-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VEsmEXzQpZxXVFYFDek2erSHurLnXf15l2pW0LD/0AVZyzL6YhKmPbnGdMaxsfP3 i8UEXj7zPbMDqJKxzTrj2Q== 0000950134-01-503866.txt : 20010710 0000950134-01-503866.hdr.sgml : 20010710 ACCESSION NUMBER: 0000950134-01-503866 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010531 FILED AS OF DATE: 20010706 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL METALS CO CENTRAL INDEX KEY: 0000022444 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-METALS SERVICE CENTERS & OFFICES [5051] IRS NUMBER: 750725338 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04304 FILM NUMBER: 1676126 BUSINESS ADDRESS: STREET 1: 7800 STEMMONS FRWY STREET 2: P O BOX 1046 CITY: DALLAS STATE: TX ZIP: 75221 BUSINESS PHONE: 2146894300 MAIL ADDRESS: STREET 1: 7800 STEMMONS FRWY STREET 2: PO BOX 1046 CITY: DALLAS STATE: TX ZIP: 75221 10-Q 1 d88897e10-q.txt FORM 10-Q FOR QUARTER ENDED MAY 31, 2001 1 FORM 1O-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 2O549 ------------------------------------ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------------------------- For quarter ended May 31, 2001 Commission File Number 1-4304 COMMERCIAL METALS COMPANY ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 75-0725338 - ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7800 Stemmons Freeway Dallas, Texas 75247 ----------------------------------------- (Address of principal executive offices ) ( Zip Code ) (214) 689-4300 ------------- (Registrant's telephone number, including area code ) --------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X ---- --- As of May 31, 2001 there were 12,987,960 shares of the Company's common stock issued and outstanding excluding 3,144,623 shares held in the Company's treasury. 2 COMMERCIAL METALS COMPANY AND SUBSIDIARIES INDEX
Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - May 31, 2001 and August 31, 2000 2 - 3 Consolidated Statements of Earnings Three months and nine months ended May 31, 2001 and 2000. 4 Consolidated Statements of Cash Flows - Nine months ended May 31, 2001 and 2000 5 Consolidated Statement of Stockholders' Equity- Nine months ended May 31, 2001 6 Notes to Consolidated Financial Statements 7 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 PART II OTHER INFORMATION Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
Page 1 3 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (In thousands except share data-unaudited)
May 31, August 31, 2001 2000 ----------- ----------- CURRENT ASSETS: Cash $ 19,180 $ 20,067 Accounts receivable (less allowance for collection losses of $6,916 and $7,868) 351,745 357,719 Inventories 266,066 277,455 Other 59,583 59,777 ----------- ----------- TOTAL CURRENT ASSETS 696,574 715,018 PROPERTY, PLANT, AND EQUIPMENT: Land 29,295 27,984 Buildings 106,864 97,566 Equipment 696,088 676,369 Leasehold improvements 32,763 31,507 Construction in process 25,507 22,702 ----------- ----------- 890,517 856,128 Less accumulated depreciation and amortization (489,675) (448,616) ----------- ----------- 400,842 407,512 OTHER ASSETS 46,975 50,332 ----------- ----------- $ 1,144,391 $ 1,172,862 =========== ===========
See notes to consolidated financial statements. Page 2 4 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands except share data-unaudited)
May 31, August 31, 2001 2000 ----------- ----------- CURRENT LIABILITIES: Commercial paper $ 51,675 $ 79,000 Notes payable 49,225 13,466 Accounts payable 178,199 194,538 Accrued expenses and other payables 125,095 142,680 Income taxes payable 4,136 678 Current maturities of long-term debt 8,790 8,828 ----------- ----------- TOTAL CURRENT LIABILITIES 417,120 439,190 DEFERRED INCOME TAXES 31,131 31,131 OTHER LONG-TERM LIABILITIES 21,764 20,041 LONG-TERM DEBT 253,967 261,884 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Capital stock: Preferred stock -- -- Common stock, par value $5.00 per share; authorized 40,000,000 shares; issued 16,132,583 shares; outstanding 12,987,960 and 13,172,675 shares 80,663 80,663 Additional paid-in capital 13,850 14,231 Accumulated other comprehensive loss (2,106) (1,591) Retained earnings 412,191 407,128 ----------- ----------- 504,598 500,431 Less treasury stock, 3,144,623 and 2,959,908 shares at cost (84,189) (79,815) ----------- ----------- 420,409 420,616 ----------- ----------- $ 1,144,391 $ 1,172,862 =========== ===========
See notes to consolidated financial statements. Page 3 5 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands except share data-unaudited)
Three months ended Nine months ended May 31, May 31, ------------------------- ------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- NET SALES $ 622,090 $ 701,209 $ 1,794,960 $ 1,951,260 COSTS AND EXPENSES: Cost of goods sold 539,197 614,133 1,582,970 1,707,618 Selling, general and administrative expenses 55,396 54,758 153,719 157,069 Employees' retirement plans 3,073 4,398 8,372 13,166 Interest expense 7,338 7,265 23,040 19,937 Litigation accrual -- -- 10,683 -- ----------- ----------- ----------- ----------- 605,004 680,554 1,778,784 1,897,790 ----------- ----------- ----------- ----------- EARNINGS BEFORE INCOME TAXES 17,086 20,655 16,176 53,470 INCOME TAXES 6,365 7,694 6,026 19,918 ----------- ----------- ----------- ----------- NET EARNINGS $ 10,721 $ 12,961 $ 10,150 $ 33,552 =========== =========== =========== =========== Basic earnings per share $ 0.83 $ 0.93 $ 0.78 $ 2.36 Diluted earnings per share $ 0.82 $ 0.92 $ 0.77 $ 2.31 Cash dividends per share $ 0.13 $ 0.13 $ 0.39 $ 0.39 Average basic shares outstanding 12,986,557 13,986,418 13,028,945 14,241,221 Average diluted shares outstanding 13,094,684 14,120,823 13,120,056 14,513,233
See notes to consolidated financial statements. Page 4 6 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands-unaudited)
Nine months ended May 31, May 31, -------- -------- 2001 2000 -------- -------- CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES: Net earnings $ 10,150 $ 33,552 Adjustments to earnings not requiring cash: Depreciation and amortization 51,264 49,579 Provision for losses on receivables 1,903 820 Net gain on sale of property (192) (5,847) -------- -------- Cash flows from operations before changes in operating assets and liabilities 63,125 78,104 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 4,071 (64,040) Decrease (increase) in inventories 11,389 (33,141) Decrease (increase) in other assets (1,458) (21,684) Increase (decrease) in accounts payable, accrued expenses, other payables and income taxes (30,466) (10,726) Increase (decrease) in other long-term liabilities 1,723 -- -------- -------- Net Cash Provided (Used) by Operating Activities 48,384 (51,487) CASH FLOWS (USED) PROVIDED BY INVESTING ACTIVITIES: Purchase of property, plant and equipment (40,100) (48,885) Sales of property, plant and equipment 192 7,866 Investment in joint venture -- (1,216) -------- -------- Net Cash (Used) Provided by Investing Activities (39,908) (42,235) CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES: Commercial paper - net change (27,325) 60,000 Notes payable - net change 35,759 40,310 Payments on long-term debt (7,955) (4,765) Stock issued under stock option, purchase and bonus plans 1,961 5,545 Treasury stock acquired (6,716) (28,816) Dividends paid (5,087) (5,561) -------- -------- Net Cash (Used) Provided by Financing Activities (9,363) 66,713 -------- -------- (Decrease) Increase in Cash and Cash Equivalents (887) (27,009) Cash and Cash Equivalents at Beginning of Year 20,067 44,665 -------- -------- Cash and Cash Equivalents at End of Period $ 19,180 $ 17,656 ======== ========
See notes to consolidated financial statements. Page 5 7 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands except share data-unaudited)
Treasury Common Stock Accumulated Stock ---------------------- Other Add'l ---------- Number of Comprehensive Paid-In Retained Number of Shares Amount Loss Capital Earnings Shares ---------- --------- ------------- ---------- ---------- ---------- Balance September 1, 2000 16,132,583 $ 80,663 $ (1,591) $ 14,231 $ 407,128 (2,959,908) Comprehensive income: Net earnings for nine months ended May 31, 2001 10,150 Other comprehensive (loss): Unrealized (loss) on derivatives net of taxes of $1 (3) Foreign currency translation adjustment net of taxes of $276 (512) Comprehensive income Cash dividends - $.39 a share (5,087) Treasury stock acquired (271,500) Stock issued under stock option, purchase and bonus plans (381) 86,785 ---------- ---------- ---------- ---------- ---------- ---------- Balance May 31, 2001 16,132,583 $ 80,663 $ (2,106) $ 13,850 $ 412,191 (3,144,623) ========== ========== ========== ========== ========== ========== Treasury Stock ---------- Amount Total ---------- ---------- Balance September 1, 2000 $ (79,815) $ 420,616 Comprehensive income: Net earnings for nine months ended May 31, 2001 10,150 Other comprehensive (loss): Unrealized (loss) on derivatives net of taxes of $1 (3) Foreign currency translation adjustment net of taxes of $276 (512) --------- Comprehensive income 9,635 Cash dividends - $.39 a share (5,087) Treasury stock acquired (6,716) (6,716) Stock issued under stock option, purchase and bonus plans 2,342 1,961 ---------- --------- Balance May 31, 2001 $ (84,189) $ 420,409 ========== =========
See notes to consolidated financial statements. Page 6 8 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - QUARTERLY FINANCIAL DATA: In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of May 31, 2001 and 2000, the results of operations and the cash flows for the nine months then ended. The results of operations for the nine month periods are not necessarily indicative of the results to be expected for a full year. NOTE B - LONG-TERM DEBT (in thousands):
Total Long-Term Current Amount Debt Maturities Outstanding -------- ---------- ----------- 6.75% notes due 2009 $100,000 $ -- $100,000 6.80% notes due 2007 50,000 -- 50,000 7.20% notes due 2005 100,000 -- 100,000 8.49% notes due 2001 -- 7,142 7,142 Other 3,967 1,648 5,615 -------- -------- -------- $253,967 $ 8,790 $262,757 ======== ======== ========
NOTE C - EARNINGS PER SHARE: In calculating earnings per share, there were no adjustments to net earnings to arrive at earnings for the nine months ended May 31, 2001 or 2000. The reconciliation of the denominators of the earnings per share calculations are as follows:
Three months ended Nine months ended May 31, May 31, ----------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Shares outstanding for basic earnings per share 12,986,557 13,986,418 13,028,945 14,241,221 Effect of dilutive securities-stock options/purchase plans 108,127 134,405 91,111 272,012 Shares outstanding for diluted earnings per share 13,094,684 14,120,823 13,120,056 14,513,233
Stock options with total share commitments of 1,619,188 at May 31, 2001 were anti-dilutive based on the average share price for the quarter of $25.48 per share, and exercise prices of $26.25 - $31.94 per share. The options expire by 2008. Page 7 9 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE D - DERIVATIVES AND RISK MANAGEMENT The Company enters into foreign currency exchange forwards as economic hedges of trade commitments or anticipated commitments denominated in currencies other than the functional currency to mitigate the effects of changes in currency rates. Due to the close match for foreign currency hedges, there was substantially no ineffectiveness in cost of goods sold or net earnings for the quarter ended May 31, 2001. Pricing of certain sales and purchase commitments is fixed to forward metal commodity exchange quotes. The Company enters into metal commodity forward contracts for copper, aluminum and zinc to mitigate the risk of unanticipated declines in gross margins on these commitments due to the volatility of the metal commodity indexes. Substantially all of the Company's instruments hedge firm commitments and are accounted for as fair value hedges, resulting in no material adjustments to comprehensive income. As of May 31, 2001, other current assets included $619 thousand representing the fair value of derivative instruments and $578 thousand of hedged firm commitments. Also, at May 31, 2001, $759 thousand and $381 thousand, respectively, were included in accrued expenses and other payables for derivative liabilities and hedged firm commitments. Certain of the Company's derivative instruments which management believes are economic hedges and mitigate exposure to fluctuations in exchange and commodity prices, have not been designated as hedges for accounting purposes. The changes in fair value of these instruments caused a $143 thousand decrease in cost of goods sold for the quarter ended May 31, 2001. NOTE E - CONTINGENCIES: There were no material developments relating to the Company's construction disputes since August 31, 2000. Refer to Note 9, Commitments and Contingences included in the notes to the consolidated financial statements for the year ended August 31, 2000. NOTE F - SUBSEQUENT EVENT: Accounts Receivable Securitization - On June 20, 2001, the Company and several of its subsidiaries (the Originators) entered into a three year agreement to periodically sell certain trade accounts receivable to a special purpose subsidiary of the Company, CMC Receivables, Inc. (CMCRI). CMCRI in turn, sells participating interests in such accounts receivable to Three Rivers Funding Corporation (TRFCO), an entity associated with Mellon Bank. The Originators retain collection and administrative responsibilities for the accounts receivable. The maximum purchase commitment by TRFCO is $130,000,000. TRFCO receives a yield on its investment equal to the rate paid by TRFCO on commercial paper issued to fund the purchases from CMCRI and other non-related entities, plus other fees. On June 22, 2001 TRFCO purchased a participating interest for $113 million. The proceeds from the sales were used to reduce short-term notes payable and commercial paper and for other corporate uses. Page 8 10 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G - BUSINESS SEGMENTS (in thousands): The following is a summary of certain financial information by reportable segment:
Three months ended May 31, 2001 ---------------------------------- MANU- MARKETING CORP CONSOL- FACTURING RECYCLING & TRADING & ELIM IDATED --------- --------- --------- --------- --------- Net sales-unaffiliated customers $ 344,250 $ 93,563 $ 184,270 $ 7 $ 622,090 Intersegment sales 1,223 5,302 4,578 (11,103) 0 --------- --------- --------- --------- --------- 345,473 98,865 188,848 (11,096) 622,090 Earnings (Loss) before income taxes 21,178 262 1,663 (6,017) 17,086
Three months ended May 31, 2000 ---------------------------------- MANU- MARKETING CORP CONSOL- FACTURING RECYCLING & TRADING & ELIM IDATED --------- --------- --------- --------- --------- Net sales-unaffiliated customers $ 343,850 $ 114,837 $ 242,700 $ (178) $ 701,209 Intersegment sales 1,439 6,320 7,957 (15,716) 0 --------- --------- --------- --------- --------- 345,289 121,157 250,657 (15,894) 701,209 Earnings (Loss) before income taxes 20,014 1,569 4,704 (5,632) 20,655
Nine months ended May 31, 2001 -------------------------------------- MANU- MARKETING CORP CONSOL- FACTURING RECYCLING & TRADING & ELIM IDATED --------- --------- --------- --------- --------- Net sales-unaffiliated customers $ 945,027 $ 281,796 $ 566,973 $ 1,164 $ 1,794,960 Intersegment sales 4,097 16,205 13,069 (33,371) 0 ----------- ----------- ----------- ----------- ----------- 949,124 298,001 580,042 (32,207) 1,794,960 Earnings (Loss) before income taxes 30,198 (2,704) 4,905 (16,223) 16,176 Total assets 775,728 104,060 218,102 46,501 1,144,391
Nine months ended May 31, 2000 -------------------------------------- MANU- MARKETING CORP CONSOL- FACTURING RECYCLING & TRADING & ELIM IDATED --------- --------- --------- --------- --------- Net sales-unaffiliated customers $ 977,437 $ 323,052 $ 651,034 $ (263) $ 1,951,260 Intersegment sales 4,291 17,444 21,530 (43,265) 0 ----------- ----------- ----------- ----------- ----------- 981,728 340,496 672,564 (43,528) 1,951,260 Earnings (Loss) before income taxes 53,311 4,424 13,264 (17,529) 53,470 Total assets 771,888 117,198 248,157 30,345 1,167,588
Page 9 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED RESULTS OF OPERATIONS (in millions)
Three Months Ended Nine Months Ended ------------------ ------------------ May 31, May 31, May 31, May 31, 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $ 622 $ 701 $ 1,795 $ 1,951 Net earnings 10.7 13.0 10.2 33.6 Cash flows 29.2 24.6 63.1 78.1 EBITDA 41.6 44.7 90.5 123.0 LIFO reserve 6.7 6.4
SIGNIFICANT EVENTS AFFECTING THE COMPANY THIS QUARTER: - - Despite a continuation of difficult market conditions, the Company reported its second highest third quarter diluted earnings per share. - - Manufacturing segment operating profit was modestly higher than last year and more than triple this year's second quarter. - - The steel group's profits increased on higher mill production and shipments, strong downstream operations, and a turnaround in large structural steel fabrication offsetting joist and cellular beam startup costs. - - Copper tube continued to produce good (although lower) results. - - The recycling segment was profitable, but less than last year. - - Marketing and trading segment volumes decreased largely due to depressed global economies. - - The Company reduced short-term debt by $82 million (45%) from the second quarter, through increased cash flows from operations and better management of working capital in the third quarter. Page 10 12 CONSOLIDATED DATA - The LIFO method of inventory valuation increased net earnings for the quarter $377 thousand (3 cents per diluted share) compared to a decrease of $626 thousand (4 cents per diluted share) last year. For the nine months ended May 31, 2001, net earnings were $974 thousand (7 cents per diluted share) higher compared to a decrease of $2.2 million (15 cents per diluted share) for the prior year period. SEGMENT OPERATING DATA - (in thousands) Net sales and operating profit (loss) by business segment are shown in the following table:
Three months ended Nine months ended ------------------ ----------------- May 31, May 31, May 31, May 31, 2001 2000 2001 2000 ---- ---- ---- ---- NET SALES: Manufacturing $ 345,473 $ 345,289 $ 949,124 $ 981,728 Recycling 98,865 121,157 298,001 340,496 Marketing and Trading 188,848 250,657 580,042 672,564 Corporate and Eliminations (11,096) (15,894) (32,207) (43,528) ----------- ----------- ----------- ----------- $ 622,090 $ 701,209 $ 1,794,960 $ 1,951,260 =========== =========== =========== =========== OPERATING PROFIT (LOSS): Manufacturing $ 21,262 $ 20,085 $ 30,475 $ 53,421 Recycling 264 1,578 (2,693) 4,450 Marketing and Trading 2,135 5,327 6,198 14,961 Corporate and Eliminations 763 930 5,236 575 ----------- ----------- ----------- ----------- $ 24,424 $ 27,920 $ 39,216 $ 73,407 =========== =========== =========== ===========
MANUFACTURING - The Company's manufacturing segment consists of the steel group and the copper tube division. Operating profit for the segment increased $1.2 million (6%) from last year's third quarter on substantially the same net sales. The steel group's operating profit was 22% above last year's third quarter. Increased shipments more than offset a lower average selling price, and strong downstream operating performance continued. Steel scrap purchase costs were much lower, mitigating the impact of higher electricity and natural gas costs. Operating profit for the copper tube division was still historically good, although about half of last year's extremely robust third quarter. Page 11 13 Steel and scrap prices per ton are noted below:
Three months ended ------------------ May 31, May 31, 2001 2000 ---- ---- Average mill selling price (total sales) $281 $312 Average mill selling price (finished goods) 288 328 Average fab selling price 627 616 Average scrap purchase price 73 96
The Company's four steel minimills reported an operating profit of $9.3 million compared with a $9.1 million operating profit for the prior year period in spite of much lower selling prices that stemmed from still excessive inventories of low-priced steel imports and aggressive domestic competition. Net sales decreased 6 % due to lower prices, partially offset by higher volumes. Mill shipments increased 6% to 523,000 tons from 491,000 tons on a year-to-year basis and were 25% higher than the current year second quarter. Tons rolled were up 2% from the prior year period due to increased production at SMI South Carolina. Tons melted decreased slightly from the prior year period. The average total mill selling price was $31 per ton (10%) below last year, and the average selling price for finished goods dropped $40 per ton (12%). Mill rebar, merchant bar and light structural prices were especially affected. Lower steel scrap prices were a significant offset in maintaining mill product margins, with the average scrap purchase costs down by $23 per ton (24%). However, mill utility costs increased by 32% per ton rolled ($3.8 million) over the prior year quarter. In spite of these adverse market and operating conditions, SMI South Carolina reported an operating profit of $2.3 million versus a $1 million operating loss in the prior year period. During the prior year third quarter, the minimills reported a $1.5 million (after-tax) graphite electrode antitrust recovery and a $500 thousand (after-tax) writedown of old mill equipment held for sale at SMI South Carolina. Net sales and operating profits for the steel fabrication and related businesses improved considerably both sequentially and from the prior year. Compared to the second quarter, prices were mixed, but volume was up, aided by better weather. Rebar fabrication, concrete related products, and the post plants continued their relative strong performance. Overall fabricated steel shipments totaled 255,000 tons (including new capacity), a 7% increase from the prior year period, and the average fab selling price increased $11 per ton (2%). The continued improvement at SMI Owen more than offset reduced profits in steel joist and cellular beam manufacturing due to $1.4 million (after-tax) of startup costs and lower selling prices. In the prior year third quarter, accruals of $3.3 million (after-tax) for estimated settlements on large steel structural jobs were more than offset by a net gain of $3.5 million (after-tax) from the sale of property. Page 12 14 The copper tube division's operating profit decreased 55% from the very robust period last year, while net sales decreased by 14%. Although the housing sector remained relatively strong, demand for plumbing and refrigeration tube was weaker. Copper tube shipments decreased 4% from the third quarter last year, and metal spreads were down 21% due to lower selling prices. Production remained approximately flat. The capital project to expand production capability by 50% should be completed in the fourth quarter. RECYCLING - The recycling segment reported a third quarter operating profit of $264 thousand, a decrease from the $1.6 million reported in the prior year, but a substantial improvement from the losses experienced during the first half of the current year. Net sales decreased by 18% to $99 million on a year-to-year basis. The principal factor was the plunge in ferrous scrap markets which, coupled with slightly weaker nonferrous markets, resulted in a $4 million decrease in material margins compared with the previous year period. The average ferrous scrap sales price fell by $27 per ton (27%) to $73, and shipments fell by 10% to 345,000 tons. The average nonferrous scrap price was 6% lower than the prior year period on substantially the same volume of shipments. However, both ferrous and nonferrous shipments increased over the current year's second quarter. Total volume of scrap processed, including the steel group's processing plants, was 580,000 tons, a decrease of 8% from the 629,000 tons processed during the prior year period. The segment's national account programs, which were implemented to enhance the sourcing of scrap, continued to grow. MARKETING AND TRADING - Operating profit of $2.1 million for the marketing and trading segment was 60% lower than the prior year's third quarter. Net sales declined 25% to $189 million, resulting from reduced volume due to depressed economies, oversupply and intense competition from domestic suppliers in the respective markets. Additionally, selling prices declined further, extending the squeeze on gross margins. The strong U.S. dollar valuation continued to hamper results in various parts of the world. Margins were compressed for most steel products, nonferrous metal products, and industrial raw materials and products. However, the Company's regionally-oriented business strategy helped to mitigate the difficult market conditions. OTHER - The Company's employees' retirement plans' expenses were lower in the current year due to a reduction in discretionary items consistent with current year to date operating profitability. Page 13 15 CONTINGENCIES - There were no material developments relating to the Company's construction disputes since August 31, 2000. Refer to Note 9, Commitments and Contingencies included in the notes to the consolidated financial statements for the year ended August 31, 2000. In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings, governmental investigations, including environmental matters, and contract disputes. Some of these matters may result in settlements, fines, penalties or judgments being assessed against the Company. While the Company is unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with the above-referenced matters, it makes accruals as warranted. Due to evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors, amounts accrued could vary significantly from amounts paid. Accordingly, it is not possible to estimate a meaningful range of possible exposure. Management believes that adequate provision has been made in the financial statements for the estimable potential impact of these contingencies, and that the outcomes will not significantly impact the long-term results of operations or the financial position of the Company, although they may have a material impact on earnings for a particular period. The Company is subject to federal, state and local pollution control laws and regulations in all locations where it has operating facilities. It anticipates that compliance with these laws and regulations will involve continuing capital expenditures and operating costs. OUTLOOK - Management believes that the results for the fourth quarter of fiscal 2001 will be similar to the third quarter. The Company expects steel minimill operating levels to improve incrementally and prices to strengthen slightly. Shipments to the construction industry should be higher despite the recent severe flooding in the U.S Gulf region. Ongoing inventory adjustments by the Company's customers should continue to progress, counteracting poor demand in the industrial sector of the U.S economy. Steel imports should continue to trend downward although they currently remain relatively high. Management expects production and shipments at the Company's fabrication operations to increase. Copper tube operating profits are expected to remain at or near current levels. Recycling results (including the outlook for both ferrous and nonferrous scrap) should be comparable to the third quarter. The marketing and trading segment's order intake shows some improvement, but global markets continue to weaken and remain intensely competitive. Page 14 16 President Bush announced on June 5, 2001, that the U.S. International Trade Commission would conduct a Section 201 trade investigation to determine if steel imports are causing serious injury to the U.S. steel industry. A favorable resolution would be beneficial to the Company's steel business. In the interim, a successful antidumping trade case on steel rebar imports is beginning to provide modest benefit for rebar pricing. The Company expects significant improvement in fiscal 2002, because of both internal and external factors, including some improvements in the U.S. economy. Management anticipates a moderate upturn in volume and selling prices in most of the Company's businesses, and that utility costs will decrease or at least stabilize. The Company has also reduced costs in other areas which should benefit the next fiscal year. Longer term, the Company expects stronger demand for construction-related products and services, including increased spending under the Federal Transportation Program. Consequently, management anticipates relatively high consumption of steel bar and structural steel in the public sector during the next few years. Additionally, institutional building and power plant construction possibilities are promising. Also, various end use markets around the world should improve. Steel and nonferrous metal consumption should continue to grow globally and become more balanced with supply. Strategically, management's focus remains on creating economic value by participating in industry consolidation, forming strategic alliances, growing value added businesses, redeploying assets and increasing the Company's earnings and cash flows. This outlook section contains forward-looking statements regarding the outlook for the Company's financial results including product pricing and demand, production rates, energy expenses, interest rates, inventory levels, and general market conditions. These forward-looking statements generally can be identified by phrases such as the Company or its management "expects", "anticipates", "believe", "ought", "should", "likely" or other words or phrases of similar impact. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from management's current opinion. Developments that could impact the Company's expectations include interest rate changes, construction activity, difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes, metals pricing over which the Company exerts little influence, increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing, global factors including credit availability, currency fluctuations, energy prices, and decisions by governments impacting the level of steel imports and pace of overall economic growth. Page 15 17 LIQUIDITY - Cash flows from operations before changes in operating assets and liabilities for the nine months ended May 31, 2001 were $63.1 million compared to $78.1 million last year primarily due to lower net earnings. Depreciation and amortization increased during the 2001 period mostly due to investments in new and expanded fabrication facilities and the ladle metallurgical station at SMI South Carolina. Provisions for losses on receivables were up in the current year due to anticipated write-offs under adverse economic conditions. Net cash flows of $48.4 million were provided by operating activities, compared to $51.5 million used in the prior year through the first nine months. This significant improvement was the result of working capital management initiatives implemented during the third quarter of fiscal year 2001. Accounts receivable at May 31, 2001 were lower than at the prior fiscal year-end primarily due to lower sales and increased collection efforts. Inventories decreased from the prior fiscal year-end primarily in marketing and trading. At May 31, 2001, inventories across all segments were substantially lower than at the second quarter end. Accounts payable decreased $16.3 million from August 31, 2000 due primarily to lower purchases in marketing and trading. However, accounts payable for all segments increased significantly during the current year's third quarter largely due to extended payment terms with suppliers. Accrued expenses and other payables decreased $17.6 million from the prior year end mostly because of the payment of incentive compensation and the funding of employee benefit plans accrued at August 31, 2000, less the litigation accrual made in the first quarter of 2001. Income taxes payable increased by $3.5 million from the prior year end because no estimated federal tax payment was required during the Company's third quarter. Notes payable and commercial paper increased $8.4 million from August 31, 2000 to $100.9 million at May 31, 2001. The Company's operating activities during the nine months provided more than sufficient cash flows to fund capital expenditures of $40.1 million, which were primarily in the steel group to further expand its joist and cellular beam operations and at the minimills. Short-term debt at May 31, 2001 was $82 million (45%) less than the $183 million reported at the prior quarter end. On June 20, 2001, the Company and several of its subsidiaries (the Originators) entered into an agreement to periodically sell certain trade accounts receivable to a special purpose subsidiary of the Company, CMC Receivables, Inc. (CMCRI). CMCRI, in turn, sells participating interests in such accounts receivable to Three Rivers Funding Corporation (TRFCO), an entity associated with Mellon Bank. The Originators retain collection and administrative responsibilities for the accounts receivable. The maximum purchase commitment by TRFCO is $130,000,000. TRFCO receives a yield on its investment equal to the rate paid by TRFCO on commercial paper issued to fund the purchases from CMCRI and other non-related Page 16 18 entities, plus other fees. On June 22, 2001, TRFCO purchased a participating interest for $113 million. The proceeds from the sales were utilized to reduce short-term notes payable and commercial paper and for other corporate uses. At May 31, 2001, there were 12,987,960 common shares issued and outstanding with 3,144,623 held in the Company's treasury. Stockholders' equity was $420 million or $32.37 per share. During the first half of fiscal 2001, the Company repurchased 271,500 shares of common stock at an average price of $24.74. No shares were repurchased during the third quarter. Net working capital was $279 million at May 31, 2001, substantially the same as at August 31, 2000. The current ratio was 1.7, up from 1.6 at August 31, 2000. The Company's effective tax rate for the current nine months was 37.3%, the same as the prior year period. Long-term debt as a percent of total capitalization was 36.0% at May 31, 2001, which was down slightly from 36.7% at August 31, 2000. The ratio of total debt to total capitalization plus short-term debt stood at 44.6%, the same as at the prior year end. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required hereunder for the Company is not significantly different from the information set forth in Item 7a. Quantitative and Qualitative Disclosures About Market Risk included in the Company's Annual Report on Form 10-K for the year ended August 31, 2000, filed November 21, 2000 with the Securities Exchange Commission, and is therefore not presented herein. Page 17 19 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the information reported in prior filings with the Securities and Exchange Commission under Item 3. Legal Proceedings in the Company's Annual Report on Form 10-K for the year ended August 31, 2000, filed November 21, 2000, the Company's Form 8-K filed December 27, 2000, and under Part II Item 1. Legal Proceedings in the Company's Form 10-Q for the quarter ended November 30, 2000, as filed January 12, 2001. As of the date of this filing, a judgment has not yet been entered by the trial Court in the Harrop litigation (United States of America for the Use and Benefit of CMC Steel Fabricators., d/b/a Safety Steel Service, Inc., v. Harrop Construction Company, Inc., and the Glenn Falls Insurance Company, Case No. C-96-38 United States District Court, Southern District of Texas, Corpus Christi Division). CMC Steel Fabricators, Inc. and Commercial Metals Company have announced their intent to appeal the judgment when entered based on the Findings Of Fact And Conclusions Of Law entered by the Court on December 22, 2000. ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable Page 18 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits required by Item 601 of Regulation S-K. (10) Material Contracts (a) Purchase and Sale Agreement dated June 20, 2001, between Various Entities Listed on Schedule I as Originators and CMC Receivables, Inc. (b) Receivables Purchase Agreement dated June 20, 2001, Among CMC Receivables, Inc. as Seller, Three Rivers Funding Corporation as Buyer and Commercial Metals Company as Servicer. B. No reports on Form 8-K have been filed during the quarter for which this report is filed. Page 19 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMERCIAL METALS COMPANY July 6, 2001 /s/ WILLIAM B. LARSON ----------------------------- William B. Larson Vice President & Chief Financial Officer July 6, 2001 /s/ MALINDA G. PASSMORE ----------------------------- Malinda G. Passmore Controller Page 20 22 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ----------- (10) Material Contracts (a) Purchase and Sale Agreement dated June 20, 2001, between Various Entities Listed on Schedule I as Originators and CMC Receivables, Inc. (b) Receivables Purchase Agreement dated June 20, 2001, Among CMC Receivables, Inc. as Seller, Three Rivers Funding Corporation as Buyer and Commercial Metals Company as Servicer.
