Exhibit
10.35


CREDIT AGREEMENT


DATED
AS OF MAY 16, 2007


KMG CHEMICALS, INC., KMG-BERNUTH, INC.,


and


WACHOVIA
BANK, NATIONAL ASSOCIATION
















TABLE OF CONTENTS


	
  Article I

  	
   

  	
   

  	
  1

  
	
  1.

  	
   

  	
  DEFINITIONS

  	
   

  	
  1

  
	
   

  	
   

  	
  1.1

  	
  Defined Terms

  	
   

  	
  1

  
	
   

  	
   

  	
  1.2

  	
  Accounting Terms

  	
   

  	
  26

  
	
   

  	
   

  	
  1.3

  	
  UCC Terms

  	
   

  	
  26

  
	
   

  	
   

  	
  1.4

  	
  Construction of Terms

  	
   

  	
  26

  
	
   

  	
   

  	
  1.5

  	
  Computation of Time Periods

  	
   

  	
  26

  
	
   

  	
   

  	
  1.6

  	
  Computation of Margin and Financial Covenants

  	
   

  	
  26

  
	
   

  	
   

  	
  1.7

  	
  Reference to Borrowers, Borrower Parties and Bank
  Parties

  	
   

  	
  26

  
	
   

  	
   

  	
  1.8

  	
  Joint and Several Liability of Borrowers

  	
   

  	
  27

  
	
   

  	
   

  	
  1.9

  	
  Wachovia Swap Documents

  	
   

  	
  28

  
	
   

  	
   

  	
  1.10

  	
  Bank as Agent For Other Bank Parties

  	
   

  	
  29

  
	
  Article II

  	
   

  	
   

  	
  29

  
	
  2.

  	
   

  	
  THE REVOLVING LOAN

  	
   

  	
  29

  
	
   

  	
   

  	
  2.1

  	
  General Terms

  	
   

  	
  29

  
	
   

  	
   

  	
  2.2

  	
  Disbursement of the Revolving Loan

  	
   

  	
  29

  
	
   

  	
   

  	
  2.3

  	
  The Revolving Note

  	
   

  	
  29

  
	
   

  	
   

  	
  2.4

  	
  Interest Rate

  	
   

  	
  30

  
	
   

  	
   

  	
  2.5

  	
  Payments of Principal and Interest

  	
   

  	
  30

  
	
   

  	
   

  	
  2.6

  	
  Use of Proceeds

  	
   

  	
  30

  
	
  Article III

  	
   

  	
   

  	
  30

  
	
  3.

  	
   

  	
  LETTERS OF CREDIT

  	
   

  	
  30

  
	
   

  	
   

  	
  3.1

  	
  Issuance of Letters of Credit

  	
   

  	
  30

  
	
   

  	
   

  	
  3.2

  	
  Reimbursement and Other Payments

  	
   

  	
  31

  
	
   

  	
   

  	
  3.3

  	
  Additional Remedies

  	
   

  	
  31

  
	
   

  	
   

  	
  3.4

  	
  No Liability of Bank

  	
   

  	
  32

  
	
   

  	
   

  	
  3.5

  	
  Indemnification

  	
   

  	
  32

  
	
  Article IV

  	
   

  	
   

  	
  32

  
	
  4.

  	
   

  	
  THE TERM LOAN

  	
   

  	
  32

  
	
   

  	
   

  	
  4.1

  	
  Disbursement of the Term Loan

  	
   

  	
  32

  
	
   

  	
   

  	
  4.2

  	
  The Term Note

  	
   

  	
  32

  
	
   

  	
   

  	
  4.3

  	
  Interest Rate

  	
   

  	
  32

  
	
   

  	
   

  	
  4.4

  	
  Payments of Principal and Interest

  	
   

  	
  33

  
	
   

  	
   

  	
  4.5

  	
  Use of Proceeds

  	
   

  	
  33

  
	
  Article V

  	
   

  	
   

  	
  33

  
	
  5.

  	
   

  	
  PAYMENTS, ADDITIONAL COSTS, ETC.

  	
   

  	
  33

  
	
   

  	
   

  	
  5.1

  	
  Payment to Bank

  	
   

  	
  33

  
	
   

  	
   

  	
  5.2

  	
  Late Payments

  	
   

  	
  34

  
	
   

  	
   

  	
  5.3

  	
  Prepayment

  	
   

  	
  34

  
	
   

  	
   

  	
  5.4

  	
  Default Rate

  	
   

  	
  34

  
	
   

  	
   

  	
  5.5

  	
  No Setoff or Deduction

  	
   

  	
  34

  
	
   

  	
   

  	
  5.6

  	
  Payment on Non-Business Day; Payment Computations

  	
   

  	
  35

  
	
   

  	
   

  	
  5.7

  	
  Indemnification

  	
   

  	
  35

  
	
   

  	
   

  	
  5.8

  	
  360-Day Year

  	
   

  	
  35

  
	
   

  	
   

  	
  5.9

  	
  No Requirement to Actually Obtain Funds

  	
   

  	
  35

  



 



 i
 









 


	
  

  	
   

  	
  5.10

  	
  Usury Limitation

  	
   

  	
  35

  
	
  Article VI

  	
   

  	
   

  	
  36

  
	
  6.

  	
   

  	
  CONDITIONS PRECEDENT

  	
   

  	
  36

  
	
   

  	
   

  	
  6.1

  	
  Documents Required for the Closing

  	
   

  	
  36

  
	
   

  	
   

  	
  6.2

  	
  Certain Events Required for Closing and for all
  Advances

  	
   

  	
  37

  
	
   

  	
   

  	
  6.3

  	
  Legal Matters

  	
   

  	
  38

  
	
   

  	
   

  	
  6.4

  	
  Election to Make Advances Prior to Satisfaction of
  Conditions Precedent

  	
   

  	
  38

  
	
  Article VII

  	
   

  	
   

  	
  38

  
	
  7.

  	
   

  	
  COLLATERAL SECURITY

  	
   

  	
  38

  
	
   

  	
   

  	
  7.1

  	
  Grant of Lien

  	
   

  	
  38

  
	
   

  	
   

  	
  7.2

  	
  Maintenance of Lien.

  	
   

  	
  39

  
	
  Article VIII

  	
   

  	
   

  	
  39

  
	
  8.

  	
   

  	
  REPRESENTATIONS AND WARRANTIES

  	
   

  	
  39

  
	
   

  	
   

  	
  8.1

  	
  Existence

  	
   

  	
  39

  
	
   

  	
   

  	
  8.2

  	
  Authority

  	
   

  	
  39

  
	
   

  	
   

  	
  8.3

  	
  Name

  	
   

  	
  40

  
	
   

  	
   

  	
  8.4

  	
  Material Contracts

  	
   

  	
  40

  
	
   

  	
   

  	
  8.5

  	
  Consents or Approvals

  	
   

  	
  40

  
	
   

  	
   

  	
  8.6

  	
  Violations or Actions Pending

  	
   

  	
  40

  
	
   

  	
   

  	
  8.7

  	
  Affiliates

  	
   

  	
  41

  
	
   

  	
   

  	
  8.8

  	
  Existing Indebtedness

  	
   

  	
  41

  
	
   

  	
   

  	
  8.9

  	
  Defaults Under Material Contracts

  	
   

  	
  41

  
	
   

  	
   

  	
  8.10

  	
  Tax Returns

  	
   

  	
  41

  
	
   

  	
   

  	
  8.11

  	
  Financial Statements

  	
   

  	
  41

  
	
   

  	
   

  	
  8.12

  	
  Good and Marketable Title

  	
   

  	
  41

  
	
   

  	
   

  	
  8.13

  	
  Real Property Locations

  	
   

  	
  41

  
	
   

  	
   

  	
  8.14

  	
  Solvency

  	
   

  	
  41

  
	
   

  	
   

  	
  8.15

  	
  ERISA

  	
   

  	
  41

  
	
   

  	
   

  	
  8.16

  	
  Priority of Liens

  	
   

  	
  42

  
	
   

  	
   

  	
  8.17

  	
  Patents, Copyrights, Etc

  	
   

  	
  42

  
	
   

  	
   

  	
  8.18

  	
  Accuracy of Documents

  	
   

  	
  42

  
	
   

  	
   

  	
  8.19

  	
  Environmental Matters

  	
   

  	
  42

  
	
   

  	
   

  	
  8.20

  	
  Full Disclosure

  	
   

  	
  42

  
	
   

  	
   

  	
  8.21

  	
  Regulated Industries

  	
   

  	
  42

  
	
   

  	
   

  	
  8.22

  	
  Insurance

  	
   

  	
  43

  
	
   

  	
   

  	
  8.23

  	
  Anti-Terrorism Laws

  	
   

  	
  43

  
	
   

  	
   

  	
  8.24

  	
  Securities Laws

  	
   

  	
  43

  
	
   

  	
   

  	
  8.25

  	
  Continuing Effectiveness

  	
   

  	
  44

  
	
  Article IX

  	
   

  	
   

  	
  44

  
	
  9.

  	
   

  	
  BORROWER’S COVENANTS

  	
   

  	
  44

  
	
   

  	
   

  	
  9.1

  	
  Affirmative Covenants

  	
   

  	
  44

  
	
   

  	
   

  	
  9.2

  	
  Negative Covenants

  	
   

  	
  47

  
	
   

  	
   

  	
  9.3

  	
  Financial Covenants

  	
   

  	
  49

  
	
   

  	
   

  	
  9.4

  	
  Insurance Covenants

  	
   

  	
  50

  
	
   

  	
   

  	
  9.5

  	
  Borrower’s General Covenants and Agreements
  Pertaining to the Collateral

  	
   

  	
  50

  



 



 ii
 









 


	
  

  	
   

  	
  9.6

  	
  Collection of Accounts; Segregation of Proceeds,
  Etc.

  	
   

  	
  51

  
	
   

  	
   

  	
  9.7

  	
  Collection Methods

  	
   

  	
  52

  
	
   

  	
   

  	
  9.8

  	
  Verification of Accounts

  	
   

  	
  52

  
	
   

  	
   

  	
  9.9

  	
  Notice Regarding Disputed Accounts

  	
   

  	
  52

  
	
   

  	
   

  	
  9.10

  	
  Records, Schedules and Assignments

  	
   

  	
  52

  
	
   

  	
   

  	
  9.11

  	
  Visitation

  	
   

  	
  52

  
	
   

  	
   

  	
  9.12

  	
  Use of Tangible Property

  	
   

  	
  52

  
	
   

  	
   

  	
  9.13

  	
  Collateral Evidenced by Instruments or Documents

  	
   

  	
  53

  
	
   

  	
   

  	
  9.14

  	
  Maintaining Bank Accounts

  	
   

  	
  53

  
	
   

  	
   

  	
  9.15

  	
  Filing Fees and Taxes

  	
   

  	
  53

  
	
   

  	
   

  	
  9.16

  	
  Underlying Documentation

  	
   

  	
  53

  
	
   

  	
   

  	
  9.17

  	
  Further Assurances

  	
   

  	
  53

  
	
  Article X

  	
   

  	
   

  	
  54

  
	
  10.

  	
   

  	
  DEFAULT

  	
   

  	
  54

  
	
   

  	
   

  	
  10.1

  	
  Events of Default

  	
   

  	
  54

  
	
   

  	
   

  	
  10.2

  	
  No Advances After Default

  	
   

  	
  56

  
	
   

  	
   

  	
  10.3

  	
  Acceleration

  	
   

  	
  56

  
	
   

  	
   

  	
  10.4

  	
  General Remedies

  	
   

  	
  56

  
	
   

  	
   

  	
  10.5

  	
  Bank’s Additional Rights and Remedies

  	
   

  	
  56

  
	
   

  	
   

  	
  10.6

  	
  Right of Set-Off

  	
   

  	
  58

  
	
   

  	
   

  	
  10.7

  	
  No Limitation on Rights and Remedies

  	
   

  	
  58

  
	
   

  	
   

  	
  10.8

  	
  Repossession of the Collateral; Care and Custody of
  the Collateral, Etc

  	
   

  	
  59

  
	
   

  	
   

  	
  10.9

  	
  Application of Proceeds

  	
   

  	
  59

  
	
   

  	
   

  	
  10.10

  	
  Attorney-in-Fact

  	
   

  	
  59

  
	
   

  	
   

  	
  10.11

  	
  Default Costs

  	
   

  	
  61

  
	
  Article XI

  	
   

  	
   

  	
  61

  
	
  11.

  	
   

  	
  MISCELLANEOUS

  	
   

  	
  61

  
	
   

  	
   

  	
  11.1

  	
  Termination of Bank’s Lien

  	
   

  	
  61

  
	
   

  	
   

  	
  11.2

  	
  Construction

  	
   

  	
  61

  
	
   

  	
   

  	
  11.3

  	
  Indemnity

  	
   

  	
  62

  
	
   

  	
   

  	
  11.4

  	
  Bank’s Consent

  	
   

  	
  62

  
	
   

  	
   

  	
  11.5

  	
  Enforcement and Waiver by Bank

  	
   

  	
  62

  
	
   

  	
   

  	
  11.6

  	
  No Representation, Assumption, or Duty

  	
   

  	
  62

  
	
   

  	
   

  	
  11.7

  	
  Expenses of Bank

  	
   

  	
  62

  
	
   

  	
   

  	
  11.8

  	
  Attorneys’ Fees

  	
   

  	
  63

  
	
   

  	
   

  	
  11.9

  	
  Exclusiveness

  	
   

  	
  63

  
	
   

  	
   

  	
  11.10

  	
  WAIVER OF PUNITIVE DAMAGES

  	
   

  	
  63

  
	
   

  	
   

  	
  11.11

  	
  Waiver and Release by Borrower

  	
   

  	
  63

  
	
   

  	
   

  	
  11.12

  	
  Limitation on Waiver of Notice, Etc

  	
   

  	
  63

  
	
   

  	
   

  	
  11.13

  	
  Additional Costs

  	
   

  	
  64

  
	
   

  	
   

  	
  11.14

  	
  Illegality and Impossibility

  	
   

  	
  64

  
	
   

  	
   

  	
  11.15

  	
  Participation

  	
   

  	
  64

  
	
   

  	
   

  	
  11.16

  	
  Binding Effect, Assignment

  	
   

  	
  64

  
	
   

  	
   

  	
  11.17

  	
  Entire Agreement, Amendments

  	
   

  	
  65

  
	
   

  	
   

  	
  11.18

  	
  Severability

  	
   

  	
  65

  
	
   

  	
   

  	
  11.19

  	
  Headings

  	
   

  	
  65

  



 



 iii
 









 


	
  

  	
   

  	
  11.20

  	
  Counterparts

  	
   

  	
  65

  
	
   

  	
   

  	
  11.21

  	
  Seal

  	
   

  	
  65

  
	
  Article XII

  	
   

  	
   

  	
  65

  
	
  12.

  	
   

  	
  SUBMISSION TO JURISDICTION, GOVERNING LAW AND
  NOTICES

  	
   

  	
  65

  
	
   

  	
   

  	
  12.1

  	
  Notices

  	
   

  	
  65

  
	
   

  	
   

  	
  12.2

  	
  Governing Law

  	
   

  	
  66

  
	
   

  	
   

  	
  12.3

  	
  SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL,
  ETC.

  	
   

  	
  66

  
	
   

  	
   

  	
  EXHIBIT A FORM OF COLLATERAL REPORT

  	
   

  	
   

  
	
   

  	
   

  	
  EXHIBIT B FORM OF COMPLIANCE CERTIFICATE

  	
   

  	
   

  
	
   

  	
   

  	
  EXHIBIT C FORM OF NOTICE OF BORROWING

  	
   

  	
   

  
	
   

  	
   

  	
  EXHIBIT D FORM OF NOTICE OF CONVERSION/CONTINUATION

  	
   

  	
   

  
	
   

  	
   

  	
  EXHIBIT E PERMITTED LIENS

  	
   

  	
   

  
	
   

  	
   

  	
  SCHEDULE 6.2(F) PENDING LITIGATION

  	
   

  	
   

  
	
   

  	
   

  	
  SCHEDULE 8.3
  LIST OF NAMES USED BY BORROWER AND PERSONS ACQUIRED IN LAST SIX YEARS

  	
   

  	
   

  
	
   

  	
   

  	
  SCHEDULE 8.4 MATERIAL CONTRACTS

  	
   

  	
   

  
	
   

  	
   

  	
  SCHEDULE 8.7 AFFILIATES

  	
   

  	
   

  
	
   

  	
   

  	
  SCHEDULE 8.13 LISTING OF REAL PROPERTY OWNED OR
  LEASED BY BORROWER

  	
   

  	
   

  
	
   

  	
   

  	
  SCHEDULE 8.17 INTELLECTUAL PROPERTY

  	
   

  	
   

  
	
   

  	
   

  	
  SCHEDULE 9.3(G)
  LISTING OF AGREEMENTS CURRENTLY IN EFFECT WITH AFFILIATES AND PERMITTED
  POST-CLOSING

  	
   

  	
   

  
	
   

  	
   

  	
  SCHEDULE 9.5(A) LISTING OF LOCATIONS OF COLLATERAL

  	
   

  	
   

  
								



 



 iv















CREDIT AGREEMENT


THIS
CREDIT AGREEMENT (this “Agreement”), dated as of May 16,
2007, is made by and among KMG CHEMICALS,
INC.,  a Texas corporation (“KMG Chemicals”),
KMG-BERNUTH, INC., a Delaware
corporation (“KMG-Bernuth”) (KMG Chemicals and KMG-Bernuth hereinafter referred
to as the “Borrowers”), and WACHOVIA BANK,
NATIONAL ASSOCIATION, a national banking association (the “Bank”).  As used herein, capitalized words and phrases
shall have the meanings ascribed thereto in Article I of this Agreement.


W I T N E S S E T H:


WHEREAS,
Borrowers have requested that Bank extend and continue to extend certain credit
to Borrowers, and Bank is willing to do so on the condition that, among other
things, Borrowers enter into this Agreement, and, subject to the terms and
conditions of this Agreement, Bank has agreed to extend to Borrowers (i) a
revolving loan of up to $8,000,000.00 (with a sublimit for standby/trade
letters of credit in the maximum amount of $1,000,000.00); and (ii) a term loan
of up to $8,400,000.00.


NOW,
THEREFORE, in consideration of the promises herein contained,
and each intending to be legally bound hereby, the parties hereto agree as
follows:


Article I


1.                                       DEFINITIONS.


1.1                                 Defined
Terms.  As used herein, the following
terms shall have the meanings set forth below (such meanings to be equally
applicable to the singular and plural forms thereof):


“Acquisition”
means any acquisition (whether in a single transaction or series of related
transactions) of (i) any going business, or all or substantially all of the
assets of any Person, whether through purchase, merger or otherwise; or (ii)
Equity Interests of any Person of five percent (5%) or more of the Equity
Interests or Voting Power of such Person.


“Adjusted LIBOR Market
Index Rate” means an interest rate equal to the sum of (i) the LIBOR Market
Index Rate, plus (ii) the Margin.


“Adjusted LIBOR Rate”
means, for each respective LIBOR Rate Interest Period, an interest rate equal
to the sum of (i) the applicable LIBOR Rate, plus (ii) the Margin.


“Advance” means
each loan of money or credit made or extended to or for the benefit of Borrower
by Bank pursuant to this Agreement.


“Affiliate” means,
with respect to any applicable Person, (a) any officers or directors of such
Person, (b) any Subsidiary of such Person, or (c) any other Person that has a
relationship with the applicable Person whereby either of such Persons directly
or indirectly controls or is controlled by or is under common control with the
other of such Persons.  The term “control”
means the possession, directly or indirectly, of the power, whether or not
exercised, to direct or



 1
 









cause the direction of
the management or policies of any Person, whether through ownership of voting
securities, by contract or otherwise.


“Agreement”
means this Credit Agreement, as amended or supplemented from time to time.


“Amortization
Expense” means the amortization expense of an applicable Person for the
applicable period (to the extent included in the computation of Net Income),
according to Generally Accepted Accounting Principles.


“Annualized
Rolling Period” means the period from the date one year prior to the
applicable date through the applicable date.


“Anti-Terrorism
Laws” means any laws relating to terrorism or money laundering, including
Executive Order No. 13224 and the USA Patriot Act.


“Asset Disposition” means any sale, assignment, transfer or
other disposition of any assets, business units or other properties (including
any interests in property or securities), excluding (i) sales of inventory in
the Ordinary Course of Business, and (ii) the sale or exchange of used or
obsolete equipment to the extent (x) the proceeds of such sale are applied
towards, or such equipment is exchanged for, similar replacement equipment, or
(y) such equipment is no longer useful for the operations in the Ordinary
Course of Business.


“Assigned
Agreements” means all leases, contracts, agreements, Documents, Instruments
and Chattel Paper included in the Collateral.


“Assignment
of Claims Act” means the Assignment of Claims Act, as amended (31 U.S.C.
Sections 3727 et. seq. and 41 U.S.C. Sections 15 et. seq.).


“Attorneys’
Fees” means attorneys’ fees actually incurred at ordinary and customary
rates.


“Available
Amount” of any Letter of Credit means, at any time, the maximum amount
available to be drawn under such Letter of Credit at such time.


“Bank”
means Wachovia Bank, National Association, a national banking association.


“Bank
Parties” means Bank and any Affiliate of Bank that is now or hereafter
becomes a party to this Agreement, any other Loan Document or any Wachovia Swap
Document.


“Bank’s
Lien” means the Lien granted to Bank by any Borrower Party pursuant to this
Agreement and the other Security Documents.


“Bankruptcy
Law” means Title 11, U.S. Code, or any similar Laws of any Jurisdiction for
the relief of debtors, and “Bankruptcy” means the commencement of any
case or other action for relief under Bankruptcy Law.


“Borrowers”
means KMG Chemicals and KMG-Bernuth.



 2
 









“Borrower
Parties” means Borrowers and any other Person that hereafter becomes a
party to this Agreement, any other Loan Document or any Wachovia Swap Document,
and which Person is responsible in whole or in part for any of the Obligations.


“Borrower’s
Interest” means all right, title and interest of Borrower of whatever kind,
nature or description.


“Borrower’s
Representatives” means the president, chief executive officer, chief
financial officer, and controller of Borrower, and any other Person designated
by Borrower as Borrower’s Representatives under this Agreement.


“Borrowing
Base” means, at any time, the amount computed on the Collateral Report most
recently delivered to, and accepted by, Bank in accordance with this Agreement
and equal to the aggregate of:


(A)                              eighty
percent (80%) of Eligible Accounts, plus


(B)                                fifty
percent (50%) of Eligible Inventory (but not more than $4,000,000.00).


“Business
Day” means any day other than a Saturday, a Sunday, a legal holiday or a
day on which banking institutions are authorized or required by Law or other
governmental action to close in Charlotte, North Carolina or New York, New
York; provided that in the case of LIBOR Rate Borrowings such day is also a day
on which dealings between banks are carried on in U.S. dollar deposits in the
London interbank market.


“Capital
Expenditures” means the sum of (i) all expenditures made by a Person,
directly or indirectly for equipment, fixed assets, real property or
improvements, or for replacements or substitutions therefore or additions
thereto, that should be, in accordance with Generally Accepted Accounting
Principles, reflected as additions to property, plant or equipment on a balance
sheet of such Person or which have a useful life of more than one year plus
(ii) the aggregate principal amount of all Indebtedness (including
Capitalized Leases) assumed or incurred in connection with any such
expenditures.


“Capitalized
Lease” means a lease that is required to be capitalized for financial
reporting purposes in accordance with Generally Accepted Accounting Principles.


