer  of the
Borrower to each such effect.

                     6.1.2     SECRETARY'S CERTIFICATE.

                        There shall be delivered to the Administrative Agent for
the benefit of each Bank a certificate  dated the Closing Date and signed by the
Secretary or an Assistant  Secretary of each of the Loan Parties,  certifying as
appropriate as to:

                               (i)    all action  taken  by  each  Loan Party in
connection with this Agreement and the other Loan Documents;

                               (ii)   the  names of  the   officer  or  officers
authorized  to sign this  Agreement  and the other Loan  Documents  and the true
signatures of such officer or officers and specifying  the  Authorized  Officers
permitted to act on behalf of each Loan Party for purposes of this Agreement and
the true signatures of such officers, on which the Administrative Agent and each
Bank may conclusively rely; and

                               (iii)  in the case of the Borrower, copies of its
organizational documents,  including its certificate of incorporation and bylaws
as in  effect  on the  Closing  Date  and  in the  case  of the  certificate  of
incorporation  certified by the appropriate  state official where such documents
are filed in a state office together with certificates from the


                                       54


appropriate  state officials as to the continued  existence and good standing of
the Borrower in the state of its formation and the state of its principal  place
of business.

                     6.1.3     DELIVERY OF GUARANTY AGREEMENTS.

                        The Guaranty Agreement shall have been duly executed and
delivered to the Administrative Agent for the benefit of the Banks.

                     6.1.4     OPINION OF COUNSEL.

                        There shall be delivered to the Administrative Agent for
the  benefit of each Bank a written  opinion  of Jeffry N.  Quinn,  the  General
Counsel for the Loan Parties (who may rely on the opinions of such other counsel
as may be acceptable to the Administrative Agent), dated the Closing Date and in
form and substance satisfactory to the Administrative Agent and its counsel:

                               (i)   as to  the  matters  set  forth  in EXHIBIT
6.1.4; and

                               (ii)  as to such  other  matters  incident to the
transactions  contemplated  herein as the  Administrative  Agent may  reasonably
request.

                     6.1.5     LEGAL DETAILS.

                        All legal details and proceedings in connection with the
transactions contemplated by this Agreement and the other Loan Documents and the
Merger  Agreement  and the  Merger  Documents  shall  be in form  and  substance
satisfactory  to the  Administrative  Agent and counsel  for the  Administrative
Agent,  and  the  Administrative  Agent  shall  have  received  all  such  other
counterpart  originals  or  certified  or other  copies  of such  documents  and
proceedings  in  connection  with  such  transactions,  in  form  and  substance
satisfactory to the Administrative Agent and said counsel, as the Administrative
Agent or said counsel may reasonably request.

                     6.1.6     PAYMENT OF FEES.

                        The Borrower shall have paid or caused to be paid to the
Administrative  Agent for itself and for the  account of the Banks to the extent
not  previously  paid the Facility  Fees,  all other  commitment  and other fees
accrued through the Closing Date and the costs and expenses for which the Agents
and the Banks are entitled to be reimbursed.

                     6.1.7     CONSENTS.

                        All  material   consents   required  to  effectuate  the
transactions  contemplated by the Loan Documents and by the Merger Agreement and
the other Merger  Documents shall have been obtained,  except for those consents
disclosed on Schedule 5.1.11.

                                       55


                     6.1.8     OFFICER'S CERTIFICATE REGARDING MACS.

                        Since  December 31,  1996,  no Material  Adverse  Change
shall  have  occurred;  prior to the  Closing  Date,  there  shall  have been no
material  change in the management of the Borrower  (other than those changes in
management  of the  Borrower in  connection  with the Merger as described in the
Form S-4 of Arch  Mineral  Corporation,  dated May 30,  1997,  as filed with the
SEC);  and there shall have been delivered to the  Administrative  Agent for the
benefit  of each Bank a  certificate  dated the  Closing  Date and signed by the
Chief Executive Officer, President or Chief Financial Officer of the Borrower to
each such effect.

                     6.1.9     NO VIOLATION OF LAWS.

                        The making of the Loans,  the issuance of the Letters of
Credit and the consummation of the Merger and of the  transactions  contemplated
by the Merger  Documents  shall not  contravene  any Law  applicable to any Loan
Party or any of the Banks.

                     6.1.10    NO ACTIONS OR PROCEEDINGS.

                        No  action,  proceeding,  investigation,  regulation  or
legislation shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin,  restrain or prohibit,  or to
obtain  damages in respect of, this  Agreement,  the other Loan  Documents,  the
Merger,   the  Merger   Documents  or  the   consummation  of  the  transactions
contemplated  hereby or thereby or which,  in the  Administrative  Agent's  sole
discretion,   would  make  it  inadvisable   to  consummate   the   transactions
contemplated by this Agreement or any of the other Loan Documents.

                     6.1.11    MERGER.

                        The Merger  shall have been  consummated  in  accordance
with  the  terms of the  Merger  Agreement,  and an  Authorized  Officer  of the
Borrower shall certify the foregoing to the Administrative Agent for the benefit
of each Bank. The Borrower shall have delivered to the Administrative  Agent the
Certificate  of Merger as filed by the Borrower  with the  Secretary of State of
the State of Delaware as  certified  by the  Secretary  of State of the State of
Delaware, evidencing the consummation of the Merger.

                     6.1.12    FINANCIAL PROJECTIONS; CLOSING DATE BALANCE
                               SHEET.

                        The Borrower shall have provided to the Banks  pro-forma
financial  projections  (the "Financial  Projections")  for the five year period
following the Closing  Date,  including a balance sheet and statement of income,
with all such Financial  Projections to be satisfactory in form and substance to
the Required Banks.


                                       56

                     6.1.13    PAYOFF OF EXISTING INDEBTEDNESS.

                        On or before the Closing Date,  the Borrower shall have:
(x) repaid all Indebtedness,  obligations,  fees, interest,  principal,  and all
other amounts owing under the Existing Credit Facilities,  (y) obtained releases
and shall  have  terminated  of record all Liens  with  respect to the  Existing
Credit  Facilities,  and (z) terminated the Existing  Credit  Facilities and all
commitments  to make  loans or  issue  Letters  of  Credit  thereunder,  and the
Borrower  shall have  provided  evidence of all of the foregoing to the Required
Banks to the satisfaction of the Required Banks in their sole discretion.

            6.2.    EACH ADDITIONAL LOAN OR LETTER OF CREDIT.

            At the time of making  any Loans or  issuing  any  Letters of Credit
other than Loans made or Letters of Credit  issued on the Closing Date and after
giving effect to the proposed  extensions  of credit:  the  representations  and
warranties of the Borrower contained in Section 5 and of the Loan Parties in the
other Loan Documents shall be true on and as of the date of such additional Loan
or Letter of Credit  with the same  effect as though  such  representations  and
warranties  had been made on and as of such  date  (except  representations  and
warranties  which  expressly  relate  solely to an earlier  date or time,  which
representations  and  warranties  shall  be true  and  correct  on and as of the
specific  dates or times  referred  to  therein)  and the  Borrower  shall  have
performed and complied with all covenants  and  conditions  hereof;  no Event of
Default or Potential  Default  shall have  occurred and be  continuing  or shall
exist;  the making of the Loans or issuance  of such Letter of Credit  shall not
contravene  any Law applicable to the Borrower or any Subsidiary of the Borrower
or any of the Banks; and the Borrower shall have delivered to the Administrative
Agent,  (and either each Issuing Bank, in the case of or request for a Letter of
Credit,  and PNC Bank in the case of a request for a Swing Loan) a duly executed
and completed Loan Request or application for a Letter of Credit as the case may
be.

            6.3.     SYNDICATION.

                     6.3.1     SYNDICATION DATE REPRESENTATIONS AND
                               WARRANTIES.

                  (a)  On  the  Syndication   Date,  the   representations   and
warranties  of the  Borrower  contained  in  Article  5 and in  the  other  Loan
Documents shall be true with the same effect as though such  representations and
warranties  had been made on such date (except  representations  and  warranties
which expressly relate solely to an earlier date or time, which  representations
and  warranties  shall be true and  correct on and as of the  specific  dates or
times  referred to therein) and the Borrower  shall have  performed and complied
with all covenants and conditions  hereof,  and no Event of Default or Potential
Default shall have occurred and be continuing or shall exist.

                  (b) On the Syndication Date, the Loan Parties shall deliver to
the  Administrative  Agent  for  the  benefit  of the  Banks  (a)  an  Officer's
Certificate  dated as of the  Syndication  Date with  respect to the matters set
forth  in  Sections  6.3.1(a),  (b) a  Secretary's  Certificate  dated as of the
Syndication  Date with  respect to the  matters  set forth in Section  6.1.2 and



                                       57


stating  that there have been no changes in the charter  documents  or bylaws of
the  Borrower  or any other Loan Party  since the Closing  Date,  (c)  Revolving
Credit Notes and Bid Notes dated as of the Syndication Date which give effect to
the syndication on the Syndication Date of the Revolving  Credit  Commitments of
the Revolving  Credit Banks which  originally  executed the Credit  Agreement in
exchange  for the original  Revolving  Credit Notes and Bid Notes issued to such
Banks,  (d) written  opinions of the counsel to the Loan Parties  identified  in
Section  6.1.4 with  respect to such  matters  as the  Administrative  Agent may
request,  and (e)  acknowledgments  dated as of the Syndication Date to the Loan
Documents in form and substance satisfactory to the Administrative Agent.

                     6.3.2     SYNDICATION COOPERATION.

                        The Borrower will use all  reasonable  efforts to assist
the Agents in syndicating  the credit  facilities,  including  participating  in
meetings with potential syndicate members.


                                  7. COVENANTS

            7.1.    AFFIRMATIVE COVENANTS.

            The Borrower  covenants and agrees that until payment in full of the
Loans,  Reimbursement Obligations and Letter of Credit Borrowings,  and interest
thereon, expiration or termination of all Letters of Credit, satisfaction of all
of the Loan Parties' other  Obligations under the Loan Documents and termination
of the Commitments,  the Borrower shall and shall cause each of its Subsidiaries
to comply at all times with the following affirmative covenants:

                    7.1.1     PRESERVATION OF EXISTENCE, ETC.

                        The   Borrower   shall  and  shall  cause  each  of  its
Subsidiaries  to,  maintain  its  legal  existence  as  a  corporation,  limited
partnership or limited  liability  company and its license or qualification  and
good standing in each  jurisdiction  in which its ownership or lease of property
or the nature of its  business  makes such license or  qualification  necessary,
except as otherwise expressly permitted in Section 7.2.3 [Liquidations, Mergers,
Etc.].

                     7.1.2     PAYMENT OF LIABILITIES, INCLUDING TAXES, ETC.

                        The   Borrower   shall  and  shall  cause  each  of  its
Subsidiaries to, duly pay and discharge, all taxes, assessments and governmental
charges or levies  imposed  upon it or upon its income or  profits,  or upon any
properties belonging to it, prior to the date on which penalties attach thereto,
and all lawful claims which,  if unpaid,  might become a lien or charge upon any
properties  of the Borrower or any  Subsidiary  of the  Borrower,  PROVIDED that
neither the Borrower nor any Subsidiary of the Borrower shall be required to pay
any such tax, assessment, charge, levy or claim which is being contested in good
faith and by proper proceedings.


                                       58


                     7.1.3     MAINTENANCE OF INSURANCE.

                        The   Borrower   shall  and  shall  cause  each  of  its
Subsidiaries to, insure its properties and assets against loss or damage by fire
and such other insurable hazards as such assets are commonly insured  (including
fire,  extended  coverage,   property  damage,  workers'  compensation,   public
liability  and  business   interruption   insurance)  and  against  other  risks
(including  errors and  omissions)  in such  amounts as similar  properties  and
assets are insured by prudent  companies  in similar  circumstances  carrying on
similar businesses, and with reputable and financially sound insurers, including
self-insurance to the extent customary.

                     7.1.4     MAINTENANCE OF PROPERTIES AND LEASES.

                        The   Borrower   shall  and  shall  cause  each  of  its
Subsidiaries  to,  maintain  and  preserve  all  of its  respective  properties,
necessary  or useful in the proper  conduct of the  business of the  Borrower or
such Subsidiary of the Borrower,  in good working order and condition,  ordinary
wear and tear excepted.

                     7.1.5     VISITATION RIGHTS.

                        The Borrower shall and shall cause each of its
Subsidiaries  to,  permit  any  of  the  officers  or  authorized  employees  or
representatives of the Administrative Agent or any of the Revolving Credit Banks
to visit and inspect  during normal  business hours any of its properties and to
examine and make  excerpts  from its books and records and discuss its  business
affairs, finances and accounts with its officers, all in such detail and at such
times and as often as any of the Revolving Credit Banks may reasonably  request,
PROVIDED  that each  Revolving  Credit Bank shall  provide the  Borrower and the
Administrative Agent with reasonable notice prior to any visit or inspection. In
the event any Revolving  Credit Bank desires to conduct an audit of the Borrower
or any  Subsidiary  of the  Borrower,  such  Revolving  Credit Bank shall make a
reasonable effort to conduct such audit  contemporaneously  with any audit to be
performed by the Administrative Agent.

                     7.1.6     KEEPING OF RECORDS AND BOOKS OF ACCOUNT.

                        The Borrower  shall,  and shall cause each Subsidiary of
the  Borrower to,  maintain  and keep proper  books of record and account  which
enable the  Borrower  and its  Subsidiaries  to issue  financial  statements  in
accordance  with  GAAP  and as  otherwise  required  by  applicable  Laws of any
Official  Body having  jurisdiction  over the Borrower or any  Subsidiary of the
Borrower,  and in which  full,  true and  correct  entries  shall be made in all
material respects of all its dealings and business and financial affairs.

                     7.1.7     PLANS AND BENEFIT ARRANGEMENTS.

                        The Borrower shall, and shall cause each other member of
the ERISA Group to,  comply  with ERISA,  the  Internal  Revenue  Code and other
applicable Laws applicable to Plans and Benefit  Arrangements  except where such
failure, alone or in conjunction



                                       59


with any other failure,  would not result in a Material Adverse Change.  Without
limiting the  generality of the  foregoing,  the Borrower shall cause all of its
Plans and all Plans  maintained by any member of the ERISA Group to be funded in
accordance  with the minimum  funding  requirements of ERISA and shall make, and
cause  each  member  of the  ERISA  Group  to  make,  in a  timely  manner,  all
contributions due to Plans, Benefit Arrangements and Multiemployer Plans.