EX-10.(A) 2 d88897ex10-a.txt PURCHASE AND SALE AGREEMENT DATED JUNE 20, 2001 1 EXHIBIT 10(a) ================================================================================ PURCHASE AND SALE AGREEMENT DATED AS OF JUNE 20, 2001 BETWEEN VARIOUS ENTITIES LISTED ON SCHEDULE I, AS THE ORIGINATORS AND CMC RECEIVABLES, INC. ================================================================================ 2 THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), dated as of June 20, 2001, is entered into between VARIOUS ENTITIES LISTED ON SCHEDULE I (each, an "Originator"; and collectively, the "Originators"), and CMC RECEIVABLES, INC., a Delaware corporation (the "Company"). DEFINITIONS Unless otherwise indicated herein, capitalized terms used in this Agreement are defined in the Receivables Purchase Agreement dated of even date herewith (as the same may be amended, supplemented or otherwise modified from time to time, the "Receivables Purchase Agreement") among the Company, as Seller, Three Rivers Funding Corporation, as Buyer (the "Buyer"), and Commercial Metals Company (herein sometimes referred to as CMC ("CMC")), as Servicer. All references herein to months are to calendar months unless otherwise expressly indicated. BACKGROUND: 1. The Company is a special purpose corporation, all of the issued and outstanding shares of which are owned by CMC; 2. The Originators generate Receivables in the ordinary course of their businesses; 3. The Originators, in order to finance their respective businesses, wish to sell certain of their Receivables to the Company, and the Company is willing to purchase such Receivables from the Originators, on the terms and subject to the conditions set forth herein; and 4. The Originators and the Company intend this transaction to be a true sale of certain Receivables by each Originator to the Company, providing the Company with the full benefits of ownership of such Receivables, and the Originators and the Company do not intend the transactions hereunder to be characterized as loans from the Company to any Originator. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto hereby agree as follows: ARTICLE I AGREEMENT TO PURCHASE AND SELL SECTION 1.1 Agreement To Purchase and Sell. On the terms and subject to the conditions set forth in this Agreement, each Originator, severally and for itself, agrees to sell to the Company, and the Company agrees to purchase from such Originator, from time to time on or after the Closing Date, but before the Purchase and Sale Termination Date, all of such Originator's right, title and interest in and to: 3 (a) each Receivable of such Originator (but only if, in the case of CMC, such Receivable was generated by or owing to an Operating Division, and only if, in the case of CMC Steel Fabricators, Inc., such Receivable was generated by the sale of goods or services by its Hope, Arkansas facility), other than Receivables generated by any Obligor that (i) is a government or a government subdivision, affiliate, or agency, (ii) is not a U.S. resident, or (iii) is listed on Schedule 1.1 attached hereto, which, so long as no Termination Event or Potential Termination Event under the Receivable Purchase Agreement shall have occurred and be continuing, may be amended or supplemented from time to time by any Originator in a writing delivered by the Originator to the Company and the Buyer setting forth the reasons for such amendment or supplement (each such Receivable, a "Purchased Receivable"), that existed and was owing to such Originator at the closing of such Originator's business on May 31, 2001 (the "Cut-off Date"); any Receivable once purchased by the Company will continue to be owned by the Company, notwithstanding any subsequent listing of the Receivable's Obligor on Schedule 1.1 (it being understood and agreed that the effect of listing on Schedule 1.1 pursuant to any such amendment or supplement an Obligor the Receivables of which were previously included in the pool of Purchased Receivables, together with all such previous listings pursuant to amendments or supplements to Schedule 1.1, will not result in the pool of Purchased Receivables, taken as a whole, having credit or collection characteristics which, based solely on the facts known to the Company and the applicable Originator at the time of such amendment or supplement, are reasonably anticipated to be materially worse than those which would have prevailed in the absence of such amendments and supplements; provided, that this parenthetical shall not apply to an amendment or supplement if, after giving effect to the exclusion of all Receivables of Obligors listed on Schedule 1.1 from the existing pool of Purchased Receivables as of the last day of the most recently completed Accounting Period, the aggregate Account Balances of all Purchased Receivables which constitute Eligible Receivables would equal or exceed $200,000,000 and the Buyer's Allocation would be less than or equal to 80%); (b) each Purchased Receivable generated by such Originator from and including the Cut-off Date to and including the Purchase and Sale Termination Date; (c) all monies due or to become due to such Originator with respect to any of the foregoing; (d) all books and records of such Originator related to any of the foregoing, and all Purchase Documents to which such Originator is a party, together with all rights (but not obligations) of such Originator thereunder; and (e) all products and proceeds of any of the foregoing, including, without limitation, (i) all funds received by such Originator, the Company or CMC, as Servicer (as defined in the Receivables Purchase Agreement and herein so called), from or on behalf of the Obligors in payment of any amounts owed (including, without limitation, invoice price, finance charges, interest and all other charges) in respect of Purchased Receivables; (ii) all amounts (including any insurance proceeds) to be applied by the Company or the Servicer to any amount owed in respect of any Purchased Receivable; and (iii) all net proceeds of sale or other disposition of repossessed goods or 2 4 other collateral or property of the Obligors in respect of Purchased Receivables or any other parties directly or indirectly liable for payment of such Purchased Receivables. All purchases shall be made without recourse, but shall be made pursuant to, and in reliance upon, the representations, warranties and covenants of the Originators set forth in this Agreement and in each other Purchase Document. No obligation or liability to any Obligor on any Purchased Receivable is intended to be assumed by the Company hereunder, and any such assumption is expressly disclaimed. The Company's foregoing commitment to purchase Purchased Receivables and the proceeds and rights described in clauses (c) through (e) (collectively, the "Related Rights") is herein called the "Purchase Facility." SECTION 1.2 Timing of Purchases. (a) Closing Date Purchases. Each Purchased Receivable and Related Rights generated by each Originator prior to the Cut-off Date shall be deemed to have been sold by such Originator to the Company on the Closing Date. (b) Subsequent Purchases. After the Closing Date, until the Purchase and Sale Termination Date, each Purchased Receivable and the Related Rights generated by each Originator shall be deemed to have been sold by such Originator to the Company immediately (and without further action) upon the creation of such Purchased Receivable. SECTION 1.3 Consideration for Purchases. On the terms and subject to the conditions set forth in this Agreement, the Company agrees to make Purchase Price payments to the Originators in accordance with Article III. SECTION 1.4 Purchase and Sale Termination Date. The "Purchase and Sale Termination Date" shall be the earliest to occur of (a) the date the Purchase Facility is terminated pursuant to Section 8.2 and (b) the Payment Date 10 days following the day on which Originators shall have given written notice to the Company at or prior to 10:00 a.m. (Dallas, Texas time) that the Originators desire to terminate this Agreement; provided, that in either case the Company shall have satisfied all of its obligations under the Receivables Purchase Agreement and such agreement shall have been terminated in accordance with its terms. SECTION 1.5 Intention of the Parties. It is the express intent of the parties hereto that the sale and transfers of the Purchased Receivables and Related Rights by the Originators to the Company, as contemplated by this Agreement, shall be treated as sales (without recourse except as provided herein) of all of the Originators' right, title and interest in, to and under the Purchased Receivables and Related Rights, and not as loans secured by the Purchased Receivables and Related Rights. If, however, notwithstanding the intent of the parties, such transactions are deemed to be loans, each Originator hereby grants to the Company a first priority security interest in all of such Originator's right, title and interest in and to (i) the Purchased Receivables and the Related Rights now existing and hereafter created by such Originator, (ii) all monies due or to become due and all 3 5 amounts received with respect thereto, (iii) all books and records of such Originator related to any of the foregoing, and all Purchase Documents to which such Originator is a party, together with all rights (but not obligations) of such Originator thereunder, and (iv) all products and proceeds of any of the foregoing. SECTION 1.6 Additional Originators. Additional Persons may be added as Originators hereunder, with the prior written consent of the Company and Mellon Bank, N.A. (the "Administrator"), which consent may be given or withheld in each of the Company's and the Administrator's sole discretion; provided, that the following conditions are satisfied on or before the date of such addition: (a) The Servicer shall have given the Administrator and the Company at least ten Business Days prior written notice of such proposed addition and the identity of the proposed additional Originator and shall have provided such other information with respect to such proposed additional Originator as the Administrator may reasonably request; (b) such proposed additional Originator has executed and delivered to the Company and the Administrator an agreement substantially in the form attached hereto as Exhibit C (a "Joinder Agreement"); (c) such proposed additional Originator has delivered to the Company and the Administrator each of the documents with respect to such Originator described in Sections 4.1 and 4.2; (d) the receivables intended to be sold by such additional Originator to the Company hereunder shall be Purchased Receivables; and (e) no Purchase and Sale Termination Event shall have occurred and be continuing. ARTICLE II PURCHASE REPORT; CALCULATION OF PURCHASE PRICE SECTION 2.1 Purchase Report. On the Closing Date and at least two (2) Business Days prior to each Settlement Date, the Servicer shall deliver to the Company and each Originator a report in substantially the form of Exhibit A (each such report being herein called a "Purchase Report") setting forth, among other things: (a) Purchased Receivables purchased by the Company from each Originator on the Closing Date (in the case of the Purchase Report to be delivered on the Closing Date); (b) Purchased Receivables purchased by the Company from each Originator during the most recently completed Accounting Period; 4 6 (c) the calculation of the Purchase Price for all Purchased Receivables; and (d) the calculation of any reductions of the Purchase Price for any Purchased Receivables as provided in Sections 3.3 (a), (b) and (c). SECTION 2.2 Calculation of Purchase Price. The "Purchase Price" to be paid to each Originator for each Purchased Receivable that is purchased hereunder from such Originator shall be equal to the product of (a) the Account Balance of such Purchased Receivable on the relevant Payment Date and (b) the difference, expressed as a percentage, of (i) one minus (ii) the Fair Market Value Discount on the relevant Payment Date. As used herein, "Fair Market Value Discount" means 2.0094%, as such percentage may be increased, decreased or otherwise adjusted by the Company from time to time (without retroactive effect) and with the prior consent of each Originator, such consent not to be unreasonably withheld; and "Payment Date" means (i) the Closing Date and (ii) each Business Day thereafter that Originators are open for business. SECTION 2.3 Payment of Fees. Each Originator hereby agrees to pay to the Company its Pro Rata Share of all reasonable fees and expenses now or hereafter incurred by the Company in connection with this Agreement, including but not limited to all attorneys', directors' and facility fees and expenses (including without limitation any Program Fees and other costs, indemnities, and expenses incurred by the Company under, and any "deemed collections" of the Company pursuant to Sections 5.03(c) or 6.04 of, the Receivables Purchase Agreement). As used herein, "Pro Rata Share" means, at any time as to any Originator, the ratio of (i) the sum of the Account Balances of the Purchased Receivables from such Originator, to (ii) the aggregate Account Balances of all Purchased Receivables from all Originators. ARTICLE III PAYMENT OF PURCHASE PRICE SECTION 3.1 Initial Purchase Price Payment. On the terms and subject to the conditions set forth in this Agreement, the Company agrees to pay to each Originator the Purchase Price for the purchase to be made from such Originator on the Closing Date partially in cash (in an amount to be agreed between the Company and such Originator and set forth in the initial Purchase Report) and partially by issuing a promissory note in the form of Exhibit B to such Originator with an initial principal balance equal to the remaining Purchase Price (each such promissory note, as it may be amended, supplemented, endorsed or otherwise modified from time to time, together with all promissory notes issued from time to time in substitution therefor or renewal thereof in accordance with the Purchase Documents, being herein called a "Company Note"). 5 7 SECTION 3.2 Subsequent Purchase Price Payments. On each Payment Date subsequent to the Closing Date, on the terms and subject to the conditions set forth in this Agreement, the Company shall pay to each Originator the Purchase Price for the Purchased Receivables generated by such Originator on such Payment Date: (a) First, in cash to the extent the Company has cash available therefor; and (b) Second, to the extent any portion of the Purchase Price remains unpaid, the principal amount outstanding under the applicable Company Note shall be increased by an amount equal to such remaining Purchase Price. The Servicer shall make all appropriate record keeping entries with respect to each of the Company Notes to reflect the foregoing payments and reductions made pursuant to Section 3.3, and the Servicer's books and records shall constitute rebuttable presumptive evidence of the principal amount of, and accrued interest on, each Company Note at any time. Furthermore, the Servicer shall hold the Company Notes for the benefit of the applicable Originator. Each Originator hereby irrevocably authorizes the Servicer to mark the Company Notes "CANCELED" and to return such Company Notes to the Company upon the final payment thereof after the Purchase and Sale Termination Date. SECTION 3.3 Settlement as to Specific Purchased Receivables and Dilution. (a) If, on the day of purchase of any Purchased Receivable from an Originator hereunder, any of the representations or warranties set forth in Sections 5.4, 5.12 and 5.21 are not true with respect to such Purchased Receivable or as a result of any action or inaction of such Originator, on any subsequent day, any of such representations or warranties set forth in Sections 5.4, 5.12 and 5.21 is no longer true with respect to such Purchased Receivable, then the Purchase Price with respect to such Purchased Receivable shall be reduced by an amount equal to the Account Balance of such Purchased Receivable and shall be accounted to such Originator as provided in clause (d) below; provided, that if the Company thereafter receives payment on account of Collections due with respect to such Purchased Receivable, the Company promptly shall deliver such funds to such Originator. (b) If, on any day, the Account Balance of any Purchased Receivable purchased hereunder is reduced or adjusted as a result of any defective, rejected, returned goods or services, or any discount or other adjustment made by any Originator, the Company or the Servicer or any setoff or dispute between any Originator or the Servicer and an Obligor as indicated on the books of the Company (or, for periods prior to the Closing Date, the books of such Originator), then the Purchase Price with respect to such Purchased Receivable shall be reduced by the amount of such net reduction and shall be accounted to such Originator as provided in clause (d) below. (c) If, on any day, the Company incurs any costs, indemnities, expenses or deemed collections set forth in Section 2.3 herein, then the Purchase Price of the Purchased 6 8 Receivables shall be reduced with respect to each Originator in an amount equal to such Originator's Pro Rata Share of such reduction or, in the case of a reduction that is solely attributable to an Originator, shall be reduced with respect to such Originator, and shall be accounted to any such Originator as provided in clause (d) below. (d) Any reduction in the Purchase Price of any Purchased Receivable pursuant to clause (a), (b) or (c) above shall be applied as a credit for the account of the Company against the Purchase Price of Receivables subsequently purchased by the Company from such Originator hereunder; provided, however if there have been no purchases of Purchased Receivables from such Originator (or insufficiently large purchases of Purchased Receivables) to create a Purchase Price sufficient to so apply such credit against, the amount of such credit shall be deemed to be a payment under, and shall be deducted from the principal amount outstanding under, the Company Note payable to such Originator. SECTION 3.4 Reconveyance of Purchased Receivables. In the event that an Originator has paid to the Company the full Account Balance of any Purchased Receivable pursuant to Section 3.3, the Company shall reconvey such Purchased Receivable to such Originator, without representation or warranty, but free and clear of all liens, security interests, charges, and encumbrances created by the Company. ARTICLE IV CONDITIONS OF PURCHASES SECTION 4.1 Conditions Precedent to Initial Purchase. The initial purchase hereunder is subject to the condition precedent that the Servicer (on the Company's behalf) shall have received, on or before the Closing Date, the following, each (unless otherwise indicated) dated the Closing Date, and each in form and substance satisfactory to the Servicer (acting on the Company's behalf): (a) A copy of the resolutions of the Board of Directors of each Originator approving the Purchase Documents to be delivered by it and the transactions contemplated hereby and thereby, certified by the Secretary or Assistant Secretary of such Originator; (b) Good standing certificates for each Originator issued as of a recent date acceptable to the Servicer by the Secretary of State of the jurisdiction of such Originator's incorporation; (c) A certificate of the Secretary or Assistant Secretary of each Originator certifying the names and true signatures of the officers authorized on such Person's behalf to sign the Purchase Documents to be delivered by it (on which certificate the Servicer and the Company may conclusively rely until such time as the Servicer shall receive from such Person a revised certificate meeting the requirements of this clause (d)); 7 9 (d) The certificate or articles of incorporation of each Originator, together with a copy of the by-laws of such Originator, each duly certified by the Secretary or an Assistant Secretary of such Originator; (e) Originals of the proper financing statements (Form UCC-1) that have been duly executed and name each Originator as the debtor/seller and the Company as the secured party/purchaser (and Three Rivers Funding Corporation, as assignee of the Company) of the Purchased Receivables generated by such Originator as may be necessary or desirable under the UCC of all appropriate jurisdictions to perfect the Company's ownership interest in all Purchased Receivables and such other rights, accounts, instruments and moneys in which an ownership or security interest may be assigned to it hereunder; (f) A written search report from a Person satisfactory to the Servicer listing all effective financing statements that name the Originators as debtors or sellers and that are filed in the jurisdictions in which filings were made pursuant to the foregoing clause (f), together with copies of such financing statements (none of which, except for those described in the foregoing clause (f), shall cover any Purchased Receivable or any Related Rights which are to be sold to the Company hereunder), and tax and judgment lien search reports from a Person satisfactory to the Servicer showing no evidence of such liens filed against any Originator; (g) Favorable opinions of (a) David M. Sudbury, General Counsel of CMC, and (b) Haynes and Boone, LLP, counsel to the Originators and the Company, in form and substance satisfactory to the Servicer and the Administrator; and (h) A Company Note in favor of each Originator, duly executed by the Company. SECTION 4.2 Certification as to Representations and Warranties. Each Originator, by accepting the Purchase Price related to each purchase of Purchased Receivables generated by such Originator and listed in a Purchase Report, shall be deemed to have certified that the representations and warranties contained in Article V are true and correct on and as of such day, with the same effect as though made on and as of such day. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR In order to induce the Company to enter into this Agreement and to make purchases hereunder, each Originator hereby makes, with respect to itself, the representations and warranties set forth in this Article V. SECTION 5.1 Organization and Good Standing. Such Originator has been duly incorporated and is validly existing as a corporation, in good standing under the laws of its jurisdiction of incorporation, with power and authority to own its properties and to conduct its business as such properties are presently owned and such business is presently conducted. 8 10 SECTION 5.2 Due Qualification. Such Originator is located and is qualified to transact business as a foreign corporation and is in good standing in all jurisdictions in which (a) the ownership or lease of its property or the conduct of its business requires such licensing or qualifica tion and (b) the failure to be so licensed or qualified could have a Material Adverse Effect. SECTION 5.3 Power and Authority; Due Authorization. Such Originator has (a) all necessary power, authority and legal right to (i) execute and deliver, and perform its obligations under, each Purchase Document to which it is a party and (ii) generate, own, sell, contribute and assign Receivables on the terms and subject to the conditions herein and therein provided, and (b) duly authorized such execution and delivery and such sale and assignment and the performance of such obligations by all necessary corporate action. SECTION 5.4 Valid Sale; Binding Obligations. Each sale of Purchased Receivables made by such Originator pursuant to this Agreement shall constitute a valid sale, transfer, and assignment of Purchased Receivables to the Company, enforceable against creditors of, and purchasers from, such Originator; and this Agreement constitutes, and each other Purchase Document to be signed by such Originator, when duly executed and delivered, will constitute, a legal, valid, and binding obligation of such Originator, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. SECTION 5.5 No Violation. The consummation of the transactions contemplated by this Agreement and the other Purchase Documents, and the fulfillment of the terms hereof or thereof, will not (a) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under (i) such Originator's certificate or articles of incorporation or bylaws, or (ii) any indenture, loan agreement, mortgage, deed of trust, or other agreement or instrument to which it is a party or by which it is bound, (b) result in the creation or imposition of any Adverse Claim upon any of its properties pursuant to the terms of any such indenture, loan agreement, mortgage, deed of trust, or other agreement or instrument, other than the Purchase Documents, or (c) violate any law or any order, rule or regulation applicable to it of any court or of any state or foreign regulatory body, administrative agency, or other governmental instru mentality having jurisdiction over it or any of its properties that could have a material adverse effect on such Originator's ability to perform its obligations under this Agreement (a "Material Adverse Effect"). SECTION 5.6 Proceedings. Except as set forth in Schedule 5.6 or as otherwise disclosed in CMC's public filings with the Securities and Exchange Commission, there is no action, suit, proceeding or investigation pending before any court, regulatory body, arbitrator, administrative agency, or other tribunal or governmental instrumentality (a) asserting the invalidity of any Purchase Document, (b) seeking to prevent such Originator from transferring any Purchased Receivable hereunder (or in the case such transfer does not constitute a sale under any applicable law, from 9 11 granting or maintaining the security interest in any Purchased Receivable) to the Purchaser or the consummation of any of the transactions contemplated by any Purchase Document, or (c) seeking any determination or ruling that could have a Material Adverse Effect. SECTION 5.7 Bulk Sales Acts. No transaction contemplated hereby requires compliance with, or will be subject to avoidance under, any bulk sales act or similar law. SECTION 5.8 Government Approvals. Except for the filing of the UCC financing statements referred to in Article IV, all of which, at the time required in Article IV, shall have been duly made and shall be in full force and effect, no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for each Originator's due execution, delivery and performance of any Purchase Document to which it is a party. SECTION 5.9 Financial Condition. (a) Material Adverse Effect. Since February 28, 2001, no event has occurred that has had, or is reasonably likely to have, a Material Adverse Effect. (b) Solvent. On the date hereof, and on the date of each purchase hereunder (both before and after giving effect to such purchase), (i) the fair market value of such Originator's assets exceeds its liabilities (whether contingent, subordinated, unmatured, unliquidated or otherwise), (ii) such Originator has sufficient cash flow to enable it to pay its debt as it matures, and (iii) such Originator does not have unreasonably small capital to conduct its business. SECTION 5.10 Licenses, Contingent Liabilities, and Labor Controversies. (a) Such Originator has not failed to obtain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its properties or to the conduct of its business, which violation or failure to obtain could have a Material Adverse Effect. (b) There are no labor controversies pending against such Originator that have had (or could have) a Material Adverse Effect. SECTION 5.11 Margin Regulations. No use of any funds acquired by Originator under this Agreement will conflict with or contravene any of Regulations, T, U and X promulgated by the Federal Reserve Board from time to time. SECTION 5.12 Quality of Title. (a) Each Purchased Receivable of such Originator (together with the Related Rights with respect to such Purchased Receivable) which is to be sold to the Company hereunder is or shall be owned by such Originator, free and clear of any lien, security interest or other charge 10 12 or encumbrance, or any other type of preferential arrangement (each, an "Adverse Claim"), except as provided herein and in the Receivables Purchase Agreement. Whenever the Company makes a purchase hereunder, it shall have acquired and shall continue to have maintained a valid and perfected ownership interest (free and clear of any Adverse Claim) in all Purchased Receivables generated by such Originator and all Collections related thereto, and in Originator's entire right, title and interest in and to the Related Rights with respect thereto. (b) No effective financing statement or other instrument similar in effect covering any Purchased Receivable generated by such Originator or any Related Rights is on file in any recording office except such as may be filed in favor of the Company or the Originators, as the case may be, in accordance with this Agreement or in favor of Three Rivers Funding Corporation in accordance with the Receivables Purchase Agreement. (c) Each Purchased Receivable purchased hereunder is on the date of purchase an Eligible Receivable. SECTION 5.13 Accuracy of Information. All factual written information heretofore or contemporaneously furnished (and prepared) by such Originator to the Company, the Administrator or the Buyer for purposes of or in connection with any Purchase Document or any transaction contemplated hereby or thereby is, and all other such factual written information hereafter furnished by such Originator to the Company or the Administrator pursuant to or in connection with any Purchase Document will be, true and accurate in all material respects on the date as of which such information is dated or certified. SECTION 5.14 Offices. Such Originator's principal place of business and chief executive office is located at the address set forth in Schedule 5.14A, and the offices where such Originator keeps all its books, records and documents evidencing its Purchased Receivables, the related Contracts and all other agreements related to such Purchased Receivables are located at the addresses specified in Schedule 5.14B (or at such other locations, notified to the Servicer and the Buyer in accordance with Section 6.1(f), in jurisdictions where all action required by Section 7.3 has been taken and completed). SECTION 5.15 Trade Names. Such Originator does not use any trade name other than its actual corporate name and the trade names set forth in Schedule 5.15. From and after the date that fell five (5) years before the date hereof, except as set forth in Schedule 5.15, such Originator has not been known by any legal name other than its corporate name as of the date hereof, nor has such Originator been the subject of any merger or other corporate reorganization. SECTION 5.16 Taxes. Such Originator has filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. 11 13 SECTION 5.17 Compliance with Applicable Laws. Such Originator is in compliance with the requirements of all applicable laws, rules, regulations and orders of all governmental authorities, a breach of any of which, individually or in the aggregate, could have a Material Adverse Effect. SECTION 5.18 Reliance on Separate Legal Identity. Such Originator acknowledges that Three Rivers Funding Corporation is entering into the Receivables Purchase Agreement in reliance upon the Company's identity as a legal entity separate from such Originator. SECTION 5.19 No Termination Event. No event has occurred and is continuing and no condition exists which constitutes a Termination Event or a Potential Termination Event under the Receivables Purchase Agreement. SECTION 5.20 Not an Investment Company. Each Originator is not, and will not become as a result of the transactions contemplated by the Purchase Documents, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 5.21 Account Balances; Purchase Notice. The Account Balances related to the sale of the Purchased Receivables are the respective amounts set forth in the Purchase Report, and all information set forth therein, is true and correct in all material respects as of such Settlement Date. SECTION 5.22 Consideration. Each Originator has sold the Purchased Receivables in exchange for payment (made by the Company in accordance with the provisions herein) in an amount which constitutes fair consideration and approximate market value for the Purchased Receivables and in a sale the terms and conditions of which (including, without limitation, the purchase price thereof) reasonably approximate an arm's-length transaction between unaffiliated parties. No such sale has been made for or on account of an antecedent debt owed to the Company and no such sale is or may be voidable or subject to avoidance under any section of the U.S. Bankruptcy Code. SECTION 5.23 Data Processing Legends. Each Originator and the Servicer have placed on the most recent, and have taken all steps reasonably necessary to ensure that there shall be placed on each subsequent, data processing report generated for such Originator which are of the type that a proposed purchaser or lender would use to evaluate the Purchased Receivables, the following legend (or the substantive equivalent thereof): "CERTAIN OF THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN SOLD PURSUANT TO A PURCHASE AND SALE AGREEMENT DATED AS OF JUNE 20, 2001, AS THE SAME MAY FROM TO TIME TO TIME BE AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED, BETWEEN CERTAIN ENTITIES LISTED ON SCHEDULE I THERETO AND CMC RECEIVABLES, INC., AND AN UNDIVIDED, FRACTIONAL OWNERSHIP INTEREST IN SUCH RECEIVABLES 12 14 DESCRIBED HEREIN HAS BEEN SOLD TO THREE RIVERS FUNDING CORPORATION PURSUANT TO THE RECEIVABLES PURCHASE AGREEMENT DATED AS OF JUNE 20, 2001, AS THE SAME MAY FROM TO TIME TO TIME BE AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED, AMONG CMC RECEIVABLES, INC., THREE RIVERS FUNDING CORPORATION AND COMMERCIAL METALS COMPANY." ARTICLE VI COVENANTS OF THE ORIGINATORS SECTION 6.1 Affirmative Covenants. From the date hereof until the first day following the Purchase and Sale Termination Date, each Originator will, unless the Company, acting in a manner consistent with its duties and responsibilities under the Receivables Purchase Agreement shall otherwise consent: (a) Compliance with Laws, Etc. Comply in all material respects with all applicable laws, rules, regulations and orders with respect to the Purchased Receivables generated by it and the Contracts and other agreements related thereto. (b) Preservation of Corporate Existence. Preserve and maintain its existence as a corporation, and all rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification could have a Material Adverse Effect. (c) Receivables Examinations. (i) At any time and from time to time during regular business hours, upon reasonable prior notice, and at each Originator's expense, as applicable, permit the Company or the Administrator, or their respective agents or representatives, (A) to examine and make copies of and abstracts from all books, records and documents (including, without limitation, computer tapes, disks and other electronic media) in possession or under the control of each Originator relating to Purchased Receivables, including, without limitation, the related Contracts and purchase orders and other agreements related thereto, and (B) to visit the offices and properties of such Originator for the purpose of examining such materials described in clause (i)(A) next above and to discuss matters relating to Purchased Receivables originated by it or the performance hereunder with any of the officers or employees of each Originator having knowledge of such matters, and (ii) without limiting the foregoing clause (i) above, from time to time on reasonable request of the Administrator, permit certified public accountants or other auditors acceptable to the Company and Administrator to conduct, at the Company's expense, certain agreed upon procedures with regard to such Originator's books and records pertaining to such Purchased Receivables. (d) Keeping of Records and Books of Account. Maintain and implement administrative and operating procedures (including, without limitation, an ability to re-create records evidencing Purchased Receivables it generates in the event of the destruction of the originals 13 15 thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of such Purchased Receivables (including, without limitation, records adequate to permit the daily identification of each new Purchased Receivable and all Collections of and adjustments to each existing Purchased Receivable). (e) Performance and Compliance with Purchased Receivables and Contracts. Timely and fully perform and comply, in all material respects, with all provisions, covenants and other promises required to be observed by it under the Contracts and all other agreements related to the Purchased Receivables that it generates. (f) Location of Records. Keep its principal place of business and chief executive office, and the offices where it keeps its records concerning or related to Purchased Receivables, at the address(es) referred to in Schedule 5.14 or, upon 15 days' prior written notice to the Company and the Administrator, at such other locations in jurisdictions where all action required by Section 7.3 shall have been taken and completed. (g) Credit and Collection Policies. Comply in all material respects with its Credit and Collection Policy in connection with the Purchased Receivables that it generates and all Contracts and other agreements related thereto. (h) Purchase Documents. Comply in all material respects with the Purchase Documents to which it is a party. (i) Notice of Material Adverse Change. Promptly upon becoming aware thereof, each Originator shall give the Company and the Buyer notice of any material adverse change in the business, operations or financial condition of such Originator which could affect adversely the collectibility of the Purchased Receivables or the ability to service the Purchased Receivables. (j) Customer List. Each Originator shall at all times maintain (or cause the Servicer to maintain) a current list (which may be stored on magnetic tapes or disks or other form of electronic media) of all Obligors under Contracts related to Purchased Receivables, including the name, address, telephone number and account number of each such Obligor, Such Originator shall deliver or cause to be delivered a copy of such list to the Buyer as soon as practicable following the their request. (k) Notice of Relocation. Each Originator shall give the Buyer sixty (60) days' prior written notice of any relocation of its Chief Executive Office if, as a result of such relocation, the applicable provisions of the Uniform Commercial Code of any applicable jurisdiction or other applicable Laws would require the filing of any amendment of any previously filed financing statement or continuation statement or of any new financing statement. Each Originator will at all times maintain its Chief Executive Office within a jurisdiction in the United States in which Article Nine of the Uniform Commercial Code (1972 or later revision) is in effect. 