“Cash
Collateral Account” means the special cash collateral account established
pursuant to Section 3.3 of this Agreement.


“Cash
Management Agreement” means any and all cash management or similar
agreements entered into or in effect between Borrower and Bank during the term
of this Agreement.


“Casualty
or Condemnation Event” means, with respect to any property of Borrower, any
loss of, damage to or condemnation or other taking of, such property for which
Borrower is entitled to receive, or receives, insurance proceeds, condemnation
proceeds or other similar proceeds or awards.



 3
 









“Change in
Control” means an event or series of events by which (A) (i) any Person or
group of Persons acting in concert or other group shall, as a result of a
tender or exchange offer, open market purchases, privately negotiated purchases
or otherwise, have become, after the date hereof, the “beneficial owner”
(within the meaning of such term under Rule 13d-3 under the Exchange Act) of
Equity Interests of Borrower representing Voting Power having the right to
elect at least 50% of the members of the Governing Body of Borrower; or (ii)
the Governing Body of KMG Chemicals shall cease to consist of a majority of the
individuals who constituted the Governing Body of KMG Chemicals as of the date
hereof or who shall have become a member thereof subsequent to the date hereof
after having been nominated, or otherwise approved in writing, by at least a
majority of individuals who constitute the Governing Body of KMG Chemicals as
of the date hereof; or (B) Borrower shall cease to own at least 99% of the
Equity Interests and Voting Power of KMEX.


“Closing”
means the time and place of actual execution and delivery of this Agreement
and, except as waived by Bank, the other documents, instruments and things
required by Section 6.1 hereof.


“Closing
Certificates” means certificates of even date herewith, signed by a duly
authorized representative of each Borrower.


“Collateral”
means all of the assets of Borrowers of every kind, nature and description,
wherever located, whether now owned or hereafter acquired (other than the
Excluded Collateral and interests in any Wachovia Documents), and including the
following:


(A)                              All
amounts that may be owing from time to time by Bank to Borrower in any
capacity, including, without limitation, any balance or share belonging to
Borrower, of any Deposit Accounts or other account with Bank;


(B)                                The
Pledged Collateral;


(C)                                All
of Borrowers’ assets which are or may be subject to Article 9 of the Uniform
Commercial Code, together with all replacements therefore, additions and
accessions thereto, and proceeds (including, but without limitation, insurance
proceeds) and products thereof, including, without limitation, the following:


(1)                                  Accounts;


(2)                                  Chattel Paper;


(3)                                  Commercial Tort
Claims;


(4)                                  Deposit Accounts;


(5)                                  Documents;


(6)                                  Equipment;


(7)                                  General Intangibles;



 4
 









(8)                                  Goods;


(9)                                  Instruments;


(10)                            Intellectual Property
Rights;


(11)                            Inventory;


(12)                            Investment Property;


(13)                            Letter-of-Credit Rights;


(14)                            Payment Intangibles;


(15)                            Software;


(16)                            Supporting Obligations;


(17)                            Rights as seller of Goods
and rights to returned or repossessed Goods;


(18)                            All existing and future
leases and use agreements of personal property entered into by Borrower as
lessor with other Persons as lessees, including without limitation the right to
receive and collect all rentals and other monies, including security deposits,
at any time payable under such leases and agreements;


(19)                            Any existing and future
leases and use agreements of personal property entered into by Borrower as
lessee with other Persons as lessors, including without limitation the
leasehold interest of Borrower in such property, and all options to purchase
such property or to extend any such lease or agreement;


(20)                            Fixtures;


(21)                            All moneys of Borrower and
all bank accounts, deposit accounts, lock boxes and other accounts in which
such moneys may at any time be on deposit or held and all investments or
securities in which such moneys may at any time be invested and all
certificates, instruments and documents from time to time representing or
evidencing any of the same;


(22)                            All claims of Borrower in
any pending litigation and/or claims for any insurance proceeds;


(D)                               All
Records pertaining to any of the Collateral;


(E)                                 Any
and all other assets of any Borrower Party of any kind, nature, or description
and which are intended to serve as collateral for the Loans under any one or
more of the Security Documents; and


(F)                                 All
interest, dividends, Proceeds, products, rents, royalties, issues and profits
of any of the property described above, including, without limitation, all
monies due and



 5
 









to become due with respect to such property,
together with all right to receive the same, and all notes, certificates of
deposit, checks and other instruments and property from time to time delivered
to or otherwise possessed by Bank for or on behalf of Borrower Party in
substitution for or in addition to any of said property.


“Collateral
Report” means a fully completed and duly executed Collateral Report and
Borrowing Base Certificate delivered by Borrowers to Bank and in the form
attached hereto as Exhibit “A”.


“Commitment
Fee” means a fee to be paid by Borrowers to Bank at or prior to the
Closing, in the amount of $10,000.00.


“Compliance
Certificate” means a fully completed and duly executed certificate
delivered by Borrowers to Bank and in the form attached hereto as Exhibit “B”.


“Consolidated Basis”
means the consolidation of the assets, liabilities, income and losses, as
applicable, of (i) Borrowers, and (ii) KMEX, provided that the assets,
liabilities, income and losses of KMEX shall be excluded from the definition of
“Consolidated Basis” at such time as consolidating statements become available
for KMEX and (i) the gross revenues of KMEX arising from sales to any Person
other than Borrowers for the trailing twelve (12) months exceeds $2,000,000.00
or (ii) the Equity Owner’s Equity, as reflected on KMEX’s balance sheet, is
more than $5,000,000.00.  It is
acknowledged that consolidating statements for KMEX are not expected to be
available in the reasonably foreseeable future, but that such consolidating
statements are expected to be available for the period ended July 31, 2008 not
later than forty-five (45) days after the end of such period.


“Current
Maturities of Long-Term Indebtedness” means all payments in respect of
Long-Term Indebtedness that are required to be made within one year from the
date of determination, whether or not the obligation to make such payments
would constitute a current Liability of the applicable Person under Generally
Accepted Accounting Principles, excluding, however, any such payment required
to be made on the ultimate maturity date of such Indebtedness.


“Default”
means the occurrence of an event described in Section 10.1 hereof regardless of
whether there shall have occurred any passage of time or giving of notice that
would be necessary in order to constitute such event as an Event of Default.


“Default
Costs” means all Indemnified Losses incurred by Bank by reason of a
Default.


“Default
Rate” means a variable per annum rate of interest equal to the lesser of
(1) two percent (2%) in excess of the Interest Rate otherwise payable
hereunder, or (2) the maximum rate allowed by applicable Laws.


“Deposit
Accounts” means all bank accounts and other deposit accounts and lock boxes
included in the Collateral or established for the benefit of any Bank Party
pursuant to the terms of any of the Loan Documents.


“Depreciation
Expense” means the depreciation expense of an applicable Person for the
applicable period (to the extent included in the computation of Net Income),
according to Generally Accepted Accounting Principles.



 6
 









“Dividends”
means dividends and other distributions to the Equity Owners of any applicable
Person on account of owing an Equity Interest.


“EBIDA”
means, with respect to an applicable Person for the applicable period, Net
Income, plus the sum of (without duplication) Interest Expense, Amortization
Expense and Depreciation Expense, all determined in accordance with Generally
Accepted Accounting Principles.


“EBITDA”
means, with respect to an applicable Person for the applicable period, Net
Income, plus the sum of (without duplication) Interest Expense, Income Tax
Expense, Amortization Expense and Depreciation Expense, all determined in
accordance with Generally Accepted Accounting Principles.


“Eligible
Account” means, at any time, an Account of Borrower that conforms and
continues to conform to the following conditions:


(A)                              The
Account is part of the Collateral and Bank’s Lien has been perfected in
accordance with applicable Laws;


(B)                                All
representations and warranties of Borrower contained in the Loan Documents with
respect to such Account are true and correct in all material respects;


(C)                                The
Account arose from a bona fide outright sale of Goods by Borrower or from
services performed by Borrower in the Ordinary Course of Business, and such
Goods have been shipped to the appropriate Account Debtor or its designees (or
the sale has otherwise been consummated), or the services have been fully
performed for the appropriate Account Debtor;


(D)                               The
Account is based upon an enforceable order or contract, written or oral, for
Goods shipped or held for services performed and the same were shipped, held,
or performed in accordance with such order or contract;


(E)                                 The
title of Borrower to the Account is absolute and is not subject to any Lien
except Bank’s Lien;


(F)                                 The
amount shown on the books of Borrower and on any invoice or statement delivered
to Bank is owing to Borrower, less any partial payment that has been made thereon
by any Person;


(G)                                The
Account shall be eligible only to the extent that it is not subject to any
claim of reduction, counterclaim, set off, recoupment, or any claim for
credits, allowances, or adjustments by the Account Debtor because of return,
inferior, or damaged goods or unsatisfactory services, or for any other reason;


(H)                               The
Account Debtor has not returned or refused to retain, or otherwise notified
Borrower of any dispute concerning, or claimed nonconformity of, any of the
Goods or services from the sale of which the Account arose;



 7
 









(I)                                    (i)
With respect to any Account generated from other than sales of animal health
pesticides or agricultural chemicals, the Account is due and payable not more
than thirty (30) days from the date of the invoice therefor and is not more
than sixty (60) days past due; and (ii) with respect to any Account generated
from sales of animal health pesticides or agricultural chemicals, the Account
is due and payable not more than ninety (90) days from the date of the invoice
therefor and is not more than sixty (60) days past due.


(J)                                   The
Account does not arise out of a contract with, or order from, a Account Debtor
that, by its terms, forbids or makes void or unenforceable the assignment by
Borrower to Bank of the Account arising with respect thereto;


(K)                               Borrower
has not received any note, trade acceptance, draft or other instrument with
respect to, or in payment of, the Account nor any Chattel Paper with respect to
the Goods giving rise to the Account, unless, if any such instrument or Chattel
Paper has been received, Borrower immediately notifies Bank and endorses or
assigns and delivers the same to Bank;


(L)                                 Borrower
has not received any notice of the death of the Account Debtor or a partner
thereof; nor of the dissolution, termination of existence, insolvency, business
failure, appointment of a receiver for any part of the property of, assignment
for the benefit of creditors by, or the filing of a petition in bankruptcy, or
the commencement of any proceeding under any Bankruptcy or insolvency laws by
or against, the Account Debtor.  Upon
receipt by Borrower of any such notice, it will immediately give Bank written
advice thereof;


(M)                            The
Account Debtor is not a foreign entity;


(N)                               The
Account Debtor is not an Affiliate of Borrower;


(O)                               If
ten percent (10%) or more of the Accounts from the Account Debtor do not
qualify as Eligible Accounts hereunder (unless the failure to qualify is solely
because of clause (P) immediately following), none of such Account Debtor’s
Accounts qualify as Eligible Accounts;


(P)                                 To
the extent that the total Eligible Accounts of the Account Debtor represent
more than ten percent (10%) of the Eligible Accounts of Borrower at any time,
such excess shall be deemed to not qualify as Eligible Accounts; and


(Q)                               Bank
has not deemed such Account ineligible because of uncertainty about the
creditworthiness of the Account Debtor or because Bank otherwise considers the
collateral value thereof to Bank to be impaired or its ability to realize such
value to be insecure.


In the event
of any dispute under the foregoing criteria about whether an Account is or has
ceased to be an Eligible Account, the decision of Bank, to be made in Bank’s
discretion, shall control.


“Eligible
Inventory” means the Inventory of Borrower which is either raw materials,
finished goods or work in process, valued at the lesser of cost (as established
on the FIFO method of accounting) or fair market value, provided, however, that
Bank may consider any of the following classes of inventory not to be Eligible
Inventory:



 8
 









(A)                              Inventory
which is not part of the Collateral, or which is part of the Collateral but
with respect to which Bank’s Lien has not been perfected in accordance with
applicable Laws.


(B)                                Inventory
with respect to which any representation or warranty contained in any of the
Loan Documents has been breached.


(C)                                Inventory
consisting of “perishable agricultural commodities” within the meaning of the
Perishable Agricultural Commodities Act of 1930, as amended, and the
regulations thereunder, or on which a Lien has arisen or may arise in favor of
agricultural producers under comparable state or local laws;


(D)                               Inventory
located on leaseholds if the value of Inventory at any particular leasehold
location is more than $250,000.00, if the lessor has not entered into a consent
and agreement providing Bank with the right to receive notice of default, the
right to repossess such Inventory at any time, and such other rights as may be
required by Bank;


(E)                                 Inventory
to which the title of Borrower is not absolute, or which is subject to any
prior Lien, except Bank’s Lien;


(F)                                 Inventory
that is obsolete, unusable or otherwise unavailable for sale;


(G)                                Inventory
consisting of promotional, marketing, packaging or shipping materials and
supplies;


(H)                               Inventory
that fails to meet, in all material respects, all standards imposed by any
governmental agency, or department or division thereof, having regulatory
authority over such Inventory or its use and sale;


(I)                                    Inventory
that is subject to any licensing, patent, royalty, trademark, trade name or
copyright agreement with any Third Person from whom Borrower has received
notice of a dispute in respect of any such agreement;


(J)                                   Inventory
located outside the United States (except as may be approved by Bank in its
discretion);


(K)                               Inventory
with a value at any particular location of more than $250,000.00 that is not in
the possession of or under the sole control of Borrower, unless all Persons
exercising dominion or control over such Inventory shall have entered into such
agreements as may be required by Bank, including agreements providing for the
right of Bank to repossess such Inventory at any time and such other rights as
may be required by Bank;


(L)                                 Inventory
in transit (unless otherwise determined to be eligible by Bank in its
discretion after a request for such determination from Borrower); and


(M)                            Inventory
returned or repossessed by Account Debtors other than Inventory that is
resalable in Borrower’s Ordinary Course of Business.



 9
 









Additionally,
Bank may exclude from Eligible Inventory all or a proportionate part of any
particular portion of Borrower’s Inventory which Bank deems ineligible because
its market value has declined or because Bank otherwise considers the
collateral value thereof to Bank to be impaired or its ability to realize such
value to be insecure.


“Environmental
Laws” means all Laws of any Jurisdiction relating to the governance or
protection of the environment, including without limitation, the Comprehensive
Environmental Response Compensation and Liability Act of 1980 (“CERCLA”), as
amended (42 U.S.C. Sections 9601, et seq.), the Hazardous Materials
Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.), the
Resource Conservation and Recovery Act (“RCRA”), as amended (42 U.S.C. Sections
6901, et seq.), the Clean Water Act, as amended (42 U.S.C. Sections
7401, et seq.), the Toxic Substances Control Act, as amended (15 U.S.C.
Sections 2601, et seq.).


“Equity
Agreements” means any and all agreements of whatever kind by, between and among
Borrower and the Equity Owners of Borrower, and relating to Borrower’s Equity
Interests.


“Equity
Interests” means any and all ownership or other equitable interests in the
applicable Person, including any interest represented by any capital stock, membership
interest, partnership interest, or similar interest, but specifically excluding
any interest of any Person solely as a creditor of the applicable Person.


“Equity
Owner” means any Person owning an Equity Interest.


“Equity
Owners’ Equity” means, at any time, the sum of the following accounts set
forth in a balance sheet of an applicable Person, adjusted to U.S. Dollars by
means of applicable foreign currency exchange rates and prepared in accordance
with Generally Accepted Accounting Principles:


(A)                              The
par or stated value of all outstanding Equity Interests;


(B)                                Capital
surplus; and


(C)                                Retained
earnings.


“ERISA”
means the Federal Employee Retirement Income Security Act of 1974, as amended
and in effect from time to time, and the regulations and published
interpretations thereof.


“ERISA
Affiliate” means any Person that would be deemed to be under “common
control” with, or a member of the same “controlled group” as, Borrower Party or
any of its subsidiaries, within the meaning of the Internal Revenue Code (as
applicable to Plans) or ERISA.


“ERISA
Event” means any of the following with respect to a Plan: (i) a Reportable
Event, (ii) a complete or partial withdrawal by Borrower or any ERISA Affiliate
from a Plan that results in liability under ERISA, or the receipt by Borrower
or any ERISA Affiliate of notice from a Multiemployer Plan that it is in
reorganization or insolvency pursuant to ERISA or that it intends to terminate
or has terminated under ERISA, (iii) the distribution by Borrower or any ERISA
Affiliate under ERISA of a notice of intent to terminate any Plan or the taking
of any action to



 10
 









terminate any Plan, (iv) the commencement of
proceedings by the PBGC under ERISA for the termination of, or the appointment
of a trustee to administer, any Plan, or the receipt by Borrower or any ERISA
Affiliate of a notice from any Multiemployer Plan that such action has been
taken by the PBGC with respect to such Multiemployer Plan, (v) the institution
of a proceeding by any fiduciary of any Multiemployer Plan against Borrower or
any ERISA Affiliate to enforce Section 515 of ERISA, which is not dismissed
within thirty (30) days, (vi) the imposition upon Borrower or any ERISA
Affiliate of any liability under Title IV of ERISA, other than for PBGC
premiums due but not delinquent under ERISA, or the imposition or threatened
imposition of any Lien upon any assets of Borrower or any ERISA Affiliate as a
result of any alleged failure to comply with the Internal Revenue Code or ERISA
in respect of any Plan, (vii) the engaging in or otherwise becoming liable for
a nonexempt Prohibited Transaction by Borrower or any ERISA Affiliate, (viii) a
violation of the applicable requirements of Section 404 or 405 of ERISA or the
exclusive benefit rule under Section 401(a) of the Internal Revenue Code by any
fiduciary of any Plan for which Borrower or any of its ERISA Affiliates may be
directly or indirectly liable, or (ix) the adoption of an amendment to any Plan
that, pursuant to the Internal Revenue Code or ERISA, would result in the loss
of a tax-exempt status of the trust of which such Plan is a part of, and
Borrower or an ERISA Affiliate fails to timely provide security to such Plan in
accordance with the provisions of ERISA.


“Event of
Default” means the occurrence of an event described in Section 10.1 hereof
provided that there shall have occurred any passage of time or giving of notice
that would be necessary in order to constitute such event as an Event of
Default under Section 10.1.


“Excluded
Collateral” (i) assets of Borrower to the extent the assignment thereof is
restricted by a contract or applicable Law and would not otherwise be permitted
by Section 9-408 of the UCC; (ii) Borrower’s Real Property; and (iii) until
such time as Borrower shall have executed and delivered the Patent and
Trademark Security Agreement as provided for in Section 8.16 of this Agreement,
Borrower’s patents, trademarks, trade names, service marks and copyrights, and
all applications therefor and licenses thereof.


“Existing
Indebtedness” means Indebtedness of Borrowers as reflected on the Most
Recent Financial Statements, and which Indebtedness is not being paid or
defeased with the proceeds of the Loans at Closing.


“Existing
Investments” means Investments of Borrowers as reflected on the Most Recent
Financial Statements.


“Extraordinary
Receipt” means any consideration received by or paid to or for the account
of an applicable Person not in the Ordinary Course of Business, including,
without limitation, proceeds from dispositions of assets outside the Ordinary
Course of Business, tax refunds, pension plan reversions, proceeds of insurance
(other than proceeds of business interruption insurance to the extent such
proceeds constitute compensation for lost earnings), condemnation awards (and
payments in lieu thereof) and indemnity payments.


“Financial
Statements” means the Most Recent Financial Statements and the income
statements, balance sheets and other financial statements required to be
delivered by Borrowers in accordance with this Agreement.



 11
 









“Financing
Statements” means the UCC-1 financing statements (including any amendments
and continuations) and UCC-3 financing statements required hereunder or under
any other Security Document.


“Fiscal
Year” means a twelve-month period of time commencing on the first day of
August.


“Fiscal
Year-End” means the end of each Fiscal Year.


“Fixed
Charge Coverage” means the quotient which is obtained by dividing (i) the
sum of EBIDA for the 12-month period preceding the applicable date, plus the
Lease and Rental Expense for the 12-month period preceding the applicable date,
by (ii) the sum of the Current Maturities of Long-Term Indebtedness as of the
applicable date, plus the Interest Expense and Lease and Rental Expense for the
12-month period preceding the applicable date.


“Funded
Debt” means as of an applicable time, without duplication, (a) all of the
Indebtedness of the applicable Person which is Indebtedness (i) for borrowed
money, or (ii) in respect of any Capitalized Lease or the deferred purchase
price of property, whether or not interest-bearing and whether or not, in
accordance with Generally Accepted Accounting Principles, classified as a
current liability or long-term Indebtedness at such date, and whether secured
or unsecured, excluding, however, (b) Indebtedness that is (i) accounts payable
and accrued expenses and other similar current liabilities incurred in Borrower’s
Ordinary Course of Business, and (ii) all Indebtedness of others guaranteed by
the applicable Person.


“Generally
Accepted Accounting Principles” means generally accepted principles of
accounting in effect from time to time in the United States applied in a manner
consistent with those used in preparing such financial statements as have
heretofore been furnished to Bank by the applicable Person.


“Governing
Body” means the board of directors of a Person (or any Person or group of
Persons exercising similar authority).


“Governmental
Approvals” means all authorizations, consents, approvals, licenses and
exemptions of, registrations and filings with, and reports to, any Governmental
Authority.


“Governmental
Authority” means any nation or government and any political subdivision
thereof, and any entity exercising executive, legislative, judicial,
regulatory, or administrative functions of or pertaining thereto, which has or
asserts jurisdiction over Bank, Borrower Parties, or any property of any of
them.


“Hazardous
Materials” and “Hazardous Substances” means “hazardous materials”
and “hazardous substances” as defined under any applicable Environmental Law.


“Income Tax
Expense” means the income tax expense of an applicable Person for the
applicable period (to the extent included in the computation of Net Income),
determined in accordance with Generally Accepted Accounting Principles.



 12
 









“Indebtedness”
means, with respect to any Person, all items of indebtedness, obligation or
liability, whether matured or unmatured, liquidated or unliquidated, direct or
contingent, joint or several, including, but without limitation or duplication:


(A)                              All obligations of
such Person for borrowed money;


(B)                                All obligations of
such Person evidenced by bonds, debentures, notes or similar instruments, or
upon which interest payments are customarily made;


(C)                                All indebtedness
guaranteed, directly or indirectly, in any manner, or endorsed (other than for
collection or deposit in the Ordinary Course of Business) or discounted with
recourse;


(D)                               All indebtedness
in effect guaranteed, directly or indirectly, through agreements, contingent or
otherwise:


(1)                                  To purchase such
indebtedness; or


(2)                                  To purchase, sell or
lease (as lessee or lessor) property, products, materials or supplies or to
purchase or sell services, primarily for the purpose of enabling the debtor to
make payment of such indebtedness or to assure the owner of the indebtedness
against loss; or


(3)                                  To supply funds to or
in any other manner invest in the debtor;


(E)                                 All indebtedness
secured by (or which the holder of such indebtedness has a right, contingent or
otherwise, to be secured by) any Lien upon property owned or acquired subject
thereto, whether or not the liabilities secured thereby have been assumed; and


(F)                                 All indebtedness
incurred as the lessee of goods or services under leases that, in accordance
with Generally Accepted Accounting Principles, should not be reflected on the
lessee’s balance sheet.


“Indemnified
Losses” means all damages, dues, penalties, fines, costs, amounts paid in
settlement, taxes, losses, expenses, and fees, including court costs and
Attorneys’ Fees and expenses.


“Interest
Expense” means the interest expense of an applicable Person for the
applicable period (to the extent included in the computation of Net Income),
determined in accordance with Generally Accepted Accounting Principles.


“Interest
Rate” means the actual interest rate at which all or any portion of the
outstanding principal amount of a Note bears interest from time to time during
the term of such Note.


