Document:

Exhibit 10.40

 

 

 

KMG CHEMICALS, INC.,

 

KMG-BERNUTH, INC., and

 

KMG ELECTRONIC CHEMICALS, INC.

 

$20,000,000

 

7.43% Senior Secured Notes due December 31, 2014

 

 

NOTE PURCHASE AGREEMENT

 

 

Dated December 31, 2007

 

 

 

 

 

Table
Of Contents

 

	
  SECTION 1.

  	
  AUTHORIZATION OF NOTES

  	
  1

  
	
   

  	
   

  	
   

  
	
  SECTION 2.

  	
  SALE AND PURCHASE OF NOTES SALE

  	
  1

  
	
   

  	
   

  	
   

  
	
  SECTION 3.

  	
  CLOSING

  	
  1

  
	
   

  	
   

  	
   

  
	
  SECTION 4.

  	
  CONDITIONS TO CLOSING

  	
  2

  
	
  Section 4.1.

  	
  Representations
  and Warranties

  	
  2

  
	
  Section 4.2.

  	
  Performance;
  No Default

  	
  2

  
	
  Section 4.3.

  	
  Certain
  Documents

  	
  2

  
	
  Section 4.4.

  	
  Opinions
  of Counsel

  	
  3

  
	
  Section 4.5.

  	
  Purchase
  Permitted By Applicable Law, Etc

  	
  3

  
	
  Section 4.6.

  	
  Sale of
  Other Notes

  	
  4

  
	
  Section 4.7.

  	
  Payment of
  Fees

  	
  4

  
	
  Section 4.8.

  	
  Payment of
  Special Counsel Fees

  	
  4

  
	
  Section 4.9.

  	
  Private
  Placement Number

  	
  4

  
	
  Section 4.10.

  	
  Title

  	
  4

  
	
  Section 4.11.

  	
  Collateral
  Agent’s Liens

  	
  4

  
	
  Section 4.12.

  	
  Encumbrance
  of Real Property Interests

  	
  4

  
	
  Section 4.13.

  	
  Changes
  in Corporate Structure

  	
  4

  
	
  Section 4.14.

  	
  No
  Material Adverse Effect

  	
  4

  
	
  Section 4.15.

  	
  Credit
  Documents and Air Products APA Documents

  	
  4

  
	
  Section 4.16.

  	
  Funding
  Instructions

  	
  5

  
	
  Section 4.17.

  	
  Proceedings
  and Documents

  	
  5

  
	
   

  	
   

  	
   

  
	
  SECTION 5.

  	
  REPRESENTATIONS AND WARRANTIES OF EACH COMPANY

  	
  5

  
	
  Section 5.1.

  	
  Organization; Power and Authority

  	
  5

  
	
  Section 5.2.

  	
  Authorization, Etc.

  	
  5

  
	
  Section 5.3.

  	
  Disclosure

  	
  5

  
	
  Section 5.4.

  	
  Organization and Ownership of Shares of Subsidiaries

  	
  6

  
	
  Section 5.5.

  	
  Financial Statements; Material Liabilities

  	
  6

  
	
  Section 5.6.

  	
  Compliance with Laws, Other Instruments, Etc.

  	
  6

  
	
  Section 5.7.

  	
  Governmental Authorizations, Etc.

  	
  7

  
	
  Section 5.8.

  	
  Litigation; Observance of Agreements, Statutes and
  Orders

  	
  7

  
	
  Section 5.9.

  	
  Taxes

  	
  7

  
	
  Section 5.10.

  	
  Title to Property; Leases

  	
  8

  
	
  Section 5.11.

  	
  Licenses,
  Permits, Etc.

  	
  8

  
	
  Section 5.12.

  	
  Compliance with ERISA

  	
  8

  
	
  Section 5.13.

  	
  Private Offering by the Companies

  	
  9

  
	
  Section 5.14.

  	
  Use of Proceeds; Margin Regulations

  	
  9

  
	
  Section 5.15.

  	
  Existing Indebtedness; Future Liens

  	
  10

  
	
  Section 5.16.

  	
  Foreign Assets Control Regulations, Etc.

  	
  10

  
	
  Section 5.17.

  	
  Status under Certain Statutes

  	
  10

  
	
  Section 5.18.

  	
  Environmental Matters

  	
  11

  
	
  Section 5.19.

  	
  Material Contracts

  	
  11

  
				

 

i

 

	
  Section 5.20.

  	
  Priority of Liens

  	
  11

  
	
  Section 5.21.

  	
  Insurance

  	
  11

  
	
  Section 5.22.