                     7.1.8     COMPLIANCE WITH LAWS.

                        The   Borrower   shall  and  shall  cause  each  of  its
Subsidiaries  to, comply with all applicable Laws,  including all  Environmental
Laws, in all respects, PROVIDED that it shall not be deemed to be a violation of
this  Section  7.1.8 if any  failure to comply  with any Law would not result in
fines,  penalties,  remediation costs,  other similar  liabilities or injunctive
relief  which in the  aggregate  would  constitute  a Material  Adverse  Change.
Without  limiting the generality of the foregoing,  the Borrower shall and shall
cause  each  of its  Subsidiaries  to  comply  with  all  Environmental  Permits
applicable to their respective  operations and properties;  obtain and renew all
Environmental  Permits necessary for their respective operations and properties;
and manage,  use and handle all  Hazardous  Substances  in  compliance  with all
applicable  Environmental  Laws,  in each case,  except for such  non-compliance
which would not or could not  reasonably be expected to have a Material  Adverse
Change.

                     7.1.9     USE OF PROCEEDS.

                        The  Borrower  will use the  Letters  of Credit  and the
proceeds of the Loans only for (i) general  corporate  purposes  and for working
capital, or (ii) to repay all Indebtedness (including,  without limitation,  all
interest,  principal, fees, all obligations and other amounts due and owing) and
terminate all commitments under the Existing Credit  Facilities.  The Borrower's
use of the Letters of Credit and the  proceeds of the Loans shall not be for any
purpose which contravenes any applicable Law or any provision hereof.

                     7.1.10    OPERATION OF MINES.

                        The   Borrower   shall  and  shall  cause  each  of  its
Subsidiaries to operate their mines in all material  respects in accordance with
sound coal mining  practices and all applicable  Federal,  state and local laws,
rules and  regulations,  including,  without  limitation,  laws and  regulations
relating to land reclamation, pollution control and mine safety.

                     7.1.11    REPAYMENT OF CERTAIN INDEBTEDNESS.

                        The  Borrower  shall  cause all  outstanding  principal,
interest,  fees,  and all other  amounts due and owing under that  certain  Note
Agreement for  $52,900,000 of 9.66% Senior Notes of Ashland Coal,  Inc., due May
15,  2006,  as amended and under that certain Note  Agreement  for  $100,000,000
9.78% Senior Notes of Ashland Coal, Inc., due September 15, 2000, as amended, to
be repaid in the event the lenders thereunder required to consent to the "Change
of  Control",  as defined in such note  agreements,  shall have not granted such
consent  in  accordance  with the  terms of such  note  agreements  on or before
September 1, 1997.

                                       60


            7.2.     NEGATIVE COVENANTS.

            The Borrower  covenants and agrees that until payment in full of the
Loans,  Reimbursement  Obligations and Letter of Credit  Borrowings and interest
thereon, expiration or termination of all Letters of Credit, satisfaction of all
of  the  Loan  Parties'  other  Obligations  hereunder  and  termination  of the
Commitments,  the  Borrower  shall and shall cause each of its  Subsidiaries  to
comply with the following negative covenants:

                     7.2.1     INDEBTEDNESS.

                        The Borrower  shall not, and shall not permit any of its
Subsidiaries  to,  at any time  create,  incur,  assume  or  suffer to exist any
Indebtedness, except:

                               (i)    Indebtedness under the Loan Documents; and

                               (ii)   additional Indebtedness of the Borrower or
any Loan Party so long as, both before and after  giving  effect to any proposed
additional Indebtedness:

                                    (y)  the Borrower and its Subsidiaries shall
be in compliance with Section 7.2.10 [Maximum Leverage Ratio] and Section 7.2.11
[Minimum Interest Coverage Ratio],  determined on a pro forma basis (in the case
of the  Interest  Coverage  Ratio,  as of the end of the  calendar  quarter most
recently  ended  and in the case of both the  Interest  Coverage  Ratio  and the
Leverage  Ratio,  as  if  such  proposed   additional   Indebtedness  were  then
outstanding), and

                                    (z)  the  covenants and defaults applicable
in respect of such proposed  additional  Indebtedness  (other than the financial
covenants  included in the Private  Placement  Agreements  on the Closing  Date,
without any further  amendment  thereto to make such covenants more restrictive,
which amendment is expressly  prohibited) are not, taken as a whole,  materially
more  restrictive  with respect to the Borrower  and its  Subsidiaries  than the
covenants and defaults under this Agreement;

                     7.2.2     LIENS.

                        The Borrower  shall not, and shall not permit any of its
Subsidiaries to, at any time create,  incur,  assume or suffer to exist any Lien
on any of its property or assets, tangible or intangible, now owned or hereafter
acquired,  or agree or become liable to do so, except Permitted Liens so long as
the  aggregate  amount of all  payments  by any such  person in  respect  of all
operating  leases  which  subject  the  assets  of  the  Borrower  or any of its
Subsidiaries  to any Permitted Lien (as the type of such lease and the amount of
such payments would be determined  under GAAP) and all  Indebtedness  secured by
such  Permitted   Liens  does  not  at  any  time  exceed  the  greater  of  (i)
$125,000,000,  or (ii) the amount equal to five percent (5%) of the total assets
of the  Borrower  and  its  Subsidiaries,  as  determined  and  consolidated  in
accordance with GAAP.



                                       61


                     7.2.3     LIQUIDATIONS, MERGERS, CONSOLIDATIONS,
                               ACQUISITIONS.

                        The Borrower  shall not, and shall not permit any of its
Subsidiaries to, dissolve,  liquidate or wind-up its affairs,  or become a party
to any merger or consolidation,  or acquire by purchase,  lease or otherwise all
or  substantially  all of the  assets  or  capital  stock of any  other  Person,
PROVIDED that

                        (1)   any Subsidiary of the Borrower may  consolidate or
merge into any other Subsidiary of the Borrower, and

                        (2)   any Loan Party may  acquire, whether by purchase 
or by  merger,  (A) all of the  ownership  interests  of  another  Person or (B)
substantially  all of assets of another  Person or of a business  or division of
another  Person  (each a  "Permitted  Acquisition"),  PROVIDED  that each of the
following requirements is met:

                               (i)   the  board of directors or other equivalent
governing body of such Person shall have approved such Permitted Acquisition;

                               (ii)  the   business  acquired,  or the  business
conducted  by the  Person  whose  ownership  interests  are being  acquired,  as
applicable,  shall be  substantially  the  same as one or more  line or lines of
business  conducted  by the Loan  Parties and shall  comply with  Section  7.2.7
[Continuation of or Change in Business];

                               (iii)  no  Potential  Default or Event of Default
shall  exist  immediately  prior to and after  giving  effect to such  Permitted
Acquisition;

                               (iv)   the Borrower and its Subsidiaries shall be
in compliance with the covenants  contained in Sections 7.2.10 [Maximum Leverage
Ratio] and 7.2.11 [Minimum  Interest  Coverage Ratio]  determined on a pro forma
basis after  giving  effect to such  Permitted  Acquisition  (including  in such
computation  Indebtedness or other liabilities assumed or incurred in connection
with such Permitted Acquisition).

                     7.2.4     DISPOSITIONS OF ASSETS OR SUBSIDIARIES.

                        The Borrower  shall not, and shall not permit any of its
Subsidiaries to, sell, convey,  assign,  lease, abandon or otherwise transfer or
dispose of,  voluntarily  or  involuntarily,  any of its  properties  or assets,
tangible  or  intangible   (including  sale,   assignment,   discount  or  other
disposition of accounts,  contract rights,  chattel paper,  equipment or general
intangibles with or without  recourse or of capital stock,  shares of beneficial
interest,  partnership  interests or limited  liability  company  interests of a
Subsidiary of the Borrower), except:

                               (i)    transactions   involving   the   sale   of
inventory in the ordinary course of business;

                                       62


                               (ii)   any sale,  transfer  or lease of assets in
the ordinary course of business which are no longer necessary or required in the
conduct of the Borrower's or such Subsidiary's business;

                               (iii)  any  sale,  transfer or lease of assets by
any  wholly-owned  Subsidiary  of the  Borrower to the  Borrower or to any other
wholly-owned Subsidiary of the Borrower;

                               (iv)   any sale, transfer  or lease  of assets in
the ordinary course of business which are replaced by substitute assets
(acquired or leased); or

                               (v)    any  sale,  transfer or  lease  (including
any  lease  transaction  under  Section  7.2.9)  of  assets,  other  than  those
specifically  excepted pursuant to clauses (i) through (iv) above, provided that
(i) at the time of any  disposition,  no Event of Default  shall  exist or shall
result  from such  disposition,  and (ii) the  aggregate  net book  value of all
assets so sold by the  Borrower  and its  Subsidiaries  shall not  exceed in any
calendar year the greater of (x)  $100,000,000  or (y) 5% of the total assets of
the Borrower and its  Subsidiaries  (as of the last day of such calendar  year),
determined and consolidated in accordance with GAAP.

                     7.2.5     AFFILIATE TRANSACTIONS.

                        The Borrower  shall not, and shall not permit any of its
Subsidiaries to, enter into or carry out any transaction  (including  purchasing
property or services  from or selling  property or services to any  Affiliate of
the  Borrower or any  Subsidiary  of the Borrower or other  Person)  unless such
transaction is not otherwise prohibited by this Agreement and is entered into in
the ordinary course of business upon fair and reasonable  arm's length terms and
conditions.

                     7.2.6     SUBSIDIARIES, PARTNERSHIPS AND JOINT VENTURES.

                        The Borrower shall not, and shall not permit any of
its Subsidiaries to, own or create directly or indirectly any Subsidiaries other
than (i) any Significant Subsidiary which has joined this Agreement as Guarantor
on the Closing Date;  (ii) any Significant  Subsidiary  formed or acquired after
the Closing Date which  becomes a Guarantor  in  accordance  with Section  10.18
[Joinder of  Guarantors];  (iii) any  Subsidiary  which  after the Closing  Date
becomes  a  Significant   Subsidiary  and  which  upon  becoming  a  Significant
Subsidiary  becomes a Guarantor in  accordance  with Section  10.18  [Joinder of
Guarantors] and (iv) any Subsidiary which is not a Significant  Subsidiary.  The
Borrower  shall  cause  any of its  Subsidiaries  which  at any time  becomes  a
Significant  Subsidiary to become a Guarantor in  accordance  with Section 10.18
[Joinder  of  Guarantors].  Notwithstanding  the  foregoing  provisions  of this
Section 7.2.7, with respect to those Significant  Subsidiaries of Ashland Coal ,
Inc.,  as of the  Closing  Date,  the  Borrower  shall  cause  such  Significant
Subsidiaries  to join the Guaranty  Agreement in  accordance  with Section 10.18
within thirty (30) days following the Closing Date. Neither the Borrower nor any
Subsidiary  of the  Borrower  shall  become or agree to (1)  become a general or
limited  partner in any  general or limited  partnership,  except  that the Loan
Parties  may be general 


                                       63


or limited  partners  in other Loan  Parties  or may make  Investments  in joint
ventures  (so as long as the joint  venture  is  engaged  in a line of  business
permitted by Section  7.2.7  [Continuation  of or Change in  Business]  and such
joint venture interests are acquired in an arms-length  transaction);  provided,
however,  that the aggregate  permitted  Investments in all joint ventures shall
not at any time  exceed,  for all  Loan  Parties  and  their  Subsidiaries,  $30
million,  or (2)  become a member or  manager  of,  or hold a limited  liability
company interest in, a limited liability  company,  except that the Loan Parties
may be members or managers of, or hold limited  liability  company interests in,
other Loan Parties.

                     7.2.7     CONTINUATION OF OR CHANGE IN BUSINESS.

                        The Borrower  shall not, and shall not permit any of its
Subsidiaries to, engage in any business other than the business substantially as
conducted  and  operated by the  Borrower or such  Subsidiary  as of the date of
consummation of the Merger and any business  substantially  related thereto, and
neither  the  Borrower  nor any  Subsidiary  of the  Borrower  shall  permit any
material change in such business.

                     7.2.8     PLANS AND BENEFIT ARRANGEMENTS.

                        The Borrower  shall not, and shall not permit any of its
Subsidiaries  to,  engage in a  Prohibited  Transaction  with any Plan,  Benefit
Arrangement or Multiemployer  Plan which, alone or in conjunction with any other
circumstances  or set of  circumstances  resulting in  liability  under ERISA or
otherwise violate ERISA:

                     7.2.9     OFF-BALANCE SHEET FINANCING.

                        The Borrower shall not, and shall not permit any of
its  Subsidiaries  to, engage in any off-balance  sheet  transaction  (i.e., the
liabilities  in  respect  of which do not  appear on the  liability  side of the
balance sheet) providing the functional  equivalent of borrowed money (including
asset  securitizations,  sale/leasebacks,  Synthetic Leases or other non-capital
leases), in excess in the aggregate for the Borrower and its Subsidiaries, as of
any date of determination of the greater of (x) $100,000,000, or (y) 5% of total
assets of the Borrower and its  Subsidiaries,  determined  and  consolidated  in
accordance  with  GAAP as of the date of  determination.  For  purposes  of this
Section 7.2.9, a "Synthetic  Lease" shall mean any lease transaction under which
the parties intend that (i) the lease will be treated as an "operating lease" by
the lessee  pursuant to Statement of Financial  Accounting  Standards No. 13, as
amended, and (ii) the lessee will be entitled to various tax benefits ordinarily
available to owners (as opposed to lessees) of like property.

                     7.2.10    MAXIMUM LEVERAGE RATIO.

                        The Borrower  shall not at any time permit  Consolidated
Debt to exceed sixty percent (60%) of Consolidated Capitalization.


                                       64


                     7.2.11    MINIMUM INTEREST COVERAGE RATIO.

                        The Borrower shall not permit the ratio of  Consolidated
EBITDA  to   consolidated   net  interest   expense  of  the  Borrower  and  its
Subsidiaries,  calculated  as of the last day of each  calendar  quarter for the
four calendar quarters then ended, to be less than 3.0 to 1.0.

                     7.2.12    NO RESTRICTION ON DIVIDENDS.

                        The Borrower  shall not, and shall not permit any of its
Subsidiaries  to,  enter into or be bound by any  agreement  which  prohibits or
restricts, in any manner, the payment of dividends (whether in cash, securities,
property or otherwise).