“Investment”
means any loan or advance to any Person, any purchase or other acquisition of
any capital stock or other ownership or profit interest, warrants, rights,
options, obligations or other securities of such Person, any capital
contribution to such Person or any other investment in such Person.



 13
 









“Jurisdiction”
means each and every nation or any political subdivision thereof.


“KMEX”
means KMG de Mexico S.A. de C.V., organized under the Laws of Mexico.


“KMEX Plant”
means the operating facility owned by KMEX and located in Matamoras, Mexico.


“KMG-Bernuth”
means KMG-Bernuth, Inc., a Delaware corporation.


“KMG
Chemicals” means KMG Chemicals, Inc., a Texas corporation.


“Laws”
means each and all laws, treaties, ordinances, statutes, rules, regulations,
orders, injunctions, writs or decrees of any Governmental Authority, or any
court or similar entity established by any thereof, whether now in effect or
hereafter enacted.


“Lease and
Rental Expense” means the lease and rental expense of an applicable Person
for the applicable period (to the extent included in the computation of Net
Income), determined in accordance with Generally Accepted Accounting
Principles.


“Letter of
Credit” means each Letter of Credit issued pursuant to Section 3.1 of this
Agreement.


“Letter of
Credit Advances” means all amounts owing to Bank under any Letter of Credit
Agreement, including, without limitation, all drafts paid by Bank under any
Letter of Credit and with respect to which and to the extent that Bank has not
been reimbursed.


“Letter of
Credit Agreements” means this Agreement and any other agreement of Borrower
with Bank and relating to Borrower’s obligation to reimburse Bank with respect
to amounts paid under any Letter of Credit and/or the granting of a Lien to
Bank to secure any such obligation, together with any and all extensions,
revisions, modifications or amendments at any time made thereto.


“Letter of
Credit Commitment” means the lesser of (i) One Million and 00/100 Dollars
($1,000,000.00); or (ii) the Unused Revolving Loan Commitment.


“Letter of
Credit Facility Fee” means an annual fee payable by Borrowers to Bank with
respect to each Letter of Credit, such fee to be payable in advance upon the
issuance of such Letter of Credit and on each anniversary date of issuance
thereafter so long as such Letter of Credit is outstanding, and equal to one
percent (1.0%) of the Available Amount of such Letter of Credit (but not less
than $500.00).


“Liabilities”
means all Indebtedness that, in accordance with Generally Accepted Accounting
Principles, should be classified as liabilities on a balance sheet of a Person.


“LIBOR
Market Index Rate” means, for any day, the rate for one month U.S. dollar
deposits as reported on Telerate, page 3750, as of 11:00 a.m. (London time) on
such day, or if such day is not a London business day, then the immediately
preceding London business day (or if not so reported, then as determined by
Bank from another recognized source or interbank quotation).



 14















“LIBOR Rate”
means, for the applicable LIBOR Rate Interest Period for each LIBOR Rate
Borrowing comprising part of the same borrowing (including conversions,
extensions and renewals), a per annum interest rate determined pursuant to the
following formula:


	
  LIBOR Rate =

  	
   

  	
  London Interbank
  Offered Rate

  
	
   

  	
   

  	
  1 - LIBOR
  Reserve Percentage

  



 


“LIBOR Rate Borrowing” means a borrowing bearing interest based
at a rate determined by reference to the LIBOR Rate, each such borrowing to be
in the principal amount of at least $200,000.00 or any larger amount which is
an even multiple of $100,000.00.


“LIBOR Rate
Interest Period” means, as to each LIBOR Rate Borrowing, a period of one
month, two months or three months, as selected pursuant to a Notice of
Borrowing or a Notice of Conversion/Continuation, commencing on the date of the
borrowing (including continuations, conversions and extensions thereof);
provided, however, (i) if any LIBOR Rate Interest Period would end on a day which
is not a Business Day, such LIBOR Rate Interest Period shall be extended to the
next succeeding Business Day (except that where the next succeeding Business
Day falls in the next succeeding calendar month, then on the next preceding
Business Day), (ii) no LIBOR Rate Interest Period shall extend beyond the
maturity date of the applicable Loan, and (iii) any LIBOR Rate Interest Period
with respect to a LIBOR Rate Borrowing that begins on the last Business Day of
a calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such LIBOR Rate Interest Period) shall
end on the last Business Day of the relevant calendar month at the end of such
LIBOR Rate Interest Period.


“LIBOR
Reserve Percentage” means for any day, that percentage (expressed as a
decimal) which is in effect from time to time under Regulation D of the Board
of Governors of the Federal Reserve System (or any successor), as such
regulation may be amended from time to time or any successor regulation, as the
maximum reserve requirement (including, without limitation, any basic,
supplemental, emergency, special, or marginal reserves) applicable with respect
to Eurocurrency liabilities as that term is defined in Regulation D (or against
any other category of liabilities that includes deposits by reference to which
the interest rate of LIBOR Rate Borrowings is determined), whether or not Bank
has any Eurocurrency liabilities subject to such reserve requirement at that
time.  LIBOR Rate Borrowings shall be
deemed to constitute Eurocurrency liabilities and as such shall be deemed
subject to reserve requirements without benefits of credits for proration,
exceptions or offsets that may be available from time to time to Bank.  The LIBOR Rate shall be adjusted
automatically on and as of the effective date of any change in the LIBOR
Reserve Percentage.


“Lien”
means any mortgage, pledge, encumbrance, charge, security interest, lien,
assignment or other encumbrance, including any conditional sale agreement or
other title retention agreement.


“Liquid
Assets” means, as of an applicable time, the following, so long as the same
is not subject to any Lien nor subject to any restriction on transferability,
whether imposed under applicable Law, by agreement, or otherwise: (i)
marketable direct obligations issued by, or unconditionally guaranteed by, the
United States Government or issued by any agency thereof and backed by the full
faith and credit of the United States, in each case maturing within one



 15
 









year from the applicable time; (ii)
certificates of deposit and time deposits having maturities of six months or
less from the applicable time and issued by any commercial bank organized under
the laws of the United States of America or any state thereof having combined
capital and surplus of not less than $500,000,000; (iii) commercial paper of an
issuer rated at least A-1 by Standard & Poor’s Ratings Services (“S&P”)
or P-1 by Moody’s Investor’s Service, Inc. (“Moody’s”), or carrying an
equivalent rating by a nationally recognized rating agency, if both of the two
named rating agencies cease publishing ratings of commercial paper issuers
generally, and maturing within six months from the applicable time; (iv)
securities with maturities of one year or less from the applicable time and
issued or fully guaranteed by any state, commonwealth or territory of the
United States, by any political subdivision or taxing authority of any such
state, commonwealth or territory or by any foreign government, the securities
of which state, commonwealth, territory, political subdivision, taxing
authority or foreign government (as the case may be) are rated at least A by
S&P or A by Moody’s; (v) securities with maturities of six months or less
from the applicable time and backed by standby letters of credit by Bank or any
commercial bank satisfying the requirements of clause (ii) of this definition;
(vi) shares of money market mutual or similar funds which invest exclusively in
assets satisfying the requirements of clauses (i) through (iii) of this
definition; and (vii) publicly traded securities listed on a nationally
recognized securities exchange in the United States.


“Loans”
means the loans and other extensions of credit, if any, being made by Bank to
Borrowers pursuant to this Agreement, including but not limited to the
Revolving Loan, the Term Loan and the Letters of Credit.


“Loan
Documents” means this Agreement, the Notes, the Security Documents, the
Letter of Credit Agreements, the Closing Certificates, and any and all other
agreements, documents and instruments of any kind executed or delivered in
connection with, or evidencing, securing, guaranteeing or relating to, the
Loans, whether heretofore, simultaneously herewith or hereafter delivered,
together with any and all extensions, revisions, modifications or amendments at
any time made to any of the foregoing (but specifically excluding any Wachovia
Swap Documents).


“London
Interbank Offered Rate” means, for any LIBOR Rate Borrowing for any LIBOR
Rate Interest Period therefor, either (a) the rate of interest per annum
determined by Bank (rounded upward to the nearest 1/100 of 1%) appearing on the
Telerate Page 3750 (or any successor page) as the London interbank offered rate
for deposits in Dollars at approximately 11:00 A.M. (London time), on the
second full Business Day preceding the first day of such LIBOR Rate Interest
Period, and in an amount approximately equal to the amount of the LIBOR Rate
Borrowing and for a period approximately equal to such LIBOR Rate Interest
Period, (b) if such rate is for any reason not available, the rate of interest
per annum determined by Bank (rounded upward to the nearest 1/100 of 1%)
appearing on Reuters Screen LIBO page as the London interbank offered rate for
deposits in Dollars at approximately 11:00 A.M. (London time), on the second
full Business Day preceding the first day of such LIBOR Rate Interest Period,
and in an amount approximately equal to the amount of the LIBOR Rate Borrowing
and for a period approximately equal to such LIBOR Rate Interest Period
(provided, however, if more than one rate is specified on Reuters Screen LIBO
page, the applicable rate shall be the arithmetic mean of all such rates
(rounded upwards, if necessary to the nearest 1/100 of 1%)), or (c) if neither
of such rates is for any reason available, the rate per annum equal to the rate
at which Bank or its designee is offered deposits in Dollars at or about 11:00
A.M. (London time), two Business Days prior to the beginning of such LIBOR Rate
Interest Period in the interbank 



 16
 









eurodollar market where the eurodollar and
exchange operations in respect of its LIBOR Rate Borrowings are then being
conducted for settlement in immediately available funds, for delivery on the
first day of such LIBOR Rate Interest Period for the number of days comprised
therein, and in an amount comparable to the amount of the LIBOR Rate Borrowing
to be outstanding during such LIBOR Rate Interest Period.


“Long-Term
Indebtedness” means at any date any Indebtedness which matures (or the
maturity of which may at the option of the applicable Person be extended such
that it matures) more than one year after such date.


“Margin”
means (i) until the date of the first Compliance Certificate required hereunder
and the adjustment of the Margin as provided herein, one percent (1.0%), and
(ii) thereafter, a percentage based upon Borrowers’ ratio of Funded Debt to
EBITDA, as follows:


	
  Ratio of Funded Debt to EBITDA

  	
   

  	
  Margin

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Equal to or
  greater than 2.5 to 1.0

  	
   

  	
  2.75

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  Equal to or
  greater than 2.0 to 1.0, but less than 2.5 to 1.0

  	
   

  	
  2.25

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  Equal to or
  greater than 1.75 to 1.0, but less than 2.0 to 1.0

  	
   

  	
  1.70

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  Equal to or
  greater than 1.0 to 1.0, but less than 1.75 to 1.0

  	
   

  	
  1.20

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  Less than 1.0 to 1.0

  	
   

  	
  1.00

  	
  %

  



“Material Adverse Change” means the occurrence of an event
giving rise to a Material Adverse Effect.


“Material
Adverse Effect” means a material adverse effect on (a) the business,
financial condition, operations or properties of any Borrower Party;
(b) the rights and remedies of Bank under any Loan Document, (c) the
ability of any Borrower Party to perform its Obligations under any Loan
Document to which it is or is to be a party, or (d) the priority of Bank’s
Lien.


“Material
Contract” means any contract or agreement (other than contracts or
agreements with respect to Asset Acquisitions) to which Borrower is a party, by
which Borrower or its properties are bound, or to which Borrower is subject and
which contract or agreement (i) pursuant to its terms provides for payments or
receipts by Borrower which might reasonably be expected to exceed $5,000,000.00
during any Fiscal Year; or (ii) if on account of any breach or termination
thereof, would reasonably be expected to cause a Material Adverse Effect.


“Most
Recent Financial Statements” means the audited balance sheet and income
statement of Borrower dated as of July 31, 2006, as supplemented by
management-prepared financial statements dated as of each Quarter-End through
the Quarter-End of October 31, 2006.



 17
 









“Net Cash
Proceeds” means (i) in the case of any Casualty or Condemnation Event, the
aggregate cash proceeds of insurance, condemnation awards and other
compensation received by Borrower in respect of such Casualty or Condemnation
Event less (x) reasonable fees and expenses incurred by Borrower in connection
therewith, (y) contractually required repayments of Indebtedness to the extent
secured by Liens on the property subject to such Casualty or Condemnation
Event, and (z) any income or transfer taxes paid or payable by Borrower as a
result of such Casualty or Condemnation Event; and (ii) in the case of any
Asset Disposition, the aggregate cash payments received by Borrower in
connection therewith, less (x) reasonable fees and expenses incurred by
Borrower in connection therewith, (y) Indebtedness to the extent the amount
thereof is secured by a Lien on the property that is the subject of such Asset
Disposition and the transferee of (or holder of the Lien on) such property
requires that such Indebtedness be repaid as a condition to such Asset
Disposition, and (z) any income or transfer taxes paid or payable by Borrower
as a result of such Asset Disposition.


“Net Income”
means the net income of an applicable Person for the applicable period as
determined in accordance with Generally Accepted Accounting Principles, but
excluding for purposes of determining any financial ratios under this
Agreement, all Extraordinary Receipts and any Income Tax Expense on such
Extraordinary Receipts and any tax deductions or credits on account of such
Extraordinary Receipts.


“Notes”
means the Revolving Note and the Term Note.


“Notice of
Borrowing” means a notice from a Borrower’s Representative in form and
substance satisfactory to Bank, such Notice of Borrowing to be substantially in
the form attached hereto as Exhibit “C”.


“Notice of
Conversion/Continuation” means a notice from a Borrower’s Representative in
form and substance satisfactory to Bank, such Notice of Conversion/Continuation
to be substantially in the form attached hereto as Exhibit “D”.


“Notice of
Issuance” means a notice from Borrower to Bank to be made by telephone and
confirmed in writing, specifying therein the information as may be reasonably
required by Bank with respect to the issuance of any Letter of Credit under
this Agreement.


“Obligations”
means the obligations (including obligations of performance) and liabilities of
any Borrower Party to any Bank Party of every kind and description whatsoever,
direct or indirect, absolute or contingent, due or to become due, now existing
or hereafter incurred, contracted or arising, or acquired by any Bank Party
from any source, joint or several, liquidated or unliquidated, regardless of
how they arise or by what agreement or instrument they may be evidenced or
whether they are evidenced by any agreement or instrument, and whether incurred
as maker, endorser, surety, guarantor, general partner, drawer, tort-feasor,
indemnitor, account party with respect to a letter of credit or otherwise,
including, but not limited to, obligations arising out of, incurred pursuant to
and/or in connection with any Loan Document or any Wachovia Swap Document, and
any and all extensions and renewals of any of the same, including but not
limited to the obligation:



 18
 









(A)                              To
pay the principal of and interest on the Notes in accordance with the
respective terms thereof and/or hereof, including any and all extensions,
modifications, and renewals thereof and substitutions therefore;


(B)                                To
pay, repay or reimburse Bank for all amounts owing hereunder and/or under any of
the other Loan Documents, including the Reimbursement Obligation and all
Indemnified Losses and Default Costs;


(C)                                To
pay, repay or reimburse to Bank Party the Wachovia Swap Obligations; and


(D)                               To
reimburse Bank, on demand, for all of Bank’s expenses and costs, including
Attorneys’ Fees and expenses of Bank’s counsel, in connection with the
preparation, administration, amendment, modification, or enforcement of this
Agreement and the other Loan Documents, including, without limitation, any
proceeding brought or threatened to enforce payment of any of the obligations
referred to in the foregoing paragraphs (A), (B) and (C).


“Ordinary
Course of Business” means an action taken by a Person only if:


(A)                              Such
action is consistent with the past practices of such Person and is taken in the
ordinary course of the normal day-to-day operations of such Person; and


(B)                                Such
action is not required to be authorized by the Governing Body of such Person
under applicable Laws.


“Organizational
Documents” means (i) the articles of incorporation and the bylaws of a
corporation, (ii) the partnership agreement and any statement of partnership of
a general partnership, (iii) the limited partnership agreement and the
certificate of limited partnership of a limited partnership, (iv) the articles
of organization and the operating agreement of a limited liability company, (v)
any charter or similar document adopted or filed in connection with the
creation, formation, or organization of a Person, and (vi) any amendment to any
of the foregoing.


“Participant”
means any bank, financial institution, Affiliate of Bank, or other entity which
enters into a participation agreement with Bank and/or to whom Bank assigns all
or a portion of its rights and obligations under this Agreement.


“Payment Due
Date” means (i) with respect to any payment of interest accruing at the
LIBOR Market Index Rate or with respect to any payment of principal on the
Loans, the last day of each calendar month during the term of this Agreement;
and (ii) with respect to any payment of interest accruing on any LIBOR Rate
Borrowing, the date of expiration of the applicable LIBOR Rate Interest Period.


“Permitted
Acquisition” means (A) any Acquisition if the total consideration paid or
payable is less than $10,000,000.00 and if (i) Borrower gives Bank not less
than ten (10) days prior written notice of such Acquisition; (ii) no later than
thirty (30) days after the Acquisition, Borrower shall have executed and
delivered such documentation (if any) as may be required by Bank so that Bank
shall have a first Lien with respect to any assets acquired in connection with
such Acquisition (other than real property); and (iii) no Default shall have
occurred and be continuing at the time of the consummation of such Acquisition
or would exist immediately after



 19
 









such Acquisition; and (B) any Acquisition if
the total consideration paid or payable is equal to or greater than
$10,000,000.00 and if (i) Borrower gives Bank not less than thirty (30) days
prior written notice of such Acquisition; (ii) Bank consents to such
Acquisition (and in granting or denying such consent, Bank may consider, among
other things, whether (x) the business acquired is a Permitted Line of
Business; (y) immediately after the Acquisition, the business so acquired (and the
assets constituting such business) shall be owned and operated by Borrower; (z)
immediately after the Acquisition, Borrower shall have executed and delivered
such documentation (if any) as may be required by Bank so that Bank shall have
a first Lien with respect to any assets acquired in connection with such
Acquisition (other than real property); and provided that in any event Bank may
withhold such consent if any Default shall have occurred and be continuing at
the time of the consummation of such Acquisition or would exist immediately
after such Acquisition.


“Permitted
Indebtedness” means:


(A)                              The
Loans;


(B)                                The
Existing Indebtedness;


(C)                                Indebtedness
otherwise expressly permitted under the terms of this Agreement or any other
Loan Document, if any;


(D)                               Indebtedness
arising under any Wachovia Swap Document;


(E)                                 Any
Indebtedness arising under any Swap Document entered into as a result of the
compliance with any affirmative covenant of any Borrower Party set forth in any
Loan Document;


(F)                                 Indebtedness
incurred in Borrower’s Ordinary Course of Business and not incurred through the
borrowing of money, provided that such Indebtedness is either Unsecured
Indebtedness or Indebtedness secured by a Permitted Lien; and


(G)                                Indebtedness
(other than Indebtedness specified in clauses (A) through (G) above) in an
aggregate amount that shall not exceed $1,000,000.00 in any consecutive
twelve-month period.


“Permitted
Investments” means:


(A)                              Liquid
Assets;


(B)                                Purchases
and acquisitions of inventory, supplies, materials and equipment in the
Ordinary Course of Business;


(C)                                Investments
consisting of loans and advances to employees for reasonable travel, relocation
and business expenses in the Ordinary Course of Business or prepaid expenses
incurred in the Ordinary Course of Business;


(D)                               Without
duplication, Investments consisting of Permitted Indebtedness and Permitted
Acquisitions;



 20
 









(E)                                 Existing
Investments;


(F)                                 Investments
(other than Investments specified in clauses (A) through (E) above) in an
aggregate amount that shall not exceed $1,000,000.00 in any consecutive
twelve-month period; and


(G)                                Any
other Investments that may be approved in writing by Bank from time to time
(including, without limitation, any approval of an investment policy
established by Borrower).


“Permitted
Liens” means:


(A)                              Bank’s
Lien;


(B)                                Those
Liens identified on the attached Exhibit “E”;


(C)                                The
following Liens, if the granting of such Lien or the attachment of such Lien to
the Collateral (i) does not otherwise constitute a Default under the terms of
this Agreement, and (ii) does not give rise to a Material Adverse Change:


(1)                                  If the validity or
amount thereof is being contested in good faith by appropriate and lawful
proceedings, so long as levy and execution thereon have been stayed and
continue to be stayed, and with respect to which adequate reserves or other
appropriate provisions are being maintained to the extent required by Generally
Accepted Accounting Principles:


(a)                                  Liens
for taxes, assessments or charges due and payable and subject to interest or
penalty;


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


(c)                                  Liens
of mechanics, materialmen, warehousemen, carriers, or other like Liens; and


(d)                                 Adverse
judgments on appeal;


(2)                                  Pledges or deposits
made in the Ordinary Course of Business to secure payment of workmen’s
compensation, or to participate in any fund in connection with workmen’s
compensation, unemployment insurance, old-age pensions or other social security
programs;


(3)                                  Good faith pledges or
deposits made in the Ordinary Course of Business to secure performance of bids,
tenders, Contracts (other than for the repayment of borrowed money) or leases,
not in excess of ten percent (10%) of the aggregate amount due thereunder, or
to secure statutory obligations, or surety, appeal, indemnity, performance,
payment, bid or other similar bonds required in the Ordinary Course of
Business; and



 21
 









(4)                                  Purchase money
security interests granted in the Ordinary Course of Business to secure not
more than one hundred percent (100%) of the purchase price of assets.


“Permitted
Line of Business” means the business engaged in by Borrower as of the date
of this Agreement, and businesses reasonably ancillary thereto.


“Permitted
Transfers of Assets” means:


(A)                              Sales
of Inventory in the Ordinary Course of Business;


(B)                                The
sale or exchange of used or obsolete Equipment to the extent (i) the proceeds
of such sale are applied towards, or such Equipment is exchanged for, similar
replacement Equipment, or (ii) such Equipment is no longer necessary for the
operations of Borrower in the Ordinary Course of Business;


(C)                                (1)
the sale or disposition of assets with a value of less than $250,000.00 outside
the Ordinary Course of Business, provided that Bank is provided written
notice of such sale or other disposition within thirty (30) days of such sale
or disposition; and (2) the sale or disposition of assets with a value of
$250,000.00 or more outside the Ordinary Course of Business, provided
that (i) Bank is provided at least ten (10) days prior written notice of such
sale or other disposition, and (ii) with respect to the Collateral, any Net
Cash Proceeds from such sales or dispositions are paid as a prepayment of the
Loans as and when required by the terms of any Loan Document, and (iii)
immediately prior to such sale or disposition, and after giving effect to such
sale or disposition, no Default or Event of Default would exist;


(D)                               Any
transfer arising from the termination of any Swap Document, if such termination
does not give rise to a Default; and


(E)                                 Dividends
if immediately prior and subsequent to the payment of any such Dividend, no
Default would exist.


“Person”
means any individual, corporation, partnership, limited partnership, limited
liability company, association, joint-stock company, trust, unincorporated
organization, joint venture, court or Governmental Authority.


“Petroleum
Products” means “petroleum products” as defined under any applicable
Environmental Law.


“Place for
Payment” means a place for payment as from time to time designated by Bank,
which place for payment currently is at the address of Bank as hereinafter
provided for with respect to notices.


“Plans”
means all Single Employer Plans and Multiple Employer Plans, both as defined in
ERISA.


“Pledge
Agreement” means that certain Pledge Agreement of even date herewith from
Borrowers to Bank, together with any and all extensions, revisions,
modifications or amendments at any time made thereto.



 22
 









“Pledged
Collateral” means the “Pledged Collateral” as defined in the Pledge
Agreement.


“Prohibited
Transaction” means a “prohibited transaction” as defined in ERISA.


“Purchase
Order” means a valid and binding order for goods to be purchased from
Borrower, which order shall be evidenced by an executed purchase order of the
respective Account Debtor.