14 16 (l) Administrative and Operating Procedures. Each Originator shall maintain and implement administrative and operating procedures adequate to permit the identification of the Receivables Pool and all collections and adjustments attributable to each Receivables Pool. (m) Certificates of Title. (A) If any amount payable under or in connection with any Purchased Receivable shall be or become evidenced by any promissory note, chattel paper or other instrument, such note, chattel paper or instrument shall be duly endorsed in a manner satisfactory to the Company and delivered to the Company or its agent. (B) Each Originator shall deliver to the Company any certificate of title or other evidence of ownership issued by the United States or any state or any political subdivision thereof relating to any chattel held as security for any amount payable under or in connection with any Purchased Receivable, with evidence of perfection of the security interest in such property noted thereon, if such notation is required under the laws of the jurisdiction in which such property is located in order to perfect a security interest in such property. (C) If the Contract relating to any Purchased Receivable requires the related Obligor to maintain insurance upon the chattel security relating to such Contract, such Originator shall deliver to the Company all documents or certificates relating to such insurance. (D) Such Originator shall deliver to the Company any other document required by the terms of the related Contracts. SECTION 6.2 Reporting Requirements. From the date hereof until the first day following the Purchase and Sale Termination Date, each Originator will, unless the Servicer (on behalf of the Company) and the Buyer shall otherwise consent in writing, furnish to the Company and the Buyer: (a) Purchase and Sale Termination Events. As soon as possible after the Originator has knowledge of the occurrence of, and in any event within three Business Days after the Originator has knowledge of the occurrence of, each Purchase and Sale Termination Event or each event which, with the giving of notice or the passage of time, or both, would constitute a Purchase and Sale Termination Event (a "Potential Purchase and Sale Termination Event") in respect of such Originator, the statement of the chief financial officer or chief accounting officer of such Originator describing such Purchase and Sale Termination Event or Potential Purchase and Sale Termination Event, and the action that such Originator proposes to take with respect thereto, in each case in reasonable detail; (b) Proceedings. As soon as possible and in any event within three Business Days 15 17 after Originator otherwise has knowledge thereof, written notice of (i) material litigation, investigation or proceeding of the type described in Section 5.6 not previously disclosed to the Company and (ii) all adverse developments that have occurred with respect to any previously disclosed litigation, proceedings and investigations that could have a Material Adverse Effect; and (c) Other. Promptly, from time to time, such other information, documents, records or reports respecting the Purchased Receivables as the Administrator may from time to time reasonably request in order to protect the interests of the Company, the Buyer or the Administrator with respect to the Purchased Receivables. SECTION 6.3 Negative Covenants. From the date hereof until the date following the Purchase and Sale Termination Date, each Originator agrees that, unless the Servicer (on behalf of the Company and acting in a manner consistent with its duties and responsibilities under the Receivables Purchase Agreement), shall otherwise consent, it shall not: (a) Sales, Liens, Etc. Except as otherwise provided herein or in any other Purchase Document, sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claim or any Collections with respect to any Purchased Receivable, or assign any right to receive income in respect thereof. (b) Extension or Amendment of Purchased Receivables. Extend, amend or otherwise modify the terms of any Purchased Receivable in any material respect generated by it, or amend, modify or waive, in any material respect, any Contract related thereto (which term or condition relates to payments under, or the enforcement of, such Contract), except for any extension, amendment or modification that is permitted under the Receivables Purchase Agreement and is consistent with its Credit and Collection Policy. (c) Change in Business or Credit and Collection Policy. Make any change in the character of its business or materially alter its Credit and Collection Policy, which change or alteration could, in either case, materially adversely change the credit standing required of particular Obligors or potential Obligors or impair the collectibility of a material portion of Purchased Receivables generated by it. (d) Purchased Receivables Not to be Evidenced by Promissory Notes or Chattel Paper. Take any action to cause or permit any Purchased Receivable generated by it to become evidenced by any "instrument" or "chattel paper" (as defined in the applicable UCC). (e) Mergers, Acquisitions, Sales, etc. (i) Be a party to any merger or consolidation, except a merger or consolidation where such Originator is the surviving entity or is merged or consolidated with another Originator, or (ii) directly or indirectly sell, transfer, assign, convey or lease (other than to another Originator or wholly-owned subsidiary thereof) (A) whether in one or a series of transactions, all or substantially all of its assets or (B) any Purchased Receivables or any interest therein (other than pursuant to this Agreement). 16 18 SECTION 6.4 Permitted Lockbox Banks. Make any changes in its instructions to Obligors regarding Collections or add or terminate any bank as a Permitted Lockbox Bank unless the requirements of Section 9.02(f) of the Receivables Purchase Agreement have been met. SECTION 6.5 Accounting for Purchases. Account for or treat the transactions contemplated hereby in any manner other than as sales of the Purchased Receivables and Related Rights by such Originator to the Company. SECTION 6.6 Substantive Consolidation. Each Originator hereby acknowledges that this Agreement and the other Purchase Documents are being entered into in reliance upon the Company's identity as a legal entity separate from such Originator and its Affiliates. Therefore, from and after the date hereof, each Originator shall take all reasonable steps necessary (including without limitation all of the steps set forth in Section 9.01(f) of the Receivables Purchase Agreement) to make it apparent to third Persons that the Company is an entity with assets and liabilities distinct from those of such Originator and any other Person, and is not a division of such Originator, its Affiliates or any other Person. Without limiting the generality of the foregoing and in addition to and consistent with the other covenants set forth herein, such Originator shall take such actions as shall be required in order that: (a) such Originator shall not be involved in the day to day management of the Company; (b) such Originator shall maintain separate corporate records and books of account from the Company and otherwise will observe corporate formalities; (c) the financial statements and books and records of such Originator shall be prepared after the date of creation of the Company to reflect and shall reflect the separate existence of the Company; (d) except as permitted by the Receivables Purchase Agreement, (i) such Originator shall maintain its assets separately from the assets of the Company, and (ii) the Company's assets, and records relating thereto, have not been, are not, and shall not be, commingled with those of the Company; (e) all of the Company's business correspondence and other communications shall be conducted in the Company's own name and on its own stationery; (f) such Originator shall not act as an agent for the Company, other than as Servicer or its subservicer under the Receivables Purchase Agreement, and in connection therewith, shall present itself to the public as an agent for the Company and a legal entity separate from the Company; (g) such Originator shall not conduct any of the business of the Company in its own name; 17 19 (h) such Originator shall not pay any liabilities of the Company out of its own funds or assets; (i) such Originator shall maintain an arm's-length relationship with the Company; (j) such Originator shall not assume or guarantee or become obligated for the debts of the Company or hold out its credit as being available to satisfy the obligations of the Company; (k) such Originator shall not acquire obligations of the Company; (l) such Originator shall allocate fairly and reasonably overhead or other expenses that are properly shared with the Company, including, without limitation, shared office space; (m) such Originator shall identify and hold itself out as a separate and distinct entity from the Company; (n) such Originator shall not enter into, or be a party to, any transaction with the Company, except in the ordinary course of its business and on terms which are intrinsically fair and not less favorable to it than would be obtained in a comparable arm's-length transaction with an unrelated third party; and (o) such Originator shall not pay the salaries of the Company's employees, if any. ARTICLE VII ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF PURCHASED RECEIVABLES SECTION 7.1 Rights of the Company. Each Originator hereby authorizes the Company, the Servicer or their respective designees to take any and all steps in such Originator's name necessary or desirable, in their respective determination, to collect all amounts due under any and all Purchased Receivables, including, without limitation, indorsing the name of such Originator on checks and other instruments representing Collections and enforcing such Purchased Receivables and the provisions of the related Contracts that concern payment and/or enforcement of rights to payment. SECTION 7.2 Responsibilities of the Originators. Anything herein to the contrary notwithstanding: 18 20 (a) Collection Procedures. Each Originator agrees to direct its respective Obligors to make payments of Purchased Receivables directly to a post office box related to the relevant Lockbox Account at a Permitted Lockbox Bank. Each Originator further agrees to transfer any Collections that it receives directly to the Servicer (for the Company's account) within one (1) Business Day of receipt thereof, and agrees that all such Collections shall be deemed to be received in trust for the Company and shall be maintained and segregated separate and apart from all other funds and monies of Originator until transfer of such Collections to the Servicer. (b) Each Originator shall perform its obligations hereunder, and the exercise by the Company or its designee of its rights hereunder shall not relieve such Originator from such obligations. (c) None of the Company, the Servicer or the Administrator shall have any obligation or liability to any Obligor or any other third Person with respect to any Purchased Receivables, Contracts related thereto or any other related agreements, nor shall the Company, the Servicer, the Buyer or the Administrator be obligated to perform any of the obligations of such Originator thereunder. (d) Each Originator hereby grants to the Servicer an irrevocable power of attorney, with full power of substitution, coupled with an interest, to take in the name of such Originator all steps necessary or advisable to endorse, negotiate or otherwise realize on any writing or other right of any kind held or transmitted by such Originator or transmitted or received by the Company (whether or not from such Originator) in connection with any Purchased Receivable. SECTION 7.3 Further Action Evidencing Purchases. Each Originator agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that the Servicer may reasonably request in order to perfect, protect or more fully evidence the Purchased Receivables and Related Rights purchased by the Company hereunder, or to enable the Company to exercise or enforce any of its rights hereunder or under any other Purchase Document. Without limiting the generality of the foregoing, upon the request of the Servicer, such Originator will: (a) execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be necessary or appropriate; and (b) mark the master data processing records that evidence or list (i) such Purchased Receivables and (ii) related Contracts with the legend set forth in Section 5.23. Each Originator hereby authorizes the Company or its designee to file one or more financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any of the Purchased Receivables and Related Rights now existing or hereafter generated by Originator. If any Originator fails to perform any of its agreements or obligations under this Agreement, the 19 21 Company or its designee may (but shall not be required to) itself perform, or cause the performance of, such agreement or obligation, and the expenses of the Company or its designee incurred in connection therewith shall be payable by Originator as provided in Section 9.1. SECTION 7.4 Application of Collections. Any payment by an Obligor in respect of any indebtedness owed by it to any Originator in connection with a Purchased Receivable shall, except as otherwise specified by such Obligor or required by applicable law and unless otherwise instructed by the Servicer (with the prior written consent of the Administrator) or the Administrator, be applied as a Collection of any such Purchased Receivable of such Obligor to the extent of any amounts then due and payable thereunder before being applied to any other indebtedness of such Obligor. ARTICLE VIII PURCHASE AND SALE TERMINATION EVENTS SECTION 8.1 Purchase and Sale Termination Events. Each of the following events or occurrences described in this Section 8.1 shall constitute a "Purchase and Sale Termination Event": (a) A Termination Event shall have occurred and, except for the Termination Event described in Section 10.01(j) of the Receivables Purchase Agreement, the Buyer shall have declared the Purchase and Sale Termination Date to have occurred; or (b) Any Originator shall fail to make any payment or deposit to be made by it hereunder when due; or (c) Any representation or warranty made or deemed to be made by any Originator (or any of its officers) under or in connection with this Agreement, any other Purchase Documents, or any other information or report delivered pursuant hereto or thereto shall prove to have been false or incorrect in any material respect when made or deemed made; or (d) Any Originator shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and such failure shall remain unremedied for 20 days after written notice thereof shall have been given by the Servicer to such Originator. SECTION 8.2 Remedies. (a) Optional Termination. Upon the occurrence of a Purchase and Sale Termination Event, the Company (but not the Servicer) shall have the option, by notice to the Originators (with a copy to the Administrator), to declare the Purchase Facility as terminated; provided, that the Company shall have satisfied all of its obligations under the Receivables Purchase Agreement and such agreement shall have been terminated in accordance with its terms. 20 22 (b) Remedies Cumulative. Upon any termination of the Purchase Facility pursuant to Section 8.2(a), the Company shall have, in addition to all other rights and remedies under this Agreement, all other rights and remedies provided under the UCC of each applicable jurisdiction and other applicable laws, which rights shall be cumulative. ARTICLE IX INDEMNIFICATION SECTION 9.1 Indemnities by the Originators. Without limiting any other rights which the Company may have hereunder or under applicable law, each Originator, severally and for itself alone hereby agrees to indemnify the Company and each of its officers, directors, employees and agents (each of the foregoing Persons being individually called a "Purchase and Sale Indemnified Party"), forthwith on demand, from and against any and all damages, losses, claims, judgments, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively called "Purchase and Sale Indemnified Amounts") awarded against or incurred by any of them arising out of or as a result of the failure of such Originator to perform its obligations under this Agreement or any other Purchase Document, or arising out of the claims asserted against a Purchase and Sale Indemnified Party relating to the transactions contemplated herein or therein or the use of proceeds thereof or therefrom, INCLUDING PURCHASE AND SALE INDEMNIFIED AMOUNTS RESULTING FROM THE NEGLIGENCE OF THE PURCHASE AND SALE INDEMNIFIED PARTIES, but excluding, however, (i) Purchase and Sale Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of such Purchase and Sale Indemnified Party, (ii) any indemnification which has the effect of recourse for non-payment of the Purchased Receivables to any indemnitor (except as otherwise specifically provided under this Section 9.1) and (iii) any tax based upon or measured by net income, property or gross receipts. Without limiting the foregoing, each Originator, severally for itself alone, shall indemnify each Purchase and Sale Indemnified Party for Purchase and Sale Indemnified Amounts relating to or resulting from: (a) the transfer by such Originator of an interest in any Purchased Receivable to any Person other than the Company; (b) the breach of any representation or warranty made by such Originator (or any of its officers) under or in connection with this Agreement or any other Purchase Document, or any information or report delivered by Originator pursuant hereto or thereto, which shall have been false or incorrect in any material respect when made or deemed made; (c) the failure by such Originator to comply with any applicable law, rule or regulation with respect to any Purchased Receivable generated by such Originator or the related Contract, or the nonconformity of any Purchased Receivable generated by such Originator or the related Contract with any such applicable law, rule or regulation; 21 23 (d) the failure to vest and maintain vested in the Company an ownership interest in the Purchased Receivables generated by such Originator free and clear of any Adverse Claim, other than an Adverse Claim arising solely as a result of an act of the Company or the Administrator, whether existing at the time of the purchase of such Purchased Receivables or at any time thereafter; (e) the failure to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Purchased Receivables or purported Purchased Receivables generated by such Originator, whether at the time of any purchase or at any subsequent time; (f) any dispute, claim, offset or defense (other than discharge in bankruptcy) of the Obligor to the payment of any Purchased Receivable or purported Purchased Receivable generated by such Originator (including, without limitation, a defense based on such Purchased Receivable's or the related Contract's not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the services related to any such Purchased Receivable or the furnishing of or failure to furnish such services, and any claim for indemnification by the Buyer or any Affected Party under the Receivables Purchase Agreement arising out of any action or inaction by or the Receivables of such Originator, including without limitation under Sections 11.03 and 11.04 thereof; (g) any product liability claim arising out of or in connection with services that are the subject of any Purchased Receivable generated by such Originator; and (h) any tax or governmental fee or charge (other than any tax excluded pursuant to clause (iii) in the proviso to the preceding sentence), all interest and penalties thereon or with respect thereto, and all out-of-pocket costs and expenses, including the reasonable fees and expenses of counsel in defending against the same, which may arise by reason of the purchase or ownership of the Purchased Receivables generated by such Originator. If for any reason the indemnification provided above in this Section 9.1 is unavailable to a Purchase and Sale Indemnified Party or is insufficient to hold such Purchase and Sale Indemnified Party harmless, then each of the Originators, severally and for itself, shall contribute to the amount paid or payable by such Purchase and Sale Indemnified Party to the maximum extent permitted under applicable law. ARTICLE X MISCELLANEOUS SECTION 10.1 Amendments, etc. (a) The provisions of this Agreement may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and executed by the Company and each Originator (with the prior written consent of the Buyer, which consent shall not be unreasonably withheld). 22 24 (b) No failure or delay on the part of the Company, the Servicer, any Originator or any third party beneficiary in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Company, the Servicer or any Originator in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Company or the Servicer under this Agreement shall, except as may otherwise be stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval under this Agreement shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. (c) The Purchase Documents contain a final and complete integration of all prior expressions by the parties hereto with respect to the subject matter thereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter thereof, superseding all prior oral or written understandings. SECTION 10.2 Notices, etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile communication) and shall be personally delivered or sent by certified mail, postage prepaid, or by facsimile, to the intended party at the mailing address or facsimile number of such party set forth under its name on the signature pages hereof or at such other address or facsimile number as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective (i) if personally delivered, when received, (ii) if sent by certified mail three (3) Business Days after having been deposited in the mail, postage prepaid, and (iii) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means. SECTION 10.3 No Waiver; Cumulative Remedies. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Without limiting the foregoing, each Originator hereby authorizes the Company, at any time and from time to time, to the fullest extent permitted by law, to set off, against any obligations of such Originator to the Company arising in connection with the Purchase Documents (including, without limitation, amounts payable pursuant to Section 9.1) that are then due and payable or that are not then due and payable but are accruing in respect of the then current Settlement Period, any and all indebtedness at any time owing by the Company to or for the credit or the account of such Originator. SECTION 10.4 Binding Effect; Assignability. This Agreement shall be binding upon and inure to the benefit of the Company and each Originator and their respective successors and permitted assigns. Each of the Administrator and the Buyer is a third party beneficiary of all of the provisions of this Agreement, entitled to enforce such provisions directly against the parties hereto. No Originator may assign any of its rights hereunder or any interest herein without the prior written consent of the Company, except as otherwise herein specifically provided. This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, 23 25 and shall remain in full force and effect until such time as the parties hereto shall agree. SECTION 10.5 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. SECTION 10.6 Costs, Expenses and Taxes. In addition to the obligations of the Originators under Article IX, each Originator, severally and for itself alone, agrees to pay on demand: (a) to the Company (and any successor and permitted assigns thereof) all costs and expenses incurred by such Person in connection with the enforcement of this Agreement and the other Purchase Documents; and (b) all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement or the other Purchase Documents to be delivered hereunder, and agrees to indemnify each Purchase and Sale Indemnified Party against any liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. SECTION 10.7 SUBMISSION TO JURISDICTION. EACH PARTY HERETO HEREBY IRREVOCABLY (a) SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE OF NEW YORK OR ANY FEDERAL COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY PURCHASE DOCUMENT; (b) AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH STATE OR UNITED STATES FEDERAL COURT; (c) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING; (d) IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO SUCH PERSON AT ITS ADDRESS SPECIFIED IN SECTION 10.2; AND (e) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION 10.7 SHALL AFFECT THE COMPANY'S RIGHT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING ANY ACTION OR PROCEEDING AGAINST ANY ORIGINATOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTIONS. SECTION 10.8 WAIVER OF JURY TRIAL. EACH PARTY HERETO WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR RELATING TO THIS AGREEMENT, ANY OTHER PURCHASE DOCUMENT, OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN 24 26 CONNECTION HEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER PURCHASE DOCUMENT, AND AGREES THAT (a) ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY AND (b) ANY PARTY HERETO (OR ANY ASSIGNEE OR THIRD PARTY BENEFICIARY OF THIS AGREEMENT) MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF ANY OTHER PARTY OR PARTIES HERETO TO WAIVER OF ITS OR THEIR RIGHT TO TRIAL BY JURY. SECTION 10.9 Captions and Cross References; Incorporation by Reference. The various captions (including, without limitation, the table of contents) in this Agreement are included for convenience only and shall not affect the meaning or interpretation of any provision of this Agreement. References in this Agreement to any underscored Section or Exhibit are to such Section or Exhibit of this Agreement, as the case may be. The Exhibits hereto are hereby incorporated by reference into and made a part of this Agreement. SECTION 10.10 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. SECTION 10.11 Acknowledgment and Agreement. By execution below, each Originator expressly acknowledges and agrees that all of the Company's rights, title, and interests in, to, and under this Agreement (but not its obligations), shall be assigned by the Company pursuant to the Receivables Purchase Agreement, and each Originator consents to such assignment. Each of the parties hereto acknowledges and agrees that the Administrator is a third party beneficiary of the rights of the Company arising hereunder and under the other Purchase Documents to which any Originator is a party. SECTION 10.12 No Proceeding. Each Originator hereby agrees that it will not institute, or join any other Person in instituting, against the Company any insolvency proceeding so long as any of the Company Notes remains outstanding and for at least one year and one day following the later of (i) the day on which the aggregate outstanding principal amount of each Company Note is paid in full and (ii) the day on which all of the obligations of the Company under the Receivables Purchase Agreement are paid in full. SECTION 10.13 Limited Recourse. Except as explicitly set forth herein, the obligations of the Company under this Agreement or any other Purchase Documents to which it is a party are solely the obligations of the Company. No recourse under any Purchase Document shall be had against, and no liability shall attach to, any officer, employee, director, or beneficiary, whether directly or indirectly, of the Company. 25 27 [SIGNATURE PAGES FOLLOW] 26 28 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. CMC STEEL FABRICATORS, INC. D/B/A/ SMI JOIST COMPANY, as an Originator By: ----------------------------------------------- Stanley A. Rabin, Vice President Address: 7800 Stemmons Freeway, 10th Floor Dallas, Texas 75247 Attention: Louis A. Federle Telephone: 214-689-4370 Facsimile: 214-689-4320 S-1 29 COMMERCIAL METALS COMPANY, as an Originator By: --------------------------------------------- Stanley A. Rabin, President Address: 7800 Stemmons Freeway, 10th Floor Dallas, Texas 75247 Attention: Louis A. Federle Telephone: 214-689-4370 Facsimile: 214-689-4320 S-2 30 HOWELL METAL COMPANY, as an Originator By: ----------------------------------------------- Stanley A. Rabin, Vice President Address: 7800 Stemmons Freeway, 10th Floor Dallas, Texas 75247 Attention: Louis A. Federle Telephone: 214-689-4370 Facsimile: 214-689-4320 S-3 31 OWEN ELECTRIC STEEL COMPANY OF SOUTH CAROLINA D/B/A SMI STEEL SOUTH CAROLINA, as an Originator By: ----------------------------------------------- Stanley A. Rabin, Vice President Address: 7800 Stemmons Freeway, 10th Floor Dallas, Texas 75247 Attention: Louis A. Federle Telephone: 214-689-4370 Facsimile: 214-689-4320 S-4 32 SMI STEEL INC., as an Originator By: ----------------------------------------------- Stanley A. Rabin, Vice President Address: 7800 Stemmons Freeway, 10th Floor Dallas, Texas 75247 Attention: Louis A. Federle Telephone: 214-689-4370 Facsimile: 214-689-4320 S-5 33 STRUCTURAL METALS, INC., as an Originator By: ----------------------------------------------- Stanley A. Rabin, Vice President Address: 7800 Stemmons Freeway, 10th Floor Dallas, Texas 75247 Attention: Louis A. Federle Telephone: 214-689-4370 Facsimile: 214-689-4320 S-6 34 CMC RECEIVABLES, INC. By: ----------------------------------------------- Stanley A. Rabin, Vice President Address: 7800 Stemmons Freeway, 10th Floor Dallas, Texas 75247 Attention: Louis A. Federle Telephone: 214-689-4370 Facsimile: 214-689-4320 S-7 EX-10.