  	
  Delivery of Credit Documents and Air Products Apa Documents

  	
  11

  

 

	
  Section 6.

  	
  Representations
  Of The Purchaser

  	
  11

  
	
  Section 6.1.

  	
  Purchase for Investment

  	
  11

  
	
  Section 6.2.

  	
  Source of Funds

  	
  12

  
				

 

	
  SECTION 7.

  	
  INFORMATION AS TO COMPANIES

  	
  13

  
	
  Section 7.1.

  	
  Financial and Business Information

  	
  13

  
	
  Section 7.2.

  	
  Officer’s Certificate

  	
  16

  
	
  Section 7.3.

  	
  Visitation

  	
  16

  
				

 

	
  SECTION 8.

  	
  PAYMENT AND PREPAYMENT OF THE NOTES

  	
  17

  
	
  Section 8.1.

  	
  Maturity

  	
  17

  
	
  Section 8.2.

  	
  Optional Prepayments with Make-Whole Amount

  	
  17

  
	
  Section 8.3.

  	
  Allocation of Partial Prepayments

  	
  17

  
	
  Section 8.4.

  	
  Maturity; Surrender, Etc.

  	
  17

  
	
  Section 8.5.

  	
  Purchase of Notes

  	
  18

  
	
  Section 8.6.

  	
  Make-Whole Amount

  	
  18

  
				

 

	
  SECTION 9.

  	
  AFFIRMATIVE COVENANTS

  	
  19

  
	
  Section 9.1.

  	
  Compliance with Law

  	
  19

  
	
  Section 9.2.

  	
  [Intentionally Omitted]

  	
  19

  
	
  Section 9.3.

  	
  Maintenance of Properties

  	
  19

  
	
  Section 9.4.

  	
  Payment of Taxes and Claims

  	
  20

  
	
  Section 9.5.

  	
  Corporate
  Existence, Etc.

  	
  20

  
	
  Section 9.6.

  	
  Books and Records

  	
  20

  
	
  Section 9.7.

  	
  Environmental Remediation and Indemnification

  	
  20

  
	
  Section 9.8.

  	
  Information Required by Rule 144A

  	
  21

  
	
  Section 9.9.

  	
  Insurance and Insurance Proceeds

  	
  21

  
	
  Section 9.10.

  	
  Maintenance of Lien

  	
  22

  
	
  Section 9.11.

  	
  General Covenants and Agreements Pertaining to the
  Collateral

  	
  22

  
	
  Section 9.12.

  	
  Collateral Evidenced by Instruments or Documents

  	
  24

  
	
  Section 9.13.

  	
  Maintaining Bank Accounts

  	
  24

  
	
  Section 9.14.

  	
  Filing Fees and Taxes

  	
  25

  
	
  Section 9.15.

  	
  Assigned Agreements

  	
  25

  
	
  Section 9.16.

  	
  Air Products Apa
  Documents

  	
  25

  
	
  Section 9.17.

  	
  Underlying Documentation

  	
  25

  
	
  Section 9.18.

  	
  Further Assurances

  	
  25

  
	
  Section 9.19.

  	
  Post Closing Matters

  	
  26

  
				

 

	
  SECTION 10.

  	
  NEGATIVE COVENANTS

  	
  26

  
	
  Section 10.1.

  	
  Financial
  Covenants

  	
  26

  
	
  Section 10.2.

  	
  Dividends

  	
  27

  
	
  Section 10.3.

  	
  Liens

  	
  27

  
	
  Section 10.4.

  	
  Indebtedness

  	
  27

  
				

 

ii

 

	
  Section 10.5.

  	
  Investments and Contingent Liabilities

  	
  27

  
	
  Section 10.6.

  	
  Sale of Equity Interests

  	
  27

  
	
  Section 10.7.

  	
  Merger,
  Consolidation, Etc.

  	
  27

  
	
  Section 10.8.

  	
  Sale of Assets, Etc.

  	
  28

  
	
  Section 10.9.

  	
  Lines of Business

  	
  28

  
	
  Section 10.10.

  	
  Terrorism
  Sanctions Regulations

  	
  28

  
	
  Section 10.11.

  	
  Affiliate
  Transactions

  	
  28

  
	
  Section 10.12.

  	
  Capital Expenditures

  	
  28

  
	
  Section 10.13.

  	
  Existing Indebtedness and Credit Agreement
  Obligations

  	
  28

  
	
  Section 10.14.

  	
  Acquisitions

  	
  29

  
	
  Section 10.15.

  	
  New Subsidiaries

  	
  29

  
	
  Section 10.16.