“Quarter”
means a period of time of three consecutive calendar months.


“Quarter-End”
means the last day of each of January, April, July and October.


“Real
Property” means the real property owned by Borrower or in which Borrower
has a leasehold interest, which Real Property is described on Schedule 8.13 of this Agreement.


“Records”
means correspondence, memoranda, tapes, discs, microfilm, microfiche, papers,
books and other documents, or transcribed information of any type, whether
expressed in ordinary or machine language, and all filing cabinets and other
containers in which any of the foregoing is stored or maintained.


“Regulation
T”, “Regulation U”, and “Regulation X” means Regulation T, Regulation U,
and Regulation X, respectively, of the Board of Governors of the Federal
Reserve System as now or from time to time hereafter in effect and shall
include any successor or other regulation or official interpretation of said
Board of Governors relating to the extension of credit by banks for the purpose
of purchasing or carrying margin stocks applicable to member banks of the
Federal Reserve System.


“Reimbursement
Obligation” means the obligation of Borrower to pay the amounts required
under Section 3.2 of this Agreement.


“Reportable
Event” means a “reportable event” as defined in ERISA, but excluding events
for which reporting has been waived.


“Responsible
Officer” means, individually and collectively, the president, chief
executive officer and chief financial officer of Borrower.


“Revolving
Loan” means the loan which Bank has agreed to advance to Borrower in
accordance with the terms of Article II of this Agreement.


“Revolving
Loan Advancement Termination Date” means the earlier of (i) the Revolving
Loan Maturity Date, or (ii) the date of the occurrence of an Event of Default.


“Revolving
Loan Advances” means all of the Advances of the Revolving Loan.


“Revolving
Loan Commitment” means the lesser of (i) Eight Million and 00/100 Dollars
($8,000,000.00), or (ii) the Borrowing Base.


“Revolving
Loan Maturity Date” means the earlier of (a) April 30, 2010, or (b) the
occurrence of an Event of Default.



 23
 









“Revolving
Note” means that certain Revolving Note of even date herewith from
Borrowers to Bank, in the principal amount of $8,000,000.00, and includes any
amendment to or modification of such note and any promissory note given in
extension or renewal of, or in substitution for, such note.


“Security Documents”
means all documents or instruments of any kind executed or delivered in
connection with the Loans, whether delivered prior to, at, or after the
Closing, wherein Bank is granted a Lien in any Borrower Party’s assets, and all
documents and instruments executed and delivered in connection with any of the
foregoing, together with any and all extensions, revisions, modifications or
amendments at any time made to any of such documents or instruments, including
but not limited to this Agreement, the Pledge Agreement and the Financing
Statements.


“Solid Wastes” means “solid wastes” as defined under any
applicable Environmental Law.


“Solvent”
and “Solvency” mean, with respect to any Person on a particular date,
that on such date (a) the fair value of the property of such Person is
greater than the total amount of liabilities, including, without limitation,
contingent liabilities, of such Person, (b) the present fair salable value
of the assets of such Person is not less than the amount that will be required
to pay the probable liability of such Person on its debts as they become
absolute and matured, (c) such Person does not intend to, and does not
believe that it will, incur debts or liabilities beyond such Person’s ability
to pay such debts and liabilities as they mature and (d) such Person is
not engaged in business or a transaction, and is not about to engage in
business or a transaction, for which such Person’s property would constitute an
unreasonably small capital.  The amount
of contingent liabilities at any time shall be computed as the amount that, in
the light of all the facts and circumstances existing at such time, represents
the amount that can reasonably be expected to become an actual or matured
liability.


“Subsidiary”
means, as to any Person (the “first person”), another Person (the “second
person”) with respect to which such first person directly or indirectly through
one or more intermediaries, controls such second person (and a first person
shall be deemed to have control if such first person, directly or indirectly,
has rights to exercise Voting Power to elect a majority of the members of the
Governing Body of the second person).


“Swap
Documents” means (A) any agreement (including terms and conditions
incorporated by reference therein) which is a rate swap agreement, basis swap,
forward rate agreement, commodity swap, interest rate option, forward foreign
exchange agreement, spot foreign exchange agreement, rate cap agreement, rate
floor agreement, rate collar agreement, currency swap agreement, cross-currency
rate swap agreement, currency option, any other similar agreement (including
any option to enter into any of the foregoing); (B) any combination of the
foregoing; or (C) any master agreement for any of the foregoing, as any of the
foregoing may be amended or supplemented from time to time.


“Tangible
Property” means all equipment, machinery, goods, furniture, furnishings,
fixtures, supplies, tools, materials, vehicles, books, records, and other
tangible personal property owned by Borrower.



 24
 









“Term Loan”
means the loan which Bank has agreed to advance to Borrower in accordance with
the terms of Article IV of this Agreement.


“Term Loan
Amount” means Eight Million Four Hundred Thousand and 00/100 Dollars
($8,400,000.00).


“Term Loan
Maturity Date” means the earlier of (i) January 31, 2013; or (ii) the
occurrence of an Event of Default.


“Term Note”
means that certain Term Note of even date herewith from Borrowers to Bank, in
the principal amount of $8,400,000.00, and includes any amendment to or modification
of such note and any promissory note given in extension or renewal of, or in
substitution for, such note.


“Third
Person” means a Person not a party to this Agreement.


“Unfunded
Pension Liability” means “unfunded pension liability” as defined in ERISA.


“Unsecured
Indebtedness” means Indebtedness not secured by any Lien.


“Unused Fee”
means the fee payable by Borrowers to Bank on each Quarter-End, as determined
by Bank as of such Quarter-End in an amount equal to (i) 0.125% times (ii) the
daily average of the Unused Revolving Loan Commitment during such Quarter (iii)
divided by four (4).


“Unused
Revolving Loan Commitment” means at any time (i) the Revolving Loan
Commitment, minus (ii) the Available Amount of the Letters of Credit, minus
(iii) any outstanding Letter of Credit Advances, minus (iv) any outstanding
Revolving Loan Advances.


“USA
Patriot Act” means the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,
Pub. L. No. 107-56, 115 Stat. 272 (2001), as the same has been, or shall
hereafter be, renewed, extended, amended or replaced.


“Voting
Power” means, with respect to any Person, the right to vote for the
election of the Governing Body of such Person under ordinary circumstances.


“Wachovia
Swap Documents” means any Swap Documents entered into between any Borrower
Party and any Bank Party.


“Wachovia Swap
Obligations” means the obligations (including obligations of performance)
and liabilities of any Borrower Party to any Bank Party of every kind and
description whatsoever, direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter incurred, contracted or arising, or
acquired by Bank Party from any source, joint or several, liquidated or unliquidated,
regardless of how they arise or by what agreement or instrument they may be
evidenced or whether they are evidenced by any agreement or instrument, and
whether incurred as counterparty, maker, endorser, surety, guarantor, general
partner, drawer, tort-feasor, indemnitor, account party with respect to a
letter of credit or



 25
 









otherwise, and arising
out of, incurred pursuant to and/or in connection with any Wachovia Swap
Document, and any and all extensions and renewals of any of the same.


“Without
Notice” means without demand of performance or other demand, advertisement,
or notice of any kind to or upon the applicable Person, except as may be
required under applicable Laws or by express provision of any Loan Document.


1.2                                 Accounting
Terms.  Accounting terms used and not
otherwise defined in this Agreement have the meanings determined by, and all
calculations with respect to accounting or financial matters unless otherwise
provided herein shall be computed in accordance with, Generally Accepted
Accounting Principles.


1.3                                 UCC
Terms.  As used herein, unless the
context clearly requires to the contrary, terms not specifically defined herein
shall have the same respective meanings as are given to those terms in the
Uniform Commercial Code as presently adopted and in effect in (i) with respect
to KMG-Chemicals, the State of Texas, and (ii) with respect to KMG-Bernuth, the
State of Delaware (except in cases and with respect to Collateral when the
perfection, the effect of perfection or nonperfection, and the priority of a
Lien in the Collateral is governed by another Jurisdiction, in which case such
terms shall have the meanings attributed to those terms under such other
Jurisdiction).


1.4                                 Construction
of Terms.  Whenever used in this
Agreement, the singular number shall include the plural and the plural the
singular, pronouns of one gender shall include all genders, use of the terms “herein”,
“hereof”, and “hereunder” shall be deemed to be references to this Agreement in
its entirety unless otherwise specifically provided, and the word “discretion”
means in the sole and absolute discretion of the applicable Person(s).


1.5                                 Computation
of Time Periods.  For purposes of
computation of periods of time hereunder, the word “from” means “from and
including”, the words “to” and “until” each mean “to but excluding”, and the
word “through” means “through and including”.


1.6                                 Computation
of Margin and Financial Covenants.


(A)                              For
purposes of computation of the Margin and the financial covenants set forth in
this Agreement, such computation shall be (i) determined by Bank as of each
Quarter-End, based on the Compliance Certificate most recently delivered by
Borrowers in accordance with the terms of this Agreement, (ii) determined on a
Consolidated Basis, and (iii) based on an Annualized Rolling Period, if
applicable.


(B)                                Any
adjustment in the Margin shall be prospective and shall commence as of the
Business Day that the delivery of a Compliance Certificate by Borrowers is
required pursuant to Section 9.1(C) (provided that should Borrowers fail to
timely deliver a required Compliance Certificate, Bank at its option may adjust
the Margin to the highest applicable percentage).


1.7                                 Reference
to Borrowers, Borrower Parties and Bank Parties.  Any reference in this Agreement or any other Loan
Document to (i) “Borrower” shall mean each and any Borrower, singularly; (ii) “Borrowers”
shall mean all the Borrowers, collectively; (iii) “Borrower



 26
 









Party” shall mean each
and any Borrower Party, singularly; (iv) “Borrower Parties” shall mean all the
Borrower Parties, collectively; (v) “Bank Party” shall mean each and any Bank
Party, singularly; and (v) “Bank Parties” shall mean all the Bank Parties,
collectively.


1.8                                 Joint
and Several Liability of Borrowers.


(A)                              Each
Borrower is accepting joint and several liability hereunder in consideration of
the financial accommodation to be provided by Bank under this Agreement, for
the mutual benefit, directly and indirectly, of each Borrower and in
consideration of the undertakings of each Borrower to accept joint and several
liability for the obligations of each other Borrower.


(B)                                Each
Borrower jointly and severally irrevocably and unconditionally accepts, not
merely as a surety but also as a co-debtor, joint and several liability with
the other Borrowers with respect to the payment and performance of all of the
Obligations, it being the intention of the parties hereto that all the
Obligations shall be the joint and several obligations of each and all of the
Borrowers without preferences or distinction among them.


(C)                                If
and to the extent that any Borrower shall fail to make any payment with respect
to any of the Obligations as and when due or to perform any of the Obligations
in accordance with the terms thereof, then in each such event, the other
Borrowers will make such payment with respect to, or perform, such Obligation.


(D)                               The
obligations of each Borrower under any Loan Document constitute full recourse
obligations of such Borrower, enforceable against it to the full extent of its
properties and assets, irrespective of the validity, regularity or
enforceability of this Agreement or any other circumstances whatsoever.


(E)                                 Except
as otherwise expressly provided in any Loan Document, each Borrower hereby
waives notice of acceptance of its joint and several liability, notice of any
borrowing made under this Agreement, notice of occurrence of any Default or
Event of Default, or of any demand for any payment under this Agreement or any
other Loan Document, notice of any action at any time taken or omitted by Bank
under or in respect of any of the Obligations, any requirement of diligence
and, generally, all demands, notice and other formalities of every kind in
connection with this Agreement or any other Loan Document.  Each Borrower hereby assents to, and waives notice
of, any extension or postponement of the time for the payment of any of the
Obligations, the acceptance of any partial payment thereon, any waiver, consent
or other action or acquiescence by Bank at any time or times in respect of any
default by any Borrower in the performance or satisfaction of any term,
covenant, condition or provision of this Agreement or any other Loan Document,
any and all other indulgences whatsoever by Bank in respect of any of the
Obligations, and the taking, addition, substitution or release, in whole or in
part, at any time or times, of any security for any of the Obligations or in
part, at any time or times, of any security for any of the Obligations or the
addition, substitution or release, in whole or in part, of any Borrower.  Without limiting the generality of the
foregoing, each Borrower assents to any other action or delay in acting or
failure to act on the part of Bank, including, without limitation, any failure
strictly or diligently to assert any right or to pursue any remedy or to comply
fully with the applicable laws or regulations thereunder which might, but for
the provisions of this Section, afford grounds for terminating, discharging or
relieving such



 27
 









Borrower, in whole or in part, from any of
its obligations under this Agreement or any other Loan Document, it being the
intention of each Borrower that, so long as any of the Obligations remain
unsatisfied, the obligations of such Borrower under this Agreement or any other
Loan Document shall not be discharged except by performance and then only to
the extent of such performance.  The
obligations of each Borrower under this Agreement and the other Loan Documents
shall not be diminished or rendered unenforceable by any winding up,
reorganization, arrangement, liquidation, reconstruction or similar proceeding
with respect to any Borrower Party or Bank. 
The joint and several liability of Borrowers hereunder shall continue in
full force and effect notwithstanding any absorption, merger, amalgamation or
any other change whatsoever in the name, membership, constitution or place of
formation of any Borrower Party or Bank.


(F)                                 The
provisions of this Section are made for the benefit of Bank and its successors
and assigns, and may be enforced from time to time against any of the Borrowers
as often as occasion therefor may arise and without requirement on the part of
Bank first to marshal any of its claims or to exercise any of its rights
against any Borrower Party or to exhaust any remedies available against any
other Borrower Party or to resort to any other source or means of obtaining
payment of any of the Obligations or to elect any other remedy.  The provisions of this Section shall remain
in effect until all the Obligations shall have been paid in full or otherwise
fully satisfied.  If at any time, any
payment, or any part thereof, made in respect of any of the Obligations, is
rescinded or must otherwise be restored or returned by Bank upon the
insolvency, bankruptcy or reorganization of any Borrower, or otherwise, the provisions
of this Section will forthwith be reinstated in effect, as though such payment
had not been made.


(G)                                Notwithstanding
any provision of any Loan Document, the liability of each Borrower under the
Loan Documents as of any date shall be limited to an amount equal to the
greatest amount that would not render such Borrower’s obligations under the
Loan Documents subject to avoidance, discharge or reduction as of such date as
a fraudulent transfer or conveyance under applicable Bankruptcy Laws or other
Laws, in each instance after giving effect to all other liabilities of such
Borrower, contingent or otherwise, that are relevant under applicable
Bankruptcy Laws or other Laws (specifically excluding, however, any liabilities
of such Borrower to the extent that such liabilities would be discharged by
payments made by such Borrower hereunder, and after giving effect to any rights
of subrogation, contribution, reimbursement, indemnity or similar rights of
such Borrower pursuant to applicable Laws or otherwise, including any agreement
of such Borrower with any other Person providing for an equitable allocation of
such liability).  Each Borrower
acknowledges and agrees that the Obligations may from time to time exceed the
limitation of liability set forth in the preceding sentence without
discharging, limiting or otherwise affecting the obligations of any Borrower
under the Loan Documents or the rights and remedies of Bank.


1.9                                 Wachovia
Swap Documents.  Notwithstanding any
provision of this Agreement, any Loan Document or any Wachovia Swap Document to
the contrary, (i) no covenant or agreement of Borrower Party shall prohibit
Borrower Party from entering into any Wachovia Swap Document; and (ii) the
right of Bank to accelerate any of the Obligations shall not be construed to
require the termination or unwinding of any transactions the subject of any
Wachovia Swap Documents.



 28















1.10                             Bank as Agent For Other Bank
Parties.  To the extent that any Lien
is granted to Bank in this Agreement or under any Loan Document as security for
any Obligation of any Borrower Party to any Bank Party other than Bank, the
Lien so granted shall be deemed to be a Lien granted to Bank as agent for such
other Bank Party, without the necessity of any act or consent of any Person.


ARTICLE II


2.                                         THE
REVOLVING LOAN


2.1                                   General Terms.  Subject to the terms hereof, Bank will lend
Borrowers, from time to time until the Revolving Loan Advancement Termination
Date, such amounts which shall not exceed, in the aggregate principal amount at
any one time outstanding, the Unused Revolving Loan Commitment.  Subject to the terms hereof, Borrowers may
borrow, repay without penalty or premium, and reborrow hereunder, from the date
of this Agreement until the Revolving Loan Advancement Termination Date.  If at any time the unpaid principal balance
of the Revolving Loan exceeds the amount Borrowers could borrow at such time as
set forth herein, Borrowers shall immediately upon demand of Bank pay or cause
to be paid such amounts to Bank, to the extent necessary to reduce the
Revolving Loan to an amount which Borrowers could borrow at that time.


2.2                                   Disbursement of the Revolving
Loan. 


(A)                                Except as otherwise provided in
a Cash Management Agreement, in order to obtain a Revolving Loan Advance, a
Borrower’s Representative shall deliver a Notice of Borrowing to Bank (i) with
respect to a Revolving Loan Advance to be made at Closing, not later than the
time of Closing, and (ii) with respect to any other Revolving Loan Advance, (x)
with respect to Revolving Loan Advances on which interest is to accrue at the
Adjusted LIBOR Rate, no later than 2:00 p.m. (Birmingham, Alabama time) on a
date not less than three (3) Business Days prior to the date such Revolving
Loan Advance is sought, and (y) with respect to Revolving Loan Advances on
which interest is to accrue at the Adjusted LIBOR Market Index Rate, no later
than 2:00 p.m. (Birmingham, Alabama time) on a date not less than one (1)
Business Day prior to the date such Revolving Loan Advance is sought.


(B)                                  After Bank’s receipt of such
funds and upon fulfillment of any applicable conditions set forth in this
Agreement, Bank will make such funds available to Borrowers by crediting a
Borrower’s deposit account with Bank.


(C)                                  Notwithstanding anything
contained herein to the contrary, Borrowers shall not be entitled to receive,
nor shall Bank be required to disburse, any Revolving Loan Advance after the
Revolving Loan Advancement Termination Date.


2.3                                   The Revolving Note.  Borrowers’ obligation to repay the Revolving
Loan shall be evidenced by the Revolving Note.



 29
 









2.4                                   Interest Rate.


(A)                                Except as provided in the
immediately succeeding subparagraph (B), during the entire term of the
Revolving Note, the outstanding principal balance of the Revolving Note shall
bear interest at the Adjusted LIBOR Market Index Rate.


(B)                                  A Borrower’s Representative may
from time to time deliver to Bank a Notice of Continuation/Conversion, electing
to have all or a portion of the outstanding principal balance of the Revolving
Loan accrue interest based on the LIBOR Rate, in which case the applicable
LIBOR Rate Borrowing shall bear interest at the Adjusted LIBOR Rate during the
applicable LIBOR Rate Interest Period (provided, however, that there shall not
be more than four (4) LIBOR Rate Borrowings outstanding at any time with
respect to the Revolving Loan).  Following
the expiration of any applicable LIBOR Rate Interest Period, if a Borrower’s
Representative shall not have timely and properly delivered a Notice of
Conversion/Continuation electing a LIBOR Rate Interest Period to commence as of
the expiration of the applicable expiring LIBOR Rate Interest Period, then the
applicable LIBOR Rate Borrowing shall automatically bear interest at the
Adjusted LIBOR Market Index Rate.


2.5                                   Payments of Principal and
Interest.  Principal and interest on
the Revolving Loan shall be payable as follows:


(A)                                On the first Payment Due Date following the date of the Revolving Note,
and on each successive Payment Due Date thereafter until the entire
indebtedness evidenced by the Revolving Note is paid in full, Borrowers shall
pay to Bank all accrued and unpaid interest on the outstanding principal
balance of the Revolving Note.


(B)                                  If not earlier demanded pursuant
to Section 10.3 hereof, on the Revolving Loan Maturity Date, the outstanding
principal balance of the Revolving Note, together with all accrued and unpaid
interest thereon, shall be due and payable to Bank.


2.6                                   Use of Proceeds.  The proceeds of the Revolving Loan shall be
used for general working capital needs of Borrower and to pay costs and
expenses associated with the closing of the Loans.


ARTICLE III


3                                            LETTERS OF CREDIT


3.1                                   Issuance of Letters of Credit.  Subject to the terms hereof, from time to
time until the Revolving Loan Advancement Termination Date, Borrower may
request Bank to issue, and Bank agrees to issue, Letters of Credit for the
account of Borrower in an aggregate Available Amount for all Letters of Credit
not to exceed at any time the Letter of Credit Commitment.  No Letter of Credit shall have an expiration
date (including all rights of Borrower or the beneficiary to require renewal)
later than the earlier of (i) 60 days before the Revolving Loan Maturity Date,
or (ii) one year after the date of issuance thereof.  In order for a Letter of Credit to be issued,
a Borrower’s Representative shall deliver a Notice of Issuance to Bank not
later than 10:30 a.m. (Birmingham, Alabama time) on a date not less than three
(3) Business Days prior to the date the issuance of such Letter of Credit is
sought, such Notice of Issuance to be accompanied by the



 30
 









form of the Letter of
Credit to be issued.  If (i) the
requested form of such Letter of Credit is acceptable to Bank in its
discretion, and (ii) if required by Bank, upon execution and delivery of a
Letter of Credit Agreement in form and substance satisfactory to Bank, Bank
will, subject to the other terms and conditions of this Agreement, issue such
Letter of Credit.  In the event and to
the extent that the provisions of any Letter of Credit Agreement shall conflict
with this Agreement, the provisions of this Agreement shall govern.


3.2                                   Reimbursement and Other
Payments.  Borrowers agree to pay to
Bank immediately upon demand of Bank (i) at the time when Bank shall pay any
draft presented under any Letter of Credit, a sum equal to the amount so paid
under such Letter of Credit, plus (ii) interest at the Default Rate on any
amount remaining unpaid by Borrowers to Bank under clause (i) above from such
time until payment in full..


3.3                                   Additional Remedies.  In addition to any rights and remedies Bank
may otherwise have under this Agreement, if (i) any Default shall have
occurred, Bank may in its discretion by notice to Borrowers, declare the
obligation of Bank to issue any Letter of Credit to be terminated, whereupon
the obligation of Bank to issue any Letter of Credit shall forthwith terminate,
and (ii) any Event of Default shall have occurred, Bank may make demand upon
Borrowers to, and forthwith upon such demand Borrowers will pay to Bank in same
day funds at Bank’s office designated in such demand, for deposit in a special
Cash Collateral Account to be maintained at such office of Bank, an amount
equal to the maximum amount then available to be drawn under the Letters of
Credit.   The Cash Collateral Account
shall be in the name of Borrowers, but under the sole dominion and control of
Bank, and shall be held and disbursed as follows:


(A)                                Bank may from time to time
invest funds on deposit in the Cash Collateral Account, reinvest proceeds of
any such investments which may mature or be sold, and invest interest or other
income received from any such investments, and all such investments and
reinvestments shall, for purposes of this Agreement, constitute part of the
funds held in the Cash Collateral Account.


(B)                                  If at any time Bank determines
that any funds held in the Cash Collateral Account are subject to any right or
claim of any Person other than claims arising under this Agreement and/or that
the total amount of such funds is less than the maximum amount at such time
available to be drawn under the Letters of Credit, Borrowers will, forthwith
upon demand by Bank, pay to Bank, as additional funds to be deposited and held
in the Cash Collateral Account, an amount equal to the excess of (i) such
maximum amount at such time available to be drawn under the Letters of Credit
over (ii) the total amount of funds, if any, then held in the Cash Collateral
Account which Bank determines to be free and clear of any such right and claim.