            7.3.     REPORTING REQUIREMENTS.

            The Borrower  covenants and agrees that until payment in full of the
Loans,  Reimbursement  Obligations and Letter of Credit  Borrowings and interest
thereon, expiration or termination of all Letters of Credit, satisfaction of all
of the Loan  Parties'  other  Obligations  hereunder  and under  the other  Loan
Documents and termination of the Commitments, the Borrower will furnish or cause
to be furnished to the  Administrative  Agent and each of the  Revolving  Credit
Banks:

                     7.3.1     QUARTERLY FINANCIAL STATEMENTS.

                        As soon as available and in any event within  forty-five
(45) calendar  days after the end of each of the first three fiscal  quarters in
each  fiscal  year,  financial  statements  of  the  Borrower,  consisting  of a
consolidated  balance  sheet as of the end of such  fiscal  quarter  and related
consolidated  statements of income,  stockholders' equity and cash flows for the
fiscal  quarter  then  ended and the  fiscal  year  through  that  date,  all in
reasonable detail and certified  (subject to normal year-end audit  adjustments)
by the Chief  Executive  Officer,  President or Chief  Financial  Officer of the
Borrower as having been prepared in accordance with GAAP,  consistently applied,
and setting forth in comparative  form the respective  financial  statements for
the corresponding date and period in the previous fiscal year. The Borrower will
be deemed to have complied with the delivery  requirements of this Section 7.3.1
if within forty-five (45) days after the end of its fiscal quarter, the Borrower
delivers  to the  Administrative  Agents  and  each  of the  Banks a copy of the
Borrower's  Form  10-Q as  filed  with  the SEC  and  the  financial  statements
contained therein meets the requirements described in this Section.

                     7.3.2     ANNUAL FINANCIAL STATEMENTS.

                        As soon as available and in any event within ninety (90)
days after the end of each fiscal year of the Borrower,  financial statements of
the Borrower  consisting of a  consolidated  balance sheet as of the end of such
fiscal year, and related consolidated statements of income, stockholders' equity
and cash flows for the fiscal  year then  ended,  all in  reasonable  detail and
setting forth in comparative form the financial  statements as of the end of and
for the preceding  fiscal year,  and certified by independent  certified  public
accountants of nationally



                                       65


recognized standing satisfactory to the Administrative Agent. The certificate or
report  of  accountants  shall  be  free  of  qualifications   (other  than  any
consistency  qualification  that may result  from a change in the method used to
prepare the financial  statements as to which such accountants concur) and shall
not indicate the occurrence or existence of any event,  condition or contingency
which would  materially  impair the  prospect of payment or  performance  of any
covenant,  agreement or duty of any Loan Party under any of the Loan  Documents.
The Borrower will be deemed to have complied with the delivery  requirements  of
this Section  7.3.2 if within ninety (90) days after the end of its fiscal year,
the Borrower delivers to the  Administrative  Agent and each of the Banks a copy
of the  Borrower's  Annual  Report  and Form 10-K as filed  with the SEC and the
financial  statements and certification of public accountants  contained therein
meets the requirements described in this Section.

                     7.3.3     CERTIFICATE OF THE BORROWER.

                        Concurrently  with  the  financial   statements  of  the
Borrower furnished to the Administrative Agent and to the Revolving Credit Banks
pursuant to Sections 7.3.1  [Quarterly  Financial  Statements] and 7.3.2 [Annual
Financial  Statements],  a  certificate  of the  Borrower  signed  by the  Chief
Executive Officer,  President or Chief Financial Officer of the Borrower, in the
form of EXHIBIT  7.3.3,  to the effect  that,  except as  described  pursuant to
Section 7.3.4 [Notice of Default], (i) the representations and warranties of the
Borrower  contained in Section 5 and in the other Loan Documents are true on and
as of the  date  of such  certificate  with  the  same  effect  as  though  such
representations  and  warranties  had been made on and as of such  date  (except
representations  and warranties which expressly relate solely to an earlier date
or time which shall be true and correct on and as of the specific dates or times
referred to therein) and the Loan Parties have  performed  and complied with all
covenants and conditions  hereof,  (ii) no Event of Default or Potential Default
exists and is continuing on the date of such  certificate  and (iii)  containing
calculations  in sufficient  detail to demonstrate  compliance as of the date of
such financial  statements with all financial covenants contained in Section 7.2
[Negative Covenants].

                     7.3.4     NOTICE OF DEFAULT.

                       Promptly  after any officer of the  Borrower has learned
of the  occurrence  of an Event of Default or Potential  Default,  a certificate
signed by the Chief Executive  Officer,  President or Chief Financial Officer of
the  Borrower  setting  forth the details of such Event of Default or  Potential
Default and the action which the Borrower proposes to take with respect thereto.

                     7.3.5     NOTICE OF LITIGATION.

                        Promptly  after the  commencement  thereof  or  promptly
after the determination thereof,  notice of all actions,  suits,  proceedings or
investigations  before or by any Official  Body or any other Person  against any
Loan Party or any  Subsidiary  of any Loan Party,  which (x) involve or could be
reasonably  expected  to  involve  assessments  against  any  Loan  Party or any
Subsidiary of any Loan Party in excess of  $10,000,000,  individually  or in the
aggregate,



                                       66


or (y) involve a claim or series of claims which if adversely  determined  would
constitute a Material Adverse Change.

                     7.3.6     NOTICE OF CHANGE IN DEBT RATING.

                        Within two (2) Business Days after  Standard & Poor's or
Moody's announces a change in the Borrower's Debt Rating, notice of such change.
Borrower  will  deliver  together  with  such  notice  a  copy  of  any  written
notification which Borrower received from the applicable rating agency regarding
such change of Debt Rating.

                     7.3.7     NOTICES REGARDING PLANS AND BENEFIT
ARRANGEMENTS.

                               7.3.7.1     CERTAIN EVENTS.

                                Promptly  upon  becoming aware of the occurrence
thereof,  notice  (including the nature of the event and, when known, any action
taken or  threatened  by the Internal  Revenue  Service or the PBGC with respect
thereto) of:

                               (i)    any  Reportable  Event with respect to the
Borrower  or any other  member of the ERISA  Group  (regardless  of whether  the
obligation to report said Reportable Event to the PBGC has been waived),

                               (ii)   any  Prohibited  Transaction  which  could
subject the Borrower or any other  member of the ERISA Group to a civil  penalty
assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of
the Internal  Revenue Code in connection with any Plan, any Benefit  Arrangement
or any trust created thereunder,

                               (iii)  any   assertion  of  material   withdrawal
liability with respect to any Multiemployer Plan,

                                (iv)  any  partial  or  complete withdrawal from
a  Multiemployer  Plan by the  Borrower  or any other  member of the ERISA Group
under Title IV of ERISA (or assertion thereof),  where such withdrawal is likely
to result in material withdrawal liability,

                               (v)    any  cessation  of   operations   (by  the
Borrower  or  any  other  member  of  the  ERISA  Group)  at a  facility  in the
circumstances described in Section 4062(e) of ERISA,

                               (vi)   withdrawal  by  the  Borrower or any other
member of the ERISA Group from a Multiple Employer Plan,

                               (vii)  a  failure  by the  Borrower  or any other
member  of the  ERISA  Group  to make a  payment  to a Plan  required  to  avoid
imposition of a Lien under Section 302(f) of ERISA,

                                       67


                               (viii)  the adoption  of an  amendment  to a Plan
requiring  the  provision  of security  to such Plan  pursuant to Section 307 of
ERISA, or

                               (ix)   any change in the actuarial assumptions or
funding  methods  used for any  Plan,  where  the  effect  of such  change is to
materially  increase or  materially  reduce the  unfunded  benefit  liability or
obligation to make periodic contributions.

                               7.3.7.2     NOTICES OF INVOLUNTARY TERMINATION
                                           AND ANNUAL REPORTS.

                                As soon as available or within thirty (30) days
after receipt thereof, copies of (a) all notices received by the Borrower or any
other  member of the ERISA  Group of the  PBGC's  intent to  terminate  any Plan
administered  or maintained by the Borrower or any member of the ERISA Group, or
to have a trustee  appointed to administer any such Plan; and (b) at the request
of the  Administrative  Agent or any Bank  each  annual  report  (IRS  Form 5500
series) and all accompanying  schedules,  the most recent actuarial reports, the
most recent financial  information  concerning the financial status of each Plan
administered  or  maintained  by the  Borrower or any other  member of the ERISA
Group, and schedules showing the amounts  contributed to each such Plan by or on
behalf of the  Borrower  or any other  member of the ERISA Group in which any of
their  personnel  participate or from which such personnel may derive a benefit,
and each  Schedule B (Actuarial  Information)  to the annual report filed by the
Borrower  or any other  member  of the ERISA  Group  with the  Internal  Revenue
Service with respect to each such Plan.

                               7.3.7.3     NOTICE OF VOLUNTARY TERMINATION.

                                Promptly upon the filing thereof, copies of any
Form 5310, or any successor or equivalent form to Form 5310, filed with the PBGC
in connection with the termination of any Plan.


                                   8. DEFAULT

            8.1.    EVENTS OF DEFAULT.

            An Event of Default  shall mean the  occurrence  or existence of any
one or more of the following events or conditions  (whatever the reason therefor
and whether voluntary, involuntary or effected by operation of Law):

                     8.1.1     PAYMENTS UNDER LOAN DOCUMENTS.

                        The Borrower  shall fail to pay (i) any principal of any
Loan (including scheduled installments, mandatory prepayments or the payment due
at maturity),  Reimbursement  Obligation or Letter of Credit Borrowing when such
principal  is due  hereunder  or (ii) any  interest  on any Loan,  Reimbursement
Obligation or Letter of Credit Borrowing or any


                                       68


other amount owing hereunder or under the other Loan Documents  within three (3)
Business Days after such interest or other amount becomes due in accordance with
the terms hereof or thereof;

                     8.1.2     BREACH OF WARRANTY.

                        Any  representation  or warranty made at any time by the
Borrower herein or by any of the Loan Parties in any other Loan Document,  or in
any  certificate,  other  instrument  or  statement  furnished  pursuant  to the
provisions  hereof or thereof,  shall prove to have been false or  misleading in
any material respect as of the time it was made or furnished;

                     8.1.3     BREACH OF NEGATIVE COVENANTS OR VISITATION
                               RIGHTS.

                        Any of the Loan Parties shall default in the  observance
or performance of any covenant contained in Section 7.1.5 [Visitation Rights] or
Section 7.2 [Negative Covenants];

                     8.1.4     BREACH OF OTHER COVENANTS.

                        Any of the Loan Parties shall default in the  observance
or performance of any other  covenant,  condition or provision  hereof or of any
other Loan Document and such default shall  continue  unremedied for a period of
thirty (30)  Business  Days after any officer of any Loan Party becomes aware of
the  occurrence  thereof (such grace period to be  applicable  only in the event
such  default  can be  remedied  by  corrective  action of the Loan  Parties  as
determined by the Administrative Agent in its sole discretion);

                     8.1.5     DEFAULTS IN OTHER AGREEMENTS OR INDEBTEDNESS.

                        A default  or event of default  shall  occur at any time
under the terms of any other agreement involving borrowed money or the extension
of credit or any other  Indebtedness under which any Loan Party or Subsidiary of
any Loan  Party  may be  obligated  as a  borrower  or  guarantor  in  excess of
$10,000,000  in the  aggregate,  and such  breach,  default  or event of default
consists  of the  failure  to pay  (beyond  any period of grace  permitted  with
respect thereto,  whether waived or not) any  indebtedness  when due (whether at
stated  maturity,  by  acceleration  or  otherwise) or if such breach or default
permits or causes the  acceleration  of any  indebtedness  (whether  or not such
right shall have been waived) or the termination of any commitment to lend;

                     8.1.6     JUDGMENTS OR ORDERS.

                        Any  judgments  or orders  for the  payment  of money in
excess of $10,000,000 in the aggregate  shall be entered  against any Loan Party
by  a  court  having  jurisdiction  in  the  premises,  which  judgment  is  not
discharged,  vacated,  bonded or stayed pending appeal within a period of thirty
(30) days from the date of entry;  PROVIDED,  HOWEVER, that any such judgment or
order shall not be an Event of Default under this Section 8.1.6 [Judgments

                                       69


or  Orders] if and for so long as (i) the  amount of such  judgment  or order in
excess of  $10,000,000  is covered by a valid and  binding  policy of  insurance
between the defendant  and the insurer  covering  payment  thereof and (ii) such
insurer,  which  shall  be rated at least  "A" by A.M.  Best  Company,  has been
notified  of, and has not  disputed the claim made for payment of, the amount of
such judgment or order.