(B) 3 d88897ex10-b.txt RECEIVABLES PURCHASE AGREEMENT DATED JUNE 20, 2001 1 EXHIBIT 10(b) ================================================================================ RECEIVABLES PURCHASE AGREEMENT dated as of June 20, 2001 Among CMC RECEIVABLES, INC. as Seller and THREE RIVERS FUNDING CORPORATION, as Buyer and COMMERCIAL METALS COMPANY, as Servicer ================================================================================ 2 RECEIVABLES PURCHASE AGREEMENT RECEIVABLES PURCHASE AGREEMENT dated as of June 20, 2001 among CMC RECEIVABLES, INC., a Delaware corporation (the "Seller"), THREE RIVERS FUNDING CORPORATION, a Delaware corporation (the "Buyer"), and COMMERCIAL METALS COMPANY, a Delaware corporation(the "Company"). WITNESSETH THAT: WHEREAS, the Company's Operating Divisions (as hereinafter defined) and the Company's Affiliates (as hereinafter defined), Structural Metals, Inc., SMI Steel Inc., Owen Electric Steel Company of South Carolina d/b/a SMI Steel South Carolina, CMC Steel Fabricators, Inc. d/b/a SMI Joist Company, and Howell Metal Company (collectively, the "Originators") in the ordinary course of their business generate trade receivables resulting from the sale of merchandise and the rendering of services to their customers; and WHEREAS, the Originators may from time to time transfer to the Seller certain of such receivables pursuant to the Sale Agreement dated as of June 20, 2001 among the Originators and the Seller, as the same may from time to time be amended, supplemented or otherwise modified (the "Sale Agreement"); WHEREAS, the Seller may from time to time create pools of such receivables; and WHEREAS, the Buyer may from time to time purchase from the Seller undivided percentage ownership interests in such pools of receivables pursuant to and in accordance with the terms hereof; NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants hereinafter set forth and intending to be legally bound hereby, agree as follows: Article I DEFINITIONS; CONSTRUCTION 1.01 Certain Definitions In addition to other words and terms defined in the recitals hereof and elsewhere in this Agreement, as used herein, the following words and terms shall have the following meanings respectively, unless otherwise required by context: "Account Balance" shall mean, in respect of each Receivable which is included in the Receivables Pool, all amounts shown as owing by the related Obligor on the accounting records 3 of an Originator and the Seller, and all other amounts which are shown on the most recent Settlement Statement and in respect of which the related Obligor is obligated, excluding each Defaulted Receivable and reduced by the aggregate amount of any taxes, transport charges or other amounts that are owed by the Obligors with respect to Receivables but are collected by the Seller or the Originators on behalf of any other Person at such time or in reimbursement of amounts owed by the Seller or the Originators to any other Person at such time. "Accounting Period" shall mean, with respect to any Settlement Date, the period ending on the last calendar day (or if such last calendar day is not a Business Day, the next succeeding Business Day) in the month immediately preceding such Settlement Date, and the corresponding periods prior to the Closing Date. "Affected Party" shall mean each of the Buyer, any permitted assignee of the Buyer, and each Person providing liquidity or credit support to the Buyer pursuant to a Liquidity Agreement or a Program Support Agreement and each of their respective Affiliates and assigns. "Affiliate" shall mean, with respect to a Person, any other Person which directly or indirectly controls, is controlled by or is under common control with such Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" shall mean this Receivables Purchase Agreement, as the same may from time to time be amended, supplemented or otherwise modified. "Business Day" shall mean any day other than a Saturday, Sunday, public holiday under the Laws of the Commonwealth of Pennsylvania, the State of Texas or the State of New York or other day on which banking institutions are authorized or obligated to close in the Commonwealth of Pennsylvania, the State of Texas or the State of New York. "Buyer's Allocation" shall have the meaning ascribed to such term in Section 3.01 hereof. "Certificate of Participation" shall mean, with respect to the Participation Interest, the written evidence of the Buyer's interest in the Receivables Pool related to such Participation Interest, in substantially the form attached as Exhibit A hereto. "Chief Executive Office" shall mean, with respect to the Seller or an Originator, the place where the Seller or the Originator, as the case may be, is located, within the meaning of 2 4 Section 9-103(c)(2) of the Uniform Commercial Code, as the same may from time to time be amended, supplemented or otherwise modified, or any analogous provision of any successor statute or any analogous provision of the Uniform Commercial Code in effect in the jurisdiction whose Law governs the perfection of the Seller's ownership interest in any Receivable or the Buyer's ownership interest in any Purchased Receivable. "Closing Date" shall mean the date on which the Participation Interest is initially purchased by the Buyer in the Receivables Pool pursuant to the terms of this Agreement. "Collections" shall mean, for any Purchased Receivable as of any date, (i) the sum of all amounts, whether in the form of cash, checks, drafts, or other instruments (excluding promissory notes), received by an Originator, the Seller or the Servicer or in a Permitted Lockbox in payment of, or applied to, any amount owed by an Obligor on account of such Purchased Receivable (including but not limited to all amounts received on account of any Defaulted Receivable), including, without limitation, all amounts received on account of such Purchased Receivable and other fees and charges, and (ii) all amounts deemed to have been received by an Originator, the Seller or the Servicer as a Collection pursuant to Sections 5.03(c) or 6.04 hereof. "Company Fiscal Year" shall mean the fiscal year of the Company, each of the other Originators and the Seller for accounting purposes. "Company Entity" shall have the meaning assigned to such term in Section 9.01(s) hereof. "Complete Servicing Transfer" shall have the meaning ascribed to such term in Section 6.07 hereof. "Concentration Limit" shall mean, as of any date of determination, with respect to all of the Receivables owing from a single Obligor (except for an Obligor listed on Exhibit I), together with Receivables owing from its Affiliates or subsidiaries, an amount equal to four percent (4%) of the aggregate of the Account Balances of the Eligible Receivables in the Receivables Pool outstanding as of the last day of the most recently completed Accounting Period; provided that such percentage shall be increased for any applicable Obligor to the highest level for which such Obligor qualifies, as determined at the end of the Accounting Period most recently completed, in accordance with the following: (i) six percent (6%) in the case of any Obligor whose long-term debt obligations are rated BBB or higher by S&P or Baa2 or higher by Moody's; (ii) eight percent (8%) in the case of any Obligor whose long-term debt is rated A or higher by S&P or A2 or higher by Moody's; or (iii) ten percent (10%) in the case of any Obligor whose long-term debt is rated AA or higher by S&P or Aa2 or higher by Moody's. 3 5 "Contract" shall mean a written or oral contract, which shall be legally binding, between an Originator and an Obligor which gives rise to a Receivable arising from the sale by the Originator of goods or services in the ordinary course of the business of the Originator. "Cost of Funds" shall mean, with respect to any Settlement Period, an amount, as notified in writing by the Buyer to the Seller on or prior to the related Settlement Date, equal to the interest or discount cost for funds borrowed or obtained during such Settlement Period, either from the issuance of commercial paper notes, the taking of loans or otherwise, by the Buyer for the purpose of maintaining or acquiring the Participation Interest, including in the computation of such cost any dealer's discount or fees and any and all other fees which are attributable to such borrowing and are specified from time to time in writing by the Buyer to the Seller. "Credit and Collection Policy" shall mean the objective receivable credit and collection practices utilized by the Originators, the Seller and the Servicer as of the date hereof and approved by the Buyer, as the same may be modified in strict compliance with this Agreement. "Credit Enhancement Floor" shall mean, with respect to any Settlement Date, the sum of (a) sixteen percent (16%), plus (b) the Expected Dilution in the aggregate with respect to all types of Dilution Factors. "Credit Enhancement Reserve" shall mean, with respect to any Settlement Date, the product of (A) the greater of (1) the sum of (x) the aggregate of the Dilution Reserves with respect to each type of Dilution Factor as of such Settlement Date, plus (y) the Credit Loss Reserve as of such Settlement Date and (2) the Credit Enhancement Floor as of such Settlement Date, and (B) the positive result, if any, of (1) the aggregate outstanding balance of Eligible Receivables in the Receivables Pool as of the last day of the full Accounting Period immediately preceding such Settlement Date, minus (2) the sum of (x) the Yield Reserve with respect to the related Settlement Period, plus (y) the Servicer's Compensation Reserve as of such Settlement Date, minus (3) the aggregate amount by which the Account Balance of Eligible Receivables of each Obligor as of the last day of the full Accounting Period immediately preceding such Settlement Date exceeds the Concentration Limit for such Obligor. "Credit Loss Reserve" shall mean, with respect to any Settlement Date, the product, expressed as a percentage, of (i) 2.0, (ii) the Loss Ratio as of such Settlement Date and (iii) the Loss Horizon Ratio as of such Settlement Date. "Days Sales Outstanding" shall mean, as of any date of calculation, the sum of (i) the product of (A) the quotient of (x) the aggregate Account Balances of all Purchased Receivables 4 6 outstanding as of the last day of the most recently ended Accounting Period less the aggregate amount of net sales of the Originators during such Accounting Period, divided by (y) the aggregate amount of net sales of the Originators during the Accounting Period (the "Prior Period") immediately preceding the most recently ended Accounting Period, and (B) the number of days in the Prior Period, plus (ii) the number of days in the most recently ended Accounting Period. "Default Ratio" shall mean, with respect to any Settlement Date, a fraction, expressed as a percentage, the numerator of which is the aggregate outstanding balance of Eligible Receivables which were in the Receivables Pool as of the first day of the full Accounting Period immediately preceding such Settlement Date and which became Defaulted Receivables during such Accounting Period and the denominator of which is the aggregate amount of net sales of the Originators during the fourth full Accounting Period immediately preceding such Settlement Date. "Defaulted Receivable" shall mean a Purchased Receivable (a) the Obligor of which is not entitled to purchase additional merchandise or services from the applicable Originator, by reason of any default or nonperformance by such Obligor, under the terms of the Credit and Collection Policy, (b) which has become uncollectible or has been written off the books of the applicable Originator or the Seller by reason of such Obligor's inability to pay, as determined by the Buyer or the Servicer, in either case in accordance with the Credit and Collection Policy, (c) in respect of which an Event of Bankruptcy has occurred with respect to the related Obligor or (d) in respect of which the Obligor is more than 60 days past due. "Deferred Purchase Price" shall mean the amount calculated pursuant to Section 5.06 hereof. "Depositary" shall mean Bankers Trust Company. "Dilution" shall mean a reduction of the Account Balance of an Eligible Receivable given to an Obligor in accordance with the Credit and Collection Policy as a result of a Dilution Factor. "Dilution Factor" shall mean each type of factor set forth on Exhibit H resulting in, or which may result in, a Dilution. "Dilution Horizon" shall mean, with respect to any type of Dilution Factor, the number indicated opposite such type of Dilution Factor on Exhibit H; provided, that the Buyer may at any time, in its reasonable discretion, change the Dilution Horizon for any type of Dilution Factor through the delivery by the Buyer to the Seller of an amended Exhibit H. 5 7 "Dilution Horizon Ratio" shall mean, as of any Settlement Date with respect to any type of Dilution Factor, a fraction, expressed as a percentage, the numerator of which is the aggregate amount of net sales of the Originators during the number of full Accounting Periods immediately preceding such Settlement Date equal to the Dilution Horizon with respect to such type of Dilution Factor and the denominator of which is the aggregate outstanding balance of Eligible Receivables in the Receivables Pool as of the last day of the full Accounting Period immediately preceding such Settlement Date. The Buyer and the Seller hereby agree that the Dilution Horizon Ratio with respect to a Dilution Factor which has a Dilution Horizon equal to zero shall be zero. "Dilution Ratio" shall mean, as of any Settlement Date with respect to any type of Dilution Factor, a fraction, expressed as a percentage, the numerator of which is the aggregate dollar amount of Dilutions attributable to such type of Dilution Factor recognized by the Originators or the Seller during the full Accounting Period immediately preceding such Settlement Date and the denominator of which is the aggregate amount of net sales of the Originators during the "N"th full Accounting Period immediately preceding such Settlement Date, where "N" is equal to the Dilution Horizon with respect to such type of Dilution Factor. The Buyer and the Seller hereby agree that the Dilution Ratio with respect to a Dilution Factor which has a Dilution Horizon equal to zero shall be zero. "Dilution Reserve" shall mean, as of any Settlement Date with respect to any type of Dilution Factor, the product of (a) the sum of (i) 2.0 times the Expected Dilution with respect to such type of Dilution Factor as of such Settlement Date, plus (ii) the product of (x) the positive result, if any, of the Dilution Spike Ratio with respect to such type of Dilution Factor as of such Settlement Date, minus such Expected Dilution, and (y) a fraction, the numerator of which is such Dilution Spike Ratio and the denominator of which is such Expected Dilution, and (b) the Dilution Horizon Ratio with respect to such type of Dilution Factor as of such Settlement Date. "Dilution Spike Ratio" shall mean, as of any Settlement Date with respect to any type of Dilution Factor, the highest Dilution Ratio with respect to such type of Dilution Factor for any full Accounting Period during the period of twelve (12) consecutive full Accounting Periods immediately preceding such Settlement Date. "Dispute" shall mean any dispute, deduction, claim, offset, defense, counterclaim, set-off or obligation of any kind, contingent or otherwise, relating to a Receivable, including, without limitation, any dispute relating to goods or services already paid for. 6 8 "Dollar", "Dollars" and the symbol "$" shall mean lawful money of the United States of America. "Eligible Receivable" shall mean any Receivable which: (a) duly complies with all applicable Laws and other legal requirements, whether Federal, state or local, including, without limitation, usury laws, the Federal Consumer Credit Protection Act, the Fair Credit Billing Act and the Federal Truth in Lending Act; (b) constitutes an "account" or a "general intangible" as defined in the Uniform Commercial Code as in effect in the State of New York and the jurisdiction whose Law governs the perfection of the Buyer's Participation Interest in such Receivable; (c) (i) was originated by an Originator in the ordinary course of the Originator's business in a transaction which complied with the Credit and Collection Policy, or (ii) was originated by a business subsequently acquired by or merged into the Originator in a transaction which complied with the policies and procedures of such business in effect at the time such Receivable was originated, provided that the eligibility of such Receivable under this clause (ii) is approved in advance in writing by the Referral Agent; (d) arises from a Contract (the form of which has been approved by the Referral Agent) and has been billed, or will be billed to the related Obligor, or in respect of which the related Obligor is otherwise liable, in accordance with the terms of such Contract; (e) arises from a Contract that (i) does not require the Obligor under such Contract to consent to the transfer, sale or assignment of the rights of the applicable Originator to receive payments under such Contract and (ii) does not contain any provision that restricts the ability of the Buyer to exercise its rights under this Agreement, including, without limitation, its right to review the Contract, except, in each case, as consented to or waived in writing by the Obligor under such Contract; (f) constitutes a legal, valid, binding and irrevocable payment obligation of the related Obligor, enforceable in accordance with its terms 7 9 (subject to contractual discounts, allowances, quality and quantity adjustments); (g) provides for payment in Dollars by the related Obligor; (h) is payable into a Permitted Lockbox or Lockbox Account or directly to the Servicer or the Seller; provided that Receivables originated by the Cometals Operating Division need not be payable into a Permitted Lockbox until such time as Cometals is required to maintain a Permitted Lockbox pursuant to Section 6.08; (i) has not been repurchased by the Seller or deemed collected pursuant to the provisions of this Agreement; (j) if it were a Purchased Receivable, would not be a Defaulted Receivable; (k) has an Obligor who is entitled to purchase additional merchandise or receive additional services from an Originator under the terms of the Credit and Collection Policy; provided, that a Receivable which has an Obligor who is not entitled to purchase additional merchandise or receive additional services from the Originator because such Obligor has reached the credit limit established by the Originator shall be deemed to satisfy this paragraph (k); (l) was not originated in or subject to the Laws of a jurisdiction whose Laws would make such Receivable, the related Contract, the transfer of such Receivable by the Originator to the Seller pursuant to the Sale Agreement or the sale of the Participation Interest in such Receivable to the Buyer hereunder unlawful, invalid or unenforceable; (m) is owned solely by the Seller free and clear of all Liens, except for the Lien arising in connection with this Agreement and any Program Support Agreement; (n) no rejection or return of the goods or services which give rise to such Receivable has occurred and all goods and services in connection therewith have been finally performed or delivered to and accepted by the Obligor without Dispute; 8 10 (o) is not an obligation of the United States, any state or municipality or any agency or instrumentality or political subdivision thereof, unless otherwise agreed to in writing by the Buyer, the Seller and the Affected Parties; (p) is not subject to any contractual right of set-off; (q) is an obligation representing part or all of the sales price of merchandise or services; (r) such Receivable must, by its terms, require full payment in respect thereof not more than 60 days past the specified due date thereof; (s) has an Obligor who is located in the United States, including the Commonwealth of Puerto Rico; (t) has an Obligor who is not an Affiliate of an Originator or the Seller; (u) was acquired by the Seller from an Originator pursuant to and in accordance with the terms of the Sale Agreement; and (v) the Obligor of which has not been deemed to be ineligible by the Buyer, in its sole discretion, upon ten (10) days prior written notice to the Seller. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that is a member of a group of which the Seller is a member and which is treated as a single employer under Section 414 of the Code. "Event of Bankruptcy" shall mean, for any Person: (a) if such Person shall fail generally to, or admit in writing its inability to, pay its debts as they become due; or (b) a proceeding shall have been instituted in a court having jurisdiction in the premises seeking a decree or order for relief in respect of such Person in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (under the Bank 9 11 Conservation Act, as amended, or otherwise) or other similar official of such Person or for any substantial part of its property, or for the winding-up or liquidation of its affairs; or (c) the commencement by such Person of a voluntary case under any applicable bankruptcy, insolvency or other similar Law now or hereafter in effect, or such Person's consent to the entry of an order for relief in an involuntary case under any such Law, or consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator, conservator (under the Bank Conservation Act, as amended, or otherwise) or other similar official of such Person or for any substantial part of its property, or any general assignment for the benefit of creditors, or, if a corporation or similar entity, any corporate action in furtherance of any of the foregoing; or (d) a decree or order of a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator, or conservator in any insolvency, readjustment of debt, marshalling of assets and liabilities, or similar proceedings, shall have been entered against such Person. "Expected Dilution" shall mean, as of any Settlement Date with respect to any type of Dilution Factor, a fraction, expressed as a percentage, the numerator of which is the sum of the Dilution Ratios with respect to such type of Dilution Factor for each of the twelve full Accounting Periods immediately preceding such Settlement Date and the denominator of which is 12. "Expiration Date" means the earliest of (i) June 16, 2004, which may be extended from time to time for an additional period or periods for up to 360 days commencing on the then scheduled Expiration Date, by written notice of request given by the Seller to the Buyer, specifying the duration of the period of extension requested, at least 120 days before such scheduled Expiration Date, and by written notice of acceptance (which notice may be given or withheld by the Buyer in its sole discretion) by the Buyer to the Seller not later than ninety (90) days prior to such scheduled Expiration Date, provided, that the new scheduled Expiration Date shall in no event result in a remaining term of this Agreement from any date of acceptance thereof that exceeds 360 days, (ii) the date that the Buyer shall give notice of the termination of the Buyer's obligation to purchase the Participation Interest or make Reinvestments 10 12 hereunder pursuant to Section 10.02, and (iii) the first date on which there shall no longer be any Liquidity Agreement or Program Support Agreement in effect (as to which the Buyer shall promptly notify the Seller after obtaining notice of such termination, including any anticipated termination) supporting commercial paper issued to fund the Participation Interest hereunder; provided, further, that if any Expiration Date is not a Business Day it shall occur on the next preceding Business Day. "Facility Fee" shall mean the facility fee set forth in a separate letter agreement, dated as of the Closing Date, between the Seller and the Buyer, as the same may be amended from time to time. "Fitch" shall mean Fitch Inc. "GAAP" shall mean generally accepted accounting principles in the United States of America, applied on a consistent basis except to the extent necessary to comply with changes in such generally accepted accounting principles. "Income Taxes" shall mean any federal, state, local or foreign taxes based upon, measured by, or imposed upon gross or net income, gross or net receipts, capital or net worth, in each case, attributable solely to cash received by the Affected Party that is not remitted or deemed remitted to the Originators or the Seller (regardless of the name of the tax imposed), including any penalties, interest or additions to tax imposed with respect thereto. "Investment" shall mean, on each date of determination, the sum of (i) the Net Investment and (ii) the Deferred Purchase Price, if any, as determined on the first Closing Date or as set forth on the most recently delivered Settlement Statement. "Law" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body (including any law, rule, regulation or governmental order relating to the protection of the environment or to public or employee health or safety). "Lien", in respect of the property of any Person, shall mean any ownership interest of any other Person, any mortgage, deed of trust, hypothecation, pledge, lien, security interest, grant of a power to confess judgment, preference, right to priority payment, filing of any financing statement, charge or other encumbrance or security arrangement of any nature whatsoever, including, without limitation, any conditional sale or title retention arrangement, any assignment, deposit arrangement, consignment or lease intended as, or having the effect of, security, or the filing of a financing statement in connection with any of the foregoing. 11 13 "Liquidation Day" shall mean each day which occurs on or after (i) the date designated in a notice given by the Buyer to the Seller stating that the conditions contained in Section 4.03 hereof are not satisfied, (ii) the Expiration Date, (iii) the date on which a Termination Event occurs and is continuing, or (iv) the date on which the Seller gives written notice to the Buyer that it no longer wishes to sell interests in the Receivables Pool to the Buyer or permit Reinvestments to be made; provided, however, there shall be no Liquidation Day after the Net Investment shall equal zero. "Liquidation Period" shall mean one or more consecutive Liquidation Days. "Liquidity Agreement" shall mean the Funding Agreement dated as of June 20, 2001 among the Buyer, Mellon Bank, as funding institution, and the Referral Agent, as the same may from time to time be amended, supplemented, modified, replaced or superseded. "Lockbox Account" shall mean an account owned and maintained by the Servicer or its subservicer, for the benefit of the Seller, with a Permitted Lockbox Bank for the purpose of depositing payments made by Obligors. "Lockbox Servicing Agreement" shall mean an agreement relating to lockbox services in connection with a Permitted Lockbox which is in form and substance satisfactory to the Buyer and which has been executed and delivered to the Buyer by a Permitted Lockbox Bank. "Loss Horizon Ratio" shall mean, with respect to any Settlement Date, a fraction, expressed as a percentage, the numerator of which is the aggregate amount of net sales of the Originators during the four full Accounting Periods immediately preceding such Settlement Date and the denominator of which is the aggregate outstanding balance of Eligible Receivables in the Receivables Pool as of the last day of the full Accounting Period immediately preceding such Settlement Date. "Loss Ratio" shall mean, with respect to any Settlement Date, the highest average Default Ratio for any three consecutive full Accounting Periods during the period of twelve consecutive full Accounting Periods immediately preceding such Settlement Date. "Maximum Net Investment" shall mean $130,000,000 or such greater amount as shall be established with the consent of the Buyer or such lesser amount as shall be established in accordance with Section 2.03 hereof. "Mellon Bank" shall mean Mellon Bank, N.A., a national banking association. 12 14 "Moody's" shall mean Moody's Investors Service, Inc. "Multiemployer Plan" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which the Seller or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code) is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Net Investment" shall mean (a) for the Closing Date, an amount equal to the Purchase Price (not including the Deferred Purchase Price, if any) paid for the Participation Interest on the Closing Date, and (b) for any other day, an amount equal to the sum of (i) the Net Investment on the Closing Date, plus (ii) amounts paid to the Seller pursuant to Section 5.01 hereof since the Closing Date as an increase in the Net Investment, less (iii) all Collections and other amounts paid to the Buyer and not reinvested (which shall not include any amounts paid to the Buyer as Cost of Funds or fees) pursuant to Sections 2.03(b), 5.03(b),(d)and (e) and 5.04 hereof since the Closing Date. In the event that any amount received by the Buyer constituting any portion of Collections is rescinded or must otherwise be returned or restored for any reason to any Person, the Net Investment shall be increased by the amount of Collections so rescinded, returned or restored. "Net Sales" shall mean, with respect to an Originator during any specified period of time, the aggregate sales by such Originator during such period which generate Receivables. "Obligor" shall mean, with respect to any Receivable, the Person who purchased goods or services under a Contract giving rise to such Receivable and who is obligated to make payments to an Originator or the Seller on such Contract in respect of such Receivable. "Office" shall mean, when used in connection with the Buyer, its office located at 114 West 47th Street, Suite 1715, New York, New York 10036, or when used in connection with the Company, an Originator or the Seller, its respective office located at 7800 Stemmons Freeway, Dallas, Texas 75247, or at such other office or offices of the Buyer, the Company, the Originator or the Seller or branch, subsidiary or Affiliate of any thereof as may be designated in writing from time to time by any party hereto to the other parties hereto. "Official Body" shall mean any 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. 13 15 "Operating Divisions" shall mean the following operating divisions of the Company: Cometals, Commonwealth Metal, Dallas Trading Division and Secondary Metals Processing Division. "Originators" shall mean the Company (acting through its Operating Divisions) and Structural Metals, Inc., SMI Steel Inc., Owen Electric Steel Company of South Carolina d/b/a SMI Steel South Carolina, CMC Steel Fabricators, Inc. d/b/a SMI Joist Company, (acting through its facility in Hope, Arkansas) and Howell Metal Company. "Participation Interest" shall mean, at any time, an undivided percentage ownership interest equal to the Buyer's Allocation at such time in all then outstanding Receivables included in the Receivables Pool, including, without limitation, all Collections, and all collateral security, insurance policies, letters of credit and surety bonds given on behalf of Obligors to secure or support payment of such Receivables, and any proceeds of any of the foregoing. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Permitted Lockbox" shall mean a post office box owned and maintained by the Servicer or its subservicer for the benefit of the Seller for the purpose of receiving payments made by Obligors. "Permitted Lockbox Bank" shall mean any bank at which a Lockbox Account is maintained, the short-term unsecured debt obligations of which are rated at least A-1 by S&P, at least P-1 by Moody's and, if rated by Fitch, at least F-1 by Fitch, appointed from time to time by the Seller and approved by the Buyer. "Person" shall mean an individual, corporation, partnership (general or limited), trust, business trust, unincorporated association, joint venture, joint-stock company, Official Body, or any other entity of whatever nature. "Plan" shall mean any pension plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code that is maintained for employees of the Seller or any ERISA Affiliate. "Potential Servicer Event" shall mean any event or condition which, with the giving of notice, the passage of time or both, would constitute a Servicer Event. "Potential Termination Event" shall mean any event or condition which, with the giving of notice, the passage of time or both, would constitute a Termination Event. 14 16 "Program Fee" shall mean, for any Settlement Period, the rate per annum set forth in the separate letter agreement, dated as of the Closing Date, between the Seller and the Buyer, as the same may be amended from time to time. "Program Fee Amount" shall mean, for any Settlement Period or part thereof, an amount equal to the product of (i) the Program Fee and (ii) the average daily Net Investment during the days elapsed in such Settlement Period and (iii) the quotient of the number of days elapsed during such Settlement Period divided by 360. "Program Support Agreement" means, collectively, all liquidity agreements, funding agreements (other than the Liquidity Agreement), credit agreements, letter of credit agreements, surety agreements, security agreements, letters of credit and all other agreements which may be in effect from time to time and which provide liquidity or credit support in respect of the commercial paper issued by the Buyer, excluding, in the sole discretion of the Referral Agent, any such agreement the absence of which would not reasonably be expected to have a material adverse effect on the ability of the Buyer to issue its commercial paper to fund the Net Investment hereunder. "Purchase Availability Amount" shall mean, as of any date, an amount equal to the excess, if any, of (i) the Maximum Net Investment as of such date over (ii) the Net Investment as of such date. "Purchase Documents" shall mean this Agreement, the Certificate of Participation, the Sale Agreement and such other agreements, documents and instruments entered into and delivered by the Seller or the Originators in connection with the transactions contemplated by this Agreement. "Purchase Notice" shall mean each notice delivered pursuant to Section 4.02(e) hereof, in such form and with such detail as the Buyer may require from time to time. "Purchase Obligation" shall have the meaning ascribed to such term in Section 2.01 hereof. "Purchase Price" shall mean, with respect to the purchase of the Participation Interest, the amount of cash consideration set forth on the Purchase Notice or otherwise paid by the Buyer for such Participation Interest on the Closing Date. "Purchased Receivable" shall mean a Receivable included in the Receivables Pool in which the Buyer is maintaining the Participation Interest pursuant to the terms of this Agreement. "Rate of Collections" shall mean, for any Accounting Period, a fraction, expressed as a percentage, the numerator of which is equal to the total Collections in respect of all 15 17 Receivables (including deemed Collections to the extent actually received by the Servicer pursuant to Section 5.07) during such Accounting Period and the denominator of which is equal to the aggregate Account Balances of all Receivables as of the close of business on the last day of the immediately preceding Accounting Period. "Receivable" shall mean, with respect to any Contract, all receivables, contract rights, general intangibles, accounts, chattel paper, instruments (including, without limitation, promissory notes), amounts due and to become due to an Originator or the Seller arising under such Contract (including but not limited to finance charges accrued with respect to such amounts and fees), and all other rights, powers and privileges of the Originator or the Seller arising thereunder or related thereto and in the merchandise (including returned goods) and contracts relating thereto, assertable against any Person whatsoever, all security interests, insurance policies, letters of credit, surety bonds, guaranties and property securing or supporting payment of such Receivable, all Records relating to such Receivable and all proceeds and products of any of the foregoing; provided, that the term shall not include any Receivable the Obligor of which is listed on Exhibit I hereto, as such exhibit may be amended, supplemented or modified from time to time. "Receivables Pool" shall mean, at any time, the group of Purchased Receivables then outstanding which have, on the Closing Date, been identified by the Seller as constituting a pool and each additional Receivable thereafter added to such pool. "Records" shall mean correspondence, memoranda, computer programs, tapes, discs, papers, books or other documents or transcribed information of any type whether expressed in ordinary or machine readable language. "Reference Rate" shall mean the rate of interest established by the Referral Agent from time to time as its reference rate; any change in the reference rate shall become effective as of the opening of business when such change occurs. The "Reference Rate" is not intended to be the lowest rate of interest charged by the Referral Agent in connection with extensions of credit to debtors. "Referral Agent" shall mean Mellon Bank, together with its successors or assigns, in its capacity as referral agent for the Buyer. "Reinvestment" shall mean the purchase by the Buyer and the sale by the Seller of additional undivided percentage ownership interests in each and every Purchased Receivable utilizing the proceeds of Collections that were allocated to the Buyer for such purpose pursuant to Section 5.03(a). 