(C)                                  Borrower hereby assigns,
transfers and sets over, and grants to Bank a Lien on and upon, the Cash
Collateral Account, including all funds held in the Cash Collateral Account
from time to time and all proceeds thereof, as security for the
Obligations.  Borrower agrees that, to
the extent notice of sale of any securities shall be required by Law, at least
five Business Days’ Notice to Borrowers of the time and place of any public
sale or the time after which any private sale is to be made shall constitute
reasonable notification.  Bank may
adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it will so adjourned.



 31
 









(D)                                 Bank may, at any time or from
time to time, apply funds from time to time held in the Cash Collateral Account
to the payment of (i) any Reimbursement Obligation, and (ii) upon termination
of all Letters of Credit and payment in full of all the Reimbursement
Obligation, in such order as Bank may elect, as shall have become or shall
become due and payable by Borrower to Bank under this Agreement.


(E)                                   Neither Borrower nor any Person
claiming on behalf of or through Borrower shall have any right to withdraw any
of the funds held in the Cash Collateral Account.


3.4                                   No Liability of Bank.  Borrowers assume all risks of the acts or
omissions of any beneficiary or transferee of any Letter of Credit with respect
to its use of such Letter of Credit. Neither Bank nor any of its officers or
directors shall be liable or responsible for (a) the use that may be made of
any Letter of Credit or any acts or omissions of any beneficiary or transferee
in connection therewith; (b) the validity, sufficiency or genuineness of
documents, or of any endorsement thereon, even if such documents should prove
to be in any or all respects invalid, insufficient, fraudulent or forged; (c)
payment by Bank against presentation of documents that do not comply with the
terms of a Letter of Credit, including failure of any documents to bear any
reference or adequate reference to the Letter of Credit; or (d) any other
circumstances whatsoever in making or failing to make payment under any Letter
of Credit.  In furtherance and not in
limitation of the foregoing, Bank may accept documents that appear on their
face to be in order, without responsibility for further investigation, regardless
of any notice or information to the contrary.


3.5                                   Indemnification.  In addition to any other indemnification
obligation of Borrower under this Agreement or any other Loan Document,
Borrowers hereby agree to indemnify and hold Bank Parties harmless from and
against any and all Indemnified Losses which Bank Parties may incur or which
may be claimed against Bank Parties by any Person by reason of or in connection
with the execution and delivery or transfer of, or payment or failure to make
lawful payment under, any Letter of Credit.


ARTICLE IV


4.                                         THE TERM LOAN


4.1                                   Disbursement of the Term Loan.  Subject to the terms hereof, Bank will lend
to Borrowers in a single Advance at the Closing the Term Loan Amount.  Bank will credit or pay the proceeds of the
Advance of the Term Loan to a Borrower’s deposit account with Bank, or in such
other manner as Borrowers and Bank may agree.


4.2                                   The Term Note.  Borrowers’ obligation to repay the Term Loan
shall be evidenced by the Term Note.


4.3                                   Interest Rate.


(A)                                Except as provided in the
immediately succeeding subparagraph (B), during the entire term of the Term
Note, the outstanding principal balance of the Term Note shall bear interest at
the Adjusted LIBOR Market Index Rate.



 32
 









(B)                                  A Borrower’s Representative may
from time to time deliver to Bank a Notice of Conversion/Continuation, electing
to have all or a portion of the outstanding principal balance of the Term Loan
accrue interest based on the LIBOR Rate, in which case the applicable LIBOR
Rate Borrowing shall bear interest at the Adjusted LIBOR Rate during the
applicable LIBOR Rate Interest Period (provided, however, that there shall not
be more than four (4) LIBOR Rate Borrowings outstanding at any time with
respect to the Term Loan).  Following the
expiration of any applicable LIBOR Rate Interest Period, if a Borrower’s
Representative shall not have timely and properly delivered a Notice of
Conversion/Continuation electing a LIBOR Rate Interest Period to commence as of
the expiration of the applicable expiring LIBOR Rate Interest Period, then the
applicable LIBOR Rate Borrowing shall automatically bear interest at the
Adjusted LIBOR Market Index Rate.


4.4                                   Payments of Principal and
Interest.  Principal and interest on
the Term Loan shall be payable as follows:


(A)                                On the first Payment Due Date following the date of this Agreement, and
on each successive Payment Due Date thereafter until the entire indebtedness
evidenced by the Term Note is paid in full, Borrowers shall pay to Bank all
accrued and unpaid interest on the outstanding principal balance of the Term
Note, together with a payment of principal each in the amount of $138,000.00.


(B)                                  If not earlier demanded pursuant
to Section 10.3 hereof, the outstanding principal balance of the Term Loan, together
with all accrued and unpaid interest thereon, shall be due and payable to Bank
on the Term Loan Maturity Date.


4.5                                   Use of Proceeds.  The proceeds of the Term Loan shall be used
to refinance Existing Indebtedness.


ARTICLE V


5.                                         PAYMENTS, ADDITIONAL COSTS, ETC.


5.1                                   Payment to Bank.  


(A)                                All monies payable to Bank under
this Agreement or under the Notes shall be paid directly to Bank in immediately
available funds at the Place for Payment. 
If Bank shall send Borrowers statements of amounts due hereunder, such
statements shall be considered correct and conclusively binding on Borrowers,
unless Borrower notifies Bank to the contrary within thirty (30) days of its
receipt of any statement which it deems to be incorrect.  Alternatively, at its discretion, Bank may
charge against any deposit account of Borrower all or any part of any amount
owed by Borrower hereunder.


(B)                                  All payments to be made by
Borrower hereunder will be made to Bank not later than 1:00 p.m. at the Place
for Payment.  Payments received after
1:00 p.m. at the Place for Payment shall be deemed to be payments made prior to
1:00 p.m. at the Place for Payment on the next succeeding Business Day.  Borrower hereby authorizes Bank to charge its
accounts with Bank in order to cause timely payment of amounts due hereunder to
be made.



 33
 









(C)                                  At the time of making each such
payment, Borrower shall, subject to the other terms and conditions of this
Agreement, specify to Bank the Loan or other obligation of Borrower hereunder
to which such payment is to be applied. 
In the event that Borrower fails to so specify the relevant Loan or if
an Event of Default shall have occurred and be continuing, Bank may apply such
payments as it may determine in its discretion.


5.2                                   Late Payments.  If any scheduled payment, whether principal,
interest or principal and interest, is late ten (10) days or more, Borrower
agrees to pay a late charge equal to five percent (5%) of the amount of the
payment which is late, but not more than the maximum amount allowed by
applicable Laws.  The foregoing provision
shall not be deemed to excuse a late payment or be deemed a waiver of any other
rights Bank may have under this Agreement, including, subject to the terms
hereof, the right to declare the entire unpaid principal and interest
immediately due and payable.


5.3                                   Prepayment.


(A)                                Borrowers may prepay or cause to
be prepaid the principal of the Loans in whole or, from time to time, in part,
without premium or penalty.


(B)                                  Except as may otherwise be
agreed to by Bank, promptly upon the receipt of any Net Cash Proceeds in an
amount in excess of $1,000,000.00 and arising from an Asset Disposition or a
Casualty or Condemnation Event, Borrowers shall pay such Net Cash Proceeds to
Bank to be applied as a prepayment of the Term Loan.


(C)                                  All partial prepayments, whether
voluntary or mandatory, shall be applied against principal and interest as Bank
may determine in its discretion, provided that no prepayment shall entitle
Borrowers to cease making any payment as otherwise scheduled hereunder.


(D)                                 No prepayment of any Loan shall
alter the notional amount of any transaction under any Wachovia Swap Document
or otherwise affect any Borrower Party’s obligations under any Wachovia Swap
Documents, which shall remain in full force and effect notwithstanding such
prepayment, subject to the terms of such Wachovia Swap Documents.


5.4                                   Default Rate.  Notwithstanding any provision herein or in
any other Loan Document to the contrary, upon the occurrence and during the
continuance of an Event of Default, the Interest Rate payable on the Loans
shall be the Default Rate.


5.5                                   No Setoff or Deduction.  All payments of principal of and interest on
the Loans and other amounts payable by Borrowers hereunder shall be made by
Borrowers without setoff or counterclaim, and, subject to the next succeeding
sentence, free and clear of, and without deduction or withholding for, or on
account of, any present or future taxes, levies, imposts, duties, fees,
assessments, or other charges of whatever nature, imposed by any Governmental
Authority, or by any department, agency or other political subdivision or
taxing authority.  If any such taxes,
levies, imposts, duties, fees, assessments or other charges are imposed, Borrowers
will pay such additional amounts as may be necessary so that payment of
principal of and interest on the Loans and other amounts payable hereunder,
after withholding or deduction for or on account thereof, will not be less than
any amount provided to be paid hereunder and, in any



 34
 









such case, Borrowers will
furnish to Bank certified copies of all tax receipts evidencing the payment of
such amounts within 30 days after the date any such payment is due pursuant to
applicable Laws.


5.6                                   Payment on Non-Business Day;
Payment Computations.  Except as
otherwise provided in this Agreement to the contrary, whenever any installment
of principal of, or interest on, any Loan or other amount due hereunder becomes
due and payable on a day which is not a Business Day, the maturity thereof
shall be extended to the next succeeding Business Day (unless such next
succeeding Business Day does not fall within the same calendar month, in which
case the maturity thereof shall be shortened to the immediately preceding
Business Day).  In the case of any
extension in the time for payment of any installment of principal, interest
shall be payable thereon at the rate per annum determined in accordance with
this Agreement during such extension.


5.7                                   Indemnification.  If Borrowers make any payment of principal
with respect to any LIBOR Rate Borrowing on any other date than the last day of
a LIBOR Rate Interest Period applicable thereto, or if Borrowers fail to borrow
any LIBOR Rate Borrowing after notice has been given to Bank in accordance with
this Agreement, or if Borrowers fail to make any payment of principal or
interest in respect of any LIBOR Rate Borrowing when due, Borrowers shall
reimburse Bank on demand for any resulting loss or expense incurred by Bank,
including without limitation any loss incurred in obtaining, liquidating or
employing deposits from third parties, whether or not Bank shall have funded or
committed to fund such LIBOR Rate Borrowing. 
A statement as to the amount of such loss or expense, prepared in good
faith and in reasonable detail by Bank and submitted by Bank to Borrowers,
shall be conclusive and binding for all purposes absent manifest error in
computation.  Calculation of all amounts
payable to Bank under this Section shall be made as though Bank shall have
actually funded or committed to fund such LIBOR Rate Borrowing through the
purchase of an underlying deposit in an amount equal to the amount of such
LIBOR Rate Borrowing in the relevant market and having a maturity comparable to
the related LIBOR RATE Interest Period and through the transfer of such deposit
to a domestic office of Bank in the United States; provided, however, that Bank
may fund such LIBOR Rate Borrowing in any manner it sees fit and the foregoing
assumption shall be utilized only for the purpose of calculation of amounts
payable under this Section.


5.8                                   360-Day Year.  All interest payable under the Notes shall be
calculated on the basis of a 360-day year by multiplying the outstanding
principal amount by the applicable per annum rate, multiplying the product
thereof by the actual number of days elapsed, and dividing the product so
obtained by 360.


5.9                                   No Requirement to Actually
Obtain Funds.  Notwithstanding the
fact that the Interest Rate pursuant to the Loans may be calculated based upon
Bank’s cost of funds, Borrowers agree that Bank shall not be required actually
to obtain funds from such source at any time.


5.10                             Usury Limitation.  If, at any time, the Interest Rate payable on
the Loans shall be deemed by any competent court of law or any Governmental
Authority to exceed the maximum rate of interest permitted by any applicable
Laws, then, for such time as the Interest Rate would be deemed excessive, its
application shall be suspended and there shall be charged instead the



 35
 









maximum rate of interest
permissible under such Laws, and any excess interest actually collected by Bank
shall be credited as a partial prepayment of principal.


ARTICLE VI


6.                                         CONDITIONS PRECEDENT


The obligation of Bank to
make the Loans and any Advance hereunder, and to issue any Letter of Credit, is
subject to the following conditions precedent:


6.1                                   Documents Required for the
Closing.  Prior to or concurrently
with the Closing, the following instruments and documents, duly executed by all
proper Persons and in form and substance satisfactory to Bank, shall have been
delivered to Bank:


(A)                                This Agreement;


(B)                                  The Notes;


(C)                                  The Pledge Agreement, together
with the original stock certificates, stock powers and other items required to
be delivered thereunder;


(D)                                 The Closing Certificates;


(E)                                   The Financing Statements,
together with evidence that such Financing Statements have been duly recorded
in all filing or recording offices that Bank may deem necessary or desirable in
order to perfect Bank’s Lien on the Collateral, and that all filing and
recording taxes and fees have been paid;


(F)                                   With respect to each Borrower
Party (other than a Borrower Party that is an individual), a certificate of an
officer or other representative acceptable to Bank dated as of the date of this
Agreement, certifying as to the incumbency and signatures of the
representative(s) of such Borrower Party signing, as applicable, this Agreement
and each of the other Loan Documents, and each other document to be delivered
pursuant hereto, together with the following documents attached thereto:


(1)                                    A copy of the resolutions of
such applicable Person’s Governing Body authorizing the execution, delivery and
performance of this Agreement, each of the Loan Documents, and each other
document to be delivered pursuant hereto, as applicable;


(2)                                    A copy, certified as of the most
recent date practicable by the secretary of state (or similar Governmental
Authority) of the state, province, or other Jurisdiction where such Person is
organized, of such Person’s Organizational Documents filed with such secretary
of state (or similar Governmental Authority);


(3)                                    A copy of such Person’s other
Organizational Documents;


(G)                                  A certificate, as of the most
recent date practicable, of the secretary of state (or similar appropriate
Governmental Authority) and department of revenue or taxation (or similar
appropriate Governmental Authority) of each Jurisdiction in which each Borrower
Party



 36
 









(other than a Borrower Party that is an
individual) is organized as to the existence and good standing of each such
Person within such Jurisdiction, and a certificate, as of the most recent date
practicable, of the secretary of state (or similar appropriate Governmental
Authority) of each state where any of the Collateral is located as to the
qualification and good standing of Borrower Party as a foreign entity doing
business in each such state;


(H)                                 A written opinion of counsel to
Borrowers, dated as of the date of Closing and addressed to Bank, in form and
substance acceptable to Bank;


(I)                                      The Most Recent Financial
Statements, in form and substance acceptable to Bank;


(J)                                     Certificates, in form and
substance satisfactory to Bank, attesting to the Solvency of Borrowers and
after giving effect to the transactions contemplated hereby;


(K)                                 UCC-11 reports showing no Liens
superior to Bank’s Lien, except for the Permitted Liens;


(L)                                   Evidence satisfactory to Bank
that Borrowers have obtained all insurance policies as required under this
Agreement and/or any of the other Loan Documents, together with evidence
satisfactory to Bank that all premiums therefore have been paid and that all
such policies are in full force and effect; and


(M)                              Receipt and approval by Bank of all other items reasonably required to
be provided to Bank, and not otherwise set forth above.


6.2                                   Certain Events Required for
Closing and for all Advances.  At the
time of the Closing and at the time of each Advance, Bank shall be satisfied
that:


(A)                                No Default shall have occurred
and be continuing;


(B)                                  No Material Adverse Change shall
have occurred;


(C)                                  All of the Loan Documents shall
have remained in full force and effect, and no Borrower Party shall have
questioned or challenged the enforceability of any provision of any of the Loan
Documents;


(D)                                 Borrowers shall have paid the
Commitment Fee, the Unused Fee, the Letter of Credit Fees, and all other fees,
expenses, costs and other amounts then owing to Bank;


(E)                                   All Indebtedness to be prepaid,
redeemed or defeased with the proceeds of any Advance shall have been satisfied
and extinguished;


(F)                                   There shall exist no action,
suit, investigation, litigation or proceeding affecting any Borrower Party
pending or threatened before any court, governmental agency or arbitrator that
(i) except as set forth on the attached Schedule 6.2(F), would reasonably be expected to have a
Material Adverse Effect, or (ii) purports to affect the legality, validity
or enforceability of this Agreement or any other Loan Document or the
consummation of the transactions contemplated hereby;



 37
 









(G)                                  All Governmental Approvals
necessary in connection with the Loan Documents and the transactions
contemplated hereby and thereby shall have been obtained (without the
imposition of any conditions that are not acceptable to Bank) and shall remain
in effect other than such Governmental Approvals the failure to obtain which
shall not affect the enforceability, validity or binding effect of any of
the Loan Documents; all applicable waiting periods shall have expired without
any action being taken by any competent authority; and no Law shall be
applicable in the judgment of Bank that restrains, prevents or imposes
materially adverse conditions upon the Loan Documents and the transactions
contemplated hereby and thereby;


(H)                                 Borrower will be able to meet
its obligations under all Plans, that the Plans are, in all material respects,
funded in accordance with the minimum statutory requirements, that no material “reportable
event” (as defined in ERISA, but excluding events for which reporting has been
waived) has occurred as to any such Plan and that no termination of, or
withdrawal from, any such Plan has occurred or is contemplated that could
result in a material liability;


(I)                                      There shall have been delivered
to Bank evidence of insurance naming Bank as insured and loss payee (as
applicable) with such responsible and reputable insurance companies or
associations, and in such amounts and covering such risks, as is satisfactory
to Bank or as otherwise required under any Loan Document; and


(J)                                     There shall have been delivered
to Bank the Collateral Reports and Compliance Certificates as required under
this Agreement and reflecting compliance with the terms of this Agreement.


6.3                                   Legal Matters.  At the time of Closing, and the disbursement
of each Advance, all legal matters incidental thereto shall be satisfactory to
Burr & Forman LLP, counsel to Bank.


6.4                                   Election to Make Advances
Prior to Satisfaction of Conditions Precedent.  In the event Bank, at its option, elects to
make one or more Advances prior to receipt and approval of all items required
by this Article, such election shall not constitute any commitment or agreement
of Bank to make any subsequent Advance until all items required by this Article
have been delivered.


ARTICLE VII


7.                                         COLLATERAL SECURITY


7.1                                   Grant of Lien. 


(A)                                As security for the prompt
satisfaction of all Obligations, Borrower hereby assigns, transfers and sets
over to Bank all of Borrower’s Interest in and to, and grants Bank a Lien on,
upon and in the Collateral.


(B)                                  No submission by Borrower to Bank of a schedule or other particular
identification of Collateral shall be necessary to vest in Bank security title
to and a security interest in each and every item of Collateral now existing or
hereafter created and acquired, but rather such title and security interest
shall vest in Bank immediately upon the creation or 



 38
 









acquisition or any item of Collateral hereafter created or acquired,
without the necessity for any other or further action by Borrower or by Bank.


7.2                                   Maintenance of Lien.


(A)                                Borrower authorizes Bank to file
one or more Financing Statements (including initial financial statements and
continuation and amendment statements) to perfect Bank’s Lien in the Collateral
pursuant to the Uniform Commercial Code, such Financing Statements to be in
form and substance as required by Bank.


(B)                                  Borrower hereby appoints Bank as
its attorney-in-fact (without requiring Bank to act as such) to file any
Financing Statement in the name of Borrower, and to perform all other acts that
Bank deems appropriate to perfect and continue Bank’s Lien and to protect and
preserve the Collateral.


(C)                                  In connection with Bank’s Lien,
Borrower will:


(1)                                    Execute and deliver, and cause
to be executed and delivered,
such documents and instruments, including amendments to the Security Documents
and Financing Statements (including amendments thereto and continuation
statements thereof) in form satisfactory to Bank as Bank, from time to time,
may specify, and pay, or reimburse Bank upon demand for paying, all costs and
taxes of filing or recording the same in such Jurisdictions as Bank may
designate; and


(2)                                    Take such other steps as Bank,
from time to time, may direct to protect, perfect, and maintain Bank’s Lien.


ARTICLE VIII


8.                                         REPRESENTATIONS AND WARRANTIES.


Each Borrower represents
and warrants to Bank (provided that it is understood that each Borrower is
making its representations only on its own behalf, and only to the extent of
its knowledge with respect to any other Borrower), knowing that Bank will rely
on such representations and warranties as an inducement to make the Loans,
that:


8.1                                   Existence.  KMG Chemicals is a duly organized and
existing Texas corporation in good standing, is duly qualified and in good
standing as a foreign corporation in each other Jurisdiction where the failure
to be so qualified might reasonably be expected to have a Material Adverse
Effect, and KMG Chemicals has full power and authority to consummate the
transactions contemplated by this Agreement. 
KMG-Bernuth is a duly organized and existing Delaware corporation in
good standing, is duly qualified and in good standing as a foreign corporation
in each other Jurisdiction where the failure to be so qualified might
reasonably be expected to have a Material Adverse Effect, and KMG-Bernuth has
full power and authority to consummate the transactions contemplated by this
Agreement.


8.2                                   Authority.  The execution, delivery and performance of
all of the Loan Documents have been duly authorized by all requisite action by
each Borrower Party a party thereto.  All
of the Loan Documents have been duly executed and delivered and constitute
valid 



 39
 









and binding obligations
of each Borrower Party a party thereto, enforceable in accordance with their
respective terms (except as may be limited by applicable Bankruptcy Laws and
other Laws affecting the enforceability of creditors’ rights generally and
principles of equity), and Bank will be entitled to the benefits of all of the
Loan Documents.


8.3                                   Name.  Set forth on Schedule 8.3 is a complete and accurate list of (i) all
names under which Borrowers have done business in the last six years; and (ii)
the names of all Persons whose assets (x) were acquired in the last six years
by Borrower outside of Borrower’s Ordinary Course of Business, (y) were included
as assets of Borrowers on the Most Recent Financial Statements with a market
value of more than $250,000.00, and (z) constitute part of the Collateral.


8.4                                   Material Contracts.  Set forth on Schedule 8.4 is a complete and accurate list of all of
the Material Contracts.


8.5                                   Consents or Approvals.


(A)                                Except for approvals, authorizations already obtained and remaining in
effect, and notices to and filings already given and made, no consent or
approval of any Third Person, and no authorization, approval or other action
by, and no notice to or filing with, any Governmental Authority or other Third
Person is required with respect to the operation of Borrower’s business (unless
the failure to obtain or file such approvals, authorizations, notices and filings
would not reasonably be expected to have a Material Adverse Effect).


(B)                                  No consent of any Third Person and no authorization, approval or other
action by, and no notice to or filing with, any Governmental Authority or other
Third Person that is required has not been obtained either (i) for the due
execution, delivery, recordation, filing or performance by any Borrower Party
of this Agreement or any other Loan Document or for the consummation of the
transaction contemplated hereby, (ii) for the mortgage, pledge, assignment, or
grant by Borrower of Bank’s Lien, (iii) for the perfection or maintenance of
Bank’s Lien, except for the recording of the Financing Statements, or (iv) for
the exercise by Bank of its rights or remedies provided for in this Agreement
or in any of the other Loan Documents (except as may be required by applicable
Laws in connection with the foreclosure and disposition of the
Collateral).  All applicable waiting
periods, if any, in connection with the transactions contemplated hereby have
expired without any action having been taken by any Person restraining,
preventing or imposing materially adverse conditions upon the rights of
Borrower to enter into and perform its obligations under this Agreement.


8.6                                   Violations or Actions Pending.  There are no actions, suits, or proceedings
pending or, to the best of Borrower’s knowledge, threatened, which might
reasonably be expected to have a Material Adverse Effect or which might
reasonably be expected to impair the value of the Collateral.  Borrower is not in violation of any agreement
the violation of which will have, or might reasonably be expected to have, a
Material Adverse Effect, and Borrower is not in violation of any order,
judgment or decree of any court, or any statute or governmental regulation to
which Borrower is subject with respect to which the violation thereof which
will  have, or might reasonably be
expected to have, a Material Adverse Effect. 
The execution and performance of any Loan Document by Borrower will not
result in any breach of or default



 40
 









under any mortgage,
lease, credit or loan agreement or any other instrument which may bind or
affect Borrower.