                     8.1.7     LOAN DOCUMENT UNENFORCEABLE.

                        Any of the Loan Documents shall cease to be legal, valid
and binding agreements  enforceable against the party executing the same or such
party's  successors  and  assigns (as  permitted  under the Loan  Documents)  in
accordance  with the respective  terms thereof or shall in any way be terminated
(except in accordance  with its terms) or become or be declared  ineffective  or
inoperative  or shall in any way be  challenged or contested or cease to give or
provide the respective Liens,  security interests,  rights,  titles,  interests,
remedies, powers or privileges intended to be created thereby;

                     8.1.8     UNINSURED LOSSES; PROCEEDINGS AGAINST ASSETS.

                        Any of the Loan  Parties' or any of their  Subsidiaries'
assets are  attached,  seized,  levied upon or  subjected  to a writ or distress
warrant; or such come within the possession of any receiver,  trustee, custodian
or assignee for the benefit of creditors and the same is not cured within thirty
(30) days thereafter;

                     8.1.9     NOTICE OF LIEN OR ASSESSMENT.

                        A notice of Lien or assessment in excess of  $10,000,000
which is not a Permitted Lien is filed of record with respect to all or any part
of any of the Loan Parties' or any of their  Subsidiaries'  assets by the United
States, or any department,  agency or instrumentality  thereof, or by any state,
county, municipal or other governmental agency, including the PBGC, or any taxes
or  debts  owing  at any time or  times  hereafter  to any one of these  becomes
payable and the same is not paid within  thirty (30) days after the same becomes
payable;

                     8.1.10    INSOLVENCY.

                        Any Loan Party or any  Subsidiary of a Loan Party ceases
to be  solvent  or  admits in  writing  its  inability  to pay its debts as they
mature;

                     8.1.11    EVENTS RELATING TO PLANS AND BENEFIT
                               ARRANGEMENTS.

                        Any of the following  occurs:  (i) any Reportable Event,
which the Administrative  Agent determines in good faith constitutes grounds for
the  termination  of any Plan by the PBGC or the  appointment  of a  trustee  to
administer or liquidate any Plan,  shall have occurred and be  continuing;  (ii)
proceedings  shall have been  instituted  or other action taken to terminate any
Plan,  or a  termination  notice shall have been filed with respect to any Plan;
(iii) a


                                       70


trustee shall be appointed to  administer  or liquidate any Plan;  (iv) the PBGC
shall give notice of its intent to institute  proceedings  to terminate any Plan
or Plans or to appoint a trustee to administer  or liquidate  any Plan;  and, in
the case of the occurrence of (i), (ii), (iii) or (iv) above, the Administrative
Agent  determines in good faith that the amount of the  Borrower's  liability is
likely to exceed 10% of its Consolidated Tangible Net Worth; (v) the Borrower or
any member of the ERISA Group shall fail to make any contributions when due to a
Plan or a Multiemployer Plan; (vi) the Borrower or any other member of the ERISA
Group  shall make any  amendment  to a Plan with  respect to which  security  is
required  under Section 307 of ERISA;  (vii) the Borrower or any other member of
the ERISA Group shall  withdraw  completely  or partially  from a  Multiemployer
Plan;  (viii) the Borrower or any other member of the ERISA Group shall withdraw
(or shall be deemed under Section  4062(e) of ERISA to withdraw) from a Multiple
Employer Plan; or (ix) any applicable Law is adopted,  changed or interpreted by
any  Official  Body with respect to or  otherwise  affecting  one or more Plans,
Multiemployer  Plans or Benefit  Arrangements  and,  with  respect to any of the
events specified in (v), (vi), (vii),  (viii) or (ix), the Administrative  Agent
determines in good faith that any such occurrence would be reasonably  likely to
materially and adversely affect the total enterprise represented by the Borrower
and the other members of the ERISA Group;

                     8.1.12    CESSATION OF BUSINESS.

                        The Loan  Parties,  taken as a whole,  cease to  conduct
their  business as  contemplated,  except as expressly  permitted  under Section
7.2.3  [Liquidations,  Mergers,  Etc.]  or 7.2.4  [Dispositions  of  Assets  and
Subsidiaries],  or are  enjoined,  restrained  or in any way  prevented by court
order  from  conducting  all or any  material  part of their  business  and such
injunction,  restraint or other  preventive order is not dismissed within thirty
(30) days after the entry thereof;

                     8.1.13    CHANGE OF CONTROL.

                                    (i)   Following  the  Merger,  any person or
group  of  persons  (within  the  meaning  of  Sections  13(d)  or  14(a) of the
Securities  Exchange Act of 1934, as amended) other than Ashland Inc. shall have
acquired  beneficial  ownership of (within the meaning of Rule 13d-3 promulgated
by the SEC  under  said  Act)  35% or more of the  voting  capital  stock of the
Borrower;  or (ii) within a period of twelve (12)  consecutive  calendar months,
individuals  who were  directors of the Borrower on the first day of such period
shall cease to constitute a majority of the board of directors of the Borrower;

                     8.1.14    INVOLUNTARY PROCEEDINGS.

                        A  proceeding  shall  have  been  instituted  in a court
having  jurisdiction  in the  premises  seeking a decree or order for  relief in
respect of any Loan Party or Subsidiary of a Loan Party in an  involuntary  case
under any applicable bankruptcy, insolvency, reorganization or other similar law
now or hereafter in effect,  or for the  appointment of a receiver,  liquidator,
assignee, custodian, trustee, sequestrator, conservator (or similar official) of
any Loan Party or  Subsidiary  of a Loan Party for any  substantial  part of its
property, or for the

                                       71


winding-up  or  liquidation  of its affairs,  and such  proceeding  shall remain
undisguised  or unseated  and in effect for a period of thirty (30)  consecutive
days or such  court  shall  enter a decree or order  granting  any of the relief
sought in such proceeding; or

                     8.1.15    VOLUNTARY PROCEEDINGS.

                        Any  Loan  Party or  Subsidiary  of a Loan  Party  shall
commence  a  voluntary  case  under  any  applicable   bankruptcy,   insolvency,
reorganization or other similar law now or hereafter in effect, shall consent to
the entry of an order for relief in an  involuntary  case under any such law, or
shall consent to the appointment or taking possession by a receiver, liquidator,
assignee,  custodian,  trustee,  sequestrator,  conservator  (or  other  similar
official) of itself or for any substantial  part of its property or shall make a
general assignment for the benefit of creditors,  or shall fail generally to pay
its debts as they become due, or shall take any action in  furtherance of any of
the foregoing.

            8.2.     CONSEQUENCES OF EVENT OF DEFAULT.

                     8.2.1     EVENTS OF DEFAULT OTHER THAN BANKRUPTCY,
                               INSOLVENCY OR REORGANIZATION PROCEEDINGS.

                        If an Event of Default  specified  under  Sections 8.1.1

through 8.1.13 shall occur and be continuing,  the Banks and the  Administrative
Agent shall be under no further obligation to make Revolving Credit Loans, Swing
Loans or Bid  Loans or issue  Letters  of  Credit,  as the case may be,  and the
Administrative  Agent may, and upon the request of the Required Banks,  shall by
written notice to the Borrower,  take one or both of the following actions:  (i)
terminate the Commitments and thereupon the Commitments  shall be terminated and
of no further force and effect,  or (ii) declare the unpaid  principal amount of
the  Revolving  Credit Loans and Swing Loans then  outstanding  and all interest
accrued thereon,  any unpaid fees and all other  Indebtedness of the Borrower to
the  Revolving  Credit Banks  hereunder  and  thereunder to be forthwith due and
payable,  and the same shall thereupon become and be immediately due and payable
to the  Administrative  Agent for the  benefit  of each  Revolving  Credit  Bank
without  presentment,  demand,  protest or any other notice of any kind,  all of
which are hereby  expressly  waived,  and (iii) require the Borrower to, and the
Borrower shall  thereupon,  deposit in a  non-interest-bearing  account with the
Administrative  Agent,  as cash  collateral for its  Obligations  under the Loan
Documents,  an  amount  equal to the  maximum  amount  currently  or at any time
thereafter  available to be drawn on all outstanding  Letters of Credit, and the
Borrower hereby pledges to the Administrative Agent and the Banks, and grants to
the Administrative  Agent and the Banks a security interest in, all such cash as
security for such Obligations. Upon the curing of all existing Events of Default
to the satisfaction of the Required Banks, the Administrative Agent shall return
such cash collateral to the Borrower; and

                     8.2.2     BANKRUPTCY, INSOLVENCY OR REORGANIZATION
                               PROCEEDINGS.

                        If an Event of Default  specified  under Section  8.1.14

[Involuntary  Proceedings] or 8.1.15  [Voluntary  Proceedings]  shall occur, the
Commitments shall

                                       72


automatically  terminate and be of no further force and effect,  the Banks shall
be under no further  obligations to make Revolving Credit Loans,  Swing Loans or
Bid Loans  hereunder  or to issue  Letters of Credit  and the  unpaid  principal
amount of the Loans then  outstanding  and all  interest  accrued  thereon,  any
unpaid fees and all other  Indebtedness  of the Borrower to the Banks  hereunder
and  thereunder  shall be  immediately  due and  payable,  without  presentment,
demand, protest or notice of any kind, all of which are hereby expressly waived;
and

                     8.2.3     SET-OFF.

                        If an Event of Default  shall  occur and be  continuing,
any Bank to whom any Obligation is owed by any Loan Party hereunder or under any
other Loan Document or any  participant of such Bank which has agreed in writing
to be bound by the  provisions of Section 9.13  [Equalization  of Banks] and any
branch,  Subsidiary  or  Affiliate of such Bank or  participant  anywhere in the
world  shall have the  right,  in  addition  to all other  rights  and  remedies
available to it, without notice to such Loan Party, to set-off against and apply
to the then  unpaid  balance of all the Loans and all other  Obligations  of the
Borrower and the other Loan Parties  hereunder or under any other Loan  Document
any debt owing to, and any other  funds held in any manner for the  account  of,
the  Borrower  or such other Loan Party by such Bank or  participant  or by such
branch,  Subsidiary  or Affiliate,  including all funds in all deposit  accounts
(whether time or demand,  general or special,  provisionally credited or finally
credited,  or  otherwise)  now or hereafter  maintained  by the Borrower or such
other Loan Party for its own account (but not including  funds held in custodian
or trust  accounts) with such Bank or participant or such branch,  Subsidiary or
Affiliate.  Such right shall exist whether or not any Bank or the Administrative
Agent  shall  have made any  demand  under  this  Agreement  or any  other  Loan
Document, whether or not such debt owing to or funds held for the account of the
Borrower or such other Loan Party is or are matured or unmatured and  regardless
of the  existence  or adequacy of any Guaranty or any other  security,  right or
remedy available to any Bank or the Administrative Agent; and

                     8.2.4     SUITS, ACTIONS, PROCEEDINGS.

                        If an Event of Default  shall  occur and be  continuing,
and whether or not the Administrative  Agent shall have accelerated the maturity
of Committed  Loans pursuant to any of the foregoing  provisions of this Section
8.2, the Agents or any Bank,  if owed any amount with respect to the Loans,  may
proceed  to protect  and  enforce  its  rights by suit in equity,  action at law
and/or other appropriate proceeding, whether for the specific performance of any
covenant or agreement  contained in this Agreement or the other Loan  Documents,
including  as  permitted  by  applicable  Law  the  obtaining  of the  EX  PARTE
appointment  of a  receiver,  and,  if such  amount  shall have  become  due, by
declaration  or otherwise,  proceed to enforce the payment  thereof or any other
legal or equitable right of any Agent or such Bank; and

                     8.2.5     APPLICATION OF PROCEEDS.

                        From and  after  the date on  which  the  Administrative
Agent  shall have taken any action  pursuant  to this  Section 8.2 and until all
Obligations of the Loan Parties

                                       73


have been paid in full,  any and all  proceeds  received  by the  Administrative
Agent from the  exercise  of any remedy by the  Administrative  Agent,  shall be
applied as follows:

                               (i)    first,  to  reimburse  the  Administrative
Agent  and the  Banks  for  out-of-pocket  costs,  expenses  and  disbursements,
including  reasonable  attorneys'  and  paralegals'  fees  and  legal  expenses,
incurred by the Administrative  Agent or the Banks in connection with collection
of any Obligations of any of the Loan Parties under any of the Loan Documents;

                               (ii)   second,    to   the   repayment   of   all
Indebtedness then due and unpaid of the Loan Parties to the Banks incurred under
this  Agreement  or any of the  other  Loan  Documents,  whether  of  principal,
interest,  fees,  expenses or  otherwise,  in such manner as the  Administrative
Agent may determine in its discretion; and

                               (iii)   the balance, if any, as required by Law.

                     8.2.6     OTHER RIGHTS AND REMEDIES.

                        In addition to all of the rights and remedies  contained
in this  Agreement  or in any of the other Loan  Documents,  the  Administrative
Agent shall have all of the rights and  remedies  under  applicable  Law, all of
which rights and remedies shall be cumulative and  non-exclusive,  to the extent
permitted  by Law.  The  Administrative  Agent may,  and upon the request of the
Required  Banks  shall,   exercise  all  post-default   rights  granted  to  the
Administrative Agent and the Banks under the Loan Documents or applicable Law.

            8.3.    RIGHT OF COMPETITIVE BID LOAN BANKS.

            If any Event of Default  shall  occur and be  continuing,  the Banks
which have any Bid Loans then outstanding to the Borrower (the "Bid Loan Banks")
shall not be entitled to accelerate  payment of the Bid Loans or to exercise any
right or remedy related to the collection of the Bid Loans until the Commitments
shall be terminated  hereunder  pursuant to Section 8.2. Upon such a termination
of the  Commitments:  (i)  references  to Revolving  Credit Loans in Section 8.2
shall be deemed to apply also to the Bid Loans and the Bid Loan  Banks  shall be
entitled to all enforcement  rights given to a holder of a Revolving Credit Loan
in Section 8.2, and (ii) the  definition  of Required  Banks shall be changed as
provided in Section 1.1 so that each Bank shall have voting rights  hereunder in
proportion  to its  share of the total  Loans  outstanding;  provided  that each
Designating  Bank shall serve as the agent of its Designated  Lender and as such
shall  exercise  all  voting,  approval  and  related  rights  on  behalf of its
Designated  Lender  as  more  fully  described  in  Section  10.11.3  and in the
Designation Agreement.

                                       74


                                  9. THE AGENTS

            9.1.    APPOINTMENT.

            Each Bank hereby  irrevocably  designates,  appoints and authorizes:
(i) PNC Bank to act as  Administrative  Agent for such Bank under this Agreement
and the other Loan  Documents for such Bank under this  Agreement and to execute
and  deliver or accept on behalf of each of the Banks the other Loan  Documents,
and (ii)  authorizes  each of PNC Bank and  Morgan to act as Agent for such Bank
under  this   Agreement.   Each  Bank   hereby   irrevocably   authorizes,   the
Administrative  Agent to take such action on its behalf under the  provisions of
this  Agreement  and the other  Loan  Documents  and any other  instruments  and
agreements  referred to herein,  and to exercise such powers and to perform such
duties hereunder as are specifically delegated to or required of the Agents, the
Administrative  Agent or any of them by the  terms  hereof,  together  with such
powers  as are  reasonably  incidental  thereto.  PNC Bank  agrees to act as the
Administrative  Agent on  behalf  of the Banks to the  extent  provided  in this
Agreement,  and each of PNC Bank and Morgan  agrees to act as Agent on behalf of
the Banks to the extent provided in this Agreement.

            9.2.    DELEGATION OF DUTIES.

            The Agents and the  Administrative  Agent may  perform  any of their
respective  duties  hereunder by or through  agents or employees  (PROVIDED such
delegation does not constitute a relinquishment  of their  respective  duties as
Agents or the Administrative Agent, as the case may be) and, subject to Sections
9.5 [Reimbursement and Indemnification of Agents by the Borrower,  Etc.] and 9.6
[Exculpatory Provisions;  Limitation of Liability],  shall be entitled to engage
and pay for the  advice  or  services  of any  attorneys,  accountants  or other
experts  concerning all matters  pertaining to its duties  hereunder and to rely
upon any advice so obtained.