  	
  Amendment of Organizational Documents

  	
  29

  
	
  Section 10.17.

  	
  Use of Proceeds

  	
  29

  
	
  Section 10.18.

  	
  Environmental Matters

  	
  29

  
	
  Section 10.19.

  	
  Accounting Policies

  	
  29

  
	
  Section 10.20.

  	
  KMEX-Specific Restrictions

  	
  30

  
	
   

  	
   

  
	
  SECTION 11.

  	
  EVENTS OF DEFAULT

  	
  30

  
				

 

	
  SECTION 12.

  	
  REMEDIES ON DEFAULT, ETC.

  	
  33

  
	
  Section 12.1.

  	
  Acceleration

  	
  33

  
	
  Section 12.2.

  	
  Other Remedies; Application of Proceeds

  	
  34

  
	
  Section 12.3.

  	
  Rescission

  	
  34

  
	
  Section 12.4.

  	
  No Waivers or Election of Remedies, Expenses, Etc.

  	
  34

  
	
   

  	
   

  
	
  SECTION 13.

  	
  REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES

  	
  35

  
	
  Section 13.1.

  	
  Registration of Notes

  	
  35

  
	
  Section 13.2.

  	
  Transfer and Exchange of Notes

  	
  35

  
	
  Section 13.3.

  	
  Replacement of Notes

  	
  35

  
				

 

	
  SECTION 14.

  	
  PAYMENTS ON NOTES.

  	
  36

  
	
  Section 14.1.

  	
  Place of Payment

  	
  36

  
	
  Section 14.2.

  	
  Home Office Payment

  	
  36

  
				

 

	
  SECTION 15.

  	
  EXPENSES, ETC.

  	
  36

  
	
  Section 15.1.

  	
  Transaction
  Expenses

  	
  36

  
	
  Section 15.2.

  	
  Survival

  	
  37

  
	
   

  	
   

  	
   

  
	
  SECTION 16.

  	
  SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE
  AGREEMENT

  	
  37

  
				

 

	
  SECTION 17.

  	
  AMENDMENT AND WAIVER

  	
  37

  
	
  Section 17.1.

  	
  Requirements

  	
  37

  
	
  Section 17.2.

  	
  Solicitation of Holders of Notes

  	
  38

  
	
  Section 17.3.

  	
  Binding Effect, etc.

  	
  38

  
	
  Section 17.4.

  	
  Notes Held by Any Company, etc.

  	
  38

  
				

 

	
  SECTION 18.

  	
  NOTICES

  	
  39

  

 

iii

 

	
  SECTION 19.

  	
  REPRODUCTION OF DOCUMENTS

  	
  39

  
	
   

  	
   

  	
   

  
	
  SECTION 20.

  	
  CONFIDENTIAL INFORMATION

  	
  39

  
	
   

  	
   

  	
   

  
	
  SECTION 21.

  	
  SUBSTITUTION OF PURCHASER

  	
  40

  
	
   

  	
   

  	
   

  
	
  SECTION 22.

  	
  JOINT AND SEVERAL LIABILITY OF COMPANIES

  	
  41

  
	
   

  	
   

  	
   

  
	
  SECTION 23.

  	
  MISCELLANEOUS

  	
  42

  
	
  Section 23.1.

  	
  Successors and Assigns

  	
  42

  
	
  Section 23.2.

  	
  Payments Due on Non-Business Days

  	
  42

  
	
  Section 23.3.

  	
  Accounting Terms

  	
  43

  
	
  Section 23.4.

  	
  Severability

  	
  43

  
	
  Section 23.5.

  	
  Transaction
  References

  	
  43

  
	
  Section 23.6.

  	
  Construction,
  etc.

  	
  43

  
	
  Section 23.7.

  	
  Counterparts

  	
  43

  
	
  Section 23.8.

  	
  Governing Law

  	
  43

  
	
  Section 23.9.

  	
  Jurisdiction and Process; Waiver of Jury Trial

  	
  44

  
				

 

iv

 

	
  SCHEDULE A

  	
   

  	
  —

  	
   

  	
  Information Relating to
  Purchasers

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULE B

  	
   

  	
  —

  	
   

  	
  Defined Terms

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULE C

  	
   

  	
  —

  	
   

  	
  Existing Liens

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULE 5.4

  	
   

  	
  —

  	
   

  	
  Subsidiaries of the
  Companies and Ownership of Subsidiary Stock

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULE 5.15

  	
   

  	
  —

  	
   

  	
  Existing Indebtedness

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULE 5.19

  	
   

  	
  —

  	
   