8.7                                   Affiliates.  Borrower has no Affiliates (other than
officers and directors) except (i) as disclosed on the attached Schedule 8.7, or (ii) Affiliates
with a Tangible Net Worth of less than $1,000,000.00.


8.8                                   Existing Indebtedness.  Borrower is not in default with respect to
any of the Existing Indebtedness.


8.9                                   Defaults Under Material
Contracts.  There is not existing any
default or event of default under any Material Contract which might reasonably
be expected to have a Material Adverse Effect.


8.10                             Tax Returns.  All federal, state, local and other tax
returns and reports of Borrower required by Laws to have been completed and
filed have been completed and duly filed, and all taxes, assessments and
withholdings shown on such returns or billed to Borrower have been paid, and
Borrower maintains adequate provisions and accruals in respect of all such
federal, state, local and other taxes, assessments and withholdings.  There are no unpaid assessments pending
against Borrower for any taxes or withholdings, and Borrower knows of no basis
therefor.


8.11                             Financial Statements. All
Financial Statements heretofore given and hereafter given to Bank are and will
be true and complete in all material respects as of their respective dates and
prepared in accordance with Generally Accepted Accounting Principles, and
fairly represent and will fairly represent the financial conditions of the
Persons to which they pertain as of the respective dates thereof, and  upon delivery to Bank, no Material Adverse
Change has or will have occurred after the respective date thereof, except as
may be disclosed in writing to Bank.


8.12                             Good and Marketable Title.
Borrower has good and marketable title to all of its assets, including, without
limitation, Borrower’s Interest in the Collateral, subject to no Liens, except
for Permitted Liens.


8.13                             Real Property Locations.  Set forth on Schedule 8.13 is a complete and accurate list of the
Real Property, showing as of the date hereof the street address, county or
other relevant jurisdiction, state, and record owner thereof.


8.14                             Solvency.  Borrower is Solvent.


8.15                             ERISA.  Each Plan is and has been administered in
compliance in all material respects with all applicable Laws, including without
limitation, the applicable provisions of ERISA and the Internal Revenue
Code.  No ERISA Event has occurred and is
continuing or, to the knowledge of Borrower, is reasonably expected to occur
with respect to any Plan, in either case that would be reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect.   No Plan has any Unfunded Pension Liability,
and neither Borrower nor any ERISA Affiliate has engaged in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA,



 41
 









in either instance where
the same would be reasonably likely, individually or in the aggregate, to have
a Material Adverse Effect.


8.16                             Priority of Liens.  Bank’s Lien constitutes a first Lien against
the Collateral, prior to all other Liens, including those which may hereafter
accrue, except for the Permitted Liens.


8.17                             Patents, Copyrights, Etc.  Except as disclosed on Schedule
8.17 (i) Borrower has no patents, trademarks, trade names,
service marks or copyrights, and (ii) no Collateral is subject to any license
agreement relating to patents, trademarks, trade names, service marks, or
copyrights, which could, directly or indirectly, preclude or render
impracticable the realization of Bank’s Lien or materially diminish the value
of such Collateral.  Upon the occurrence
of any Default and demand of Bank, Borrower shall promptly execute and deliver
to Bank a Patent and Trademark Security Agreement in form and substance as may
be reasonably required by Bank, in order to grant to Bank a Lien in all of
Borrower’s patents, trademarks, trade names, service marks and copyrights, and
all applications therefor and licenses thereof.


8.18                             Accuracy of Documents.  All documents furnished to Bank by or on
behalf of any Borrower Party as part of or in support of the application for
the Loans or the Loan Documents are true, correct, complete and accurately
represent the matters to which they pertain.


8.19                             Environmental Matters.
Except as disclosed on Schedule 8.19,
or except as would not reasonably be expected to give rise to a Material
Adverse Change, (a) Borrower is not in material violation of or subject to any
existing, pending or threatened investigation or inquiry by any Governmental
Authority or any remedial obligations under any applicable Environmental Laws,
and Borrower will promptly notify Bank if any Responsible Officer becomes aware
of any such investigation or inquiry; (b) except for Governmental Approvals
already obtained, Borrower has not obtained and is not required to obtain any
Governmental Approvals to construct, occupy, operate or use any buildings,
improvements, fixtures or equipment by reason of any Environmental Laws; and
(c) Borrower covenants and agrees that it will not cause there to be any
material violation of any Environmental Law in connection with the disposal or
release of Petroleum Products, Hazardous Substances, Hazardous Materials or
Solid Wastes.


8.20                             Full Disclosure.  All material factual information heretofore
or contemporaneously furnished to Bank by or on behalf of Borrower for purposes
of or in connection with this Agreement and the transactions contemplated
hereby is, and all other such factual information hereafter furnished to Bank
in writing by or on behalf of Borrower will be, true and accurate in all
material respects on the date as of which such information is dated or
certified (or, if such information has been amended or supplemented, on the
date as of which any such amendment or supplement is date or certified) and not
made incomplete by omitting to state a material fact necessary to make the
statements contained therein, in light of the circumstances under which such
information was provided, not materially misleading.


8.21                             Regulated Industries.  Borrower is not (i) an “investment company,”
a company “controlled” by an “investment company,” or an “investment advisor,”
within the meaning of the Investment Company Act of 1940, as amended, or (ii) a
“holding company,” a “subsidiary company” of a “holding company,” or an “affiliate”
of a “holding company,” or an “affiliate” of a “holding company” or of a “subsidiary
company” of a “holding company,” within the meaning of the Public Utility
Holding Company Act of 1935, as amended.



 42















8.22                           Insurance.  The assets, properties and business of
Borrower and KMEX are insured against such hazards and liabilities, under such
coverages and in such amounts, as are customarily maintained by prudent
companies similarly situated and under policies issued by insurers of
recognized responsibility, and upon request of Bank, Borrower shall provide
(and shall cause KMEX to provide) Bank with insurance certificates and copies
of insurance policies then in effect (it being understood that Borrowers do not
maintain coverages for products liability insurance on Borrowers’ wood treating
products).


8.23                           Anti-Terrorism
Laws.


(A)                              General.  Neither Borrower nor any Affiliate of
Borrower is in violation of any Anti-Terrorism Law or engages in or conspires
to engage in any transaction that evades or avoids, or has the purpose of
evading or avoiding, or attempts to violate, any of the prohibitions set forth
in any Anti-Terrorism Law.


(B)                                Executive
Order No. 13224.


(1)                                  Neither Borrower nor
any Affiliate of Borrower is any of the following (each a “Blocked Person”):


(a)                                  A
Person that is listed in the annex to, or is otherwise subject to the
provisions of, Executive Order No. 13224;


(b)                                 A
Person owned or controlled by, or acting for or on behalf of, any Person that
is listed in the annex to, or is otherwise subject to the provisions of,
Executive Order No. 13224;


(c)                                  A
Person with which any bank or other financial institution is prohibited from
dealing or otherwise engaging in any transaction by any Anti-Terrorism Law;


(d)                                 A
Person that commits, threatens or conspires to commit or supports “terrorism”
as defined in Executive Order No. 13224;


(e)                                  A
Person that is named as a “specially designated national” on the most current
list published by the U.S. Treasury Department Office of Foreign Asset Control
at its official website or any replacement website or other replacement  official publication of such list; or


(f)                                    A
Person who is affiliated with a Person listed above.


(2)                                  Neither Borrower nor
any Affiliate of Borrower (i) conducts any business or engages in making or
receiving any contribution of funds, goods or services to or for the benefit of
any Blocked Person or (ii) deals in, or otherwise engages in any transaction
relating to, any property or interests in property blocked pursuant to
Executive Order No. 13224.


8.24                           Securities
Laws.  Borrower has filed and will
continue to file when and as due all reports required under Section 15(b) of
the Securities Exchange Act of 1934 (provided that any



 43
 









delayed filing shall not
constitute a Default so long as (x) such delayed filing does not continue for
more than one hundred eighty (180) days, (y) Bank is notified of the delayed
filing within thirty (30) days of the original filing due date and is provided
a writing setting forth with reasonable particularity the reasons for such
delayed filing) and (z) if requested by Bank, Borrower will provide periodic
updates with respect to the status of the delayed filing.


8.25                           Continuing
Effectiveness.  All representations
and warranties contained herein shall be deemed continuing, continually
republished, and in effect at all times while Borrower remains indebted to Bank
pursuant to the Loans and shall be deemed to be incorporated by reference at
the time of each Advance unless Borrower specifically notifies Bank of any
change therein.


ARTICLE IX


9.                                       BORROWER’S
COVENANTS


Each Borrower does hereby
covenant and agree with Bank that, so long as any of the Obligations remain
unsatisfied or any commitments hereunder remain outstanding, such Borrower at
all times will comply or cause to be complied with the following covenants:


9.1                                 Affirmative
Covenants.


(A)                              Borrower
will duly and promptly pay and perform all of Borrower’s Obligations to Bank
Parties according to the terms of this Agreement, the other Loan Documents and
the Wachovia Swap Documents, and will cause each other Borrower Party to
perform such other Borrower Party’s Obligations to Bank Parties according to
the terms of this Agreement, the other Loan Documents and the Wachovia Swap
Documents.


(B)                                Borrower
will use the proceeds of the Loans only for the purposes permitted herein, or
as Bank may have otherwise approved from time to time; and Borrower will
furnish Bank such evidence as it may reasonably require with respect to such
uses.


(C)                                Borrower
will furnish or cause to be furnished to Bank:


(1)                                  Within
forty-five days after each Quarter-End (a) an unaudited (management-prepared)
income statement of Borrowers and KMEX (on a Consolidated Basis) for such
Quarter, and (b) an unaudited (management-prepared) balance sheet of Borrowers
and KMEX (on a Consolidated Basis) for such Quarter, all in reasonable detail
with Bank having full access to all supporting schedules and comments, such
income statements and balance sheets to be prepared in accordance with
Generally Accepted Accounting Principles consistently applied by Borrowers and
KMEX, except for any inconsistencies explained therein;


(2)                                  Within
one hundred twenty (120) days after each Fiscal Year-End (a) a statement of
Equity Owners’ Equity for Borrowers and KMEX (on a Consolidated Basis), (b) an
income statement of Borrowers and KMEX (on a Consolidated Basis) for such
Fiscal Year, and (c) a balance sheet of Borrowers and KMEX (on a Consolidated
Basis) as of the end of such Fiscal Year, all in reasonable detail, including
all supporting schedules and comments; the statements and balance sheets to be
audited by an



 44
 









independent
certified public accountant selected by Borrowers and KMEX and acceptable to
Bank, and certified by such accountants to have been prepared in accordance
with Generally Accepted Accounting Principles consistently applied by Borrowers
and KMEX, except for any inconsistencies explained in such certificate; and
Bank shall have the right, from time to time, to discuss any Borrower Party’s
and KMEX’s affairs directly with such Person’s accountants, and any such
accountants are authorized and directed to give Bank any information Bank may
request at any time regarding the financial affairs of Borrower Party and KMEX,
and are authorized and directed to furnish Bank with copies of any documents in
their possession related thereto;


(3)                                  Promptly
after sending or making available or filing of the same, copies of all reports,
proxy statements and financial statements (if any) that Borrower sends or makes
available to its Equity Owners and all registration statements and reports that
Borrower files with the Securities and Exchange Commission (or any other
similar Governmental Authority) or any successor Person; and


(4)                                  Within forty-five
(45) days after each Quarter-End, a Compliance Certificate; and


(5)                                  Within forty-five
(45) days after each Quarter-End, a Collateral Report for the immediately
preceding Quarter, certified to be correct by the principal financial officer
of Borrowers (together with a Schedule of Accounts and Schedule of Inventory if
required under Section 9.10 of this Agreement).


(D)                               Borrower
will pay or cause to be paid when due (i) the Commitment Fee, the Unused Fee,
the Letter of Credit Fees and all other fees and expenses owing to Bank; and
(ii) all expenses involved in perfecting Bank’s Lien or the priority of Bank’s
Lien and all other expenses of Bank related to the Loans, or the protection and
preservation of the Collateral, or the interpretation, administration and
enforcement of any provision of this Agreement, or the preparation and
negotiation of this Agreement, any of the other Loan Documents, or amendments
to any of them, including, without limitation, recording fees and taxes, tax,
title and lien search charges, and Attorneys’ Fees (including Attorneys’ Fees
at trial and on any appeal by Borrower or Bank), real property taxes and
insurance premiums.


(E)                                 Borrower
will permit Bank and its agents to have access to the Collateral at reasonable
times.


(F)                                 After
the occurrence of a Default and upon demand of Bank, Borrower will cause, or
permit Bank to cause, all or any part of the Tangible Property comprising part
of the Collateral to be appraised (or reappraised) at Borrower’s expense at any
time.


(G)                                If
any of the information or disclosures provided on any Schedule originally
attached hereto become outdated or incorrect in any material respect, Borrower
shall deliver to Bank as part of a Compliance Certificate such revision or
updates to such Schedule as may be necessary or appropriate to update or
correct such Schedule; provided, that no such revisions or updates to any such
Schedule shall be deemed to have amended, modified or superseded such Schedule
as originally attached hereto, or to have cured any breach of warranty



 45
 









or misrepresentation resulting from the
inaccuracy or incompleteness of any such Schedule unless and until Bank shall
have accepted in writing such revisions or updates to such Schedule.


(H)                               Borrower
will certify to Bank upon request by Bank that:


(1)                                  Borrower has complied
with and is in compliance with all terms, covenants and conditions of this
Agreement which are binding upon it;


(2)                                  There exists no
Default; or, if such is not the case, that one or more specified Defaults have
occurred; and


(3)                                  The representations
and warranties contained in this Agreement are true with the same effect as
though made on the date of such certificate, except for those representations
and warranties which relate to a specific date.


(I)                                    Borrower
will, when requested so to do, make available for inspection and audit by duly
authorized representatives of Bank any of its Records, and will furnish Bank
any information regarding its business affairs and financial condition within a
reasonable time after written request therefore.  Borrower shall reimburse Bank for all costs
associated with such audit if the audit reveals a material discrepancy in any
financial report, statement or other document provided to Bank pursuant to this
Agreement.


(J)                                   Borrower
will keep accurate and complete Records, consistent with sound business
practices.


(K)                               Within
ten (10) days of Bank’s request therefore, Borrower will furnish or cause to be
furnished to Bank copies of income tax returns filed by Borrower Parties and
KMEX.


(L)                                 Borrower
will pay when due (or within applicable grace periods) all Indebtedness due
Third Parties, unless the failure so to pay such Indebtedness would not give
rise to a Material Adverse Change.


(M)                            Borrower
will notify Bank thirty (30) days in advance of any change in the Jurisdiction
of organization of Borrower, any change in the location of any place of
business of Borrower or of the establishment of any new place of business, or
the discontinuance of any existing place of business.


(N)                               Borrower
will promptly notify Bank in writing if any Responsible Officer of Borrower
obtains knowledge of any of the following:


(1)                                  The occurrence of any
Default or Event of Default, together with a written statement of a Responsible
Officer specifying the nature of such Default or Event of Default, the period
of existence thereof and the action that Borrower has taken and proposes to
take with respect thereto;


(2)                                  The cancellation or
termination of any Material Contract (other than upon the expiration of its
term); and



 46
 









(3)                                  Any default or event
of default (after the expiration of any applicable grace and cure period) under
any agreement of any Borrower Party with any Person and relating to the
borrowing of money.


(O)                               Borrower
will collect its Accounts and sell its Inventory only in the Ordinary Course of
Business (except in connection with Permitted Transfers of Assets).


(P)                                 Borrower
will:


(1)                                  Fund all its Plans in
accordance with no less than the minimum funding standards of Section 302 of
ERISA;


(2)                                  Furnish Bank, upon
request, with copies of all reports or other statements filed with the United
States Department of Labor or the Internal Revenue Service with respect to all
such Plans; and


(3)                                  Promptly advise Bank
of the occurrence of any Reportable Event or Prohibited Transaction with
respect to any such Plan.


(Q)                               Borrower
will notify Bank promptly upon Borrower (i) registering securities under
Section 12 of the Securities Exchange Act of 1934 or (ii) filing a registration
statement under the Securities Act of 1933.


9.2                                 Negative
Covenants.


(A)                              No
Borrower will engage in any business other than the Permitted Lines of
Business.


(B)                                No
Borrower will, without Bank’s prior written consent, change its name, enter
into any merger, consolidation, liquidation, reorganization or
recapitalization, or dissolve.


(C)                                No
Borrower will, without Bank’s prior written consent, sell, transfer, lease or
otherwise dispose of, or enter into any agreement to sell, lease, transfer,
assign or otherwise dispose of, all or any part of its assets, including,
without limitation, the Collateral (other than Permitted Transfers of Assets).


(D)                               No
Borrower will, without Bank’s prior written consent, consummate any Acquisition
(other than Permitted Acquisitions).


(E)                                 Except
for Subsidiaries with a Tangible Net Worth of less than $1,000,000.00, no
Borrower will, without Bank’s prior consent, create, acquire or own any
Subsidiary in connection with an Acquisition or otherwise.


(F)                                 No
Borrower will become liable, directly or indirectly, as guarantor or otherwise
for any obligation of any other Person, provided that a Borrower may guaranty
Indebtedness of any Subsidiary so long as such guaranty does not otherwise give
rise to a Default (and for purposes of this paragraph (F), such contingent
liability shall be included as Indebtedness of Borrower unless the same is
already reflected as Indebtedness on a Consolidated Basis).



 47
 









(G)                                No
Borrower will, directly or indirectly, grant, make, create, incur, assume or
suffer to exist (or enter into or suffer to exist any agreement or restriction
that prohibits or conditions the creation, incurrence or assumption of), any
Lien upon or with respect to any part of the Collateral, whether now owned or
hereafter acquired, or agree to do any of the foregoing, other than Permitted
Liens.


(H)                               No
Borrower will, without Bank’s prior written consent, issue, redeem, purchase or
retire any of its Equity Interests or grant or issue any warrant, right or
option pertaining thereto or any other security convertible into any of the
foregoing, nor otherwise permit any voluntary transfer, sale, redemption,
retirement, or other change in the ownership of any Equity Interests of
Borrower by Borrower if the same would result in a Change in Control.


(I)                                    No
Borrower will, without Bank’s prior written consent, amend or modify in any material
respect any of its Organizational Documents.


(J)                                   No
Borrower will directly or indirectly apply any part of the proceeds of any Loan
to the purchasing or carrying of any “margin stock” within the meaning of
Regulation T, Regulation U or Regulation X, or any regulations, interpretations
or rulings thereunder.


(K)                               No
Borrower will treat, store, handle, discharge, or dispose of any Hazardous
Materials, Petroleum Products, or Solid Wastes except in material compliance
with all Environmental Laws or where any such failure in compliance could not
reasonably be expected to result in a Material Adverse Effect.


(L)                                 No
Borrower will (i) conduct any business or engage in any transaction or dealing
with any Blocked Person, including the making or receiving any contribution of
funds, goods or services to or for the benefit of any Blocked Person; (ii) deal
in, or otherwise engage in any transaction relating to, any property or
interests in property blocked pursuant to Executive Order No. 13224; or (iii)
engage in on conspire to engage in any transaction that evades or avoids, or
has the purpose of evading or avoiding, or attempts to violate, any of the
prohibitions set forth in Executive Order No. 13224 or the USA Patriot
Act.  Borrower shall deliver to Bank any
certification or other evidence requested from time to time by Bank, in its
discretion, confirming Borrower’s compliance with this Section 9.2(L).


(M)                            No
Borrower will make or permit any material changes in its accounting policies or
reporting practices, except as may be permitted or required by Law or Generally
Accepted Accounting Principles.


(N)                               Except
with Bank’s prior written consent, Borrower shall not allow KMEX to (i) cease
operations of the KMEX Plant or sell, transfer, lease or otherwise dispose of
the KMEX Plant, or (ii) so long as KMEX’s assets, liabilities, income and
losses are included within the definition of “Consolidated Basis”, sell,
transfer, lease or otherwise dispose of, or enter into any agreement to sell,
lease, transfer, assign or otherwise dispose of, all or any material part of
KMEX’s assets (other than the KMEX Plant) except in KMEX’s Ordinary Course of
Business.



 48
 









9.3                                 Financial
Covenants.


(A)                              Borrowers
and KMEX (on a Consolidated Basis) will maintain or cause to be maintained at
all times during the term of this Agreement:


(1)                                  A Fixed Charge
Coverage of not less than 1.25 to 1.0; and


(2)                                  A ratio of (i) Funded
Debt to (ii) the sum of Funded Debt plus Equity Owners’ Equity of not more than
45%.


(B)                                Borrowers
will maintain or cause to be maintained at all times during the term of this
Agreement a Borrowing Base such that the balance of the Revolving Loan will
not, at any time, exceed the Borrowing Base.


(C)                                No
Borrower will declare or pay any Dividends in an amount such that such
declaration or payment would give rise to a Default arising out of the failure
to maintain the covenants required under Section 9.3(A).


(D)                               No
Borrower will make any Investment, other than Permitted Investments.


(E)                                 No
Borrower will incur, create, assume, or permit to exist any Indebtedness, other
than Permitted Indebtedness.


(F)                                 Except
for agreements reflected in the Most Recent Financial Statements, agreements
currently in effect and listed on  Schedule
9.3 (F) attached hereto, agreements which provide only for either
Permitted Investments or Permitted Indebtedness, and agreements between or
among Borrower and other Persons whose assets, liabilities, income and losses
are included within the definition of “Consolidated Basis”, no Borrower will
enter into any agreement, transaction or series of transactions where any
Affiliate of Borrower is a party thereto, (i) except in the Ordinary Course of
Business or (ii) unless the Governing Body of Borrowers have approved such
agreement or transaction.


(G)                                Except with the written consent of Bank, no
Borrower will enter into any agreement with respect to any of its Existing
Indebtedness which is Indebtedness for borrowed money if the effect of such
agreement is to


(1)                                  Increase the interest rate on such
Indebtedness;


(2)                                  Change the dates upon which payments of
principal, interest or other scheduled payments are due on such Indebtedness
(other than to extend such dates);


(3)                                  Change any default or event of default (other
than to delete or make less restrictive any default provision) with respect to
such Indebtedness;


(4)                                  Add any covenant with respect to such
Indebtedness;


(5)                                  Change the redemption or prepayment
provisions of such Indebtedness (other than to extend the dates therefore or to
reduce the premiums payable in connection therewith); or



 49
 









(6)                                  Materially increase the obligations of
Borrower or confer additional material rights to the holder of such
Indebtedness in a manner adverse to Borrower or Bank.


9.4                                 Insurance
Covenants.  Borrower will maintain,
or cause to be maintained, and will cause KMEX to maintain, public liability
insurance, and fire and extended coverage insurance on all of Borrower’s and
KMEX’s Tangible Property, all in such form and amounts as are consistent with
industry practices and with such insurers as may be reasonably satisfactory to
Bank, provided that Borrowers and KMEX shall not be required to maintain
products liability insurance on Borrowers’ wood treating products or other
insurable risks if Borrower determines in the exercise of its business judgment
that the cost of such insurance is prohibitive.