            9.3.    NATURE OF DUTIES; INDEPENDENT CREDIT INVESTIGATION.

            Neither  the  Agents  nor the  Administrative  Agent  shall have any
duties or  responsibilities  except those  expressly set forth in this Agreement
and no implied covenants, functions,  responsibilities,  duties, obligations, or
liabilities  shall be read into this Agreement or otherwise exist. The duties of
the   Administrative   Agent  and  of  the  Agents  shall  be   mechanical   and
administrative in nature;  neither the Administrative Agent nor the Agents shall
have by reason of this Agreement a fiduciary or trust relationship in respect of
any Bank; and nothing in this Agreement, expressed or implied, is intended to or
shall be so  construed as to impose upon the  Administrative  Agent or any Agent
any  obligations  in respect of this  Agreement  except as  expressly  set forth
herein.  Without  limiting the generality of the foregoing,  the use of the term
"Agents" in this Agreement with reference to the Agents or Administrative Agent,
as the case may be, is not intended to connote any  fiduciary  or other  implied
(or express)  obligations  arising under agency  doctrine of any applicable Law.
Instead,  such term is used merely as a matter of market custom, and is intended
to create or reflect only an  administrative  relationship  between  independent
contracting  parties.  Each Bank  expressly  acknowledges  (i) that  neither the
Administrative Agent nor any Agent has made any representations or warranties to
it and that no 

                                       75


act by the  Administrative  Agent or any Agent  hereafter  taken,  including any
review of the affairs of any of the Loan Parties,  shall be deemed to constitute
any representation or warranty by the  Administrative  Agent or any Agent to any
Bank; (ii) that it has made and will continue to make, without reliance upon the
Administrative  Agent or any Agent,  its own  independent  investigation  of the
financial condition and affairs and its own appraisal of the creditworthiness of
each of the Loan Parties in  connection  with this  Agreement and the making and
continuance  of the Loans  hereunder;  and (iii)  except as  expressly  provided
herein, that neither the Administrative  Agent nor any Agent shall have any duty
or  responsibility,  either  initially or on a continuing  basis, to provide any
Bank with any credit or other  information with respect thereto,  whether coming
into its possession before the making of any Loan, the issuance of any Letter of
Credit or at any time or times thereafter.

            9.4.   ACTIONS IN DISCRETION OF AGENTS; INSTRUCTIONS FROM THE BANKS.

            The  Administrative  Agent and each Agent  agrees,  upon the written
request of the Required  Banks, to take or refrain from taking any action of the
type  specified  as being  within the  Administrative  Agent's  or such  Agent's
rights,  powers or discretion  herein,  PROVIDED that neither the Administrative
Agent nor any Agent  shall be  required  to take any action  which  exposes  the
Administrative  Agent or any Agent to personal liability or which is contrary to
this Agreement or any other Loan Document or applicable Law. In the absence of a
request by the Required  Banks,  the  Administrative  Agent and each Agent shall
have  authority,  in  their  sole  discretion,  to take or not to take  any such
action, unless this Agreement  specifically requires the consent of the Required
Banks or all of the Banks.  Any action  taken or failure to act pursuant to such
instructions or discretion shall be binding on the Banks, subject to Section 9.6
[Exculpatory  Provisions,  Etc.].  Subject to the  provisions of Section 9.6, no
Bank shall have any right of action whatsoever against the Administrative  Agent
or any Agent as a result  of the  Administrative  Agent or any  Agent  acting or
refraining  from acting  hereunder in accordance  with the  instructions  of the
Required  Banks,  or in the  absence  of  such  instructions,  in  the  absolute
discretion of the Administrative Agent or the Agents, as the case may be.

            9.5.   REIMBURSEMENT AND INDEMNIFICATION OF AGENTS BY THE BORROWER.
               
            The  Borrower   unconditionally  agrees  to  pay  or  reimburse  the
Administrative  Agent and each Agent and hold the Administrative  Agent and each
Agent  harmless  against  (a)  liability  for  the  payment  of  all  reasonable
out-of-pocket costs, expenses and disbursements,  including fees and expenses of
outside  counsel,  appraisers  and  environmental  consultants,  incurred by the
Administrative  Agent or any  Agent  (i) in  connection  with  the  development,
negotiation,  preparation,  printing,  execution,  administration,  syndication,
interpretation  and  performance of this Agreement and the other Loan Documents,
(ii) relating to any requested  amendments,  waivers or consents pursuant to the
provisions hereof, (iii) in connection with the enforcement of this Agreement or
any other Loan  Document or collection of amounts due hereunder or thereunder or
the proof and  allowability  of any claim  arising  under this  Agreement or any
other Loan  Document,  whether in  bankruptcy  or  receivership  proceedings  or
otherwise,  and (iv) in any workout or  restructuring  or in connection with the
protection,  preservation, 

                                       76


exercise or enforcement of any of the terms hereof or of any rights hereunder or
under any other Loan Document or in connection with any foreclosure,  collection
or  bankruptcy  proceedings,  and  (b)  all  liabilities,  obligations,  losses,
damages, penalties,  actions, judgments, suits, costs, expenses or disbursements
of any kind or  nature  whatsoever  which  may be  imposed  on,  incurred  by or
asserted against the Administrative Agent or any Agent, in its capacity as such,
in any way  relating  to or  arising  out of this  Agreement  or any other  Loan
Documents  or any action  taken or omitted  by the  Administrative  Agent or any
Agent  hereunder or  thereunder,  PROVIDED that the Borrower shall not be liable
for any portion of such liabilities,  obligations,  losses, damages,  penalties,
actions,  judgments, suits, costs, expenses or disbursements if the same results
from the  Administrative  Agent's or any  Agent's  gross  negligence  or willful
misconduct, or if the Borrower was not given notice of the subject claim and the
opportunity to participate in the defense  thereof,  at its expense (except that
the Borrower  shall remain liable to the extent such failure to give notice does
not result in a loss to the Borrower),  or if the same results from a compromise
or settlement agreement entered into without the consent of the Borrower,  which
shall not be unreasonably withheld.

            9.6.    EXCULPATORY PROVISIONS; LIMITATION OF LIABILITY.

            Neither  the  Administrative  Agent,  any  Agent  nor  any of  their
respective directors, officers, employees, agents, attorneys or Affiliates shall
(a) be liable to any Bank for any  action  taken or omitted to be taken by it or
them  hereunder,  or in  connection  herewith  including  pursuant  to any  Loan
Document,  unless  caused  by its or  their  own  gross  negligence  or  willful
misconduct,  (b) be  responsible  in any  manner  to any of the  Banks  for  the
effectiveness,  enforceability,  genuineness,  validity or the due  execution of
this Agreement or any other Loan  Documents or for any recital,  representation,
warranty, document, certificate, report or statement herein or made or furnished
under or in connection with this Agreement or any other Loan  Documents,  or (c)
be under any obligation to any of the Banks to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions hereof or
thereof on the part of the Loan Parties,  or the financial condition of the Loan
Parties,  or the  existence  or  possible  existence  of any Event of Default or
Potential  Default.  No claim may be made by any of the Loan Parties,  any Bank,
the  Administrative  Agent or any Agent or any of their respective  Subsidiaries
against the Administrative Agent, any Agent, any Bank or any of their respective
directors, officers, employees, agents, attorneys or Affiliates, or any of them,
for any special,  indirect or  consequential  damages or, to the fullest  extent
permitted by Law,  for any punitive  damages in respect of any claim or cause of
action  (whether  based on contract,  tort,  statutory  liability,  or any other
ground)  based  on,  arising  out of or  related  to any  Loan  Document  or the
transactions  contemplated  hereby or any act,  omission or event  occurring  in
connection therewith, including the negotiation,  documentation,  administration
or collection  of the Loans,  and the Borrower (for itself and on behalf of each
of its Subsidiaries),  the Administrative Agent, each Agent and each Bank hereby
waive,  releases  and agree  never to sue upon any  claim for any such  damages,
whether such claim now exists or  hereafter  arises and whether or not it is now
known or  suspected  to exist in its favor.  Each Bank agrees  that,  except for
notices,  reports and other documents  expressly required to be furnished to the
Banks  by the  Administrative  Agent  or any  Agent  hereunder  or  given to the
Administrative  Agent or any Agent for the  account  of or


                                       77


with copies for the Banks, the Administrative Agent each Agent and each of their
respective directors, officers, employees, agents, attorneys or Affiliates shall
not have any duty or responsibility to provide any Bank with any credit or other
information concerning the business, operations,  property, condition (financial
or otherwise),  prospects or creditworthiness of the Loan Parties which may come
into the  possession  of the  Administrative  Agent,  any  Agent or any of their
directors, officers, employees, agents, attorneys or Affiliates.

            9.7.    REIMBURSEMENT AND INDEMNIFICATION OF AGENTS BY THE BANKS.

            Each Bank agrees to reimburse and indemnify the Administrative Agent
and each  Agent (to the  extent  not  reimbursed  by the  Borrower  and  without
limiting the  Obligation  of the Borrower to do so) in proportion to its Ratable
Share from and against all liabilities, obligations, losses, damages, penalties,
actions,   judgments,   suits,  costs,  expenses  or  disbursements,   including
attorneys'  fees  and  disbursements  (including  the  allocated  costs of staff
counsel), and costs of appraisers and environmental consultants,  of any kind or
nature  whatsoever  which may be imposed on, incurred by or asserted against the
Administrative  Agent, the Agents, or any of them in their respective capacities
as such,  in any way  relating to or arising out of this  Agreement or any other
Loan Documents or any action taken or omitted by the Administrative Agent or any
Agent  hereunder or  thereunder,  PROVIDED  that no Bank shall be liable for any
portion of such liabilities,  obligations,  losses, damages, penalties, actions,
judgments,  suits, costs, expenses or disbursements (a) if the same results from
the   Administrative   Agent's  or  any  Agent's  gross  negligence  or  willful
misconduct,  as the case may be, or (b) if such Bank was not given notice of the
subject claim and the opportunity to participate in the defense thereof,  at its
expense (except that such Bank shall remain liable to the extent such failure to
give notice does not result in a loss to the Bank),  or (c) if the same  results
from a compromise and settlement  agreement  entered into without the consent of
such Bank,  which shall not be  unreasonably  withheld.  In addition,  each Bank
agrees promptly upon demand to reimburse the Administrative Agent and each Agent
(to  the  extent  not  reimbursed  by the  Borrower  and  without  limiting  the
Obligation  of the Borrower to do so) in proportion to its Ratable Share for all
amounts  due and  payable by the  Borrower  to the  Administrative  Agent or the
Agents,  as the case may be in  connection  with the periodic  audit of the Loan
Parties' books,  records and business properties by the Administrative  Agent or
the Agents.

            9.8.    RELIANCE BY AGENTS.

            The  Administrative  Agent and each Agent  shall be entitled to rely
upon any  writing,  telegram,  telex or teletype  message,  resolution,  notice,
consent, certificate,  letter, cablegram,  statement, order or other document or
conversation by telephone or otherwise  believed by it to be genuine and correct
and to have been signed, sent or made by the proper Person or Persons,  and upon
the advice and opinions of counsel and other  professional  advisers selected by
the Administrative  Agent or any Agent. The Administrative  Agent and each Agent
shall be fully  justified  in failing or refusing  to take any action  hereunder
unless it shall first be  indemnified to its  satisfaction  by the Banks against
any and all  liability  and  expense  which may be  incurred  by it by reason of
taking or continuing to take any such action.



                                       78


            9.9.    NOTICE OF DEFAULT.

            Neither  the  Administrative  Agent nor any Agent shall be deemed to
have knowledge or notice of the occurrence of any Potential  Default or Event of
Default unless such person has received  written notice from a Revolving  Credit
Bank or the Borrower  referring to this  Agreement,  describing  such  Potential
Default  or Event of  Default  and  stating  that such  notice  is a "notice  of
default."

            9.10.   NOTICES.

            Each of the  Administrative  Agent and each Agent agrees to promptly
send to each  Revolving  Credit  Bank a copy of all  notices  received  from the
Borrower  pursuant  to the  provisions  of  this  Agreement  or the  other  Loan
Documents promptly upon receipt thereof. The Administrative Agent shall promptly
notify the Borrower and the other  Revolving  Credit Banks of each change in the
Base Rate and the effective date thereof.

            9.11.   BANKS IN THEIR INDIVIDUAL CAPACITIES.

            With  respect to its  Revolving  Credit  Commitment,  the  Revolving
Credit Loans,  the Swing Loans, the issuance of any Letter of Credit and any Bid
Loans  made by it and any other  rights and  powers  given to it as a  Revolving
Credit  Bank  hereunder  or  under  any  of  the  other  Loan   Documents,   the
Administrative  Agent and each  Agent  shall  have the same  rights  and  powers
hereunder as any other Revolving Credit Bank and may exercise the same as though
it were not the  Administrative  Agent or an Agent,  as the case may be, and the
term "Revolving  Credit Banks" shall,  unless the context  otherwise  indicates,
include the Administrative Agent and each Agent in its individual capacity.  PNC
Bank and its  Affiliates,  Morgan and its  Affiliates  and each of the Banks and
their  respective  Affiliates  may,  without  liability  to  account,  except as
prohibited herein, make loans to, accept deposits from, discount drafts for, act
as trustee under  indentures of, and generally  engage in any kind of banking or
trust business with, the Loan Parties and their  Affiliates,  in the case of the
Administrative   Agent  or  any   Agent,   as  though  it  were  not  acting  as
Administrative  Agent or Agent, as the case may be, hereunder and in the case of
each Bank, as though such Bank were not a Bank hereunder.  The Banks acknowledge
that, pursuant to such activities, the Administrative Agent or its Affiliates or
any Agent or its respective Affiliates may (i) receive information regarding the
Loan  Parties  (including  information  that may be subject  to  confidentiality
obligations  in favor of the Loan  Parties)  and  acknowledge  that  neither the
Administrative Agent nor any Agent shall be under any obligation to provide such
information to them, and (ii) accept fees and other  consideration from the Loan
Parties for services in connection  with this  Agreement  and otherwise  without
having to account for the same to the Banks.