16 18 "Remainder" shall have the meaning assigned to such term in Section 5.03(a) hereof. "Reportable Event" shall mean any reportable event as defined in Section 4043(c) of ERISA or the regulations issued thereunder with respect to a Plan (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code). "Responsible Officer" shall mean the chief executive officer, chief financial officer, controller, secretary, treasurer or any vice president of the Seller, the Company or any other Originator, respectively, as the case may be. "Sale Agreement" shall have the meaning assigned to such term in the recitals hereto. "Servicer" shall mean the Company, or any Person other than the Company or its Affiliates which, upon the termination of the Company as Servicer, succeeds to the functions performed by the Company as the servicer of the Purchased Receivables pursuant to a Complete Servicing Transfer and a Successor Servicing Agreement. "Servicer Event" shall mean a Termination Event (other than the Termination Event under Section 10.01(k) relating to the Buyer). "Servicer's Compensation" shall have the meaning ascribed to such term in Section 6.06(e) hereof. "Servicer's Compensation Reserve" shall mean, as of any Settlement Date, an amount equal to the product of (i) .50%, (ii) the aggregate outstanding balance of Eligible Receivables in the Receivables Pool as of the last day of the full Accounting Period immediately preceding such Settlement Date, and (iii) a fraction, the numerator of which is the product of (a) the Days Sales Outstanding at the close of business as of the last day of such Accounting Period and (b) 1.5 and the denominator of which is 360. "Settlement Date" shall mean, as to each Settlement Period, the twenty-second (22nd) calendar day (or, if such twenty-second (22nd) calendar day is not a Business Day, the next succeeding Business Day) after the last day of the Accounting Period most recently completed. "Settlement Period" shall mean (a) the period from and including the Closing Date and ending on the day immediately preceding the first Settlement Date, and (b) thereafter, the period from and including the Settlement Date of the immediately preceding Settlement Period and ending on the day immediately preceding the next Settlement Date. 17 19 "Settlement Statement" shall mean a statement substantially in the form of Exhibit B hereto, which, among other things, will identify in the aggregate all Receivables included in the Receivables Pool as of the last day of the Accounting Period most recently completed, duly completed and executed by a Responsible Officer of the Company or, if the Company is no longer the Servicer, of the Seller and delivered to the Buyer pursuant to Section 5.01 hereof. "S&P" shall mean Standard & Poor's Ratings Services. "Successor Servicing Agreement" shall mean any agreement between the Buyer and any Person, other than the Company or its Affiliate, which contains provisions concerning the servicing of the Purchased Receivables substantially similar to the provisions contained herein, including Sections 5.03, 5.04, 5.06, 6.01, 6.02, 6.04, 6.06 and 6.07 hereof, pursuant to which such Person performs servicing functions in respect of the Purchased Receivables, and all agreements, instruments and documents attached thereto or delivered in connection therewith, as any of the same may from time to time be amended, supplemented or otherwise modified and in effect. "Termination Event" shall have the meaning ascribed to such term in Section 10.01 hereof. "Transaction Costs" shall have the meaning ascribed to such term in Section 11.01 hereof. "UCC" shall have the meaning ascribed to such term in Section 1.02 hereof. "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I Subtitle E of Title IV of ERISA. "Yield Reserve" shall mean, with respect to any Settlement Period, an amount equal to the result of (X) the sum of (i) the Cost of Funds for such Settlement Period and (ii) the product of (a) the Program Fee, (b) the Net Investment at the close of business on the first day of such Settlement Period, and (c) a fraction, the numerator of which is the actual number of days in such Settlement Period and the denominator of which is 360, and (iii) the product of (a) the Facility Fee, (b) the Maximum Net Investment as of the close of business of the first day of such Settlement Period, and (c) a fraction, the numerator of which is the actual number of days in such Settlement Period and the denominator of which is 360, divided by (Y) the actual number of days in of such Settlement Period, times (Z) the product of the Days Sales Outstanding as of the last day of its most recently ended Accounting Period times 1.5. 18 20 1.02 Interpretation and Construction. Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular the plural and the part the whole. References in this Agreement to "determination" by the Buyer shall be conclusive absent manifest error and include good faith estimates by the Buyer (in the case of quantitative determinations) and good faith beliefs by the Buyer (in the case of qualitative determinations). The words "hereof", "herein", "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation hereof in any respect. Section, subsection and appendix references are to this Agreement unless otherwise specified. As used in this Agreement, the masculine, feminine or neuter gender shall each be deemed to include the others whenever the context so indicates. Terms not otherwise defined herein which are defined in the Uniform Commercial Code as in effect in the State of New York (the "UCC") on the date hereof shall have the respective meanings ascribed to such terms therein unless the context otherwise clearly requires. This Agreement shall be construed as a whole and in accordance with its fair meaning. Article II AGREEMENT TO PURCHASE AND SELL 2.01 Purchase Limits. Subject to the terms and conditions hereof, the Seller may at its option sell to the Buyer, and the Buyer agrees to purchase from the Seller (such agreement being referred to herein as the "Purchase Obligation"), at any time and from time to time on and after the date hereof and to but excluding the Expiration Date, undivided percentage ownership interests in the Receivables Pool by purchasing the Participation Interest in such Receivables Pool. Subject to the terms and conditions hereof, the Buyer shall also (i) make Reinvestments by permitting the Servicer to cause Collections allocated to the Buyer to be applied to the purchase of additional undivided percentage ownership interests in the Receivables Pool, and (ii) increase its Net Investment in the Participation Interest on any Settlement Date at the request of the Seller (without regard to a minimum amount). The Buyer shall not purchase the Participation Interest on the Closing Date, or permit a Reinvestment to be made on any day, or increase its Net Investment on any Settlement Date, to the extent that the amount of such purchase or Reinvestment shall exceed the Purchase Availability Amount, or shall cause the Buyer's Allocation (after giving effect to such purchase or Reinvestment) to exceed 100%. The Buyer shall not be obligated to increase the Maximum Net Investment. The Buyer shall not purchase the Participation Interest if the Buyer cannot issue its commercial paper notes or 19 21 short-term promissory notes or otherwise borrow in order to fund the Purchase Price of such Participation Interest, or to make any such purchase or any Reinvestment or increase its Net Investment on any Settlement Date at or after the earlier to occur of (i) the Expiration Date, and (ii) the reduction of the Maximum Net Investment to zero pursuant to Section 2.03 hereof. So long as no Termination Event or Potential Termination Event shall have occurred and be continuing, the Buyer shall make timely annual requests for renewal of the Liquidity Agreement during the term of this Agreement, provided, that no such renewal shall be required to extend the term of the Liquidity Agreement beyond the Expiration Date. 2.02 Amount of Purchases. The sale of the Participation Interest on the Closing Date by the Seller to the Buyer shall be for a minimum Purchase Price of $25,000,000. 2.03 Reduction of the Maximum Net Investment and Net Investment; Termination of the Agreement. (a) Reduction of Maximum Net Investment. The Maximum Net Investment shall be reduced to zero (i) on the Expiration Date, or (ii) in accordance with Section 10.02 hereof. In addition, upon written notice from the Seller to the Buyer, the Seller may reduce in whole or in part the Maximum Net Investment, effective as of the next Settlement Date on or after the thirtieth (30th) day following the date on which such notice is given; provided, however, that (i) any partial reduction must be in an amount equal to $5,000,000 or any greater amount which is an integral multiple of $5,000,000, and (ii) if the Maximum Net Investment at the time of such notice is less than or equal to $20,000,000, the Seller may only elect to reduce the amount of the Maximum Net Investment to zero. Notwithstanding any other provision of this Agreement, the Maximum Net Investment may not at any time be reduced below the amount of the aggregate Net Investment in effect at such time. (b) Reduction of the Net Investment. If at any time the Seller shall wish to cause the reduction of the Net Investment (but not to commence the permanent liquidation of the Participation Interest), the Seller may do so upon ten (10) days prior written notice thereof to the Buyer (such notice to include the amount of such proposed reduction and the proposed date on which such reduction will commence, which date shall be agreed to by the Buyer). On the proposed date of commencement of such reduction and on each day thereafter, the Servicer shall refrain from making Reinvestments of Collections until the amount of such Collections not so reinvested shall equal the desired amount of reduction. The Servicer shall pay to the Buyer all Collections received on each day during the period in which Reinvestment of Collections has been suspended pursuant to this Section 2.03(b) on the date which is the earlier of (i) two (2) Business Days or (ii) the number of days specified in Section 9-306(4)(d) of the 20 22 Uniform Commercial Code as in effect in the jurisdiction whose Laws govern the rights of the Buyer in and to any such Collections after the day on which such Collections are received by the Servicer. The Net Investment shall be deemed reduced in the amount to be paid to the Buyer only when in fact so paid. The Seller shall use reasonable efforts to attempt to choose a reduction amount, and the date of the commencement thereof, so that such reduction shall commence and conclude in the same Settlement Period. The Seller shall pay to the Buyer an amount equal to any actual loss, cost or expense incurred by the Buyer as the result of the repayment of the Net Investment prior to the maturity date of any (x) loans made to the Buyer by third parties or (y) commercial paper notes or short-term promissory notes issued by the Buyer, in each case for the purpose of maintaining the Participation Interest. Buyer shall provide the Seller with written notice as promptly as practicable of such actual loss, cost or expense, which notice shall provide the calculations used in determining the amount of such loss, cost or expense. (c) Termination of the Agreement. This Agreement shall terminate at the latest to occur of (i) the Expiration Date, (ii) the first day on which the Net Investment equals zero, all other amounts accrued and owing to the Buyer under this Agreement have been paid in full and the Maximum Net Investment has been reduced to zero, or (iii) the first day on which all Eligible Receivables in the Receivables Pool have been collected or written off by the Seller and the Maximum Net Investment has been reduced to zero; provided, however, that the covenants, representations, warranties and indemnities of the Company and the Seller to the Buyer contained herein or made pursuant hereto shall survive such termination. Upon such termination, the Buyer shall convey to the Seller, without recourse, its Participation Interest in all Purchased Receivables and shall deliver to the Seller all instruments and documents relating thereto. Upon such reconveyance, the Deferred Purchase Price shall be deemed to have been paid in full. 2.04 Fees Payable to the Buyer. (a) Facility Fee. The Seller agrees to pay to the Buyer, in consideration for the Purchase Obligation hereunder, from and including the date of execution of this Agreement to but excluding the Expiration Date, the Facility Fee. The accrued Facility Fee shall be due and payable in accordance with Sections 5.03 and 5.04 hereof until the earlier of the Expiration Date or the date on which the Maximum Net Investment is reduced to zero pursuant to Section 2.03(a) hereof. To the extent the Facility Fee is not paid from Collections in accordance with Section 5.03 or 5.04 hereof, the Facility Fee shall be an absolute and unconditional obligation of the Seller. (b) Fees Non-Refundable. The fees to be paid to the Buyer pursuant to this Section 2.04 are non-refundable and shall 21 23 not be refunded for any reason whatsoever, including, without limitation, the later reduction or termination of the Maximum Net Investment in whole or in part in accordance with the provisions of this Agreement. Article III BUYER'S ALLOCATION 3.01 Buyer's Allocation. The Buyer's Allocation on any day of determination shall be a percentage, not in excess of 100%, equal to the quotient of (i) the Investment, divided by (ii) the positive result of (a) the aggregate Account Balances of all Eligible Receivables included in the Receivables Pool on the date of determination before giving effect to Collections on such date, less (b) the aggregate amount by which the Account Balance of Eligible Receivables of each Obligor exceeds the Concentration Limit for such Obligor. 3.02 Frequency of Computation of the Buyer's Allocation. The Buyer's Allocation shall be initially computed as of the opening of business of the Servicer on the Closing Date. Thereafter, until the Net Investment shall be reduced to zero, the Buyer's Allocation shall be automatically recomputed as of the close of business of the Servicer on each Business Day, and the Buyer's Allocation shall constitute the percentage ownership interest of the Buyer in the Receivables Pool on such date; provided, however, that on and after a Liquidation Day and during the continuance of a Liquidation Period, the Buyer's Allocation shall be equal to the Buyer's Allocation as computed on the first Business Day preceding the occurrence of such Liquidation Day. The Buyer's Allocation shall be reduced to zero at such time as the related Net Investment shall be reduced to zero, the Buyer shall have received all amounts in respect of accrued and unpaid Cost of Funds and Program Fee and all other amounts payable to it pursuant to this Agreement, and the Servicer, provided the Company is not the Servicer, shall have received the accrued Servicer's Compensation. Article IV ClOSING PROCEDURES 4.01 Purchase and Sale Procedures. (a) General. The sale of the Participation Interest hereunder shall, with respect to the Receivables Pool, transfer ownership to the Buyer of an undivided percentage ownership interest in each Receivable in such Receivables Pool, effective upon the creation of such Receivable. (b) Indemnity for Failure to Close. If a sale of the Participation Interest fails to occur on the Closing Date as 22 24 specified in the Purchase Notice delivered pursuant to Section 4.02(e) hereof and agreed to by the Buyer pursuant to Section 4.04 hereof for reasons other than a breach by the Buyer, the Seller shall reimburse the Buyer on demand for any loss, cost or expense (including loss of margin) incurred by the Buyer with respect to this Agreement, its obligations hereunder or its funding of the proposed Purchase Price (including, without limitation, any loss, cost or expense in obtaining, liquidating or employing deposits as loans from third parties or the loss, cost or expense of issuing its commercial paper notes or short-term promissory notes in order to fund such Purchase Price) until the earlier of (A) the Closing Date as specified in a subsequent Purchase Notice delivered pursuant to Section 4.02(e) hereof and agreed to by the Buyer pursuant to Section 4.04 hereof or (B) the date on which (i) the Buyer redeploys any funds committed to fund such Purchase Price at a rate of return greater than or equal to the Cost of Funds, or (ii) such commercial paper notes or short-term promissory notes become due and payable, as the case may be. The Buyer shall notify the Seller of the amount determined by the Buyer (which determination shall be conclusive and binding absent manifest error) to be necessary to compensate the Buyer for such loss, cost or expense. Such amount shall be due and payable by the Seller to the Buyer ten (10) Business Days after such notice is given. 4.02 Conditions Precedent to the First Purchase. The obligation of the Buyer to purchase the Participation Interest from the Seller on the Closing Date shall be subject to the satisfaction on or before June 30, 2001 of the conditions set forth in Section 4.03 hereof and the following further conditions: (a) Standing. The Buyer shall have received (i) from each of the Seller and each Originator, a certificate, dated a recent date relative to the Closing Date as determined by the Buyer, of the Secretary of State or other similar official as to its good standing under the Laws of its jurisdiction of organization, and (ii) from each Originator, a certificate, dated a recent date relative to the Closing Date as determined by the Buyer, of the Secretary of State or other similar official of the State where its chief executive offices are located as to its good standing under the Laws of such jurisdiction. (b) Opinions of Counsel. The Buyer shall have received favorable written opinions of David M. Sudbury, Esq., General Counsel of the Company, and of Haynes and Boone, LLP, counsel for the Originators and the Seller, each dated the Closing Date, each in form and substance acceptable to the Buyer. (c) Financing Statements, etc. The Buyer shall have received evidence satisfactory to it of the completion of all recordings, registrations and filings as may be necessary in the opinion of the Buyer to evidence or perfect the ownership 23 25 interests to be acquired by the Buyer hereunder, including, without limitation: (i) acknowledgment copies of proper financing statements on Form UCC-1 filed on or prior to the Closing Date, naming each Originator as debtor and/or assignor and the Seller as secured party and/or assignee (in respect of the transfer of Receivables contemplated by the Sale Agreement) and naming the Seller as debtor and/or assignor and the Buyer as secured party and/or assignee (in respect of the transfer of the Participation Interest contemplated by this Agreement), or such other similar instruments or documents as may be necessary in the opinion of the Buyer under the Uniform Commercial Code or any comparable law of all appropriate jurisdictions to evidence or perfect the Buyer's Participation Interest; and (ii) evidence of searches satisfactory to the Buyer listing all effective financing statements which name an Originator (or any predecessor entity thereof) or the Seller as debtor and/or assignor in the jurisdictions in which filings are made pursuant to subsection (i) above, together with copies of such financing statements, none of which (other than the filings made pursuant to subsection (i) above) shall cover any Receivables or the related Contracts, and of tax lien searches satisfactory to the Buyer. (d) Lockbox Agreements. The Buyer shall have received duly executed copies of Lockbox Servicing Agreements with each of one or more Permitted Lockbox Banks. (e) Purchase Notice. The Buyer shall have received from the Seller, no less than two (2) Business Days prior to the Closing Date, a notice (the "Purchase Notice") in substantially the form of Exhibit F hereto, utilizing information as of the last day of the most recently completed Accounting Period, together with such written documentation of the procedures utilized and calculations made in connection with the preparation of such Purchase Notice as the Buyer may request. (f) Responsible Officer Certificate. The Buyer shall have received a certificate of a Responsible Officer, dated the Closing Date, from each of the Seller and each Originator, in substantially the form attached hereto as Exhibit C, and as to such other matters incident to the transactions contemplated by the Purchase Documents as the Buyer may reasonably request, in form and substance satisfactory to the Buyer. The Buyer may conclusively rely on any such certificate unless and until a later certificate revising the prior certificate is received by the Buyer. 24 26 (g) Certificate of Participation. The Buyer shall have received on the Closing Date, a Certificate of Participation executed on behalf of the Seller by a Responsible Officer. (h) Buyer's Review. The Buyer shall have completed to its satisfaction a review of the Servicer's billing and collection operations and reporting systems. (i) Regulatory Approvals. Each Originator and the Seller shall have received all necessary and desirable regulatory approvals, if any, of the transactions under this Agreement and the Sale Agreement. 4.03 Conditions Precedent to Each Purchase and Reinvestment The obligation of the Buyer to purchase the Participation Interest from the Seller on the Closing Date, to make a Reinvestment on any date, or to increase the Net Investment in the Receivables Pool on any Settlement Date, is subject to the performance by each of the Originators and the Seller of its respective obligations hereunder on or before the Closing Date, such date on which a Reinvestment will be made or such Settlement Date, and to the satisfaction of the following further conditions: (a) Details, Proceedings and Documents. All legal details and proceedings in connection with the transactions contemplated by the Purchase Documents or the Receivables to be included in the Receivables Pool on the Closing Date, such Settlement Date or such date of such Reinvestment shall be in form and substance satisfactory to the Buyer, and the Buyer shall have received all such originals or certified copies or other copies of such documents and proceedings in connection with such transactions, in form and substance satisfactory to the Buyer. (b) Representations and Warranties. On and as of such date (i) the representations and warranties of the Seller contained in Article VIII hereof and of each of the Originators contained in the Sale Agreement shall be true and correct with the same force and effect as though made on and as of the Closing Date, such Settlement Date or such date of Reinvestment (except to the extent that such representations and warranties relate solely to an earlier date), (ii) the Originators and the Seller shall be in compliance with the respective covenants contained in Article IX hereof and in the Sale Agreement, and (iii) no Termination Event or Potential Termination Event shall occur as a result of the Purchase and sale of the Participation Interest in the Receivables Pool on the Closing Date, such Settlement Date or such date of Reinvestment, or shall have occurred and be continuing or shall exist on the Closing Date, such Settlement Date or such date of Reinvestment. (c) Sale Agreement. The Sale Agreement shall be in full force and effect. 25 27 4.04 Purchase Price Subject to the terms and conditions hereof, and relying upon the representations and warranties set forth herein, on the Closing Date, the Buyer shall purchase the Participation Interest in the Receivables Pool described in the Purchase Notice delivered by the Seller to the Buyer and agreed upon by the Buyer. On the date of purchase of the Participation Interest, the Buyer shall make available to the Seller at its Office, or such other place as the Seller has notified the Buyer, the Purchase Price therefor. 4.05 Sale Without Recourse. (a) The sale of the Participation Interest hereunder shall, except to the extent specified in Section 5.06 hereof, be made without recourse to the Seller with respect to any loss arising from Defaulted Receivables, provided, that nothing contained herein shall limit the rights of the Buyer provided in Section 2.04, Article V, Section 6.04 and Articles VII and XI hereof. (b) This Agreement also constitutes a security agreement under the UCC. The Buyer and the Seller intend that the transactions contemplated by this Agreement shall be treated as sales and not as a financing. However, in the event that it is ever determined that such transactions constitute a financing arrangement, the Seller hereby grants to the Buyer on the date hereof and on the terms and conditions of this Agreement a first priority security interest in and against all of the Seller's right, title and interest in and to the Purchased Receivables and the proceeds thereof for the purposes of securing the obligations of the Seller and the rights of the Buyer under this Agreement. 4.06 Non-Assumption by the Buyer of Obligations No obligation or liability of the Seller to any Obligor under any Purchased Receivable or Contract shall be assumed by the Buyer hereunder or under the Certificate of Participation, and any such assumption is hereby expressly disclaimed. The Buyer shall be indemnified by the Seller in accordance with Section 11.04 hereof in respect of any losses, claims, damages, liabilities, costs or expenses arising out of or incurred in connection with any Obligor's assertion of such obligation or liability against the Buyer. 4.07 Character of Receivables Added to Receivables Pools All Receivables acquired by the Seller pursuant to the Sale Agreement shall be included in the Receivables Pool immediately upon the Seller's acquisition thereof. All such Receivables will comprise only one Receivables Pool. 26 28 Article V SETTLEMENTS; ADJUSTMENTS 5.01 Settlement Statements The Seller shall, or shall cause the Servicer to, submit to the Buyer not less than two (2) Business Days prior to each Settlement Date, a Settlement Statement signed by a Responsible Officer dated as of such Settlement Date and including information in respect of the Receivables Pool as of the last day of the Accounting Period most recently completed. The execution and delivery of any Settlement Statement shall constitute a representation and warranty by the Seller and the Servicer that the information contained therein is true and correct as of the date thereof. Such Settlement Statement shall be accompanied by such other information as the Buyer may reasonably request. Subject to the terms and conditions of this Agreement, if the Seller requests on a Settlement Statement that the Net Investment be increased to an amount in excess of the Net Investment as of the immediately preceding Settlement Date, the Buyer shall make available to the Seller at its Office, or such other place as the Seller has notified to the Buyer, on the next succeeding Settlement Date, the amount of such increase in the Net Investment; provided, that such increase in the Net Investment shall not cause the Net Investment to exceed the Maximum Net Investment then in effect. The Seller may request a reduction in the Net Investment in accordance with Section 2.03(b). 5.02 Receivables Status Upon ten (10) Business Days' notice from the Buyer, the Seller or the Servicer will furnish or cause to be furnished to the Buyer a written report, signed by a Responsible Officer, containing such information as the Buyer may reasonably request (in such form as the Buyer may reasonably request), which shall include, without limitation, with respect to the Participation Interest (a) the Account Balances of all Purchased Receivables, together with all Collections, Dilutions, and other adjustments to such Receivables since the date of the last written report furnished to the Buyer, and an aging of all Purchased Receivables as of a date no later than the date of such notice; and (b) an analysis and explanation of significant variances, if any, between actual Collections of Purchased Receivables during such Settlement Period and historical collections experience. 5.03 Non-Liquidation Settlements. (a) Daily Settlements. On each day (other than a Liquidation Day) with regard to each Settlement Period, the Buyer shall be allocated an amount of Collections equal to the product of (i) the Buyer's Allocation, expressed as a decimal, and (ii) Collections, if any, with respect to the Purchased Receivables on such day. The Servicer shall hold in trust for the benefit of the Buyer out of such amount in respect of such Buyer's 27 29 Allocation an amount equal to the Cost of Funds and Program Fee Amount accrued through such day and not previously so held (whether or not accrued during the current Settlement Period), and (following such allocation) shall hold in trust for its own account an amount, if available, equal to the Servicer's Compensation accrued through such day for the Participation Interest and not previously so held and (following such allocation) shall hold in trust for the account of the Buyer an amount, if available, equal to the Facility Fee accrued through such day and not previously so held. The remainder of such amount (the "Remainder") in respect of the Buyer's Allocation shall, subject to the terms and conditions of this Agreement, be utilized by the Servicer to make a Reinvestment in the Receivables Pool in the amount of the Remainder, subject to Sections 2.01 and 4.03 hereof, and after giving effect to any allocation of new Receivables to the Receivables Pool. Any portion of the Remainder not applied to a Reinvestment shall be held by the Servicer in accordance with subsection (d) below. The Remainder, or any portion thereof, which is applied to a Reinvestment, and any amount of Collections which were not allocated to the Buyer pursuant to the first sentence of this Section 5.03(a), shall be remitted by the Servicer to the Seller. Notwithstanding the foregoing, in the event that at the end of any Settlement Period the amounts held in trust for the benefit of the Buyer pursuant to the second sentence of this Section 5.03(a) and not previously paid to the Buyer are less than the accrued and unpaid Cost of Funds and Program Fee Amount for such Settlement Period, then any amount which had been deemed to be a Remainder during such Settlement Period (up to the amount of such deficit in the amount available to pay the Cost of Funds and Program Fee Amount) shall be deemed to have been held in trust for the benefit of the Buyer pursuant to the second sentence of this Section 5.03(a). (b) Settlement Period. On each Settlement Date (other than a Settlement Date with respect to a Settlement Period during which a Liquidation Day occurs), the Servicer shall pay to the Buyer and the Servicer the amounts held in trust for the benefit of the Buyer and the Servicer, respectively, pursuant to subsection (a) above and not previously paid to the Buyer and the Servicer, respectively. (c) Deemed Collections. If on any day the Account Balance of a Purchased Receivable is reduced as a result of a Dilution with respect to such Purchased Receivable, the Servicer shall be deemed to have received on such day a Collection of Purchased Receivables in the amount of such reduction. If on any day any of the representations and warranties of the Seller set forth in Section 8.02(b) and (c) is no longer true or was not true when made with respect to such Purchased Receivable, or if any of the representations and warranties of the Seller set forth in Section 8.02(a) was not true when made, the Seller shall be 28 30 deemed to have received on such day a Collection of such Purchased Receivable in full. (d) Unreinvested Collections. Any portion of the Remainder which may not be immediately applied to Reinvestments in the Participation Interest in accordance with Section 5.03(a) for any reason, shall be so reinvested as soon as practicable without violating any provisions of this Agreement; provided, however, that if any portion of the Remainder may not be applied to Reinvestments in the Participation Interest for any reason on the date which is the earlier of (i) two (2) Business Days or (ii) the number of days specified in Section 9-306(4)(d) of the Uniform Commercial Code as in effect in the jurisdiction whose Laws govern the rights of the Buyer in and to any such portion of the Remainder after the Servicer receives such portion of the Remainder, the Servicer shall pay such portion of the Remainder to the Buyer on such earlier date. The Net Investment shall be deemed reduced in the amount to be paid to the Buyer only when in fact so paid. (e) Reduction of Buyer's Allocation. Notwithstanding anything to the contrary contained herein, if, on any Settlement Date prior to the occurrence of a Liquidation Day (after giving effect to all payments required to be made by the Seller or the Servicer to or for the account of the Buyer pursuant to this Section 5.03 and any increase in the Net Investment effected on such day), the Buyer's Allocation shall exceed one hundred percent (100%), the Seller shall make a payment of an amount in immediately available funds to the Referral Agent for the account of the Buyer as a reduction of the Net Investment such that, after giving effect to such payment, the Buyer's Allocation is equal to one hundred percent (100%). 5.04 Liquidation Settlements. (a) Notwithstanding the provisions of Sections 5.03(a) and (b) hereof, on each Liquidation Day with regard to each Settlement Period, the Servicer shall allocate to, and hold in trust for the benefit of, the Buyer for payment in accordance with Section 5.04(b), an amount of Collections equal to the product of (i) the Buyer's Allocation, and (ii) Collections in respect of the Purchased Receivables for such Liquidation Day. The Collections allocated to the Buyer pursuant to this section shall be allocated on a daily basis (i) first, to the payment of any Cost of Funds and Program Fee accrued and owing to the Buyer, (ii) second, subject to Section 6.06(e), to the payment of any Servicer's Compensation accrued and owing to the Servicer, (iii) third, to make payment in respect of any Facility Fee accrued and owing to the Buyer, (iv) fourth, to make payment in respect of the Net Investment, and (v) fifth, to the payment of any other amount accrued and owing to the Buyer under this Agreement. Any amount of such Collections which were not allocated to the Buyer 29 31 pursuant to the first sentence of this Section 5.04 on such Liquidation Day, shall be remitted by the Servicer to the Seller. (b) Collections held by the Servicer on behalf of the Buyer pursuant to this Section 5.04 shall be remitted to the Buyer on the date which is the earlier of (i) two (2) Business Days or (ii) the number of days specified in Section 9-306(4)(d) of the Uniform Commercial Code as in effect in the jurisdiction whose Laws govern the rights of the Buyer in and to any such Collections after the Servicer receives such Collections. 5.05 Allocation of Collections. (a) Except as required by Law or the underlying Contract, if any Obligor is obligated under one or more Purchased Receivables and also under one or more Contracts not constituting Purchased Receivables, then any payment received from or on behalf of such Obligor shall be applied (i) to a specific Contract if the Obligor designates such payment to be so applied, or (ii) to the Purchased Receivables in the order in which payments are due thereunder if the application of such payment is not so designated. (b) Notwithstanding any other provision of this Agreement, the Buyer is not entitled to receive any portion of Collections once the Net Investment is reduced to zero and the Seller has no remaining payment obligations to the Buyer under this Agreement. 