9.5                                 Borrower’s
General Covenants and Agreements Pertaining to the Collateral.  Borrower covenants and agrees that:


(A)                              The
addresses of Borrower’s principal place of business (or chief executive office
if more than one), the office where Borrower keeps and will keep Borrower’s
Records, including, without limitation, those Records concerning all of
Borrower’s Accounts and the other Collateral, and the place or places at which
all of Borrower’s Inventory, Equipment and other Tangible Property is and will
be located are correctly set forth on Schedule
9.5(A); and Borrower shall immediately advise Bank in writing of
any change in any of said addresses. 
Borrower shall not remove such Records from the place or places set
forth on Schedule 9.5(A),
nor shall Borrower keep any of such Records at any other locations unless (i)
Borrower gives Bank at least 10 days’ written notice thereof and of the new
location, and (ii) the new location is within the continental United States of
America.  Borrower shall give Bank at
least 10 days’ prior written notice of Borrower’s opening of any new office or
place of business, and any such office or place of business shall be within the
continental United States of America.


(B)                                Borrower
is and shall remain the owner of all real estate on which any of the locations
described in subparagraph (A) next above are located; or if not, except as
otherwise agreed to by Bank, Borrower has heretofore obtained from each owner
of said real estate a written waiver or subordination (in form and substance
reasonably satisfactory to Bank) of any landlord’s Lien or other Lien said
owner might have with respect to the Collateral, and Borrower has delivered the
same to Bank.


(C)                                Upon
request of Bank, Borrower shall promptly deliver to Bank the certificates of
title for any motor vehicles now or hereafter included in the Collateral that
are subject to the title Laws of any state of the United States of America or
any other Jurisdiction and shall join with Bank in executing any applications
and other documents and taking any other actions necessary or desirable in Bank’s
opinion to perfect Bank’s Lien in such vehicles.  Bank may retain possession of such
certificates of title until payment in full of all the Obligations and/or until
Bank’s Lien is terminated.


(D)                               Bank
may correct any and all patent errors in this Agreement or any financing
statements or other documents executed in connection herewith.



 50
 









(E)                                 Borrower
shall furnish to Bank from time to time statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as Bank may request, all in reasonable detail.


(F)                                 Borrower
shall keep and maintain at its own cost and expense satisfactory and complete
Records of the Collateral, including without limitation, a record of all
payments received and all credits granted with respect to the Collateral and
all other dealings with the Collateral. 
Upon request of Bank, Borrower shall make proper entries in its books
disclosing the assignment of the Collateral to Bank, and Borrower shall
segregate its Records concerning the Collateral and mark the Collateral with
Bank’s name or in such other manner as shall be satisfactory to Bank.  After the occurrence of and during the
continuance of any Default, Borrower shall deliver and turn over to Bank any
such Records at any time on demand of Bank.


(G)                                Borrower
shall obtain a waiver of any lien claims or rights that any owners or
mortgagees of any real estate (or of any possessory interest therein) on which
the Collateral, or any part thereof, is now or hereafter may be located, may
have with respect to the Collateral, or shall secure an agreement wherein such
Persons subordinate their rights, titles, interests and lien claims to Bank’s
Lien in, on and upon the Collateral.


(H)                               Borrower
shall provide Bank with copies of all agreements between Borrower and any
warehouse at which any Collateral may, from time to time, be kept and all lease
or similar agreements between Borrower and any other Person, whether Borrower
is lessor or lessee thereunder.


(I)                                    If
any Account arises out of a contract with the United States of America, or any
other Governmental Authority, Borrower shall promptly notify Bank thereof in
writing and execute any instruments and take any other action required or
requested by Bank to perfect Bank’s Lien on and right to collect such Account
under the provisions of the Assignment of Claims Act or other applicable Law.


(J)                                   Borrower
shall promptly notify Bank in writing of the initiation of any Commercial Tort
Claim seeking damages on behalf of Borrower in excess of $500,000.00.  Borrower shall execute and deliver such
statements, documents and notices and do and cause to be done all such things
as Bank may reasonably deem necessary or appropriate to create, perfect and
maintain the Lien in any Commercial Tort Claim.


9.6                                 Collection
of Accounts; Segregation of Proceeds, Etc. 
Borrower covenants and agrees that, except to the extent that Bank’s
exercise of its rights and remedies hereunder or under any other Loan Document
shall prevent Borrower from doing so, Borrower will, at Borrower’s sole
expense, collect from the Account Debtor on each Account all amounts due
thereon as and when the same shall become due; and in the event of any default
by any Account Debtor justifying such action, Borrower shall have the
authority, at Borrower’s sole expense, to repossess any merchandise covered by
any such Account in accordance with the terms thereof and any applicable Law
and to take such other action with respect to any such Account or the
merchandise covered thereby as Borrower, in the absence of instructions from
Bank, may deem advisable.



 51
 









9.7                                 Collection
Methods.  Borrower agrees that no
court action or other legal proceedings for garnishment, attachment,
repossession of property, detinue, or any attempt to repossess any merchandise
covered by any Account other than through legal proceedings, shall be done or
attempted to be done by Borrower except by or under the direction of competent
legal counsel.  Borrower agrees to
indemnify and hold Bank harmless from any loss or liability of any kind or
character which may be asserted or sought to be asserted against Bank by virtue
of any suit filed, process issued or any repossession or attempted repossession
done or attempted by Borrower or at Borrower’s direction or any endeavors that
Borrower may make to collect or enforce any Accounts or repossess any goods
covered by any Account.


9.8                                 Verification
of Accounts.  Borrower agrees that any
of Bank’s officers, employees or agents shall have the right, at any time or
times hereafter, in Bank’s name or in the name of Borrower, to verify with any
Account Debtor the validity or amount of, or any other matter relating to, any
Accounts by mail, telephone, telegraph or otherwise.


9.9                                 Notice
Regarding Disputed Accounts. 
Borrower covenants and agrees that in the event any Eligible Account is
subject to a dispute between any Account Debtor and Borrower where the amount
in controversy exceeds $250,000.00, Borrower shall promptly provide Bank with
written notice thereof, explaining in detail the reason for the dispute, all
claims related thereto and the amount in controversy.


9.10                           Records,
Schedules and Assignments.  Borrower
covenants and agrees that Borrower shall keep accurate Records of Borrower’s
Accounts and Inventory, and shall 
promptly deliver to Bank, within 15 days after demand of Bank (i) a
detailed aged trial balance, in form and substance acceptable to Bank, of all
then-existing Accounts (“Schedule of Accounts”), (ii) a current schedule of
Inventory (“Schedule of Inventory”), (iii) the original or a copy of all
Documents evidencing or relating to the Accounts or Inventory so scheduled,
(iv) such other information relating to the then-existing Accounts and
Inventory as Bank shall reasonably request, and (v) formal written assignments
or schedules specifically describing the Accounts and Inventory and confirming
Bank’s Lien thereon.


9.11                           Visitation.  Borrower agrees to permit representatives of
Bank from time to time to visit and inspect the Collateral, all Records related
thereto, the premises upon which any of the Collateral is located, and any of
the other offices and properties of Borrower; to examine the assets, books of
account, and Records of Borrower; to discuss the affairs and finances of
Borrower with and be advised as to the same by the officers thereof; and to
verify the amount, quantity, value and condition of, or any other matter
relating to, the Collateral, all at such reasonable times and intervals as Bank
may desire.


9.12                           Use
of Tangible Property.  Borrower
covenants and agrees (a) to comply with all applicable Laws governing the use
of all Tangible Property (except where a failure to so comply with such Laws
would cause a Material Adverse Effect), (b) to maintain all Tangible Property
in good condition and repair (normal wear and tear excepted), (c) to comply
with the material terms of any lease covering the premises wherein any Tangible
Property is located and to comply with all material requirements of any
Governmental Authority concerning such premises or the conduct of business
therein where a failure to so comply with such lease terms or Laws would cause
a Material Adverse Effect; and (d) not to lease any of the Tangible Property to
any Person or permit the same to be leased or used for hire otherwise than
pursuant to any Permitted Liens.



 52















9.13                           Collateral
Evidenced by Instruments or Documents  .  Borrower covenants and agrees that upon
Borrower's receipt of any Collateral which is evidenced or secured by an
agreement, Instrument, Document or Chattel Paper and upon demand of Bank,
Borrower shall deliver the original thereof (or each executed or original
counterpart if more than one) to Bank, together with appropriate endorsements
and/or assignments in form and substance acceptable to Bank.


9.14                           Maintaining
Bank Accounts.  Borrower covenants
and agrees that until the termination of Bank’s Lien:


(A)                              Borrower
shall maintain all of its bank accounts (collectively, the “Bank Accounts”),
including any Deposit Accounts and disbursement accounts, only with Bank (the “Approved
Bank Accounts”).


(B)                                Upon
the occurrence of a Default and the demand of Bank, Borrower shall maintain
lockboxes and blocked deposit accounts (each a “Lockbox Account”) only with
Bank and with other banks (each a “Lockbox Bank”) that have entered into letter
or other agreements (each a “Lockbox Agreement”) approved by and acceptable to
Bank in its discretion.


(C)                                Borrower
shall immediately instruct each Person obligated at any time to make any
payment to Borrower for any reason to make such payment to a Lockbox Account,
and shall pay to Bank for deposit in an Approved Bank Account as may be from
time to time designated by Bank, at the end of each Business Day, all proceeds
of Collateral and all other cash received by it on such day.


(D)                               Borrower
shall instruct each Lockbox Bank to transfer to an Approved Bank Account
designated by Bank, at the end of each Business Day, in same day funds, an
amount equal to the credit balance of the Lockbox Account in such Lockbox Bank.


(E)                                 Upon
any termination of any Lockbox Agreement or other agreement with respect to the
maintenance of a Lockbox Account by Borrower or any Lockbox Bank, Borrower
shall immediately notify all Persons that were making payments to such Lockbox
Account to make all future payments to another Lockbox Account or to an Approved
Bank Account designated by Bank. 
Borrower agrees to terminate any or all Lockbox Account and Lockbox
Agreements upon request by Bank.


9.15                           Filing
Fees and Taxes.  Borrower covenants
and agrees to pay all recording and filing fees, revenue stamps, taxes and
other expenses and charges payable in connection with the execution and
delivery to Bank of this Agreement and the other Loan Documents, and the
recording, filing, satisfaction, continuation and release of any financing
statements or other instruments filed or recorded in connection herewith or
therewith.


9.16                           Underlying
Documentation.  Borrower covenants
and agrees that Borrower will, upon the request therefor by Bank, promptly
deliver possession to Bank of any or all of the Material Contracts.


9.17                           Further
Assurances.  Borrower covenants and
agrees that, at Borrower’s cost and expense, upon request of Bank, Borrower
shall duly execute and deliver, or cause to be duly



 53
 









executed and delivered,
to Bank such further instruments and documents and do and cause to be done such
further acts as may be reasonably necessary or proper in the opinion of Bank or
its counsel to carry out more effectively the provisions and purposes of this
Agreement.


Article X


10.                                 DEFAULT


10.1                           Events
of Default.  The occurrence of any one
or more of the following events shall constitute an Event of Default hereunder:


(A)                              Borrower
shall fail to pay any installment of principal or interest or fee or any other
amount payable under this Agreement or any other Loan Document as and when the
same becomes due.


(B)                                Any
Borrower Party shall fail to pay, perform or observe any other obligation,
condition, or covenant to be observed or performed by it under this Agreement
or any other Loan Document, and such failure shall continue for ten (10) days (or
such longer period up to thirty (30) days if such failure is not capable of
being cured within ten (10) days, provided that Borrower Party has commenced
and continues to diligently pursue cure of such failure) after:


(1)                                  Notice of such
failure from Bank;


(2)                                  Any Responsible
Officer knows of any such failure; or


(3)                                  Bank is notified of
such failure or should have been so notified pursuant to the provisions of this
Agreement or any other Loan Document.


(C)                                There
shall occur any Default or Event of Default as defined and provided under any
other Loan Document.


(D)                               There
shall occur any default or event of default (after the expiration of any
applicable grace and cure period) under any agreement of any Borrower Party
with any Person and relating to the borrowing of money.


(E)                                 The
validity or enforceability of this Agreement or any other Loan Document shall
be contested by any Borrower Party, and/or any Borrower Party shall deny that
it has any or further liability or obligation hereunder or thereunder.


(F)                                 Assignment
or attempted assignment by Borrower of this Agreement, any rights hereunder, or
any Advance to be made hereunder, or the conveyance, lease, mortgage, or any
other alienation or encumbrance of the Collateral or any interest therein
without the prior written consent of Bank, except for transfers permitted
hereunder or under any other Loan Document.


(G)                                Except
as otherwise permitted herein, the transfer of Borrower’s interest in, or
rights under, this Agreement by operation of law or otherwise, including,
without limitation, such transfer by Borrower as debtor in possession under the
Bankruptcy Code, or by a



 54
 









trustee for Borrower under the Bankruptcy
Code, to any Third Person, whether or not the obligations of Borrower under
this Agreement are assumed by such Third Person.


(H)                               The
institution of a foreclosure or other possessory action against the Collateral
or any part thereof, except where such action would not be reasonably expected
to have a Material Adverse Effect.


(I)                                    The
death or dissolution of any Borrower Party, or any Change in Control.


(J)                                   Any
financial statement, representation, warranty or certificate made or furnished
by any Borrower Party to Bank in connection with this Agreement, or as
inducement to Bank to enter into this Agreement, or in any separate statement
or document to be delivered hereunder to Bank, shall be materially false,
incorrect, or incomplete when made.


(K)                               The
occurrence of any event, act, condition or occurrence of whatever nature
wherein the legality, validity, or enforceability of any provision of any Loan
Document is questioned or challenged.


(L)                                 Any
Borrower Party shall admit its inability to pay its debts as they mature, or
shall make an assignment for the benefit of itself or any of its creditors.


(M)                            Proceedings
in Bankruptcy, or for reorganization of any Borrower Party, or for the
readjustment of any of its debts, under the Bankruptcy Code, as amended, or any
part thereof, or under any other Laws, whether state or federal, for the relief
of debtors, now or hereafter existing, shall be commenced by any Borrower
Party, or shall be commenced against any Borrower Party and shall not be
discharged within sixty (60) days of commencement.


(N)                               A
receiver or trustee shall be appointed for any Borrower Party or for any
substantial part of its assets, or any proceedings shall be instituted for the
dissolution or the full or partial liquidation of any Borrower Party, and such
receiver or trustee shall not be discharged within thirty (30) days of his
appointment, or such proceedings shall not be discharged within sixty (60) days
of its commencement, or any Borrower Party shall discontinue business or
materially change the nature of its business.


(O)                               Any
Borrower Party shall suffer a final judgment for payment of money in excess of $500,000.00
and shall not discharge the same within a period of thirty (30) days unless,
pending further proceedings, execution has not been commenced or if commenced
has been effectively stayed.


(P)                                 A
judgment creditor of any Borrower Party shall obtain possession of any of the
Collateral with an aggregate value of more than $500,000.00 by any means,
including, without limitation, levy, distraint, replevin or self-help.


(Q)                               There
shall occur any default, event of default or termination event under any Wachovia
Swap Document for which Borrower Party is a defaulting party or an affected
party.



 55
 









Provided that with
respect to each of the foregoing, an Event of Default will be deemed to have
occurred upon the occurrence of the applicable event without notice being
required if Bank is prevented from giving notice by Bankruptcy or other
applicable Law.


10.2                           No
Advances After Default.  Upon the
occurrence and during the continuance of any Default, and notwithstanding any
provision contained herein or in any other Loan Document to the contrary, Bank
shall have the absolute right (i) to refuse to make, and shall be under no
obligation to make, any further Advances, and (ii) to refuse to issue any
Letters of Credit.


10.3                           Acceleration.  All Obligations shall, at the option of Bank,
become immediately due and payable, Without Notice, upon the occurrence of an
Event of Default without further action of any kind.


10.4                           General
Remedies.  Upon the occurrence of any
Event of Default, Bank shall have, in addition to the rights and remedies given
it by this Agreement and the other Loan Documents, all those allowed by all
applicable Laws, including but without limitation, the Uniform Commercial
Code.  Without limiting the generality of
the foregoing, Bank may immediately, Without Notice, sell at public or private
sale or otherwise realize upon, the whole or, from time to time, any part of
the Collateral, or any interest which Borrower may have therein.


10.5                           Bank’s
Additional Rights and Remedies.  Upon
the occurrence of any Event of Default and except as may otherwise be
prohibited or expressly provided for to the contrary under applicable Law, in
addition to any rights or remedies Bank may otherwise have under this
Agreement, any other Loan Documents, or under applicable Laws, Without Notice,
Bank shall have the right to take any or all of the following actions at the
same or different times:


(A)                              To
cancel Bank’s obligations arising under this Agreement;


(B)                                To
institute appropriate proceedings to specifically enforce performance of the
terms and conditions of this Agreement;


(C)                                To
take immediate possession of the Collateral;


(D)                               To
appoint or seek appointment of a receiver, Without Notice and without regard to
the solvency of Borrower or the adequacy of the security, for the purpose of
preserving the Collateral, preventing waste, and to protect all rights accruing
to Bank by virtue of this Agreement and the other Loan Documents.  All expenses incurred in connection with the
appointment of such receiver, or in protecting, preserving, or improving the
Collateral, shall be charged against Borrower and shall be secured by Bank’s
Lien;


(E)                                 To
proceed to perform any and all of the duties and obligations and exercise all
the rights and remedies of Borrower contained in the Assigned Agreements as
fully as Borrower could itself;


(F)                                 To
notify Account Debtors that Accounts have been assigned to Bank, demand and
receive information from Account Debtors with respect to Accounts, forward
invoices to Account Debtors directing them to make payments to Bank, collect
all Accounts in Bank’s or Borrower’s name and take control of any cash or
non-cash proceeds of Collateral;



 56
 









(G)                                To
enforce payment of any Accounts, to prosecute any action or proceeding with
respect to Accounts, to extend the time of payment of any and all Accounts, to
make allowances and adjustments with respect thereto and to issue credits in
the name of Bank or Borrower;


(H)                               To
settle, compromise, extend, renew, release, terminate or discharge, in whole or
in part, any Account or deal with the same as Bank may deem advisable;


(I)                                    To
require Borrower to open all mail only in the presence of a representative of
Bank, who may take therefrom any remittance on Collateral;


(J)                                   To
charge, set-off and otherwise apply all or any part of the Obligations against
the Deposit Accounts, or any part thereof;


(K)                               To
exercise any and all rights and remedies of Borrower under or in connection
with any Assigned Agreement or otherwise in respect of the Collateral,
including, without limitation, any and all rights of Borrower to demand or
otherwise require payment of any amount under, or performance of any provision
of, any Assigned Agreement;


(L)                                 To
enter upon the premises of Borrower or any other place or places where the
Collateral is located and kept, and through self-help and without judicial
process, without first obtaining a final judgment or giving Borrower notice and
opportunity for a hearing on the validity of Bank’s claim, without any
pre-seizure hearing as a condition to repossession through court action and
without any obligation to pay rent to Borrower, to remove the Collateral
therefrom to the premises of Bank or of any agent of Bank, for such time as
Bank may desire, in order effectively to collect or liquidate the Collateral;


(M)                            To
require Borrower, upon the request of Bank, to assemble the Inventory,
Equipment and any other property included in the Collateral and make it
available to Bank at places which Bank shall select, whether at Borrower’s
premises or elsewhere, and to make available to Bank all of Borrower’s premises
and facilities for the purpose of Bank’s taking possession of, removing or
putting the Inventory and such other goods in salable form;


(N)                               To
collect, receive, appropriate, repossess and realize upon the Collateral, or
any part thereof, and to sell, lease, assign, give option or options to
purchase, or sell or otherwise dispose of and deliver the Collateral (or
contract to do so), or any part thereof, in one or more parcels, at public or
private sale or sales, at any exchange broker’s board or at any of Bank’s
offices or elsewhere, at such prices as Bank may deem best, for cash or on
credit or for future delivery without assumption of any credit risk.  Bank shall have the right upon any such
public sale or sales, and to the extent permitted by Law, to purchase the whole
or any part of the Collateral so sold, free of any right or equity of
redemption, which equity of redemption Borrower hereby releases.  To the extent permitted by applicable Law,
Borrower waives all claims, damages, and demands against Bank arising out of
the repossession, retention or sale of the Collateral;


(O)                               To
use, and to permit any purchaser of any of the Collateral from Bank to use
without charge, Borrower’s labels, General Intangibles, and advertising matter or
any property of a similar nature, as it pertains to, or is included in, any of
the Collateral, in



 57
 









advertising for sale, preparing for sale and
selling any Collateral, and finishing the manufacture, processing, fabrication,
packaging and delivery of the Inventory, and Borrower’s rights under all
licenses and all franchise agreements shall inure to Bank’s benefit;


(P)                                 To
send any written notice to Borrower required by Law or this Agreement in the
manner set forth in this Agreement; and any notice sent by Bank in such manner
at least ten (10) Business Days (counting the date of sending) prior to the
date of a proposed disposition of the Collateral shall be deemed to be
reasonable notice (provided, however, that nothing contained herein shall be
deemed to require 10 days’ notice if, under the applicable circumstances, a
shorter period of time would be allowed under applicable Law); and


(Q)                               To
exercise, in addition to all other rights which it has under this Agreement or
other applicable Law, all of the rights and remedies of a secured party upon
default under the Uniform Commercial Code or other applicable Law.


10.6                           Right
of Set-Off.  Upon the occurrence of
and during the continuance of any Default, Bank may, and is hereby authorized
by Borrower, at any time and from time to time, to the fullest extent permitted
by applicable Laws, and Without Notice to Borrower, set-off and apply any and
all deposits (general or special, time or demand, provisional or final) at any
time held and any other Indebtedness at any time owing by Bank to, or for the
credit or the account of, Borrower against any or all of the Obligations now or
hereafter existing whether or not such Obligations have matured and
irrespective of whether Bank has exercised any other rights that it has or may
have with respect to such Obligations, including without limitation any
acceleration rights.  The aforesaid right
of set-off may be exercised by Bank against Borrower or against any trustee in
Bankruptcy, debtor in possession, assignee for the benefit of the creditors,
receiver, or execution, judgment or attachment creditor of Borrower, or such
trustee in Bankruptcy, debtor in possession, assignee for the benefit of
creditors, receiver, or execution, judgment or attachment creditor,
notwithstanding the fact that such right of set-off shall not have been
exercised by Bank prior to the making, filing or issuance, or service upon Bank
of, or of notice of, any such petition; assignment for the benefit of
creditors; appointment or application for the appointment of a receiver; or
issuance of execution, subpoena, order or warrant.  Bank agrees to promptly notify Borrower after
any such set-off and application, provided that the failure to give such notice
shall not affect the validity of such set-off and application.  The rights of Bank under this Section are in
addition to the other rights and remedies (including, without limitation, other
rights of set-off) which Bank may have.


10.7                           No
Limitation on Rights and Remedies. 
The enumeration of the powers, rights and remedies in this Article shall
not be construed to limit the exercise thereof to such time as an Event of
Default occurs if, under applicable Law or any other provision of this
Agreement or any other Loan Document, Bank has any of such powers, rights and
remedies regardless of whether an Event of Default has occurred, and any
limitation contained herein or in any of the other Loan Documents as to Bank’s
exercise of any power, right or remedy for a period of time only during the
continuance of an Event of Default shall only be applicable at such time as
Bank shall have actual knowledge that such Event of Default is no longer
continuing and for a reasonable time thereafter as may be necessary for Bank to
cease the exercise of such powers, rights and remedies (it being expressly
understood and agreed that until such time as Bank shall obtain such knowledge
and after the expiration of such reasonable time, Bank shall have no liability



 58
 









whatsoever for the
commencement of or continuing exercise of any such power, right or remedy).