            9.12.   HOLDERS OF NOTES.

            The Administrative Agent and each Agent may deem and treat any payee
of any Note as the  owner  thereof  for all  purposes  hereof  unless  and until
written notice of the assignment or transfer  thereof shall have been filed with
the Administrative  Agent and the 


                                       79


Agents.  Any  request,  authority  or  consent  of any Person who at the time of
making  such  request or giving such  authority  or consent is the holder of any
Note shall be conclusive  and binding on any  subsequent  holder,  transferee or
assignee of such Note or of any Note or Notes issued in exchange therefor.

            9.13.   EQUALIZATION OF BANKS.

            The Banks and the holders of any  participations  in any Commitments
or Loans  or  other  rights  or  obligations  of a Bank  hereunder  agree  among
themselves  that,  with respect to all amounts  received by any Bank or any such
holder  for   application  on  any  Obligation   hereunder  or  under  any  such
participation,  whether  received by  voluntary  payment,  by  realization  upon
security,  by the  exercise  of the  right  of  set-off  or  banker's  lien,  by
counterclaim or by any other non-pro rata source,  equitable  adjustment will be
made in the manner stated in the following sentence so that, in effect, all such
excess  amounts  will be shared  ratably  among the  Banks and such  holders  in
proportion  to their  interests  in payments on the Loans,  except as  otherwise
provided in Section 3.4.3 [Agents' and Bank's Rights],  4.4.2  [Replacement of a
Bank] or 4.5 [Additional  Compensation in Certain  Circumstances].  The Banks or
any such holder  receiving any such amount shall  purchase for cash from each of
the other Banks an interest in such Bank's  Loans in such amount as shall result
in a ratable  participation  by the Banks and each such holder in the  aggregate
unpaid  amount of the Loans,  PROVIDED that if all or any portion of such excess
amount is thereafter recovered from the Bank or the holder making such purchase,
such purchase  shall be rescinded and the purchase  price restored to the extent
of such recovery,  together with interest or other amounts,  if any, required by
law  (including  court  order) to be paid by the Bank or the holder  making such
purchase.

            9.14.   SUCCESSOR AGENTS.

            Any Agent or the  Administrative  Agent  (i) may  resign as Agent or
Administrative  Agent,  as  the  case  may  be or  (ii)  shall  resign  if  such
resignation is requested by the Required  Banks (if the Agent or  Administrative
Agent is a Revolving Credit Bank, such Agent's or  Administrative  Agent's Loans
and  Commitment  shall be considered in  determining  whether the Required Banks
have requested such resignation) or required by Section 4.4.2  [Replacement of a
Bank],  in either  case of (i) or (ii) by giving not less than thirty (30) days'
prior written notice to the Borrower.  If any Agent or the Administrative  Agent
shall resign  under this  Agreement,  then either (a) the  Required  Banks shall
appoint  from among the  Revolving  Credit  Banks a  successor  to such Agent or
Administrative  Agent,  as the  case may be,  for the  Revolving  Credit  Banks,
subject to the consent of the  Borrower,  such  consent  not to be  unreasonably
withheld,  or (b) if a successor Agent or  Administrative  Agent shall not be so
appointed and approved within the thirty (30) day period following an Agent's or
the  Administrative  Agent's notice, as the case may be, to the Revolving Credit
Banks of its resignation,  then the resigning  Administrative Agent or resigning
Agent, as the case may be shall appoint, with the consent of the Borrower,  such
consent  not to be  unreasonably  withheld,  a  successor  who  shall  serve  as
Administrative  Agent  or  Agent,  as the case may be,  until  such  time as the
Required  Banks  appoint  and the  Borrower  consents  to the  appointment  of a
successor to such resigning  Administrative Agent or Agent. 


                                       80


Upon its appointment  pursuant to either clause (a) or (b) above, such successor
Administrative Agent or Agent shall succeed to the rights,  powers and duties of
the resigning  Administrative  Agent or Agent, as the case may be, and the terms
"Agent"  and   "Administrative   Agent"  shall  mean  such  successor  Agent  or
Administrative  Agent, as the case may be, effective upon its  appointment,  and
the former  Administrative  Agent's or Agent's  rights,  powers and duties as an
Agent or Administrative  Agent shall be terminated  without any other or further
act or deed on the part of such former Agent or  Administrative  Agent or any of
the parties to this Agreement. After the resignation of the Administrative Agent
or any Agent  hereunder,  the  provisions  of this  Section 9 shall inure to the
benefit  of such  former  Administrative  Agent and each  former  Agent and such
former  Administrative  Agent and each former  Agent shall not by reason of such
resignation be deemed to be released from liability for any actions taken or not
taken by it while it was Administrative Agent or an Agent under this Agreement.

            9.15.   ADMINISTRATIVE AGENT'S FEE.

            The Borrower shall pay to the  Administrative  Agent a nonrefundable
fee (the "Bid Loan Processing  Fee") in connection with processing Bid Loans and
a nonrefundable fee (the  "Administrative  Agent's Fee") for the  Administrative
Agent's  services  hereunder  under the terms of a letter  (the  "Administrative
Agent's Letter") between the Borrower and the  Administrative  Agent, as amended
from time to time.

            9.16.   AVAILABILITY OF FUNDS.

            The Administrative  Agent may assume that each Bank has made or will
make the  proceeds of a Loan  available to the  Administrative  Agent unless the
Administrative  Agent  shall  have been  notified  by such Bank on or before the
later of (1) the close of Business on the Business Day  preceding  the Borrowing
Date with  respect  to such Loan or two (2) hours  before  the time on which the
Administrative  Agent  actually  funds the proceeds of such Loan to the Borrower
(whether  using its own funds  pursuant to this Section  9.16 or using  proceeds
deposited  with the  Administrative  Agent by the Banks and whether such funding
occurs  before or after the time on which  Banks are  required  to  deposit  the
proceeds of such Loan with the Administrative  Agent). The Administrative  Agent
may, in reliance  upon such  assumption  (but shall not be  required  to),  make
available to the Borrower a corresponding  amount. If such corresponding  amount
is not in fact made  available  to the  Administrative  Agent by such Bank,  the
Administrative  Agent shall be  entitled  to recover  such amount on demand from
such Bank (or, if such Bank fails to pay such amount  forthwith upon such demand
from the Borrower) together with interest thereon, in respect of each day during
the period commencing on the date such amount was made available to the Borrower
and ending on the date the Administrative  Agent recovers such amount, at a rate
per annum equal to (i) the Federal Funds  Effective  Rate during the first three
(3) days  after such  interest  shall  begin to accrue  and (ii) the  applicable
interest rate in respect of such Loan after the end of such three-day period.


                                       81


            9.17.   CALCULATIONS.

            In the  absence  of gross  negligence  or  willful  misconduct,  the
Administrative  Agent shall not be liable for any error in computing  the amount
payable to any Bank whether in respect of the Loans,  fees or any other  amounts
due to the Banks under this  Agreement.  In the event an error in computing  any
amount payable to any Bank is made, the  Administrative  Agent, the Borrower and
each  affected Bank shall,  forthwith  upon  discovery of such error,  make such
adjustments  as shall be required to correct  such error,  and any  compensation
therefor will be calculated at the Federal Funds Effective Rate.

            9.18.   BENEFICIARIES.

            Except as expressly  provided herein, the provisions of this Section
9 are solely for the  benefit of the  Administrative  Agent,  each Agent and the
Banks,  and the Loan Parties shall not have any rights to rely on or enforce any
of the  provisions  hereof.  In  performing  its functions and duties under this
Agreement,  the  Administrative  Agent and each  Agent  shall act  solely as the
Administrative  Agent or  Agent,  as the case may be,  of the  Banks  and do not
assume  and  shall  not be  deemed  to have  assumed  any  obligation  toward or
relationship of agency or trust with or for any of the Loan Parties.


                                10. MISCELLANEOUS

            10.1.   MODIFICATIONS, AMENDMENTS OR WAIVERS.

            With the written consent of the Required Banks,  the  Administrative
Agent,  acting on behalf of all the Banks,  and the  Borrower,  on behalf of the
Loan Parties,  may from time to time enter into written  agreements  amending or
changing  any  provision  of this  Agreement  or any other Loan  Document or the
rights of the Banks or the Loan Parties  hereunder or  thereunder,  or may grant
written  waivers or  consents  to a departure  from the due  performance  of the
Obligations  of the Loan Parties  hereunder or thereunder.  Any such  agreement,
waiver or consent made with such written  consent shall be effective to bind all
the Banks and the Loan Parties;  PROVIDED,  that, without the written consent of
all the Banks, no such agreement, waiver or consent may be made which will:

                     10.1.1    INCREASE OF REVOLVING CREDIT COMMITMENT;
                               EXTENSION OF EXPIRATION DATE.

                        Increase the amount of the Revolving  Credit  Commitment
of any Bank hereunder or extend the Expiration Date;

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                     10.1.2    EXTENSION OF PAYMENT; REDUCTION OF PRINCIPAL
                               INTEREST OR FEES; MODIFICATION OF TERMS OF 
                               PAYMENT.

                        Whether  or not any Loans are  outstanding,  extend  the
time for payment of principal  or interest of any Loan,  the Facility Fee or any
other fee payable to any Bank, or reduce the principal  amount of or the rate of
interest  borne by any Loan or reduce the  Facility Fee or any other fee payable
to any Bank,  or  otherwise  affect the terms of payment of the  principal of or
interest of any Loan, the Facility Fee or any other fee payable to any Bank;

                     10.1.3    RELEASE OF GUARANTOR.

                        Release any  Guarantor  from its  Obligations  under the
Guaranty  Agreement  or  any  other  security  for  any  of  the  Loan  Parties'
Obligations,  other than,  prior to an Event of Default  upon the request by the
Borrower to the Administrative  Agent of the release from the Guaranty Agreement
of any  Subsidiary  which is no longer a Significant  Subsidiary  (which request
shall be accompanied by evidence satisfactory to the Administrative Agent in its
sole  discretion  that the  Subsidiary  which the Borrower is  requesting  be so
released  from the Guaranty  Agreement is no longer a  Significant  Subsidiary),
which release from the Guaranty Agreement of a non Significant Subsidiary may be
granted solely by the Administrative Agent without the approval of any Revolving
Credit Bank; or

                     10.1.4    MISCELLANEOUS

                        Amend  Section 4.2 [Pro Rata  Treatment  of Banks],  9.6
[Exculpatory  Provisions,  Etc.] or 9.13 [Equalization of Banks] or this Section
10.1, alter any provision  regarding the pro rata treatment of the Banks, change
the  definition  of  Required  Banks,  change the  definition  of  Supermajority
Required  Banks,  or  change  any  requirement  providing  for  the  Banks,  the
Supermajority  Required  Banks or the Required  Banks to authorize the taking of
any action hereunder;  PROVIDED,  further, that no agreement,  waiver or consent
which would  modify the  interests,  rights or  obligations  of any Agent in its
capacity  shall be  effective  without  the written  consent of such  Agent,  no
agreement,  waiver or  consent  which  would  modify  the  interests,  rights or
obligations  of the  Administrative  Agent in its  capacity  shall be  effective
without the  written  consent of the  Administrative  Agent,  and no  agreement,
waiver or consent which would modify the interests, rights or obligations of any
Issuing Bank as the issuer of Letters of Credit  shall be effective  without the
written consent of such Issuing Bank.

            10.2.   NO IMPLIED WAIVERS; CUMULATIVE REMEDIES; WRITING REQUIRED.

            No course of dealing  and no delay or failure of the  Administrative
Agent, any Agent or any Bank in exercising any right, power, remedy or privilege
under this Agreement or any other Loan Document shall affect any other or future
exercise thereof or operate as a waiver thereof, nor shall any single or partial
exercise thereof or any abandonment or discontinuance of steps to enforce such a
right,  power,  remedy or privilege  preclude any further exercise thereof or of
any other  right,  power,  remedy or  privilege.  The rights and remedies of the
Administrative  Agent,  each Agent and the Banks  under this  Agreement  and any
other Loan  Documents are 

                                       83


cumulative  and not  exclusive  of any  rights  or  remedies  which  they  would
otherwise have. Any waiver, permit, consent or approval of any kind or character
on the part of any Bank of any breach or default  under  this  Agreement  or any
such waiver of any provision or condition of this  Agreement  must be in writing
and  shall  be  effective  only to the  extent  specifically  set  forth in such
writing.

            10.3.   REIMBURSEMENT AND INDEMNIFICATION OF BANKS BY THE
                    BORROWER; TAXES.

            The Borrower agrees  unconditionally upon demand to pay or reimburse
to each Bank (other than the  Administrative  Agent and the Agents,  as to which
the  Borrower's  Obligations  are set forth in Section  9.5  [Reimbursement  and
Indemnification  of Agents  by the  Borrower])  and to save  such Bank  harmless
against (i) liability  for the payment of all  reasonable  out-of-pocket  costs,
expenses and disbursements  (including fees and expenses of outside counsel) for
each Bank (except with respect to (a) and (b) below),  incurred by such Bank (a)
in connection with the administration and interpretation of this Agreement,  and
other instruments and documents to be delivered  hereunder,  (b) relating to any
amendments,  waivers or  consents  pursuant  to the  provisions  hereof,  (c) in
connection with the enforcement of this Agreement or any other Loan Document, or
collection of amounts due hereunder or thereunder or the proof and  allowability
of any claim arising under this Agreement or any other Loan Document, whether in
bankruptcy or receivership  proceedings or otherwise,  and (d) in any workout or
restructuring  or in connection with the protection,  preservation,  exercise or
enforcement  of any of the terms hereof or of any rights  hereunder or under any
other  Loan  Document  or in  connection  with any  foreclosure,  collection  or
bankruptcy proceedings, or (ii) all liabilities,  obligations,  losses, damages,
penalties,  actions,  judgments,  suits, costs, expenses or disbursements of any
kind or nature  whatsoever  which may be imposed  on,  incurred  by or  asserted
against such Bank,  in its  capacity as such,  in any way relating to or arising
out of this Agreement or any other Loan Documents or any action taken or omitted
by such Bank  hereunder or  thereunder,  PROVIDED that the Borrower shall not be
liable  for any  portion  of such  liabilities,  obligations,  losses,  damages,
penalties,  actions,  judgments,  suits, costs, expenses or disbursements (A) if
the same results from such Bank's gross negligence or willful misconduct, or (B)
if the Borrower was not given notice of the subject claim and the opportunity to
participate  in the defense  thereof,  at its expense  (except that the Borrower
shall remain liable to the extent such failure to give notice does not result in
a loss  to the  Borrower),  or (C) if the  same  results  from a  compromise  or
settlement  agreement  entered into without the consent of the  Borrower,  which
shall not be unreasonably  withheld. The Banks will attempt to minimize the fees
and expenses of legal  counsel for the Banks which are subject to  reimbursement
by the Borrower  hereunder by considering the usage of one law firm to represent
the Banks , the  Administrative  Agent, and the Agents if appropriate  under the
circumstances.  The Borrower agrees  unconditionally to pay all stamp, document,
transfer,  recording  or filing  taxes or fees and  similar  impositions  now or
hereafter  determined by the  Administrative  Agent, any Agent or any Bank to be
payable in connection  with this Agreement or any other Loan  Document,  and the
Borrower agrees unconditionally to save the Administrative Agent, each Agent and
the Banks  harmless  from and  against  any and all  present  or future  claims,
liabilities  or losses with respect to or resulting  from any omission to pay or
delay in paying any such taxes, fees or impositions.