5.06 Deferred Purchase Price. On the Closing Date, and, thereafter, in each Settlement Statement, the Servicer shall calculate the Deferred Purchase Price as of the last day of the full Accounting Period most recently completed, which shall be an amount equal to the sum of (1) the Credit Enhancement Reserve, plus (2) the Yield Reserve, plus (3) the Servicer's Compensation Reserve; provided, that if a Liquidation Day occurs, the Deferred Purchase Price will thereafter be the amount of the Deferred Purchase Price at the close of business on the day immediately preceding such Liquidation Day. 5.07 Treatment of Collections and Deemed Collections. Any Collections deemed to be received pursuant to this Agreement shall be paid by the Seller to the Servicer in same day funds on the date of such deemed receipt. The Servicer shall hold or distribute all Collections deemed received pursuant to Sections 5.03 and 6.04 hereof to the same extent as if such Collections had actually been received. So long as the Servicer shall hold any Collections or deemed Collections required to be paid to the Buyer, it shall hold such Collections in trust and separate and apart from its own funds and shall clearly mark its records to reflect such trust. 30 32 Article VI PROTECTION OF THE BUYER; ADMINISTRATION AND COLLECTIONS 6.01 Maintenance of Information and Computer Records. The Seller will, or will cause the Servicer to, hold in trust and keep safely for the Buyer all evidence of the Buyer's right, title and interest in the Receivables Pool. The Seller will, or will cause the Servicer and each Originator to, on or prior to the Closing Date, and with respect to all Receivables that are added to the Receivables Pool after the Closing Date, on each respective date such Receivables are added, place an appropriate code or notation in its Records to indicate those Receivables which are or which will be included in the Receivables Pool. 6.02 Protection of the Interests of the Buyer. (a) The Seller will, or will cause the Servicer to, from time to time do and perform any and all acts and execute any and all documents (including, without limitation, the execution, amendment or supplementation of any financing statements, continuation statements, the Certificate of Participation and notices of Certificate of Participation relating to the Participation Interest for filing under the provisions of the Uniform Commercial Code of any applicable jurisdiction, the execution, amendment or supplementation of any instrument of transfer, and the making of notations on the Records of the Seller) as may be requested by the Buyer in order to effect the purposes of this Agreement and the sale of the Participation Interest hereunder and to perfect the Buyer's right, title and interest in the Receivables Pool and all Collections with respect thereto against all Persons whomsoever. (b) To the fullest extent permitted by applicable Law, the Seller hereby irrevocably grants to the Buyer and the Referral Agent an irrevocable power of attorney, with full power of substitution, coupled with an interest, to sign and file in the name of the Seller, or in its own name, financing statements and continuation statements and amendments thereto with respect to the Buyer's Participation Interest in the Purchased Receivables. (c) At any reasonable time and from time to time at the Buyer's reasonable request and (unless a Termination Event or Potential Termination Event has occurred and is continuing) upon 3 Business Days notice to the Seller, the applicable Originator or the Servicer, the Seller, such Originator or the Servicer, as the case may be, shall permit such Person as the Buyer may designate to conduct audits or visit and inspect any of the properties of the Seller, such Originator or the Servicer, as the case may be, to examine the Records, internal controls and procedures maintained by the Seller, such Originator or the 31 33 Servicer, as the case may be, and take copies and extracts therefrom, and to discuss the Seller's, such Originator's or the Servicer's, as the case may be, affairs with its officers, employees and independent accountants. Each of the Seller, such Originator and the Servicer hereby authorizes such officers, employees and its independent accountants (in the case of such accountants, in the presence of a Responsible Officer of the Seller, such Originator or the Servicer, as the case may be) to discuss with the Buyer the affairs of the Seller, such Originator or the Servicer, as the case may be. The Seller shall reimburse the Buyer for all reasonable fees, costs and expenses incurred by or on behalf of the Buyer in connection with the foregoing actions promptly upon receipt of a written invoice therefor. (d) The Buyer shall have the right to do all such acts and things as it may deem necessary to protect its interests, including, without limitation, confirmation and verification of Purchased Receivables; provided, that the Buyer will not contact any Obligor unless a Termination Event or Potential Termination Event has occurred. 6.03 Maintenance of the Location of Writings and Records. The Seller will at all times until completion of a Complete Servicing Transfer keep or cause to be kept at its Chief Executive Office or at an office of the Servicer designated in advance to the Buyer, each writing or Record which evidences, and which is necessary or desirable to establish or protect, including such books of account and other Records as will enable the Buyer or its designee to determine at any time the status of, the Participation Interest of the Buyer in each Purchased Receivable; provided, that any Records may be stored at other locations to the extent temporary location elsewhere is necessary in connection with litigation, repossession, other collection activities or other usual business purposes. The Seller shall at its own expense prepare and maintain machine-readable magnetic tapes or other media in such format as the Buyer, in its reasonable discretion, may require pertaining to the Purchased Receivables. 6.04 Information. The Seller will, or will cause the Servicer to, furnish to the Buyer such additional information with respect to the Purchased Receivables (including but not limited to the Credit and Collection Policy) as the Buyer may reasonably request. The Seller will also furnish to the Buyer all modifications, adjustments or supplements to the Credit and Collection Policy as in effect on the date hereof; provided, however, that neither the Seller nor any Originator shall, without the Buyer's prior written consent, alter its credit, enforcement and other policies as in effect from time to time if the effect of any alteration thereof would be to materially adversely affect the collectibility of the Purchased Receivables. If any such alteration made without the Buyer's consent is later determined by the Buyer to have had a material adverse effect on 32 34 the collectibility of Purchased Receivables, then the Seller or the Originator, as the case may be, shall promptly revise such policies in order to prevent any such material adverse effect from occurring thereafter, and the Purchased Receivables that, in the sole judgment of the Buyer, became uncollectible due to such change shall be deemed collected and shall be treated as deemed Collections pursuant to Section 5.07 hereof. Promptly upon becoming aware of any Termination Event or Potential Termination Event, the Servicer shall give the Buyer notice thereof. 6.05 Performance of Undertakings Under the Purchased Receivables; Indemnification. Each Originator will at all times observe and perform, or cause to be observed and performed, all obligations and undertakings to the Obligors arising in connection with each Purchased Receivable or related Contract and neither the Originator nor the Seller will take any action or cause any action to be taken to impair the rights of the Seller to the Receivables or the rights of the Buyer to its Participation Interest in the Purchased Receivables. In such connection, the Buyer shall be indemnified by the Seller in accordance with Section 11.04 hereof and by each Originator in accordance with the Sale Agreement in respect of any losses, claims, damages, liabilities, costs or expenses incurred or arising out of any action taken or caused to be taken by the Originator or the Seller which impairs the Seller's rights to the Receivables or the Buyer's rights to its Participation Interest in the Purchased Receivables. 6.06 Administration and Collections; Indemnification. (a) General. Until a Complete Servicing Transfer shall have occurred, the Company will be responsible for the administration, servicing and collection of the Purchased Receivables; provided, however, that the Company may delegate its duties to the Originator in accordance with Section 6.09 and, upon written approval by the Buyer, such duties may also be delegated by the Company to any of its Affiliates or a third party (without impairment, in either case, of the Company's Obligations as Servicer). If and to the extent that the Company or any of its Affiliates or any such third party is performing such functions, the Company agrees to exercise or cause such Affiliate or third party to exercise the same degree of skill and care and apply the same standards, policies, procedures and diligence that it applies to the performance of the same functions with respect to accounts owned by the Company. (b) Administration. The Servicer shall, to the maximum extent permitted by Law, have the power and authority, on behalf of the Buyer as part of the Servicer's administrative and servicing obligations hereunder, to take such action in respect of any such Purchased Receivable as the Servicer may deem advisable, including the resale of any repossessed, returned or rejected goods; provided, however, that the Servicer may not 33 35 under any circumstances compromise, rescind, cancel, adjust or modify (including by extension of time for payment or granting any discounts, allowances or credits) the Account Balance of the related Contract for any Purchased Receivable, except in accordance with the Credit and Collection Policy or otherwise with the Buyer's prior written consent. The Servicer undertakes to comply with each of the covenants of the Seller included herein in respect of which the Seller undertakes to cause the Servicer to take or avoid taking actions specified therein, and further agrees to perform the Servicer's obligations under Article II of the Sale Agreement. (c) Enforcement Proceedings. In the event of a default under any Purchased Receivable before a Servicer Event, the Servicer shall, at the Seller's expense, to the maximum extent permitted by Law, have the power and authority, on behalf of the Buyer as part of the Servicer's administrative and servicing obligations hereunder, to take any action in respect of any such Purchased Receivable as the Servicer may deem advisable; provided, however, that the Servicer or the Seller, as the case may be, shall take no enforcement action (judicial or otherwise) with respect to such Purchased Receivable, except in accordance with the Credit and Collection Policy or otherwise with the written consent of the Buyer. The Servicer or the Seller, as the case may be, will apply or will cause to be applied at all times before a Servicer Event the same standards and follow the same procedures with respect to deciding to commence, and in prosecuting, litigation on such Purchased Receivables as is applied and followed with respect to like accounts not owned by the Buyer. In no event shall the Servicer or the Seller, as the case may be, be entitled to make or authorize any Person to make the Buyer a party to any litigation without the Buyer's express prior written consent. (d) Obligations of the Buyer. The Buyer may, but shall have no obligation to, take any action or commence any proceeding to realize upon any Purchased Receivable. At such time as the Servicer or the Seller, as the case may be, has any obligation to pursue the collection of Purchased Receivables and the Buyer possesses any documents necessary therefor, the Buyer agrees to furnish such documents to the Servicer or the Seller, as the case may be, to the extent and for the period necessary for the Servicer or the Seller, as the case may be, to comply with its obligations hereunder. (e) Servicer's Compensation. The Servicer's Compensation for performing its responsibilities as the servicer with respect to any Purchased Receivables on any day shall be equal to the quotient of (A) the product of (1) one-half of one percent (0.50%), and (2) the Account Balances of Purchased Receivables on such day, divided by (B) 360. Subject to Section 6.07(a), the Servicer's Compensation shall be retained by the Servicer in accordance with Section 5.03 hereof or paid to 34 36 the Servicer by the Buyer in the event Collections are applied in accordance with Section 5.04 hereof; provided, however, that if the Company is the Servicer, the Servicer's Compensation shall not be paid on or after any day on which a Termination Event shall have occurred and be continuing. (f) Indemnity. The Servicer shall indemnify the Buyer in respect of any losses, claims, damages, liabilities, costs or expenses incurred or arising out of any action taken or caused to be taken by the Servicer under this Section 6.06. 6.07 Complete Servicing Transfer. (a) General. If at any time a Servicer Event shall have occurred and be continuing, the Buyer may, by notice in writing to the Seller and the Company, terminate the Company's capacity as Servicer in respect of the Purchased Receivables (such termination referred to herein as a "Complete Servicing Transfer"), notify Obligors of its interest in the Purchased Receivables, take control of the Lockbox Accounts and exercise all other incidences of ownership in the Purchased Receivables. After a Complete Servicing Transfer, the Buyer may administer, service and collect the Purchased Receivables itself, and in such event may retain the Servicer's Compensation for its own account, in any manner it sees fit, including, without limitation, by compromise, extension or settlement of such Purchased Receivables. Alternatively, the Buyer may engage Mellon Bank to perform all or any part of the administration, servicing and collection of the Purchased Receivables and pay to Mellon Bank all or a portion of the Servicer's Compensation in consideration thereof. (b) Transition. The Company, within ten (10) Business Days after receiving a notice pursuant to Section 6.07(a) hereof, shall, at its own cost and expense, deliver or cause to be delivered to the Buyer or its designated agent (i) a schedule of the Purchased Receivables indicating as to each such Purchased Receivable information as to the related Obligor, the Account Balance as of such date of the related Contract and the location of the evidences of such Purchased Receivable and related Contract, together with such other information as the Buyer may reasonably request and (ii) all evidence of such Purchased Receivables and related Contracts and such other Records related thereto (including, without limitation, true copies of any computer tapes and data in computer memories) as the Buyer may reasonably deem necessary to enable it to protect and enforce its rights to, or its position as owner of, a Participation Interest therein. After any such delivery, neither the Seller nor any Originator will hold or retain any executed counterpart or any document evidencing such Purchased Receivables or related Contracts without clearly marking the same to indicate conspicuously that the same is not the original and that transfer 35 37 thereof does not transfer any rights against the related Obligor or any other Person. (c) Collections. From and after the occurrence of a Complete Servicing Transfer, the Seller and the Servicer will cause to be transmitted and delivered directly to the Buyer or its designated agent, for the Buyer's own account, forthwith upon receipt and in the exact form received, all Collections (properly endorsed, where required, so that such items may be collected by the Buyer) on account of its Participation Interest in the Purchased Receivables. All such Collections consisting of cash shall not be commingled with other items or monies of the Seller or any Originator for a period longer than the lesser of (i) two (2) Business Days or (ii) the number of days specified in Section 9-306(4)(d) of the Uniform Commercial Code as in effect in the jurisdiction whose Laws govern the rights of the Buyer in and to any such Collections. If the Buyer or its designated agent receives items or monies that are not payments on account of its Participation Interest in the Purchased Receivables, such items or monies shall be delivered promptly to the Seller after being so identified by the Buyer or its designated agent. The Seller hereby irrevocably grants the Buyer or its designated agent, if any, an irrevocable power of attorney, with full power of substitution, coupled with an interest, to take, from and after the occurrence of a Termination Event or Potential Termination Event, in the name of the Seller all steps with respect to the Purchased Receivable which the Buyer, in its reasonable discretion, may deem necessary or advisable to negotiate or otherwise realize on any right of any kind held or owned by the Seller or transmitted to or received by the Buyer or its designated agent (whether or not from the Seller or any Obligor) in connection with its Participation Interest in such Purchased Receivable; provided, however, that the Buyer hereby agrees not to exercise, and not to permit its designated agents to exercise, such power of attorney unless a Servicer Event shall have occurred and be continuing. The Buyer will provide such periodic accountings and other information related to disposition of funds so collected as the Seller may reasonably request. (d) Collection and Administration at Expense of Company. The Company agrees that, in the event of a Complete Servicing Transfer, it will reimburse the Buyer for all reasonable out-of-pocket expenses (including, without limitation, reasonable attorneys' and accountants' and other third parties' fees and expenses, expenses incurred by the Referral Agent's credit recovery group (or any successor), expenses of litigation or preparation therefor, and expenses of audits and visits to the offices of the Company) incurred by the Buyer or the Referral Agent in connection with and following the transfer of functions following a Complete Servicing Transfer (excluding, however, the fees of any successor Servicer). 36 38 (e) Payments by Obligors. At any time, and from time to time following a Complete Servicing Transfer, or if a Servicer Event shall have occurred and be continuing, the Seller, each Originator and the Servicer shall permit such Persons as the Buyer may designate to open and inspect all mail received in the Permitted Lockboxes, by the Seller at any of its offices or by an Originator or the Servicer at any of their respective offices if (in the case of an Originator or the Servicer) such mail on its face appears that it may be related to the Purchased Receivables, and to remove therefrom any and all Collections or other correspondence from Obligors or the Originator in respect of Purchased Receivables. All Collections received by the Buyer shall be applied in accordance with Section 5.05 hereof. The Buyer shall be entitled to notify the Obligors of Purchased Receivables to make payments directly to the Buyer of amounts due thereunder at any time and from time to time following the occurrence of (i) a Servicer Event, (ii) a Complete Servicing Transfer, or (iii) a violation by the Seller of the provisions of Section 6.08 hereof. 6.08 Lockboxes. The Seller and each Originator hereby agree (i) to cause all Collections which may be sent by mail as payment on account of Purchased Receivables to be mailed by Obligors to Permitted Lockboxes; (ii) to make or cause the Servicer to make the necessary bookkeeping entries to reflect such Collections on the Records pertaining to such Purchased Receivables; (iii) to apply or cause the Servicer to apply all such Collections as provided in this Agreement; (iv) not to amend or modify any term, with respect to the disposition of such Collections or any other amounts received by the Seller, the Originators or the Servicer or any Permitted Lockbox Bank, of this Agreement or any other agreement (including instructions with respect thereto) without the prior written consent of the Buyer to such amendment or modification; provided that the Cometals Operating Division shall not be required to maintain a Permitted Lockbox or to comply with clause (i) above until the tenth day following the date on which the Seller or the Servicer receives notice from the Buyer that a Potential Termination Event or other event which gives the Buyer reasonable grounds for insecurity has occurred and the Buyer is requiring Cometals to commence to maintain a Permitted Lockbox and to comply with clause (i) above. 6.09 Subservicing The Servicer may delegate its responsibilities for the servicing and administration of the Receivables and Collections of an Originator (other than the Company and its Operating Divisions) to such Originator; provided, that (i) the Servicer shall remain liable for the performance of the duties and obligations of the Servicer pursuant to the terms hereof, and (ii) any applicable subservicing agreement provides that such subservicer may be removed as subservicer if it fails to perform its duties as subservicer or if any event occurs which materially and adversely 37 39 affects the ability of such subservicer to perform its duties and obligations as subservicer. The Servicer will be responsible for any compensation paid to a subservicer. The appointment of any subservicer in respect of any Receivables shall not relieve the Servicer of its obligation to service and administer such Receivables and the Servicer shall be liable for the acts of each subservicer. Article VII REPURCHASES BY SELLER 7.01 Repurchases. If on the last day of a Settlement Period the Net Investment shall be equal to or less than five percent (5%) of the Purchase Price paid for the Participation Interest on the Closing Date, the Seller shall be entitled on such last day to repurchase the Participation Interest from the Buyer upon at least ten (10) Business Days' prior written notice to the Buyer. 7.02 Repurchase Price. In the case of a repurchase by the Seller pursuant to Section 7.01 hereof, the Seller shall, on the date of such repurchase, pay to the Buyer, as the repurchase price thereof, an amount equal to the sum of (i) the Net Investment as of such date, plus (ii) the Cost of Funds and Program Fee Amount accrued and owing as of such date, plus (iii) if the Servicer is not the Company or an Affiliate, the accrued Servicer's Compensation as of such date, plus (iv) all other amounts due to the Buyer hereunder, plus (v) any actual loss, cost or expense incurred by the Buyer as the result of the repayment of the Net Investment prior to the maturity date of any (a) loans made to the Buyer by third parties or (b) commercial paper notes or short-term promissory notes issued by the Buyer, in each case for the purpose of maintaining the Participation Interest. The Buyer shall provide the Seller with prompt written notice of such actual loss, cost or expense, which notice shall provide the calculations used in determining the amount of such loss, cost or expense. 7.03 Reassignment of Repurchased Receivables. Upon receipt of the purchase price of the Participation Interest pursuant to Section 7.02 hereof, the Buyer shall reassign to the Seller the Buyer's Participation Interest in the Purchased Receivables, without recourse, representation or warranty (except for the warranty that upon the reassignment to the Seller of the Buyer's Participation Interest in such Purchased Receivables, no Lien created by the Buyer will affect the Purchased Receivables). 7.04 Obligations Not Affected. The obligations of the Seller to the Buyer under this Article VII shall not be affected by any invalidity, illegality or irregularity of any Purchased Receivable, the related Contract or the sale thereof, except and to the extent that any such invalidity, illegality or 38 40 irregularity is caused solely by the gross negligence or willful misconduct of the Buyer. Article VIII REPRESENTATIONS AND WARRANTIES 8.01 General Representations and Warranties of the Seller. The Seller, in addition to its other representations and warranties contained herein or made pursuant hereto, hereby represents and warrants to the Buyer, on and as of the date hereof, the Closing Date, each Settlement Date on which the Net Investment is increased, and each date on which a Reinvestment is made, that: (a) Organization and Qualification. The Seller is a corporation duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization. The Seller is duly qualified to do business as a foreign limited liability company in good standing in each jurisdiction in which the ownership of its properties or the nature of its activities, or both, requires it to be so qualified or, if not so qualified, the failure to so qualify would not have a material adverse effect on its business, operations, properties or financial condition. All of the Seller's issued and outstanding stock is owned by the Company, free of any Liens, and has been fully paid and is nonassessable. (b) Authorization. The Seller has the power and authority to execute and deliver the Purchase Documents, to convey the Participation Interest to the Buyer, and to perform its obligations hereunder and thereunder. (c) Execution and Binding Effect. Each of the Purchase Documents (except the Certificate of Participation) has been duly and validly executed and delivered by the Seller and constitutes a legal, valid and binding obligation of the Seller enforceable in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws in effect from time to time affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. When duly executed and delivered by the Seller under the provisions hereof, the Certificate of Participation will constitute a legal, valid and binding assignment by the Seller enforceable in accordance with the terms thereof and hereof, which will vest absolutely and unconditionally in the Buyer a valid Participation Interest in the Purchased Receivables purported to be assigned thereby, subject to no Liens whatsoever. Upon the filing of the financing statements required under Section 4.02(c) hereof, the Buyer's Participation Interest will be perfected under Article Nine of such Uniform Commercial Code, prior to and enforceable against 39 41 all creditors of and purchasers from the Seller and all other Persons whatsoever. (d) Authorizations and Filings. No authorization, consent, approval, license, exemption or other action by, and no registration, qualification, designation, declaration or filing with, any Official Body is or will be necessary or, in the opinion of the Seller, advisable in connection with the execution and delivery of the Purchase Documents, the consummation of the transactions herein or therein contemplated or the performance of or the compliance with the terms and conditions hereof or thereof, to ensure the legality, validity or enforceability hereof or thereof, or to ensure that the Buyer will have its Participation Interest in and to the Purchased Receivables perfected and prior to all other Liens (including competing ownership interests), other than the filing of financing statements under the Uniform Commercial Code in the jurisdictions required under Section 4.02(c) hereof. (e) Absence of Conflicts. Neither the execution and delivery of the Purchase Documents, nor the consummation of the transactions herein or therein contemplated, nor the performance of or the compliance with the terms and conditions hereof or thereof, will (i) violate any Law applicable to it or (ii) conflict with or result in a breach of or a default under (A) the operating agreement or certificate of formation of the Seller or (B) any agreement or instrument, including, without limitation, any and all indentures, debentures, loans or other agreements to which the Seller is a party or by which it or any of its properties (now owned or hereafter acquired) may be subject or bound. (f) Location of Chief Executive Office, etc. As of the date hereof the Seller's Chief Executive Office is located at 7800 Stemmons Freeway, Dallas, Texas. The Seller has only the Affiliates identified in Exhibit D hereto, and has not changed its name, merged or consolidated with any other corporation or been the subject of any proceeding under Title 11, United States Code (Bankruptcy) within the past ten (10) years. (g) No Termination Event. No event has occurred and is continuing and no condition exists which constitutes a Termination Event or a Potential Termination Event. (h) Accurate and Complete Disclosure. No information, whether written or oral, furnished by the Seller to the Buyer pursuant to or in connection with this Agreement, including such information in the Certificate of Participation, Purchase Notice and any Settlement Statement, or any transaction contemplated hereby is false or misleading in any material respect as of the date as of which such information was furnished (including by omission of material information necessary to make such information not misleading). 40 42 (i) No Proceedings. There are no proceedings or investigations pending or, to the Seller's best knowledge, threatened before any court, official body, regulatory body, administrative agency, or other tribunal or governmental instrumentality (A) asserting the invalidity of the Purchase Documents, (B) seeking to prevent the consummation of any of the transactions contemplated by the Purchase Documents, or (C) seeking any determination or ruling that could materially and adversely affect (i) the performance by the Seller or the Servicer of its obligations under this Agreement, or (ii) the validity or enforceability of the Purchase Documents, the Contracts or any material amount of the Receivables. (j) Bulk Sales Act. No transaction contemplated hereby requires compliance with any bulk sales act or similar law. (k) Litigation. No injunction, decree or other decision has been issued or made by any court, government or agency or instrumentality thereof with respect to or affecting the Seller and no litigation, investigation or proceeding of the type referred to in Section 9.01(j) exists. (l) Margin Regulations. The use of all funds acquired by the Seller under this Agreement will not conflict with or contravene any of Regulations T, U and X of the Board of Governors of the Federal Reserve System, as the same may from time to time be amended, supplemented or otherwise modified. (m) Not an Investment Company. The Seller is not, and will not become as a result of the transactions contemplated by the Purchase Documents, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 8.02 Representations and Warranties of the Seller With Respect to Each Sale of Receivables. By selling the Participation Interest in the Receivables Pool to the Buyer (including by Reinvestment), the Seller represents and warrants to the Buyer as of the date of such sale or Reinvestment and as of each Settlement Date on which the Net Investment is increased (in addition to its other representations and warranties contained herein or made pursuant hereto) that: (a) Account Balances; Purchase Notice. If such sale is on the Closing Date, the Account Balances of the related Contracts for the Purchased Receivables are the respective amounts therefor set forth in the Purchase Notice, and all information set forth on such Purchase Notice is true and correct as of such Closing Date. (b) Assignment. The Certificate of Participation vests in the Buyer all the right, title and interest of the 41 43 Seller in and to the Purchased Receivables (to the extent of the Participation Interest), and constitutes a valid sale thereof, enforceable against all creditors of and purchasers from the Seller. (c) No Liens. Each Purchased Receivable, together with the related Contract and all purchase orders and other agreements related to such Purchased Receivable, is owned by the Seller free and clear of any Lien, except as provided herein, and when the Buyer purchases the Participation Interest in such Purchased Receivables it shall have acquired and shall continue to have maintained an undivided percentage ownership interest to the extent of its Participation Interest in such Purchased Receivables and in the Collections with respect thereto free and clear of any Lien, except as provided herein. (d) Consideration. The Seller has either (i) purchased the receivables in exchange for payment (made by the Seller in accordance with the provisions of the Sale Agreement) in an amount which constitutes fair consideration and approximate market value for the Receivables and in a sale the terms and conditions of which (including, without limitation, the purchase price thereof) reasonably approximate an arm's-length transaction between unaffiliated parties or (ii) acquired the Receivables as a capital contribution in accordance with the provisions of the Sale Agreement. No such sale, and no such contribution, has been made for or on account of an antecedent debt owed to the Seller and no such sale or contribution is or may be voidable or subject to avoidance under any section of the U.S. Bankruptcy Code. 8.03 Representations and Warranties of the Servicer. The Servicer represents and warrants (in the case of the initial Servicer, as of the date hereof, and in the case of any Servicer appointed thereafter pursuant to Article VI, as of the date of its acceptance of its appointment, and in each case as of the date of each Settlement Statement) as follows: (a) Organization and Qualification. The Servicer is a corporation duly organized, validly existing and in good standing under the Laws of its jurisdiction of incorporation. The Servicer is duly qualified to do business as a foreign corporation in good standing in each jurisdiction in which the ownership of its properties or the nature of its activities or both, requires it to be so qualified or, if not so qualified, the failure to so qualify would not have a material adverse effect on its business, operations, properties or financial condition. (b) Authorization. The Servicer has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. (c) Execution and Binding Effect. This Agreement has been duly and validly executed and delivered by the Servicer and 42 44 constitutes a legal, valid and binding obligation of the Servicer enforceable in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws in effect from time to time affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (d) Authorizations and Filings. No authorization, consent, approval, license, exemption or other action by, and no registration, qualification, designation, declaration or filing with, any Official Body is or will be necessary or, in the opinion of the Servicer, advisable in connection with the execution and delivery of this Agreement, the consummation of the transactions herein contemplated or the performance of or the compliance with the terms and conditions hereof by the Servicer, to ensure the legality, validity or enforceability hereof. (e) Absence of Conflicts. Neither the execution and delivery of this Agreement and the Sale Agreement, nor the consummation of the transactions herein and therein contemplated, nor the performance of or the compliance with the terms and conditions hereof by the Servicer, will (i) violate any Law or (ii) conflict with or result in a breach of or a default under (A) the articles or certificate of incorporation or by-laws of the Servicer or (B) any agreement or instrument in any material respect, including, without limitation, any and all indentures, debentures, loans or other agreements to which the Servicer is a party or by which it or any of its properties (now owned or hereafter acquired) may be subject or bound. (f) No Termination Event. No event has occurred and is continuing and no condition exists which constitutes a Termination Event or a Potential Termination Event. (g) Accurate and Complete Disclosure. No information, whether written or oral, furnished by the Servicer to the Buyer pursuant to or in connection with this Agreement, including such information in any Settlement Statement, or any transaction contemplated hereby, including without limitation information regarding the Permitted Lockboxes and Permitted Lockbox Accounts, is false or misleading in any material respect as of the date as of which such information was furnished (including by omission of material information necessary to make such information not misleading). (h) No Proceedings. There are no proceedings or investigations pending or threatened before any court, official body, regulatory body, administrative agency, or other tribunal or governmental instrumentality (A) asserting the invalidity of any of this Agreement (B) seeking to prevent the consummation of any of the transactions contemplated by any of this Agreement, or (C) seeking any determination or ruling that could materially and 43 45 adversely affect (i) the performance by the Servicer of its obligations under this Agreement or (ii) the validity or enforceability of the Contracts or any material amount of the Receivables. (i) Not an Investment Company. The Servicer is not, and will not become as a result of the transactions contemplated by the Purchase Documents, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Article IX COVENANTS 9.01 Affirmative Covenants of the Seller. In addition to its other covenants contained herein or made pursuant hereto, the Seller covenants to the Buyer as follows: (a) Notice of Termination Event. Promptly upon becoming aware of any Termination Event or Potential Termination Event, the Seller shall give the Buyer notice thereof, together with a written statement of a Responsible Officer setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Seller. (b) Notice of Material Adverse Change. Promptly upon becoming aware thereof, the Seller shall give the Buyer notice of any material adverse change in the business, operations or financial condition of the Seller which could affect adversely the collectibility of the Purchased Receivables or the ability to service the Purchased Receivables. In order to verify compliance with this Section 9.01(b), the Seller shall furnish the following to the Buyer: (i) as soon as practicable and in any event within 45 days following the close of each fiscal quarter, excluding the last fiscal quarter, of each fiscal year of the Seller during the term of this Agreement, an unaudited consolidated balance sheet of the Seller as at the end of such quarter and unaudited consolidated statements of income and cash flows of the Seller for such quarter and for the fiscal year through such quarter, setting forth in comparative form the corresponding figures for the corresponding quarter of the preceding fiscal year, all in reasonable detail and certified by the principal financial officer of the Seller, subject to adjustments of the type which would occur as a result of a year-end audit, as having been prepared in accordance with GAAP; and (ii) as soon as practicable and in any event within 90 days after the close of each fiscal year of the 44 46 Seller during the term of this Agreement, a consolidated balance sheet of the Seller as at the close of such fiscal year and consolidated statements of income and cash flows of the Seller for such fiscal year, setting forth in comparative form the corresponding figures for the preceding fiscal year, all in reasonable detail and certified (with respect to the consolidated financial statements) by the principal financial officer of the Seller as having been prepared in accordance with GAAP. (c) Preservation of Existence. The Seller shall preserve and maintain its existence, rights, franchises and privileges in the jurisdiction of its organization, and qualify and remain qualified in good standing as a foreign limited liability company in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification could materially adversely affect (i) the interests of the Buyer hereunder or (ii) the ability of the Seller to perform its obligations hereunder. (d) Compliance with Laws. The Seller shall comply in all material respects with all Laws applicable to the Seller, its business and properties, and the Receivables. (e) Enforceability of Obligations. The Seller shall ensure that, with respect to each Purchased Receivable, the obligation of any related Obligor to pay the unpaid balance of such Purchased Receivable in accordance with the terms of the related Contract remains legal, valid, binding and enforceable against such Obligor, except (i) as otherwise permitted by Section 6.06(b) hereof, (ii) as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws which may be applied in the event of the bankruptcy or insolvency of such Obligor, and (iii) as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity). (f) Books and Records. The Seller shall maintain and implement administrative and operating procedures (including, without limitation, the ability to recreate Records evidencing the Purchased Receivables in the event of the destruction of the originals thereof), and keep and maintain all documents, books, Records and other information reasonably necessary or advisable for the collection of all Purchased Receivables (including, without limitation, Records adequate to permit the identification of all Collections and adjustments to each existing Purchased Receivable) at its Chief Executive Office, except as provided in Section 6.03 hereof. (g) Fulfillment of Obligations. The Seller will duly observe and perform, or cause to be observed or performed, all obligations and undertakings on its part to be observed and 45 47 performed under or in connection with the Purchased Receivables, and will do nothing to impair the rights, title and interest of the Buyer in and to its Participation Interest in the Purchased Receivables. (h) Customer List. The Seller shall at all times maintain (or cause the Servicer to maintain) a current list (which may be stored on magnetic tapes or disks) of all Obligors under Contracts related to Purchased Receivables, including the name, address, telephone number and account number of each such Obligor. The Seller shall deliver or cause to be delivered a copy of such list to the Buyer as soon as practicable following the Buyer's request. (i) Copies of Reports, Filings, Opinions, etc. (1) Together with each Settlement Statement required to be delivered pursuant to Section 5.01, the Seller shall cause the Servicer to prepare and forward to the Buyer (i) a report in substantially the form of Exhibit E hereto, relating to the Receivables Pool, as of the close of business on the last day of the Accounting Period most recently completed, and (ii) a listing by Obligor of all Purchased Receivables together with an aging of such Purchased Receivables as of the last day of the most recently completed Accounting Period. (2) The Seller shall, upon request by the Buyer, but not more often than annually, furnish to the Buyer an opinion of counsel who shall be satisfactory to the Buyer with respect to the perfection of the Buyer's right, title and interest in the Receivables Pool and all Collections with respect thereto against all Persons whomsoever. (3) Simultaneously with the delivery of the Seller's annual financial statements pursuant to Section 9.01(b)(ii) for each fiscal year of the Seller commencing with the fiscal year ending in 2002, the Seller shall, at the Seller's expense, cause a firm of nationally recognized independent certified public accountants acceptable to the Buyer (who may render other services to the Servicer or the Seller) to furnish a report (which report shall cover the twelve months ending on the last day of the Seller's fiscal year which is covered by such financial statements) to the Buyer and the Referral Agent to the effect that they have applied certain procedures agreed upon with the Servicer and Buyer and examined certain documents and records relating to the servicing of the Receivables under this Agreement and as to the accounting firm's findings with regard to the 46 48 procedures; provided that such examinations and reports may be combined with the examinations and reports required by Section 9.03(i)(3). (j) Litigation. As soon as possible, and in any event within five (5) Business Days of the Seller's knowledge thereof, the Seller shall give the Buyer notice of (i) any litigation, investigation or proceeding to which the Seller is a party or which could have an adverse effect on the business, operations, property or financial condition of the Seller or impair the ability of the Seller to perform its obligations under this Agreement and (ii) any material adverse development in previously disclosed litigation. (k) Total Systems Failure. The Seller shall cause the Servicer to promptly notify the Buyer of any total systems failure and to advise the Buyer of the estimated time required to remedy such total systems failure and of the estimated date on which a Settlement Statement can be delivered. Until a total systems failure is remedied, the Seller shall cause the Servicer (i) to furnish to the Buyer such periodic status reports and other information relating to such total systems failure as the Buyer may reasonably request and (ii) to promptly notify the Buyer if the Servicer believes that such total systems failure cannot be remedied by the estimated date, which notice shall include a description of the circumstances which gave rise to such delay, the action proposed to be taken in response thereto, and a revised estimate of the date on which a Settlement Statement can be delivered. The Seller shall cause the Servicer to promptly notify the Buyer when a total systems failure has been remedied. (l) Notice of Relocation. The Seller shall give the Buyer sixty (60) days' prior written notice of any relocation of its Chief Executive Office if, as a result of such relocation, the applicable provisions of the Uniform Commercial Code of any applicable jurisdiction or other applicable Laws would require the filing of any amendment of any previously filed financing statement or continuation statement or of any new financing statement. The Seller will at all times maintain its Chief Executive Office within a jurisdiction in the United States in which Article Nine of the Uniform Commercial Code (1972 or later revision) is in effect. (m) Further Information. The Seller will furnish or cause to be furnished to the Buyer such other information, as promptly as practicable, and in such form and detail, as the Buyer may reasonably request. (n) Treatment of Purchase. For accounting purposes, the Seller shall treat the Purchase and each Reinvestment made hereunder as a sale of an undivided participation interest in the Purchased Receivables. The Seller shall also maintain its 47 49 records and books of account in a manner which clearly reflects the sale of the Participation Interest to the Buyer and the Buyer's Investment therein. (o) Administrative and Operating Procedures. The Seller shall maintain and implement administrative and operating procedures adequate to permit the identification of the Receivables Pool and all collections and adjustments attributable to each Receivables Pool. (p) Certificates of Title. (1) If any amount payable under or in connection with any Purchased Receivable shall be or become evidenced by any promissory note, chattel paper or other instrument, such note, chattel paper or instrument shall be duly endorsed in a manner satisfactory to the Buyer and delivered to the Buyer or its agent. (2) The Seller shall deliver to the Buyer any certificate of title or other evidence of ownership issued by the United States or any state or any political subdivision thereof relating to any chattel held as security for any amount payable under or in connection with any Purchased Receivable, with evidence of perfection of the security interest in such property noted thereon, if such notation is required under the laws of the jurisdiction in which such property is located in order to perfect a security interest in such property. (3) If the Contract relating to any Purchased Receivable requires the related Obligor to maintain insurance upon the chattel security relating to such Contract, the Seller shall deliver to the Buyer all documents or certificates relating to such insurance. (4) The Seller shall deliver to the Buyer any other document required by the terms of the related Contracts. (q) Acknowledgment of Servicer. If there is a Servicer other than the Seller, the Company or the Buyer, the Seller shall deliver to the Buyer a copy of the Successor Servicing Agreement together with an acknowledgment from the Servicer affirming that the Successor Servicing Agreement is in full force and effect. (r) Transfer of Receivables from the Company. Any Receivable transferred by the Company to the Seller shall be transferred in accordance with the terms and conditions of the Sale Agreement. 48 50 (s) Separate Existence. The Seller hereby acknowledges that the Buyer is entering into the transactions contemplated by this Agreement in reliance upon the Seller's identity as a separate legal entity from the Originators or any Company Entity (as defined below). Therefore, from and after the date of execution and delivery of this Agreement, the Seller shall take all reasonable steps including, without limitation, all steps that the Buyer may from time to time reasonably request, to maintain the Seller's identity as a separate legal entity and to make it manifest to third parties that the Seller is an entity with assets and liabilities distinct from those of the Originators and any Affiliates (other than the Seller) thereof (each of the Originators and its Affiliates (other than the Seller) shall be referred to herein as a "Company Entity"), and not just a division of any Company Entity. Without limiting the generality of the foregoing and in addition to and consistent with the covenants set forth above, the Seller shall: (i) require that all full-time employees of the Seller identify themselves as such and not as employees of any Company Entity (including, without limitation, by means of providing appropriate employees with business or identification cards identifying such employees as the Seller's employees); (ii) to the extent any employee, consultant or agent of the Seller is also an employee, consultant or agent of any Company Entity, allocate the compensation of such employee, consultant or agent between the Seller and such Company Entity on a basis which reflects the services rendered to the Seller and such Company Entity; (iii) allocate all overhead expenses (including, without limitation, telephone and other utility charges) for items shared between the Seller and any Company Entity on a reasonable basis consistent with GAAP; (iv) at all times on and after the Closing Date have at least one director on its board of directors who is not, (A) a director, member, officer or employee of any Company Entity, (B) a person related to any officer, member, or director of any Company Entity, (C) a holder (directly or indirectly) of more than 5% of any voting securities of any Company Entity, or (D) a person related to a holder (directly or indirectly) of more than 5% of any voting securities of any Company Entity (the "Independent Director"); (v) ensure that all of its actions are duly authorized by vote of its board of directors (including 49 51 the Independent Director) in accordance with its bylaws; (vi) maintain the Seller's books and records separate from those of any Company Entity and in a location which is clearly identified (by signage or otherwise) as allocated solely to the Seller; (vii) prepare its financial statements separately from those of other Company Entities; (viii) except as herein specifically otherwise provided, not commingle funds or other assets of Seller with those of any other Company Entity and not maintain bank accounts or other depository accounts other than each Lockbox Account to which any Company Entity is an account party, into which any Company Entity makes deposits or from which any Company Entity has the power to make withdrawals; (ix) be obligated to reimburse any Company Entity which pays any of the Seller's operating expenses; and (x) not permit the Seller to be named as an insured on the insurance policy covering the property of any Company Entity, except and only to the extent that such policy also covers property of the Seller, or enter into an agreement with the holder of such policy whereby in the event of a loss in connection with the property of any Company Entity, proceeds are paid to the Seller. (t) Enforcement of Sale Agreement. The Seller shall enforce the obligations of the Originators and the Company under the Sale Agreement for the benefit of the Buyer. (u) Compliance with ERISA. (1) The Seller shall comply in all material respects with the applicable provisions of ERISA and (2) furnish to the Buyer (i) as soon as possible after, and in any event within thirty (30) days after any Responsible Officer of the Seller or any ERISA Affiliate either knows or has reason to know that, any Reportable Event has occurred and the aggregate unfunded vested benefits of the Seller and all ERISA Affiliates of the Seller exceed $50,000,000, (A) a copy of the notice of such event required to be given to the PBGC or, if notice is not so required, a statement of an officer of the Seller having responsibility over its employee benefits (a "Benefits Officer") setting forth in reasonable detail the nature of such event and the action proposed to be taken with respect thereto and (B) in the event that a notice is required to be given to the PBGC, as soon as practicable after the reasonable request of the Buyer following receipt a copy of such notice, a statement of a Benefits Officer of the type described in (A) 50 52 above, (ii) promptly after receipt thereof, a copy of any notice the Seller or any ERISA Affiliate may receive from the PBGC relating to the intention of the PBGC to terminate any Plan or Plans (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code) or to appoint a trustee to administer any Plan or Plans, (iii) within ten (10) days after the due date for filing with the PBGC pursuant to Section 412(n) of the Code of a notice of failure to make a required installment or other payment with respect to a Plan, a copy of such notice, and, as soon as practicable after the reasonable request of the Buyer, a statement of a Benefits Officer setting forth in reasonable detail the nature of such failure and the action proposed to be taken with respect thereto and (iv) promptly and in any event within thirty (30) days after receipt thereof by the Seller or any ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy of each notice received by the Seller or any ERISA Affiliate concerning (A) the imposition of Withdrawal Liability in excess of $10,000,000 or (B) a determination that a Multiemployer Plan is, or is expected to be, terminated or in reorganization, in each case within the meaning of Title IV of ERISA. 9.02 Negative Covenants of the Seller. The Seller covenants that it will not, without the prior written consent of the Buyer: (a) Statementing for and Treatment of the Sales. Prepare any financial statements for financial accounting or reporting purposes which shall account for the transactions contemplated hereby in any manner other than as a sale of the Participation Interest in the Purchased Receivables to the Buyer. (b) No Rescissions or Modifications. Rescind or cancel any Purchased Receivable or related Contract or modify any terms or provisions thereof, except in accordance with the Credit and Collection Policy or otherwise with the prior written consent of the Buyer. (c) No Liens. Cause any of the Purchased Receivables to be sold, pledged, assigned or transferred or to be subject to a Lien, other than the sale and assignment of the Participation Interest therein to the Buyer and the Liens created in connection with the transactions contemplated by this Agreement and the Program Support Agreements. (d) Mergers, Acquisitions. Be a party to any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any stock of any class of, or any partnership or joint venture interest in, any other Person (e) No Changes. Change its name, identity or organizational structure in any manner which would, could or 51 53 might make any financing statement or continuation statement filed in connection with this Agreement or the transactions contemplated hereby seriously misleading within the meaning of Section 9-402(7) of the Uniform Commercial Code of any applicable jurisdiction or other applicable Laws unless it shall have given the Buyer at least sixty (60) days' prior written notice thereof, or amend its limited liability company agreement. (f) Payment Instructions. Add any bank as a Permitted Lockbox Bank, terminate any bank listed on Exhibit G hereto as a Permitted Lockbox Bank, change any Lockbox Account listed on Exhibit G hereto, or make any change in its instructions to Obligors regarding payments to be made to the Seller or payments to be made to any Permitted Lockbox Bank, unless the Buyer shall have received ten (10) Business Days' prior notice of such addition, termination or change and, with respect to the addition of any Permitted Lockbox Bank, a Lockbox Servicing Agreement executed by such Permitted Lockbox Bank shall have been delivered to the Buyer. (g) Sales, etc. Sell, transfer, convey, assign or lease all or any substantial part of its assets, or sell or assign with or without recourse any Receivables (other than pursuant hereto), or permit any subsidiary to do any of the foregoing. (h) Permitted Debt. Incur any debt or other liability except for (a) debt of the Seller in favor of an Originator which is evidenced by a promissory note of the Seller containing the following terms: (i) a fixed date for the payment of principal and interest which date shall be no earlier than one year and one day after the date specified in Section 8.2 of the Sale Agreement; provided, that the note may be prepaid on any date no earlier than 91 days after the date specified in Section 8.2 of the Sale Agreement so long as sufficient funds remain in the Seller after such prepayment to provide for the payment of all of the Seller's fees and expenses anticipated to accrue through the maturity date; (ii) the obligations under such promissory note shall be subordinated to all obligations of the Seller to the Buyer and no payments shall be made under such promissory note until all obligations to the Buyer have been satisfied in full, provided that payments (including prepayments) of principal and interest may be made if, after giving effect to such payment, no Termination Event or Potential Termination Event would occur or be continuing; and (iii) the obligations of the Seller under such promissory note shall not constitute a claim against the Seller in the event the Seller has insufficient funds to satisfy the obligation unless all obligations of the Seller to the Buyer have been paid in full and any period during which a trustee or receiver of the Seller or the Seller's assets could recover any payments made to the Buyer hereunder has expired, (b) obligations in connection with operating expenses arising in the ordinary 52 54 course of its business and (c) any liability arising under this Agreement. (i) Other Agreements. Not enter into or be a party to any agreement or instrument other than agreements with the Company covering the lease of its offices, the allocation of its overhead and the provision for management expenses, agreements covering insurance, this Agreement, the Sale Agreement, or any other agreement referred to herein or contemplated hereby, amend, modify or waive any provision in any thereof, or give any approval or consent or permission provided for in any thereof without the prior written consent of the Buyer (which consent will not be unreasonably withheld); provided, however, that each such agreement shall contain an undertaking from each Person who enters into any such agreement with the Seller that such Person will not institute, or join with any other Person in instituting, against the Seller any proceeding of the type referred to in Section 11.19. (j) Other Business. Without the prior written consent of the Buyer, not engage in any business or enterprise or enter into any transaction other than as contemplated by this Agreement and the Sale Agreement. 9.03 Affirmative Covenants of the Servicer. In addition to its other covenants contained herein or made pursuant hereto, the Servicer covenants to the Buyer as follows: (a) Notice of Termination Event. Promptly upon becoming aware of any Termination Event or Potential Termination Event, the Servicer shall give the Buyer notice thereof, together with a written statement of a Responsible Officer setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Servicer. (b) Notice of Material Adverse Change. Promptly upon becoming aware thereof, the Servicer shall give the Buyer notice of any material adverse change in the business, operations or financial condition of the Servicer which could affect adversely the collectibility of the Purchased Receivables or the ability to service the Purchased Receivables. In order to verify compliance with this Section 9.01(b), the Servicer shall furnish the following to the Buyer: (i) as soon as practicable and in any event within 45 days following the close of each fiscal quarter, excluding the last fiscal quarter, of each fiscal year of the Servicer during the term of this Agreement, an unaudited consolidated balance sheet of the Servicer as at the end of such quarter and unaudited consolidated statements of income and cash flows of the Servicer for such quarter and for the fiscal year through such quarter, setting forth in 53 55 comparative form the corresponding figures for the corresponding quarter of the preceding fiscal year, together with notes thereto as are required to be included therein in accordance with GAAP, all in reasonable detail and certified by the principal financial officer of the Servicer, subject to adjustments of the type which would occur as a result of a year-end audit, as having been prepared in accordance with GAAP; and (ii) as soon as practicable and in any event within 90 days after the close of each fiscal year of the Servicer during the term of this Agreement, a consolidated balance sheet of the Servicer as at the close of such fiscal year and consolidated statements of income and cash flows of the Servicer for such fiscal year, setting forth in comparative form the corresponding figures for the preceding fiscal year, all in reasonable detail and certified (with respect to the consolidated financial statements) by independent certified public accountants of recognized standing selected by the Servicer and satisfactory to the Buyer, whose certificate or opinion accompanying such financial statements shall not contain any qualification, exception or scope limitation not satisfactory to the Buyer. (c) Preservation of Corporate Existence. The Servicer shall preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification could materially adversely affect (i) the interests of the Buyer hereunder or (ii) the ability of the Servicer to perform its obligations hereunder. (d) Compliance with Laws. The Servicer shall comply in all material respects with all Laws applicable to the Servicer, its business and properties, and the Receivables. (e) Enforceability of Obligations. The Servicer shall ensure that, with respect to each Purchased Receivable, the obligation of any related Obligor to pay the unpaid balance of such Purchased Receivable in accordance with the terms of the related Contract remains legal, valid, binding and enforceable against such Obligor, except (i) as otherwise permitted by Section 6.06(b) hereof, (ii) as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws which may be applied in the event of the bankruptcy or insolvency of such Obligor, and (iii) as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity). 54 56 (f) Books and Records. The Servicer shall maintain and implement administrative and operating procedures (including, without limitation, the ability to recreate Records evidencing the Purchased Receivables in the event of the destruction of the originals thereof), and keep and maintain all documents, books, Records and other information reasonably necessary or advisable for the collection of all Purchased Receivables (including, without limitation, Records adequate to permit the identification of all Collections and adjustments to each existing Purchased Receivable) at its Chief Executive Office, except as provided in Section 6.03 hereof. (g) Fulfillment of Obligations. The Servicer will duly observe and perform, or cause to be observed or performed, all obligations and undertakings on its part to be observed and performed under or in connection with the Purchased Receivables, and will do nothing to impair the rights, title and interest of the Buyer in and to its Participation Interest in the Purchased Receivables. (h) Customer List. The Servicer shall at all times maintain a current list (which may be stored on magnetic tapes or disks) of all Obligors under Contracts related to Purchased Receivables, including the name, address, telephone number and account number of each such Obligor. The Servicer shall deliver or cause to be delivered a copy of such list to the Buyer as soon as practicable following the Buyer's request. (i) Copies of Reports, Filings, Opinions, etc. (1) Together with each Settlement Statement required to be delivered pursuant to Section 5.01, the Servicer shall prepare and forward to the Buyer (i) a report in substantially the form of Exhibit E hereto, relating to the Receivables Pool, as of the close of business on the last day of the Accounting Period most recently completed, and (ii) a listing by Obligor of all Purchased Receivables together with an aging of such Purchased Receivables as of the last day of the most recently completed Accounting Period. (2) The Servicer shall, upon request by the Buyer, but not more often than annually, furnish to the Buyer an opinion of counsel who shall be satisfactory to the Buyer with respect to the perfection of the Buyer's right, title and interest in the Receivables Pool and all Collections with respect thereto against all Persons whomsoever. (3) Simultaneously with the delivery of the Servicer's annual financial statements pursuant to Section 9.03(b)(ii) for each fiscal year of the Servicer, commencing with the fiscal year ending in 55 57 2002, the Servicer shall, at the Servicer's expense, cause a firm of nationally recognized independent certified public accountants acceptable to the Buyer (who may render other services to the Servicer or the Seller) to furnish a report (which report shall cover the twelve months ending on the last day of the Servicer's fiscal year which is covered by such financial statements) to the Buyer and the Referral Agent to the effect that they have applied certain procedures agreed upon with the Servicer and Buyer and examined certain documents and records relating to the servicing of the Receivables under this Agreement and as to the accounting firm's findings with regard to the procedures; provided that such examinations and reports may be combined with the examinations and reports required by Section 9.01(i)(3). (j) Litigation. As soon as possible, and in any event within five (5) Business Days of the Servicer's knowledge thereof, the Servicer shall give the Buyer notice of (i) any litigation, investigation or proceeding, whether or not the Servicer is a party, which could have a material adverse effect on the business, operations, property or financial condition of the Servicer or impair the ability of the Servicer to perform its obligations under this Agreement and (ii) any material adverse development in previously disclosed litigation. (k) Total Systems Failure. The Servicer shall promptly notify the Buyer of any total systems failure and to advise the Buyer of the estimated time required to remedy such total systems failure and of the estimated date on which a Settlement Statement can be delivered. Until a total systems failure is remedied, the Servicer shall (i) furnish to the Buyer such periodic status reports and other information relating to such total systems failure as the Buyer may reasonably request and (ii) promptly notify the Buyer if the Servicer believes that such total systems failure cannot be remedied by the estimated date, which notice shall include a description of the circumstances which gave rise to such delay, the action proposed to be taken in response thereto, and a revised estimate of the date on which a Settlement Statement can be delivered. The Servicer will promptly notify the Buyer when a total systems failure has been remedied. (l) Notice of Relocation. The Servicer shall give the Buyer sixty (60) days' prior written notice of any relocation of its Chief Executive Office if, as a result of such relocation, the applicable provisions of the Uniform Commercial Code of any applicable jurisdiction or other applicable Laws would require the filing of any amendment of any previously filed financing statement or continuation statement or of any new financing statement. The Servicer will at all times maintain its Chief Executive Office within a jurisdiction in the United States in 56 58 which Article Nine of the Uniform Commercial Code (1972 or later revision) is in effect. (m) Further Information. The Servicer will furnish or cause to be furnished to the Buyer such other information, as promptly as practicable, and in such form and detail, as the Buyer may reasonably request. (n) Administrative and Operating Procedures. The Servicer shall maintain and implement administrative and operating procedures adequate to permit the identification of the Receivables Pool and all collections and adjustments attributable to each Receivables Pool. (o) Certificates of Title. (1) If any amount payable under or in connection with any Purchased Receivable shall be or become evidenced by any promissory note, chattel paper or other instrument, such note, chattel paper or instrument shall be duly endorsed in a manner satisfactory to the Buyer and delivered to the Buyer or its agent. (2) The Servicer shall deliver to the Buyer any certificate of title or other evidence of ownership issued by the United States or any state or any political subdivision thereof relating to any chattel held as security for any amount payable under or in connection with any Purchased Receivable, with evidence of perfection of the security interest in such property noted thereon, if such notation is required under the laws of the jurisdiction in which such property is located in order to perfect a security interest in such property. (3) If the Contract relating to any Purchased Receivable requires the related Obligor to maintain insurance upon the chattel security relating to such Contract, the Servicer shall deliver to the Buyer all