10.8                           Repossession
of the Collateral; Care and Custody of the Collateral, Etc.  Borrower agrees to give Bank notice in the
manner set forth in this Agreement within 24 hours of the time of repossession
of the Collateral, or any part thereof, by Bank as to any other property of
Borrower alleged to have been left on, upon or in the repossessed Collateral at
the time of repossession; and such notice shall be an express condition
precedent to any action or suit for loss or damages in connection
therewith.  Borrower further agrees that
Bank may hold any such property of Borrower without liability for a reasonable
time after any such notice is received, and that Bank will have a reasonable
time to notify Borrower as to where Borrower can collect such property.  Borrower agrees that if Bank shall repossess
the Collateral, or any part thereof, at a time when no Event of Default shall
have occurred hereunder, and the repossessed Collateral is thereafter returned
to Borrower, the damages therefor, if any, shall not exceed the fair rental
value of the repossessed Collateral for the time it was in Bank’s
possession.  Borrower hereby expressly
and irrevocably consents to, and to the extent that Borrower may lawfully do
so, invites Bank and its agents to come upon any premises on which the
Collateral, or any part thereof, is now or hereafter located for any and all
purposes related to the Collateral including without limitation repossession of
the Collateral, or any part thereof.  To
the extent that Borrower may lawfully do so, Borrower further covenants and
warrants that (a) any entry by Bank and its agents upon such premises for the
purpose of repossessing the Collateral, or any part thereof, shall not be
trespass upon such premises, and (b) any such repossession shall not constitute
conversion of the Collateral, or any part thereof, and Borrower further agrees
to indemnify and hold Bank harmless against, and hereby releases Bank from any
actions, costs, obligations or expenses arising directly, indirectly or
remotely from any attempt to enter such premises and repossess the Collateral,
or any part thereof.  Bank shall be
deemed to have exercised reasonable care in the custody and preservation of the
Collateral in its possession if it takes such reasonable actions for that
purpose as Borrower shall request in writing, but Bank shall have sole power to
determine whether such actions are reasonable. 
Any omission to do any act not requested by Borrower shall not be deemed
a failure to exercise reasonable care. 
Borrower shall at all times be responsible for the preservation of the
Collateral and shall be liable for any failure to realize upon, or to exercise
any right or power with respect to, the Collateral, or for any delay in so
doing, whether or not the Collateral is in Borrower’s possession.


10.9                           Application
of Proceeds.  Except as otherwise
expressly required to the contrary by applicable Law or any other Loan
Document, the net cash proceeds resulting from the exercise of any of the
rights and remedies of Bank under this Agreement, after deducting all charges,
expenses, costs and Attorneys’ Fees relating thereto, shall be applied by Bank
to the pro rata payment of the Obligations, and Borrower shall remain liable to
Bank for any deficiency.


10.10                     Attorney-in-Fact.  Borrower hereby constitutes and appoints
Bank, or any other Person whom Bank may designate upon notice to Borrower, as
Borrower’s attorney-in-fact (such appointment being coupled with an interest
and being irrevocable until Bank’s Lien shall have been terminated in writing
as set forth in this Agreement), at Borrower’s sole cost and expense, to
exercise any one or more of the following rights and powers at any time after
the occurrence and during the continuance of an Event of Default (and all acts
of such attorney-in-fact taken pursuant to this Section are hereby ratified and
approved by Borrower, and said attorney shall not be liable for any acts or
omissions nor for any error of judgment or mistake of fact or law):



 59
 









(A)                              To
take or to bring, in the name of Bank or in the name of Borrower, all steps,
action, suits or proceeding deemed by Bank necessary or desirable to effect
collection of the Accounts;


(B)                                To
settle, adjust, compromise, extend, renew, discharge, terminate or release the
Accounts in whole or in part;


(C)                                To
settle, adjust or compromise any legal proceedings brought to collect the
Accounts;


(D)                               To
notify Account Debtors to make payments on the Accounts directly to Bank or to
a lockbox designated by Bank;


(E)                                 To
transmit to Account Debtors notice of Bank’s interest in the Accounts and to
demand and receive from such Account Debtors at any time, in the name of Bank
or of Borrower, information concerning the Accounts and the amounts owing
thereon;


(F)                                 To
use Borrower’s stationery and sign the name of Borrower to verifications of the
Accounts and notices thereof to Account Debtors;


(G)                                To
sell or assign any of the Collateral upon such terms, for such amounts and at
such time or times as Bank deems advisable, and to execute any bills of sale or
assignments in the name of Borrower in relation thereto;


(H)                               To
take control, in any manner, of any item of payment on, or proceeds of,
Collateral;


(I)                                    To
prepare, file and sign Borrower’s name on any proof of claim in Bankruptcy or
similar document against any Account Debtor;


(J)                                   To
prepare, file and sign Borrower’s name on any notice of lien, assignment or
satisfaction of lien or similar document in connection with the Collateral;


(K)                               To
sign or endorse the name of Borrower upon any Chattel Paper, Document,
Instrument, invoice, freight bill, bill of lading, warehouse receipt or similar
document or agreement relating to the Collateral;


(L)                                 To
use the information recorded on or contained in any data processing equipment
and computer hardware and software relating to the Collateral to which Borrower
has access;


(M)                            To
enter into contracts or agreements for the processing, fabrication, packaging
and delivery of the Collateral as said attorney-in-fact or Bank may from time
to time deem appropriate and charge Borrower’s account for any costs thereby
incurred;


(N)                               To
receive, take, endorse, assign and deliver in Bank’s name or in the name of
Borrower any and all checks, notes, drafts and other instruments;



 60
 









(O)                               To
receive, open and dispose of all mail addressed to Borrower and to notify
postal authorities to change the address for the delivery thereof to such
address as Bank may designate; and


(P)                                 To
do all acts and things necessary, in Bank’s discretion, to fulfill Borrower’s
obligations under this Agreement and to otherwise carry out the purposes of
this Agreement.


10.11                     Default
Costs.  Borrower hereby agrees to pay
to Bank upon demand all Default Costs incurred by Bank, which agreement shall
be a continuing agreement and shall survive payment of the Loans and termination
of this Agreement.


Article XI


11.                                 MISCELLANEOUS


11.1                           Termination
of Bank’s Lien.  This Agreement and
Bank’s Lien will not be terminated until one of Bank’s officers signs a written
termination or satisfaction agreement to such effect.  Even if all of the Obligations owing to Bank
Parties at any time should be paid, Bank’s Lien will continue to secure any
Obligations of any Borrower Party thereafter arising until the written
termination or satisfaction agreement referred to above has been executed by
Bank (provided that Bank agrees to promptly provide a written termination or
satisfaction agreement upon request of Borrower, provided that Bank has no
obligation to make any further Advances, and there is not existing any
Default).  Except as otherwise expressly
provided for in this Agreement, no termination of this Agreement shall in any
way affect or impair the representations, warranties, agreements, covenants,
obligations, duties and Obligations of any Borrower Party or the powers,
rights, and remedies of Bank under this Agreement with respect to any
transaction or event occurring prior to such termination, all of which shall
survive such termination.  Except as may
otherwise expressly be provided herein to the contrary, in no event shall Bank
be obligated to terminate Bank’s Lien or return or release the Collateral or
any portion thereof to Borrower (a) until payment in full of the Obligations
(including termination of all transactions outstanding under any Wachovia Swap
Documents and payment in full of all amounts payable thereunder), or (b) if
Bank is obligated to extend credit to or for the benefit of Borrower under this
Agreement.


11.2                           Construction.  The provisions of this Agreement shall be in
addition to those of any other Loan Document and any guaranty, pledge or
security agreement, mortgage, deed of trust, security deed, note or other
evidence of liability given by any Borrower Party to or for the benefit of any
Bank Party, all of which shall be construed as complementary to each other, and
all existing liabilities and obligations of any Borrower Party to any Bank
Party and any Liens heretofore granted to or for the benefit of any Bank Party
shall, except and only to the extent expressly provided herein to the contrary,
remain in full force and effect, and shall not be released, impaired,
diminished, or in any other way modified or amended as a result of the
execution and delivery of this Agreement or any other Loan Document or by the
agreements and undertaking of any Borrower Party contained herein and
therein.  Nothing herein contained shall
prevent any Bank Party from enforcing any or all other notes, guaranties,
pledges or security agreements, mortgages, deeds of trust, or security deeds in
accordance with their respective terms. 
In the event of a conflict between any of the provisions of this
Agreement, the Notes, any



 61
 









one or more of the
Security Documents or any other Loan Document, the provisions most favorable to
Bank Parties shall control.


11.3                           Indemnity.  Borrower hereby agrees to indemnify Bank
Parties and their respective officers, directors, agents, and attorneys
against, and to hold Bank Parties and all such other Persons harmless from all
Indemnified Losses resulting from any representation or warranty made by any
Borrower Party or on any Borrower Party’s behalf pursuant to this Agreement
having been false when made, or resulting from any Borrower Party’s breach of
any of the covenants set forth in this Agreement, which indemnification is in
addition to, and not in derogation of, any statutory, equitable, or common law
right or remedy Bank Parties may have for breach of representation, warranty,
statement or covenant or otherwise may have under any of the Loan
Documents.  This agreement of indemnity
shall be a continuing agreement and shall survive payment of the Loans and
termination of this Agreement.


11.4                           Bank’s
Consent.  Except where otherwise
expressly provided in the Loan Documents, in any instance where the approval,
consent, or the exercise of Bank’s judgment or discretion is required or
permitted, the granting or denial of such approval or consent and the exercise
of such judgment or discretion shall be (a) within the sole discretion of
Bank; and (b) deemed to have been given only by a specific writing
intended for the purpose given and executed by Bank.


11.5                           Enforcement
and Waiver by Bank.  Bank shall have
the right at all times to enforce the provisions of this Agreement, the Notes,
and each of other Loan Documents in strict accordance with the terms hereof and
thereof, notwithstanding any conduct or custom on the part of Bank in
refraining from so doing at any time or times. 
The failure of Bank at any time or times to enforce its rights under
such provisions, strictly in accordance with the same, shall not be construed
as having created a custom in any way or manner contrary to specific provisions
of this Agreement or as having in any way or manner modified or waived the
same.  All rights and remedies of Bank
are cumulative and the exercise of one right or remedy shall not be deemed a
waiver or release of any other right or remedy.


11.6                           No
Representation, Assumption, or Duty. 
Nothing, including any Advance or acceptance of any document or
instrument, shall be construed as a representation or warranty, express or
implied, to any Person by any Bank Party. 
Any inspection or audit of the Collateral or the Records of Borrower, or
the procuring of documents and financial and other information, by or on behalf
of any Bank Party shall be for Bank Parties’ protection only, and shall not
constitute any assumption of responsibility by any Bank Party with respect
thereto or relieve Borrower of any of Borrower’s obligations.


11.7                           Expenses
of Bank.  Borrower will, on demand,
reimburse Bank for all expenses incurred by Bank in connection with the closing
of the Loans and the preparation, negotiation, amendment, modification,
interpretation, administration or enforcement of this Agreement and the other
Loan Documents and/or in the collection of any amounts owing from any Borrower
Party or any other Person to Bank under this Agreement or any other Loan
Document and, until so paid, the amount of such expenses shall be added to and
become part of the amount of the Obligations.



 62
 









11.8                           Attorneys’
Fees.  If at any time or times
hereafter Bank employs counsel to advise or provide other representation with
respect to this Agreement, any Loan Document, or any other agreement, document
or instrument heretofore, now or hereafter executed by any Borrower Party and
delivered to Bank with respect to the Obligations, or to commence, defend or
intervene, file a petition, complaint, answer, motion or other pleadings or to
take any other action in or with respect to any pending, threatened or
anticipated suit or proceeding relating to this Agreement, any Loan Document,
or any other agreement, instrument or document heretofore, now or hereafter
executed by any Borrower Party and delivered to Bank with respect to the
Obligations, or to represent Bank in any litigation with respect to the affairs
of any Borrower Party, or to enforce any rights of Bank or obligations of any
Borrower Party or any other Person which may be obligated to Bank by virtue of
this Agreement, any Loan Document, or any other agreement, document or
instrument heretofore, now or hereafter delivered to Bank by or for the benefit
of any Borrower Party with respect to the Obligations, or to collect from any
Borrower Party any amounts owing hereunder, then in any such event, all of the
Attorneys’ Fees incurred by Bank arising from such services and any expenses,
costs and charges relating thereto shall constitute additional obligations of
Borrower payable on demand and, until so paid, shall be added to and become
part of the Obligations.


11.9                           Exclusiveness.  This Agreement, the Notes, the Security
Documents, and any other Loan Documents made pursuant hereto are made for the
sole protection of Borrower Parties, Bank Parties, and Bank Parties’ successors
and assigns, and no other Person shall have any right of action hereunder.


11.10                     WAIVER OF
PUNITIVE DAMAGES.  BORROWER AGREES
THAT WITH RESPECT TO ANY CLAIM OF BORROWER ARISING UNDER THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT, IN NO EVENT SHALL BORROWER HAVE A REMEDY OF, OR SHALL BANK
BE LIABLE FOR, INDIRECT, SPECIAL, CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES,
AND BORROWER WAIVES ANY RIGHT OR CLAIM TO SUCH DAMAGES BORROWER MAY HAVE OR
WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH THE LOANS OR THE LOAN
DOCUMENTS, WHETHER THE SAME IS RESOLVED BY ARBITRATION, MEDIATION, JUDICIAL
PROCESS OR OTHERWISE.


11.11                     Waiver and
Release by Borrower.  Borrower (A)
waives protest of all commercial paper at any time held by Bank on which
Borrower is any way liable; (B) waives notice of acceleration and of intention
to accelerate; (C) waives notice and opportunity to be heard, after
acceleration, before exercise by Bank of the remedies of self-help, set-off, or
of other summary procedures permitted by any applicable Laws or by any
agreement with Borrower, and except where required hereby or by any applicable
Laws which requirement cannot be waived, notice of any other action taken by
Bank; and (D) releases Bank Parties and their respective officers, attorneys,
agents and employees from all claims for loss or damage caused by any act or
omission on the part of any of them in connection with the Obligations, the
Loan Documents or the Wachovia Swap Documents.


11.12                     Limitation
on Waiver of Notice, Etc. 
Notwithstanding any provision of this Agreement to the contrary, to the
extent that any applicable Law expressly limits any waiver of any right
contained herein or in any other Loan Document (including any waiver of any
notice or other demand), such waiver shall be ineffective to such extent.



 63
 









11.13                     Additional
Costs.  In the event that any
applicable Law now or hereafter in effect and whether or not presently
applicable to Bank, or any interpretation or administration thereof by any
Governmental Authority charged with the interpretation or administration
thereof, or compliance by Bank with any guideline, request or directive of any
such Governmental Authority (whether or not having the force of law), shall (i)
affect the basis of taxation of payments to Bank of any amounts payable by
Borrower under this Agreement (other than taxes imposed on the overall net
income of Bank), or (ii) impose, modify or deem applicable any reserve, special
deposit or similar requirement against assets of, deposits with or for the
account of, or credit extended by Bank, or (iii) impose any other condition
with respect to this Agreement, the Notes or the Loans, or (iv) affect the
amount of capital required or expected to be maintained by Bank, and the result
of any of the foregoing is to increase the cost to Bank of making, funding or
maintaining the Loans or to reduce the amount of any amount receivable by Bank
thereon, then Borrower shall pay to Bank from time to time, upon request by
Bank, additional amounts sufficient to compensate Bank for such increased cost
or reduced amount receivable to the extent Bank is not compensated therefor in
the computation of the interest rate applicable to the Loans.  A statement as to the amount of such
increased cost or reduced amount receivable, prepared in good faith and in
reasonable detail by Bank and submitted by Bank to Borrower, shall be
conclusive and binding for all purposes absent manifest error in computation.


11.14                     Illegality
and Impossibility.  In the event that
any applicable Law now or hereafter in effect and whether or not presently
applicable to Bank, or any interpretation or administration thereof by any Governmental
Authority charged with the interpretation or administration thereof, or
compliance by Bank with any guideline, request or directive of such
Governmental Authority (whether or not having the force of law), including
without limitation exchange controls, shall make it unlawful or impossible for
Bank to maintain any Loan under this Agreement, Borrower shall upon receipt of
reasonable notice thereof from Bank repay in full the then outstanding
principal amount of such Loan, together with all accrued interest thereon to
the date of payment and all amounts owing to Bank, (a) on the last day of the
then current interest period applicable to such Loan if Bank may lawfully
continue to maintain such Loan to such day, or (b) immediately if Bank may not
continue to maintain such Loan to such day.


11.15                     Participation.  Notwithstanding any other provision of this
Agreement, Borrower understands and agrees that Bank may enter into
participation or other agreements with Participants whereby Bank will allocate
certain percentages of its commitment to them and/or assign all or a portion of
its rights and obligations under this Agreement.  Borrower acknowledges and agrees that, for
the convenience of all parties, this Agreement is being entered into with Bank
only and that its obligations under this Agreement are undertaken for the
benefit of, and as an inducement to each such Participant as well as Bank, and
Borrower hereby agrees that, at Bank’s election and upon notice from Bank to
Borrower, each such Participant shall have the same rights and/or obligations
as if it were an original party to this Agreement.  Borrower hereby grants to each such
Participant, the right to set off deposit accounts maintained by Borrower with
such Participant in accordance with this Agreement.  Borrower authorizes Bank to disclose
financial and other information regarding Borrower to Participants and
potential Participants.


11.16                     Binding
Effect, Assignment.  This Agreement
shall inure to the benefit of, and shall be binding upon, the respective
successors and permitted assigns of the parties hereto.



 64















Borrower has no right to
assign any of its rights or obligations hereunder without the prior written
consent of Bank.


11.17                     Entire Agreement, Amendments.  This Agreement, including the Exhibits
hereto, all of which are hereby incorporated herein by reference, and the
documents executed and delivered pursuant hereto, constitute the entire
agreement between the parties, and may be amended only by a writing signed on
behalf of each party.


11.18                     Severability.  If any provision of this Agreement, the
Notes, or any of the other Loan Documents shall be held invalid under any
applicable Laws, such invalidity shall not affect any other provision of this
Agreement or such other instrument or agreement that can be given effect
without the invalid provision, and, to this end, the provisions hereof are
severable.


11.19                     Headings.  The section and paragraph headings hereof are
inserted for convenience of reference only, and shall not alter, define, or be
used in construing the text of such sections and paragraphs.


11.20                     Counterparts.  This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute but one and the same instrument.


11.21                     Seal.  This Agreement is intended to take effect as
an instrument under seal.


Article XII


12.                                 SUBMISSION
TO JURISDICTION, GOVERNING LAW AND NOTICES


12.1                           Notices.  Any notices or consents required or permitted
by this Agreement shall be in writing and shall be deemed delivered if
delivered in person or if sent by certified mail, postage prepaid, return
receipt requested, or by nationally-recognized overnight courier service (such
as Federal Express), as follows, unless such address is changed by written
notice hereunder:


	
  (A)

  	
  If to Borrowers:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  KMG Chemicals, Inc.

  
	
   

  	
   

  	
  10611 Harwin Drive, Suite 402

  
	
   

  	
   

  	
  Houston, Texas 77036-1534

  
	
   

  	
   

  	
  Attention: Mr. John V. Sobchak

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  KMG-Bernuth, Inc.

  
	
   

  	
   

  	
  10611 Harwin Drive, Suite 402

  
	
   

  	
   

  	
  Houston, Texas 77036-1534

  
	
   

  	
   

  	
  Attention: Mr. John V. Sobchak

  



 



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  (B)

  	
  If to Bank:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Wachovia Bank, National Association

  
	
   

  	
   

  	
  P.O. Box 2554

  
	
   

  	
   

  	
  Birmingham, Alabama 35290

  
	
   

  	
   

  	
  Mail Code AL0029

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  and in the case of any consent or approval required
  of Bank or any notice of any alleged breach of any of Bank’s obligations
  under any Loan Document,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Ray D. Gibbons, Esq.

  
	
   

  	
   

  	
  Burr & Forman LLP

  
	
   

  	
   

  	
  420 North 20th Street

  
	
   

  	
   

  	
  Suite 3400

  
	
   

  	
   

  	
  Birmingham, Alabama 35203

  



 


12.2                           Governing
Law.  This Agreement is entered into
and performable in Jefferson County, Alabama, and the substantive Laws, without
giving effect to principles of conflict of laws, of the United States and the
State of Alabama shall govern the construction of this Agreement and the
documents executed and delivered pursuant hereto, and the rights and remedies
of the parties hereto and thereto, except to the extent that the Uniform
Commercial Code or other applicable Law requires that the perfection, the
effect of perfection or non-perfection, the priority of Bank’s Lien under the
Loan Documents, or the enforcement of certain of Bank’s remedies with respect
to the Collateral, be governed by the Laws of another Jurisdiction.


12.3                           SUBMISSION
TO JURISDICTION; WAIVER OF JURY TRIAL, ETC.


(A)                              BORROWER
HEREBY IRREVOCABLY AND UNCONDITIONALLY:


(1)                                  SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY
LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, OR FOR RECOGNITION AND
ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL
JURISDICTION OF THE COURTS OF THE STATE OF ALABAMA, THE COURTS OF THE UNITED
STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ALABAMA, AND APPELLATE COURTS
FROM ANY THEREOF;


(2)                                  CONSENTS THAT ANY
SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS, AND WAIVES ANY
OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR
PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN
AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;



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(3)                                  AGREES THAT SERVICE
OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY
THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF
MAIL), POSTAGE PREPAID, TO BORROWER AT ITS ADDRESS SET FORTH IN THIS AGREEMENT
OR AT SUCH OTHER ADDRESS OF WHICH BANK SHALL HAVE BEEN NOTIFIED PURSUANT
THERETO; AND


(4)                                  AGREES THAT NOTHING
HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION.


(B)                                EACH
OF BORROWER AND BANK HEREBY:


(1)                                  IRREVOCABLY AND
UNCONDITIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING
OR COUNTERCLAIM OF ANY TYPE AS TO ANY MATTER ARISING DIRECTLY OR INDIRECTLY OUT
OF OR WITH RESPECT TO THIS AGREEMENT, THE NOTES, ANY OF THE OTHER LOAN
DOCUMENTS OR ANY OTHER DOCUMENT EXECUTED IN CONNECTION HEREWITH OR THEREWITH;
AND


(2)                                  AGREES THAT ANY OF
THEM MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF
THE KNOWING, VOLUNTARY AND BARGAINED FOR AGREEMENT BETWEEN THE PARTIES
IRREVOCABLY TO WAIVE TRIAL BY JURY, AND THAT ANY DISPUTE OR CONTROVERSY OF ANY
KIND WHATSOEVER BETWEEN OR AMONG THEM SHALL INSTEAD BE TRIED IN A COURT OF
COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.


* * * * *



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IN WITNESS WHEREOF,
the parties hereto have caused this Agreement to be executed by their
respective duly authorized representatives as of the day and year first above
written.


	
   

  	
  BORROWERS:

  
	
   

  	
   

  	
   

  
	
   

  	
  KMG CHEMICALS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John V.
  Sobchak

  
	
   

  	
  Its:

  	
  CFO

  
	
   

  	
   

  	
   

  
	
   

  	
  KMG-BERNUTH, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ J. Neal
  Butler

  
	
   

  	
  Its:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  BANK:

  
	
   

  	
   

  	
   

  
	
   

  	
  WACHOVIA BANK,

  
	
   

  	
  NATIONAL ASSOCIATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Alan T. Drennan

  
	
   

  	
  Its:

  	
  Senior Vice
  President

  



 



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