                                       84


            10.4.   HOLIDAYS.

            Whenever  payment of a Loan to be made or taken  hereunder  shall be
due on a day which is not a Business Day such  payment  shall be due on the next
Business Day and such extension of time shall be included in computing  interest
and fees,  except that the Loans shall be due on the Business Day  preceding the
Expiration  Date if the  Expiration  Date is not a Business  Day.  Whenever  any
payment  or action to be made or taken  hereunder  (other  than  payment  of the
Loans)  shall be  stated to be due on a day which is not a  Business  Day,  such
payment  or action  shall be made or taken on the next  following  Business  Day
(except as provided in Section 3.2  [Interest  Periods] with respect to Interest
Periods under the  Euro-Rate  Option),  and such  extension of time shall not be
included in computing  interest or fees, if any, in connection with such payment
or action.

            10.5.   FUNDING BY BRANCH, SUBSIDIARY OR AFFILIATE.

                    10.5.1    NOTIONAL FUNDING.

                        Each  Bank  shall  have  the  right  from  time to time,
without  notice to the  Borrower,  to deem any branch,  Subsidiary  or Affiliate
(which for the  purposes  of this  Section  10.5 shall mean any  corporation  or
association which is directly or indirectly  controlled by or is under direct or
indirect  common control with any  corporation or association  which directly or
indirectly  controls such Bank) of such Bank to have made,  maintained or funded
any Loan to which  the  Euro-Rate  Option  applies  at any time,  PROVIDED  that
immediately  following (on the assumption  that a payment were then due from the
Borrower to such other  office),  and as a result of such  change,  the Borrower
would not be under any  greater  financial  obligation  pursuant  to Section 4.5
[Additional  Compensation in Certain  Circumstances]  than it would have been in
the absence of such  change.  Notional  funding  offices may be selected by each
Bank without  regard to such Bank's  actual  methods of making,  maintaining  or
funding the Loans or any sources of funding  actually  used by or  available  to
such Bank.

                     10.5.2    ACTUAL FUNDING.

                        Each Bank shall have the right from time to time to make
or maintain any Loan by arranging for a branch,  Subsidiary or Affiliate of such
Bank to make or maintain  such Loan subject to the last sentence of this Section
10.5.2. If any Bank causes a branch, Subsidiary or Affiliate to make or maintain
any part of the Loans  hereunder,  all terms and  conditions  of this  Agreement
shall,  except where the context clearly  requires  otherwise,  be applicable to
such  part of the  Loans  to the  same  extent  as if such  Loans  were  made or
maintained by such Bank,  but in no event shall any Bank's use of such a branch,
Subsidiary  or  Affiliate  to make or maintain  any part of the Loans  hereunder
cause such Bank or such  branch,  Subsidiary  or  Affiliate to incur any cost or
expenses  payable by the  Borrower  hereunder or require the Borrower to pay any
other  compensation  to any Bank  (including  any  expenses  incurred or payable
pursuant  to Section 4.5  [Additional  Compensation  in Certain  Circumstances])
which would otherwise not be incurred.

                                       85


            10.6.   NOTICES.

            All notices, requests,  demands, directions and other communications
(as used in this Section 10.6,  collectively  referred to as "notices") given to
or made upon any party hereto under the provisions of this Agreement shall be by
telephone  or in writing  (including  telex or facsimile  communication)  unless
otherwise  expressly permitted hereunder and shall be delivered or sent by telex
or facsimile to the  respective  parties at the  addresses and numbers set forth
under their respective names on SCHEDULE 1.1(B) hereof or in accordance with any
subsequent unrevoked written direction from any party to the others. All notices
shall,  except as otherwise  expressly herein provided,  be effective (a) in the
case of telex or facsimile,  when  received,  (b) in the case of  hand-delivered
notice,  when  hand-delivered,  (c) in the case of telephone,  when  telephoned,
PROVIDED,  however,  that in order to be effective,  telephonic  notices must be
confirmed  in writing no later than the next day by letter,  facsimile or telex,
(d) if given by mail, four (4) days after such communication is deposited in the
mail with first-class  postage  prepaid,  return receipt  requested,  and (e) if
given by any other means (including by air courier),  when delivered;  provided,
that notices to the Agents or to the Administrative Agent shall not be effective
until received.  Any Bank giving any notice to the Borrower shall simultaneously
send a copy thereof to the Administrative  Agent, and the  Administrative  Agent
shall  promptly  notify the other Banks of the receipt by it of any such notice.
Each  Designated  Lender  appoints  its  Designating  Bank as its  agent for the
purpose of  delivering  and  receiving  all notices  hereunder as more fully set
forth in Section 10.11 and in its  Designation  Agreement with such  Designating
Bank.  Any notice  delivered to the Borrower shall be deemed to be notice to the
Loan Parties and shall be binding upon all of the Loan Parties.

            10.7.   SEVERABILITY.

            The  provisions of this  Agreement are intended to be severable.  If
any provision of this Agreement shall be held invalid or  unenforceable in whole
or in part in any jurisdiction,  such provision shall, as to such  jurisdiction,
be ineffective to the extent of such invalidity or  unenforceability  without in
any  manner  affecting  the  validity  or  enforceability  thereof  in any other
jurisdiction or the remaining provisions hereof in any jurisdiction.

            10.8.   GOVERNING LAW.

            Each   Letter  of  Credit  and  Section   2.10   [Letter  of  Credit
Subfacility]   shall  be  subject  to  the  Uniform  Customs  and  Practice  for
Documentary   Credits  (1993  Revision),   International   Chamber  of  Commerce
Publication  No. 500,  as the same may be revised or amended  from time to time,
and  to  the  extent  not  inconsistent  therewith,  the  internal  laws  of the
Commonwealth of Pennsylvania  without regard to its conflict of laws principles,
and the  balance of this  Agreement  shall be deemed to be a contract  under the
Laws of the  Commonwealth of Pennsylvania and for all purposes shall be governed
by and  construed  and  enforced in  accordance  with the  internal  laws of the
Commonwealth of Pennsylvania without regard to its conflict of laws principles.

                                       86


            10.9.   PRIOR UNDERSTANDING.

            This  Agreement  and the other Loan  Documents  supersede  all prior
understandings  and  agreements,  whether  written or oral,  between the parties
hereto and thereto relating to the transactions provided for herein and therein,
including any prior confidentiality agreements and commitments.

            10.10.  DURATION; SURVIVAL.

            All  representations and warranties of the Borrower contained herein
or made by any Loan Party in  connection  herewith  shall  survive the making of
Loans and issuance of Letters of Credit and shall not be waived by the execution
and delivery of this Agreement,  any investigation by the Administrative  Agent,
any Agent or the Banks, the making of Loans,  issuance of Letters of Credit,  or
payment in full of the Loans.  All  covenants  and  agreements  of the  Borrower
contained in Sections 7.1 [Affirmative Covenants],  7.2 [Negative Covenants] and
7.3 [Reporting Requirements] herein shall continue in full force and effect from
and after the date hereof so long as the Borrower may borrow or request  Letters
of Credit hereunder and until termination of the Commitments and payment in full
of the Loans and  expiration  or  termination  of all  Letters  of  Credit.  All
covenants  and  agreements  of the  Borrower  contained  herein  relating to the
payment of principal,  interest,  premiums,  additional compensation or expenses
and  indemnification,  including  those set forth in  Section 4  [Payments]  and
Sections 9.5 [Reimbursement and Indemnification of Agents by the Borrower],  9.7
[Reimbursement and  Indemnification of Agents by Banks] and 10.3  [Reimbursement
and  Indemnification  of Banks by the Borrower  Etc.],  shall survive payment in
full of the  Loans,  expiration  or  termination  of the  Letters  of Credit and
termination of the Commitments.

            10.11.   SUCCESSORS AND ASSIGNS.

                     10.11.1   BINDING EFFECT; ASSIGNMENTS BY BORROWER.

                        This Agreement  shall be binding upon and shall inure to
the benefit of the Banks,  the Agents,  the  Administrative  Agent,  the Issuing
Banks, the Borrower and their respective successors and assigns, except that the
Borrower may not assign or transfer any of its rights and Obligations  hereunder
or any interest herein without the consent of all of the Revolving  Credit Banks
(each  on its  own  behalf  and on  behalf  of any  Designated  Lenders  of such
Revolving Credit Bank).

                     10.11.2   ASSIGNMENTS AND PARTICIPATIONS BY BANKS OTHER
                               THAN ASSIGNMENTS OF BID LOANS AMONG DESIGNATING 
                               BANKS AND DESIGNATED LENDERS.

                        This   Section   shall  apply  to  any   assignment   or
participation  by a  Bank  of its  Loans,  Letters  of  Credit  Outstandings  or
Commitments   except  for   assignments  or  designations  of  Bid  Loans  among
Designating  Banks or  Designated  Lenders  described in Section  10.11.3.  Each
Revolving  Credit Bank may, at its own cost, make assignments of all or any part
of its Revolving Credit  Commitment and Revolving Credit Loans and Bid Loans and
its Ratable



                                       87


Share of Letter of Credit  Outstandings  to one or more banks or other entities,
subject to the  consent of the  Borrower  (which  consent  shall not be required
during any period in which an Event of Default exists),  the applicable  Issuing
Banks, and the Administrative Agent with respect to any assignee,  such consents
not to be unreasonably  withheld,  and PROVIDED that assignments may not be made
in  amounts  less than  $10,000,000  and a Bank may assign a Bid Loan to another
Person only if either such Bank is a Revolving Credit Bank and is simultaneously
assigning all or a portion of its Revolving Credit Commitment to such Person, or
the assignee is already a Revolving Credit Bank hereunder. Each Bank may, at its
own  cost,  grant  participations  in all or any  part of its  Revolving  Credit
Commitment  and the  Revolving  Credit Loans and Bid Loans made by it and of its
Ratable  Share of Letter of Credit  Outstandings  to one or more  banks or other
entities,  without the consent of any party hereto. In the case of an assignment
of all or any  portion of a Revolving  Credit  Commitment,  upon  receipt by the
Administrative  Agent of the Assignment and Assumption  Agreement,  the assignee
shall  have,  to the  extent  of  such  assignment  (unless  otherwise  provided
therein),  the same rights,  benefits and obligations as it would have if it had
been  a  signatory  Revolving  Credit  Bank  hereunder,   the  Revolving  Credit
Commitments in Section 2.1 shall be adjusted accordingly,  and upon surrender of
any Revolving Credit Note subject to such assignment, the Borrower shall execute
and deliver a new  Revolving  Credit Note to the  assignee in an amount equal to
the amount of the Revolving Credit Commitment  assumed by it and a new Revolving
Credit Note to the  assigning  Revolving  Credit Bank in an amount  equal to the
Revolving Credit Commitment  retained by it hereunder.  The assigning Bank shall
surrender  its  Bid  Note  if  it is  assigning  all  of  its  Revolving  Credit
Commitment. The Borrower shall execute and deliver to the assignee a Bid Note in
the form of EXHIBIT 1.1(B).  Any assigning Bank shall pay to the  Administrative
Agent a service fee in the amount of $3,500 for each  assignment,  which  amount
shall not be subject to reimbursement or indemnification by the Borrower. In the
case of a participation, the participant shall have only the rights specified in
Section 8.2.3  [Set-Off] (the  participant's  rights against the selling Bank in
respect of such participation to be those set forth in the agreement executed by
such Bank in favor of the  participant  relating  thereto and not to include any
voting rights except with respect to changes of the type  referenced in Sections
10.1.1,  10.1.2 and 10.1.3), all of such Bank's obligations under this Agreement
or any other Loan Document shall remain  unchanged,  and all amounts  payable by
any Loan Party  hereunder or thereunder  shall be determined as if such Bank had
not  sold  such  participation.   Any  assignee  or  participant  which  is  not
incorporated  under the Laws of the United  States of America or a state thereof
shall  deliver  to the  Borrower  and  the  Administrative  Agent  the  form  of
certificate   described  in  Section  10.17   relating  to  federal  income  tax
withholding. Each Bank may furnish any publicly available information concerning
any Loan Party or its Subsidiaries and any other information concerning any Loan
Party or its  Subsidiaries  in the  possession of such Bank from time to time to
assignees and participants  (including  prospective  assignees or participants),
PROVIDED  that  such  assignees  and  participants  agree  to be  bound  by  the
provisions of Section 10.12.