documents or certificates relating to such insurance. (4) The Servicer shall deliver to the Buyer any other document required by the terms of the related Contracts. (p) Compliance with Sale Agreement. The Servicer shall, and shall cause each other Originator to, comply with its obligations under the Sale Agreement for the benefit of the Buyer. (q) Notice of Ratings Changes. The Servicer shall give the Buyer prompt notice of any change from time to time 57 59 (including any credit watch or warning with respect thereto) in the ratings from S&P or Moody's of the Servicer's long term unsecured debt. 9.04 Negative Covenants of the Servicer. The Servicer covenants that it will not, without the prior written consent of the Buyer: (a) No Rescissions or Modifications. Rescind or cancel any Purchased Receivable or related Contract or modify any terms or provisions thereof, except in accordance with the Credit and Collection Policy or otherwise with the prior written consent of the Buyer. (b) No Liens. Cause any of the Purchased Receivables to be sold, pledged, assigned or transferred or to be subject to a Lien, other than the sale and assignment of the Participation Interest therein to the Buyer and the Liens created in connection with the transactions contemplated by this Agreement. (c) No Changes. Change its name, identity or corporate structure in any manner which would, could or might make any financing statement or continuation statement filed in connection with this Agreement or the Sale Agreement or the transactions contemplated hereby or thereby seriously misleading within the meaning of Section 9-402(7) of the Uniform Commercial Code of any applicable jurisdiction or other applicable Laws unless it shall have given the Buyer at least sixty (60) days' prior written notice thereof. ARTICLE X TERMINATION 10.01 Termination Events. A "Termination Event" shall mean the occurrence and continuance of one or more of the following events or conditions: (a) either the Seller or Servicer, as the case may be, shall fail to remit or fail to cause to be remitted to the Buyer on any Settlement Date any Collections or other amounts required to be remitted to the Buyer, on such Settlement Date; or (b) the Seller or any Originator shall fail to deposit or pay, or fail to cause to be deposited or paid, when due any other amount due hereunder or under the Sale Agreement; or (c) any representation, warranty, certification or statement made by the Seller or any Originator under this Agreement or in any agreement, certificate, report, appendix, schedule or 58 60 document furnished by or on behalf of the Seller or any Originator to the Buyer pursuant to or in connection with this Agreement (including, without limitation, the Sale Agreement) shall prove to have been false or misleading in any respect material to this Agreement or the transactions contemplated hereby as of the time made or deemed made (including by omission of material information necessary to make such representation, warranty, certification or statement not misleading) and, if remediable, shall remain false or misleading in any material respect for ten (10) Business Days after the earlier of (i) notice to the Seller or the Servicer thereof and (ii) discovery by the Seller or the Servicer thereof; or (d) the Seller, any Originator or the Servicer shall fail to obtain the prior consent of the Buyer to any action or provision as to which such consent is required by the terms of this Agreement or the Sale Agreement; or (e) the Seller, any Originator or the Servicer shall default or fail in the performance or observance of any other covenant, agreement or duty applicable to it contained herein or in the Sale Agreement and such default or failure shall continue for twenty (20) days after either (i) any Responsible Officer of the Seller or such Originator becomes aware thereof or (ii) written notice thereof to the Seller by the Buyer; or (f) a default shall have occurred and be continuing following the expiration of any applicable grace period under any instrument or agreement evidencing, securing or providing for the issuance of indebtedness for borrowed money of, or guaranteed by, the Seller, any Originator or any Affiliate thereof, and in an amount equal to or in excess of $10,000,000 in the case of any Originator or any Affiliate thereof other than the Seller, which default would permit acceleration of the maturity of such indebtedness; or (g) a Permitted Lockbox Bank shall default or fail in the performance or observance of any agreement or duty applicable to it under the Lockbox Servicing Agreement executed by it and such default or failure shall continue for three (3) Business Days after notice thereof to such Permitted Lockbox Bank and within such period another Permitted Lockbox with another Permitted Lockbox Bank is not 59 61 established by the Seller, if so requested by the Buyer; or (h) litigation (including, without limitation, derivative actions), arbitration, governmental proceedings or actions pursuant to or brought to enforce any Law is pending against the Seller, any Originator or any Affiliate thereof which in the reasonable opinion of the Buyer is likely to (i) impair the ability of the Seller to perform its obligations under this Agreement or the Sale Agreement, or (ii) materially adversely affect the financial position or business of the Originator or impair the ability of the Originator to perform its obligations under this Agreement, the Sale Agreement or the Company's Consent; or (i) there shall have occurred any event which materially adversely affects the collectibility of a material amount of the Purchased Receivables or there shall have occurred any other event which materially adversely affects the ability of the Servicer to collect the Purchased Receivables or the ability of the Servicer to perform hereunder; or (j) an Event of Bankruptcy shall occur with respect to (i) the Seller or any Originator, or (ii) one or more Affiliates of the Seller or any Originator which could have a material adverse effect on the business, financial condition or operations of the Seller or such Originator and, in the case of an involuntary proceeding, such proceeding shall continue undismissed for sixty (60) days or a final order or decree shall be entered; or (k) the Buyer or the Receivables Pool shall be deemed to have become an "investment company" within the meaning of the Investment Company Act of 1940, as amended; or (l) the average Rate of Collections for any three consecutive Accounting Periods shall be less than 50%; or (m) the Sale Agreement ceases to be in full force and effect, or ceases to evidence the transfer by the Originators to the Seller of all Receivables; or (n) either (i) the Servicer is rated below B+ by S&P and below B1 by Moody's (the "Threshold Level" of S&P and Moody's, respectively), (ii) the Servicer is rated at or above the Threshold Level by one of 60 62 S&P or Moody's, but two or more rating categories below the Threshold Level by the other thereof, (iii) the Servicer is rated by only one of S&P or Moody's and that one rating is below the Threshold Level or (iv) the Servicer is not rated by either S&P or Moody's; (o) the ability of the Seller to transfer undivided interests in the Receivables hereunder or the ability of the Company to transfer Receivables under the Sale Agreement shall have been adversely affected by any action of a regulatory authority having jurisdiction over the Seller or any Originator, as the case may be; or (p) (1) this Agreement or the Certificate of Participation shall for any reason cease to evidence the transfer to the Buyer (or its assignees or transferees) of legal and equitable right, title and interest to, and ownership of, an undivided percentage ownership interest in the Purchased Receivables and Collections with respect thereto to the extent of the Participation Interest, or (2) if this Agreement or the Certificate of Participation shall not evidence the transfer of an undivided percentage ownership interest as described in clause (1) above, this Agreement or such Certificate of Participation shall for any reason not create a valid and perfected first priority security interest (as defined in the UCC) in favor of the Buyer in the Purchased Receivables and Collections with respect thereto; (q) (i) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 50% or more of the outstanding shares of the voting capital stock of the Company having the power (without the occurrence of a contingency) to elect the Board of Directors of the Company; or (ii) as of any date, a majority of the Board of Directors of the Company consists of individuals who were not either (A) directors of the Company as of the corresponding date of the previous year, (B) selected or nominated to become directors by the Board of Directors of the Company of which a majority consisted of individuals described in clause (A), or (C) selected or nominated to become directors by the Board of Directors of the Company of which a majority consisted of individuals 61 63 described in clause (A) and individuals described in clause (B); (r) the average Default Ratio for any three consecutive Accounting Periods is greater than 3%; or (s) the average Dilution Ratio for any three consecutive Accounting Periods is greater than 5%. 10.02 Consequences of a Termination Event. (a) If a Termination Event specified in Section 10.01 hereof shall occur and be continuing, the Buyer may, by notice to the Seller, terminate its obligation to purchase the Participation Interest or make Reinvestments hereunder; provided, that in the case of a Termination Event under Section 10.01(j), such obligation of the Buyer hereunder shall be automatically terminated without any action on the part of the Buyer. Any such termination shall reduce the Maximum Net Investment in effect from time to time thereafter to the amount of the aggregate Net Investment at such time. (b) Upon any termination of the Buyer's obligation to purchase the Participation Interest and to make Reinvestments pursuant to this Section 10.02, the Buyer shall have, in addition to all rights and remedies under this Agreement or otherwise, all other rights and remedies provided under the Uniform Commercial Code of the applicable jurisdiction and under other applicable Laws, which rights shall be cumulative. (c) The parties hereto acknowledge that this Agreement is, and is intended to be, a contract to extend financial accommodations to the Seller within the meaning of Section 365(e)(2)(B) of the Federal Bankruptcy Code (11 U.S.C. Section 365(e)(2)(B)) (or any amended or successor provision thereof or any amended or successor code). ARTICLE XI MISCELLANEOUS 11.01 Expenses. The Company agrees, upon receipt of a written invoice, to pay or cause to be paid, and to save the Buyer and the Referral Agent harmless against liability for the payment of, all reasonable out-of-pocket expenses (including, without limitation, reasonable attorneys', accountant's and other third parties' fees and expenses, any filing fees, stamp taxes, expenses of litigation or preparation therefor, audit expenses and expenses incurred by officers or employees of the Buyer, but excluding salaries and similar overhead costs of the Buyer and the Referral Agent which are incurred notwithstanding the execution and performance of this Agreement) incurred by or on 62 64 behalf of the Buyer and the Referral Agent from time to time (a) arising in connection with the development, audit, delivery, collection, preparation, printing, execution, performance, administration and interpretation of the Purchase Documents, or transactions undertaken, pursuant to or in connection herewith or therewith (including, without limitation, the perfection or protection of the Buyer's Participation Interest in the Purchased Receivables), (b) relating to any amendments, waivers or consents to the Purchase Documents requested by the Seller or the Company, (c) arising in connection with the Buyer's or its agent's enforcement or preservation of rights under the Purchase Documents, or (d) arising in connection with any litigation or preparation for litigation involving the Purchase Documents, which, including all amounts payable under Section 11.03, shall be referred to in this Agreement as "Transaction Costs". 11.02 Payments. All payments to be made to the Buyer hereunder shall be payable at 11:00 a.m., Pittsburgh time, on the day when due, at the Buyer's Office in Dollars in immediately available funds. To the extent permitted by Law, any amounts due from the Seller hereunder which are not paid when due shall bear interest for each day from the day due until paid, payable on demand, at a rate per annum equal to two percent (2.00%) above the Reference Rate. 11.03 Indemnity for Taxes, Reserves and Expenses. If after the date hereof, the adoption of any Law or guideline or any amendment or change in the administration, interpretation or application of any existing or future Law or guideline by any Official Body charged with the administration, interpretation or application thereof, or the compliance with any request or directive of any Official Body (whether or not having the force of Law): (a) subjects an Affected Party to any tax or changes the basis of taxation with respect to the Purchase Documents, the Participation Interest, the Purchased Receivables or payments of amounts due hereunder or under the Purchased Receivables (including, without limitation, any sales, gross receipts, general corporate, personal property, privilege or license taxes (unless such tax results solely from the failure to file or keep current any certification or documentation required to qualify for any exemption from or reduction of any such tax to which such Affected Party would otherwise be entitled), and including claims, losses and liabilities arising from any failure to pay or delay in paying any such tax (unless such failure or delay results solely from such Affected Party's gross negligence or willful misconduct), but excluding Income Taxes incurred by such Affected Party arising out of or as a result of this Agreement or the ownership of the Participation Interest or in respect of any Receivable), or 63 65 (b) imposes, modifies or deems applicable any reserve (including, without limitation, any reserve imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets held by, credit extended by, deposits with or for the account of, or other acquisition of funds by, an Affected Party, or (c) shall change the amount of capital maintained or requested or directed to be maintained by an Affected Party, or (d) imposes upon an Affected Party any other condition or expense (including, without limitation, (i) loss of margin and (ii) reasonable attorneys' fees and expenses, expenses incurred by officers or employees of the Referral Agent's credit recovery group (or any successor thereto) and expenses of litigation or preparation therefor in contesting any of the foregoing) with respect to the Purchase Documents, the Participation Interest, the Purchased Receivables or the purchase, maintenance or funding of the purchase of the Participation Interest in any Receivables by an Affected Party, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, reduce the rate of return on capital, or impose any expense (including loss of margin) upon, an Affected Party with respect to this Agreement, the obligations hereunder or the funding of purchases hereunder, the Buyer may notify the Seller of the amount of such increase, reduction, or imposition in writing within 180 days of the later of the event giving rise to such increased costs or the Buyer's knowledge thereof, and shall provide the Seller with a certificate which identifies the factual basis for such increase, reduction or imposition, the amount or amounts that the Buyer has reasonably determined will compensate it hereunder, and the manner in which such amount or amounts have been calculated, and the Seller shall pay to the Buyer the amount so notified to the Seller by the Buyer (which determination shall be conclusive) necessary to compensate the Buyer for such increase, reduction or imposition; provided, that the Seller and any other persons who from time to time sell receivables or interests therein to the Buyer ("Other Sellers") each shall be liable for such amount ratably in accordance with the usage under their respective facilities; provided, further, that (i) if any portion of such amount is attributable to the Seller and not attributable to any Other Seller, the Seller shall be solely liable for such portion, and (ii) if any portion of such amount is attributable to any Other Seller and not attributable to the Seller in any way, the Seller shall not be liable for any of such portion. The Buyer's determination with respect to the allocation of such amounts among the Seller and Other Sellers shall be binding on the Seller. Such amounts shall be due and payable by the Seller to 64 66 such Affected Party ten (10) Business Days after such notice is given. 11.04 Indemnity. (a) The Seller agrees to indemnify, defend and save harmless the Buyer, the Referral Agent, their respective directors, officers, shareholders, employees, agents and each legal entity, if any, who controls the Buyer or the Referral Agent (each, an "Indemnified Party"), forthwith on demand, from and against any and all losses, claims, damages, liabilities, costs and expenses (including, without limitation, all reasonable attorneys' fees and expenses, expenses incurred by their respective credit recovery groups (or any successors thereto) and expenses of settlement, litigation or preparation therefor) which the Buyer may incur or which may be asserted against the Buyer by any Person (including, without limitation, any Originator or any Obligor or any other Person whether on its own behalf or derivatively on behalf of the Seller) (all of the foregoing being collectively referred to as "Losses"), INCLUDING ANY LOSSES ARISING OR RESULTING FROM NEGLIGENCE ON THE PART OF AN INDEMNIFIED PARTY, but excluding, (a) Losses to the extent resulting from the gross negligence or willful misconduct on the part of such Indemnified Party, (b) recourse (except as otherwise provided in this Agreement) for Defaulted Receivables, (c) any Losses with respect to any tax, reserve, capital charge or expense related thereto (indemnification with respect to such Losses being provided as and to the extent provided in Section 11.03), or (d) Losses to the extent that such Losses resulted from an act or omission of the Servicer, if the Servicer is not the Company or an Affiliate of the Company arising from or incurred in connection with (i) any breach of a representation, warranty or covenant by the Seller or any Originator made or deemed made hereunder or in connection herewith or the transactions contemplated herewith, or (ii) any suit, action, claim, proceeding or governmental investigation, pending or threatened, whether based on statute, regulation or order, on tort, on contract or otherwise, before any local, state or federal court, arbitrator or administrative, governmental or regulatory body, which arises out of or relates to the Purchase Documents, the Participation Interest in the Purchased Receivables or related Contracts, or the use of the proceeds of the sale of the Participation Interest in the Receivables pursuant hereto or the transactions contemplated hereby (all Losses, after giving effect to the limitations set forth in clauses (a) through (d) above, being hereinafter referred to as "Indemnified Amounts"). (b) Without limitation of the generality of Section 11.04(a), the Seller shall pay on demand to each Indemnified Party any and all amounts necessary to indemnify such Indemnified Party from and against any and all Indemnified Amounts relating to or resulting from any of the following: 65 67 (i) the creation of the Participation Interest in any Purchased Receivable which is not at the date of the creation of such Participation Interest an Eligible Receivable; (ii) reliance on any representation or warranty made or deemed made by the Seller or any Originator (or any of its respective Responsible Officers) or any statement made by any Responsible Officer of the Seller or any Originator under or in connection with this Agreement which shall have been incorrect in any material respect when made; (iii) the failure by the Seller or any Originator to comply with any applicable law, rule or regulation; (iv) the failure to vest in the Buyer an undivided percentage interest, to the extent of the Participation Interest, in the Purchased Receivables and Collections in respect thereof, free and clear of any Lien; (v) the failure to have filed, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or under any other applicable law with respect to the assignment of the Participation Interest; (vi) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Purchased Receivable (including, without limitation, a defense based on such Purchased Receivable or the related Contract not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or service related to such Purchased Receivable or the furnishing or failure to furnish such merchandise or services; (vii) any failure of the Seller or any Originator to perform its duties or obligations in accordance with the provisions of this Agreement; or (viii) any products liability claim arising out of or in connection with merchandise, insurance or services which are the subject of any Contract. (c) Promptly upon receipt by any Indemnified Party hereunder of notice of the commencement of any suit, action, claim, proceeding or governmental investigation (an "Action"), such Indemnified Party shall, if a claim in respect thereof is to be made against the Seller hereunder, notify the Seller in 66 68 writing of the commencement thereof. The Seller may participate in the defense of any such Action at its expense, and no settlement thereof shall be made without the approval of the Seller and the Indemnified Party. The approval of the Seller will not be unreasonably withheld or delayed. In case any Action shall be brought against any Indemnified Party, the Seller shall be entitled to participate in and, to the extent that it shall wish, to assume the defense thereof, with counsel satisfactory to the Indemnified Party, and after notice from the Seller to such Indemnified Party of its election so to assume the defense thereof, the Seller shall not be liable to such Indemnified Party for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof other than reasonable costs of investigation. In any such Action, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Seller and such Indemnified Party shall have mutually agreed in writing to the retention of such counsel or (ii) the named parties to any such Action (including any impleaded parties) include both the Seller and such Indemnified Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Seller shall not, in conjunction with any Action or related Actions in the same jurisdiction, be liable for the fees and expenses of more than one separate firm in addition to any local counsel for all such Indemnified Parties, unless (i) the Seller and such Indemnified Parties shall have mutually agreed in writing to the retention of separate counsel or (ii) the named parties to any such Action (including any impleaded parties) include such Indemnified Parties and representation of such Indemnified Parties by the same counsel would be inappropriate due to actual or potential differing interests between them, and that all such fees and expenses shall be reimbursed as they are incurred. (d) The indemnity contained in this Section 11.04 shall survive the termination of this Agreement. 11.05 Holidays. Except as may be provided in this Agreement to the contrary, if any payment due hereunder shall be due on a day which is not a Business Day, such payment shall instead be due the next following Business Day. 11.06 Records. All amounts calculated or due hereunder shall be determined from the records of the Buyer, which determinations shall be conclusive absent manifest error. 11.07 Amendments and Waivers. The Buyer, the Company and the Seller may from time to time enter into agreements amending, modifying or supplementing this Agreement, and the Buyer, in its sole discretion, may from time to time grant waivers of the provisions of this Agreement or consents to 67 69 a departure from the due performance of the obligations of the Seller or any Originator under this Agreement. Any such agreement, waiver or consent must be in writing and shall be effective only to the extent specifically set forth in such writing. Any waiver of any provision hereof, and any consent to a departure by the Seller from any of the terms of this Agreement, shall be effective only in the specific instance and for the specific purpose for which given and if such amendment, waiver or departure would have a material adverse effect on the rights or obligations the Referral Agent or any Affected Party, such amendment, departure or waiver shall not be effective until consented to by the affected party. 11.08 No Implied Waiver; Cumulative Remedies. No course of dealing and no delay or failure of the Buyer in exercising any right, power or privilege under the Purchase Documents shall affect any other or future exercise thereof or the exercise of any other right, power or privilege; nor shall any single or partial exercise of any such right, power or privilege or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies of the Buyer under the Purchase Documents are cumulative and not exclusive of any rights or remedies which the Buyer would otherwise have. 11.09 No Discharge. The obligations of the Seller and the Originators under the Purchase Documents shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, discharged or in any way affected by (a) any exercise or nonexercise of any right, remedy, power or privilege under or in respect of the Purchase Documents or applicable Law, including, without limitation, any failure to set-off or release in whole or in part by the Buyer of any balance of any deposit account or credit on its books in favor of the Seller or an Originator or any waiver, consent, extension, indulgence or other action or inaction in respect of any thereof, or (b) any other act or thing or omission or delay to do any other act or thing which would operate as a discharge of the Seller or an Originator as a matter of Law. 11.10 Notices. All notices under Section 10.02 hereof shall be given to the Seller by telephone (confirmed by first-class mail) or facsimile, (which shall be effective when given by telephone or sent by facsimile) or by first-class mail, express mail or courier (which shall be effective when deposited in the mail or delivered to the courier), in all cases with charges prepaid. All other notices, requests, demands, directions and other communications (collectively "notices") under the provisions of this Agreement shall be in writing (including telexed or facsimile communication) unless otherwise expressly permitted hereunder and shall be sent by first-class mail, express mail, or by facsimile, in all cases with charges 68 70 prepaid, and any such properly given notice shall be effective when received. All notices shall be sent to the applicable party at the address stated on the signature page hereof or in accordance with the last unrevoked written direction from such party to the other parties hereto. 11.11 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 of such provision in any other jurisdiction or the remaining provisions hereof in any jurisdiction. 11.12 Governing Law. THIS AGREEMENT AND THE CERTIFICATES OF PARTICIPATION SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK INCLUDING ITS CONFLICT OF LAWS RULES. The Seller hereby consents to the jurisdiction of the courts of the State of New York and the courts of the United States located in the State of New York for the purpose of adjudicating any claim or controversy arising in connection with this Agreement, and for such purpose, to the extent it may lawfully do so, waives any objection to such jurisdiction or to venue therein. 11.13 Prior Understandings. This Agreement sets forth the entire understanding of the parties relating to the subject matter hereof, and supersedes all prior understandings and agreements, whether written or oral. 11.14 Survival. All representations and warranties of the Seller and the Originators contained herein or made in connection herewith or in connection with the Certificate of Participation shall survive the making thereof, and shall not be waived by the execution and delivery of this Agreement or the Certificate of Participation, any investigation by the Buyer, the purchase, repurchase or payment of the Participation Interest in any Purchased Receivable, or any other event or condition whatsoever (other than a written waiver complying with Section 11.07 hereof). All obligations of the Seller to make payments to, or to indemnify, the Buyer or to repurchase the Participation Interest in the Purchased Receivables from the Buyer shall survive the payment of all Purchased Receivables, the termination of the Purchase Obligation and the termination of all other obligations of the Seller hereunder and shall not be affected by reason of an invalidity, illegality or irregularity of any Purchased Receivable. The covenants and agreements contained in or given pursuant to this Agreement (including, without limitation, those contained in Article IX) shall continue in full force and effect until the termination of the Purchase Obligation, liquidation of the Participation Interest in the 69 71 Purchased Receivables and discharge of all other obligations of the Seller and the Originators hereunder. 11.15 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. 11.16 Set-Off. In case a Termination Event shall occur and be continuing, the Buyer and, to the fullest extent permitted by Law, the holder of any assignment of the Buyer's rights hereunder (including without limitation each Affected Party), shall each have the right, in addition to all other rights and remedies available to it, without notice to the Seller, to set-off against and to appropriate and apply to any amount owing by the Seller hereunder which has become due and payable, any debt owing to, and any other funds held in any manner for the account of, the Seller by the Buyer or by any holder of any assignment, including, without limitation, 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 Seller with the Buyer or any holder of any assignment. Such right shall exist whether or not such debt owing to, or funds held for the account of, the Seller is or are matured other than by operation of this Section 11.16 and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to the Buyer or any holder. Nothing in this Agreement shall be deemed a waiver or prohibition or restriction of the Buyer's or any holder's rights of set-off or other rights under applicable Law. 11.17 Time of Essence. Time is of the essence in this Agreement. 11.18 Payments Set Aside. To the extent that the Seller, any Originator or any Obligor makes a payment to the Buyer or the Buyer exercises its rights of set-off and such payment or set-off or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by, or is required to be refunded, rescinded, returned, repaid or otherwise restored to the Seller, such Originator, such Obligor, a trustee, a receiver or any other Person under any Law, including, without limitation, any bankruptcy law, any state or federal law, common law or equitable cause, the obligation or part thereof originally intended to be satisfied shall, to the extent of any such restoration, be reinstated, revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred. The provisions of this Section 11.18 shall survive the termination of this Agreement. 70 72 11.19 No Petition. Each of the Seller and each Originator agrees that it will not institute against, or join any other Person in instituting against, the Buyer any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other similar proceeding under the laws of the United States or any state of the United States. The provisions of this Section 11.19 shall survive the termination of this Agreement. 11.20 No Recourse. The obligations of the Buyer under this Agreement are solely the corporate obligations of the Buyer. No recourse shall be had for the payment of any amount owing in respect to this Agreement or for the payment of any fee hereunder or for any other obligation or claim arising out of or based upon this Agreement against GSS, against any stockholder, employee, officer, director or incorporator of the Buyer or against the Referral Agent or any stockholder, employee, officer, director, incorporator or affiliate thereof. For purposes of this paragraph, the term "GSS" shall mean and include Global Securitization Services, LLC and all Affiliates thereof and any employee, officer, director, incorporator, shareholder or beneficial owner of any of them; provided, however, that the Buyer shall not be considered to be an affiliate of GSS or the Referral Agent. 11.21 Tax Treatment. It is the intention of the parties hereto that for the purposes of all taxes, the transactions contemplated hereby shall be treated as a loan by the Buyer to the Seller secured by the Receivables (the "Intended Characterization"). Each party hereby agrees that will report such transactions for the purposes of all taxes, and otherwise will act for the purposes of all taxes, in a manner consistent with the Intended Characterization. 11.22 Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No party may assign any of its rights or delegate any of its duties hereunder without the prior written consent of the other parties hereto; provided that the Buyer shall not be prohibited from making any assignment contemplated in or permitted by a Liquidity Agreement or a Program Support Agreement. 71 73 IN WITNESS WHEREOF, the parties hereto, by their duly authorized signatories, have executed and delivered this Agreement as of the date first above written. THREE RIVERS FUNDING CORPORATION By: --------------------------------------------- Title: ------------------------------------------ Address: c/o Global Securitization Services, LLC 114 West 47th Street, Suite 1715 New York, New York 10036 Attention: Mr. Bernard J. Angelo Telephone: (212) 302-5151 Facsimile: (212) 302-8767 with a copy of all notices to: Mellon Bank, N.A., as Referral Agent One Mellon Bank Center - Room 0410 Pittsburgh, Pennsylvania 15258-0001 Attention: Mr. Jonathan F. Widich Telephone: (412) 234-0711 Facsimile: (412) 234-5434 CMC RECEIVABLES, INC. By: --------------------------------------------- Title: ------------------------------------------ Address: 7800 Stemmons Freeway 10th Floor Dallas, Texas 75247 Attention: Louis A. Federle Telephone: (214) 689-4370 Facsimile: (214) 689-4320 72 74 COMMERCIAL METALS COMPANY, as Company, Originator and Servicer By: --------------------------------------------- Title: ------------------------------------------ Address: 7800 Stemmons Freeway 10th Floor Dallas, Texas 75247 Attention: Louis A. Federle Telephone: (214) 689-4370 Facsimile: (214) 689-4320 Acknowledged and Agreed to by: STRUCTURAL METALS, INC. By: ----------------------- Title: -------------------- SMI STEEL, INC. By: ----------------------- Title: -------------------- OWEN ELECTRIC STEEL COMPANY OF SOUTH CAROLINA d/b/a SMI STEEL SOUTH CAROLINA By: ----------------------- Title: -------------------- CMC STEEL FABRICATORS, INC. d/b/a SMI JOIST COMPANY By: ----------------------- Title: -------------------- HOWELL METAL COMPANY By: ----------------------- Title: -------------------- 73 -----END PRIVACY-ENHANCED MESSAGE-----