                                       88


                     10.11.3   ASSIGNMENTS OF BID LOANS AMONG DESIGNATING
                               BANKS AND DESIGNATED LENDERS.

                               10.11.3.1   ASSIGNMENTS TO DESIGNATED LENDERS.

                              Any  Revolving  Credit Bank (each a "Designating
Bank") may at any time,  subject to the consent of the  Borrower  which  consent
shall not be  unreasonably  withheld,  and subject to the terms of this  Section
10.11.3.1,  designate one or more Designated Lenders to fund Bid Loans which the
Designating  Bank is required to fund. The  provisions of Section  10.11.2 shall
not apply to any such designation. No Revolving Credit Bank shall be entitled to
make more than two such designations. The parties to each such designation shall
execute  and  deliver  to the  Administrative  Agent,  for their  acceptance,  a
Designation   Agreement.   Upon  its  receipt  of  an  appropriately   completed
Designation  Agreement  executed by a Designating Bank, a designee  representing
that it is a Designated  Lender and the Borrower  and the  Administrative  Agent
will accept such Designation Agreement.  From and after the later of the date on
which the Administrative Agent receives the executed  Designation  Agreement and
the effective date specified in the Designation Agreement, the Designated Lender
shall  become  a party  to this  Agreement  with a right to make any Bid Loan on
behalf of its  Designating  Bank  pursuant to Section 2.9 after the Borrower has
accepted a Bid (or a portion  thereof) of the Designating  Bank. The Designating
Bank shall not be obligated to designate its  Designated  Lender to fund any Bid
Loan,  and such  Designated  Lender shall not be obligated to fund any Bid Loan,
each such designation being subject to the agreement of the Designating Bank and
its  Designated  Lender  and to be made at the time  that such Bid Loan is made.
Each  Designating  Bank shall  serve as the agent of the  Designated  Lender for
purposes of giving and receiving all  communications  and notices and taking all
actions  hereunder,  including  without  limitation votes,  approvals,  waivers,
consents and  amendments  under or relating to this  Agreement or the other Loan
Documents. Any such notice,  communication,  vote, approval,  waiver, consent or
amendment  shall be signed by the  Designating  Bank as agent for the Designated
Lender  and shall not be signed by the  Designated  Lender.  The  Borrower,  the
Agents,  the  Administrative  Agent and the Banks may rely  thereon  without any
requirement  that the  Designated  Lender  sign or  acknowledge  the  same.  Any
Designated Lender which is not incorporated  under the Laws of the United States
of  America  or  a  state   thereof  shall  deliver  to  the  Borrower  and  the
Administrative Agent the form of certificate described in Section 10.17 relating
to federal income tax withholding.

                               10.11.3.2   ASSIGNMENTS BY DESIGNATED LENDERS.

                              Any  Designated  Lender  may  assign  its Bid Loan
to its  Designating  Bank or to another  Designated  Lender  designated  by such
Designating Bank and such assignment shall not be subject to the requirements of
Section 10.11.2,  provided that the Designated Lender and Designating Bank shall
notify the Administrative Agent promptly of such assignment.

                                       89


                              10.11.3.3  WAIVERS AND CERTAIN MATTERS REGARDING 
                                         CONDUITS AS DESIGNATING BANKS.

                              Notwithstanding any provision of this Agreement or
any other Loan Document to the contrary,  neither the Administrative  Agent, any
Agent,  the  Borrower  nor any Bank shall  institute or join any other person in
instituting against Wood Street Funding Corporation, a Delaware corporation (and
a  Designating  Bank,  designated  by PNC Bank) or against any  similar  conduit
established  by any other  Designated  Lender which has been  designated by such
Designated  Lender  as  a  Designating  Bank,  any  bankruptcy,  reorganization,
arrangement, insolvency or liquidation proceeding, or other proceeding under any
federal or state  bankruptcy  or similar  law,  for one year and a day after the
Expiration Date of the Credit Agreement.

                     10.11.4   FOREIGN ASSIGNEES AND PARTICIPANTS.

                        Any assignee or  participant  which is not  incorporated
under the Laws of the United  States of America or a state thereof shall deliver
to the Borrower and the Administrative  Agent the form of certificate  described
in Section  10.17  [Tax  Withholding  Clause]  relating  to  federal  income tax
withholding. Each Bank may furnish any publicly available information concerning
any Loan Party or its Subsidiaries and any other information concerning any Loan
Party or its  Subsidiaries  in the  possession of such Bank from time to time to
assignees and participants  (including  prospective  assignees or participants),
PROVIDED  that  such  assignees  and  participants  agree  to be  bound  by  the
provisions of Section 10.12 [Confidentiality].

                     10.11.5   ASSIGNMENTS BY BANKS TO FEDERAL RESERVE BANKS.

                        Notwithstanding  any other  provision in this Agreement,
any Bank may at any time  pledge  or  grant a  security  interest  in all or any
portion of its rights  under  this  Agreement,  its Notes (if any) and the other
Loan Documents to any Federal  Reserve Bank in accordance  with  Regulation A of
the FRB or U.S.  Treasury  Regulation 31 CFR Section 203.14 without notice to or
consent of the Borrower and the Administrative Agent. No such pledge or grant of
a  security  interest  shall  release  the  transferor  Bank of its  obligations
hereunder or under any other Loan Document.

            10.12.   CONFIDENTIALITY.

                     10.12.1   GENERAL.

                        The Agents, the Administrative  Agent and the Banks each
agree to keep  confidential all information  obtained from any Loan Party or its
Subsidiaries  which is  nonpublic  and  confidential  or  proprietary  in nature
(including   any   information   the   Borrower   specifically   designates   as
confidential),  except as provided below,  and to use such  information  only in
connection  with their  respective  capacities  under this Agreement and for the
purposes contemplated hereby. The Agents, the Administrative Agent and the Banks
shall be permitted to disclose such  information  (i) to outside legal  counsel,
accountants and other professional



                                       90


advisors who need to know such information in connection with the administration
and  enforcement  of this  Agreement,  subject to  agreement  of such Persons to
maintain the confidentiality, (ii) to assignees and participants as contemplated
by Section 10.11, (iii) to the extent requested by any bank regulatory authority
or, with notice to the  Borrower as permitted  by  applicable  Law, as otherwise
required by applicable  Law or by any subpoena or similar legal  process,  or in
connection with any investigation or proceeding  arising out of the transactions
contemplated by this Agreement, (iv) if it becomes publicly available other than
as a result of a breach of this Agreement or becomes available from a source not
known to be  subject to  confidentiality  restrictions,  or (v) if the  Borrower
shall have consented to such disclosure.

                     10.12.2   SHARING INFORMATION WITH AFFILIATES OF THE
                               BANKS.

                        The  Borrower   acknowledges  that  from  time  to  time
financial  advisory,  investment  banking and other  services  may be offered or
provided to the Borrower or one or more of its Affiliates  (in  connection  with
this  Agreement  or  otherwise)  by any Bank or by one or more  Subsidiaries  or
Affiliates of such Bank and the Borrower (on its own behalf and on behalf of its
Subsidiaries) hereby authorizes each Bank to share any information  delivered to
such Bank by the Borrower and its Subsidiaries pursuant to this Agreement, or in
connection with the decision of such Bank to enter into this  Agreement,  to any
such  Subsidiary  or Affiliate of such Bank, it being  understood  that any such
Subsidiary or affiliate of any Bank receiving such information shall be bound by
the  provisions  of  Section  10.12.1  as if it  were  a  Bank  hereunder.  Such
Authorization shall survive the repayment of the Loans and other Obligations and
the termination of the Commitments.

            10.13.   COUNTERPARTS.

            This  Agreement may be executed by different  parties  hereto on any
number of separate counterparts,  each of which, when so executed and delivered,
shall be an original,  and all such counterparts  shall together  constitute one
and the same instrument.

            10.14.   AGENT'S OR BANK'S CONSENT.

            Whenever  the  Administrative  Agent's,  any  Agent's  or any Bank's
consent is required to be obtained under this Agreement or any of the other Loan
Documents  as a  condition  to any action,  inaction,  condition  or event,  the
Administrative  Agent,  each Agent and each Bank shall be  authorized to give or
withhold such consent in its sole and absolute  discretion  and to condition its
consent upon the giving of  additional  collateral,  the payment of money or any
other matter.

            10.15.   EXCEPTIONS.

            The representations, warranties and covenants contained herein shall
be independent of each other, and no exception to any  representation,  warranty
or  covenant  shall be deemed to be an  exception  to any other  representation,
warranty or covenant contained herein 


                                       91


unless expressly provided, nor shall any such exceptions be deemed to permit any
action or omission that would be in contravention of applicable Law.

            10.16.   CONSENT TO FORUM; WAIVER OF JURY TRIAL.

            THE  BORROWER  HEREBY  IRREVOCABLY   CONSENTS  TO  THE  NONEXCLUSIVE
JURISDICTION  OF THE COURT OF COMMON  PLEAS OF  ALLEGHENY  COUNTY AND THE UNITED
STATES  DISTRICT  COURT FOR THE  WESTERN  DISTRICT OF  PENNSYLVANIA,  AND WAIVES
PERSONAL  SERVICE  OF ANY AND ALL  PROCESS  UPON IT AND  CONSENTS  THAT ALL SUCH
SERVICE OF PROCESS BE MADE BY  CERTIFIED  OR  REGISTERED  MAIL  DIRECTED  TO THE
BORROWER AT THE ADDRESS  PROVIDED  FOR IN SECTION 10.6 AND SERVICE SO MADE SHALL
BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT  THEREOF.  THE BORROWER WAIVES ANY
OBJECTION  TO  JURISDICTION  AND VENUE OF ANY  ACTION  INSTITUTED  AGAINST IT AS
PROVIDED  HEREIN  AND  AGREES  NOT TO  ASSERT  ANY  DEFENSE  BASED  ON  LACK  OF
JURISDICTION OR VENUE. THE BORROWER,  THE AGENTS, THE  ADMINISTRATIVE  AGENT AND
THE  BANKS  HEREBY  WAIVE  TRIAL  BY JURY IN ANY  ACTION,  SUIT,  PROCEEDING  OR
COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AGREEMENT,  ANY OTHER
LOAN DOCUMENT OR THE COLLATERAL TO THE FULL EXTENT PERMITTED BY LAW.

            10.17.   TAX WITHHOLDING CLAUSE.

            Each  Bank  or  assignee  or  participant  of a  Bank  that  is  not
incorporated  under the Laws of the United  States of America or a state thereof
agrees that it will deliver to each of the Borrower and the Administrative Agent
two (2) duly completed  copies of the following:  (i) Internal  Revenue  Service
Form W-9,  4224 or 1001,  or other  applicable  form  prescribed by the Internal
Revenue Service,  certifying that such Bank, assignee or participant is entitled
to receive  payments under this  Agreement and the other Loan Documents  without
deduction or  withholding  of any United  States  federal  income  taxes,  or is
subject to such tax at a reduced rate under an  applicable  tax treaty,  or (ii)
Internal  Revenue Service Form W-8 or other  applicable form or a certificate of
such Bank, assignee or participant  indicating that no such exemption or reduced
rate is  allowable  with  respect  to such  payments.  Each  Bank,  assignee  or
participant  required to deliver to the Borrower and the Administrative  Agent a
form or certificate  pursuant to the preceding  sentence shall deliver such form
or certificate as follows:  (A) each Bank which is a party hereto on the Closing
Date shall  deliver such form or  certificate  at least five (5)  Business  Days
prior to the  first  date on which  any  interest  or fees  are  payable  by the
Borrower  hereunder  for  the  account  of  such  Bank;  (B)  each  assignee  or
participant  shall deliver such form or  certificate  at least five (5) Business
Days before the effective date of such assignment or  participation  (unless the
Administrative  Agent in its sole  discretion  shall  permit  such  assignee  or
participant to deliver such form or certificate less than five (5) Business Days
before  such  date in which  case it shall be due on the date  specified  by the
Administrative  Agent).  Each Bank,  assignee or participant which so delivers a
Form  W-8,  W-9,  4224 or 1001  further  undertakes  to  

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deliver to each of the Borrower and the Administrative  Agent two (2) additional
copies of such form (or a  successor  form) on or before the date that such form
expires or becomes  obsolete or after the  occurrence  of any event  requiring a
change in the most recent form so delivered by it, and such  amendments  thereto
or extensions or renewals thereof as may be reasonably requested by the Borrower
or the  Administrative  Agent,  either  certifying  that such Bank,  assignee or
participant  is entitled to receive  payments under this Agreement and the other
Loan  Documents  without  deduction or  withholding of any United States federal
income taxes or is subject to such tax at a reduced rate under an applicable tax
treaty or stating  that no such  exemption  or reduced  rate is  allowable.  The
Administrative  Agent shall be entitled to withhold United States federal income
taxes at the full  withholding  rate unless the Bank,  assignee  or  participant
establishes  an exemption or that it is subject to a reduced rate as established
pursuant to the above provisions.

            10.18.   JOINDER OF GUARANTORS.

            Any  Significant  Subsidiary  of the  Borrower  which is required to
become a Guarantor  pursuant to Section 7.2.6  [Subsidiaries,  Partnerships  and
Joint  Ventures]  shall  execute and deliver to the  Administrative  Agent (i) a
Guarantor Joinder in substantially the form attached hereto as EXHIBIT 1.1(G)(1)
pursuant to which it shall join as a Guarantor  each of the  documents  to which
the Guarantors are parties; and (ii) documents in the forms described in Section
6.1 [First  Loans and Letters of Credit]  modified as  appropriate  to relate to
such Subsidiary.  The Borrower shall deliver such Guarantor  Joinder and related
documents to the  Administrative  Agent within five (5) Business  Days after any
Subsidiary of the Borrower becomes a Significant Subsidiary.


                                       93



      IN WITNESS WHEREOF,  the parties hereto, by their officers  thereunto duly
authorized,  have  executed  this  Agreement  as of the day and year first above
written.

ATTEST:                                   ARCH COAL, INC.


/s/ Miriam Rogers Singer                 By: /s/ Patrick A. Kriegshauser
- ------------------------                       -----------------------------
 Assistant Secretary                     Title: Senior Vice President and 
 [Seal]                                         Chief Financial Officer
                                               ----------------------------



                                       94


                                          [REVOLVING CREDIT BANKS:]


                                          PNC BANK, NATIONAL ASSOCIATION,
                                          individually and as Administrative
                                          Agent and Agent


                                          By: /s/ Michael J. Beyer
                                             ----------------------  
                                          Title: Senior Vice President
                                                ------------------------  


                                          MORGAN GUARANTY TRUST COMPANY OF
                                          NEW YORK, individually and as Agent


                                          By: /s/ Adam J. Silver 
                                             ---------------------  
                                          Title: Associate
                                                ---------------------  



                                                                 Exhibit 23.1



                       CONSENT OF INDEPENDENT AUDITORS



We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-30563) pertaining to the Ashland Coal, Inc. Employee Thrift Plan and
in the related Prospectus,  the Registration  Statement (Form S-8 No. 333-30565)
pertaining to the Arch Coal,  Inc. 1997 Stock  Incentive Plan and in the related
Prospectus,  and the Registration  Statement (Form S-8 No. 333-30567) pertaining
to the Coal-Mac,  Inc. Savings and Retirement Plan and in the related Prospectus
of our report dated January 22, 1997, with respect to the consolidated financial
statements of Ashland Coal,  Inc. and  subsidiaries  as of December 31, 1996 and
1995 and for each of the three  years in the  period  ended  December  31,  1996
included in this Current Report (Form 8-K).



                                          /s/ ERNST & YOUNG LLP

Louisville, Kentucky
July 11, 1997