  	
  Material Contracts

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULE 9.11(a)

  	
   

  	
  —

  	
   

  	
  Collateral Locations

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULE 9.19

  	
   

  	
  —

  	
   

  	
  Post Closing Matters

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULE 10.11

  	
   

  	
  —

  	
   

  	
  Affiliate Transactions

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  EXHIBIT 1

  	
   

  	
  —

  	
   

  	
  Form of 7.43% Senior
  Secured Note due December 31, 2014

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  EXHIBIT 4.4(a)

  	
   

  	
  —

  	
   

  	
  Form of Opinion of
  Special Counsel for the Companies

  

 

v

 

	
  7.43%
  Senior Secured Notes due December 31, 2014

  
	
   

  
	
  December 31, 2007

  
	
   

  
	
  TO EACH OF THE PURCHASERS
  LISTED IN

  
	
   

  	
  SCHEDULE A HERETO:

  

 

Ladies and Gentlemen:

 

KMG CHEMICALS, INC., a Texas
corporation (“KMG Chemicals”), KMG-BERNUTH, INC.,
a Delaware corporation (“KMG-Bernuth”),
and KMG ELECTRONIC CHEMICALS, INC., a Texas corporation (“KMG ECI”
and, together with KMG Chemicals and KMG-Bernuth, collectively, the “Companies” and each, individually, a “Company”),
each agrees with each of the purchasers whose names appear at the end hereof
(each, a “Purchaser” and, collectively, the “Purchasers”) as follows:

 

SECTION 1.                                                    AUTHORIZATION OF
NOTES.

 

The Companies will authorize
the issue and sale of $20,000,000 aggregate principal amount of their 7.43%
Senior Secured Notes due December 31, 2014 (the “Notes”,
such term to include any such notes issued in substitution therefor pursuant to
Section 13).  The Notes shall
be substantially in the form set out in Exhibit 1.  Certain capitalized and other terms used in
this Agreement are defined in Schedule B; and references to a “Schedule”
or an “Exhibit” are, unless otherwise specified, to a Schedule or an Exhibit attached
to this Agreement.

 

SECTION 2.                                                    SALE AND PURCHASE OF
NOTES SALE.

 

Subject to the terms and
conditions of this Agreement, the Companies will issue and sell to each
Purchaser and each Purchaser will purchase from the Companies, at the Closing
provided for in Section 3, Notes in the principal amount specified
opposite such Purchaser’s name in Schedule A at the purchase price of
100% of the principal amount thereof. 
The Purchasers’ obligations hereunder are several and not joint
obligations and no Purchaser shall have any liability to any Person for the
performance or non-performance of any obligation by any other Purchaser
hereunder.

 

SECTION 3.                                                    CLOSING.

 

The sale and purchase of the
Notes to be purchased by each Purchaser shall occur at the offices of Baker
Botts L.L.P., 2001 Ross Avenue, Dallas, Texas 75201, at 10:00 a.m.,
Dallas, Texas time, at a closing (the “Closing”) on December 31,
2007  or on such other Business Day
thereafter on or prior to January 15, 2008 or at such other place as may
be agreed upon by the Companies and the Purchasers.  At the Closing the Companies will deliver to
each Purchaser the Notes to be purchased by such Purchaser in the form of a
single Note (or such greater number of Notes in denominations of at least
$100,000 as such Purchaser may request) dated the date of the Closing and
registered in such Purchaser’s name (or in the name of its nominee), against
delivery by such Purchaser to the Companies or their order of immediately
available funds in the amount of the purchase price therefor by wire transfer
of immediately available funds for the account of the Companies to account
number 2000630326893 at Wachovia Bank, N.A., Charlotte, North 

 

1

 

Carolina, ABA No. 111025013.  If at the Closing the Companies shall fail to
tender such Notes to any Purchaser as provided above in this Section 3,
or any of the conditions specified in Section 4 shall not have been
fulfilled to such Purchaser’s satisfaction, such Purchaser shall, at its
election, be relieved of all further obligations under this Agreement, without
thereby waiving any rights such Purchaser may have by reason of such failure or
such nonfulfillment.

 

SECTION 4.                                                    CONDITIONS TO
CLOSING.

 

Each Purchaser’s obligation
to purchase and pay for the Notes to be sold to such Purchaser at the Closing
is subject to the fulfillment to such Purchaser’s satisfaction, prior to or at
the Closing, of the following conditions:

 

Section 4.1.           Representations and Warranties.  The
representations and warranties of each Company in this Agreement and the other
Note Documents shall be correct when made and at the time of the Closing.

 

Section 4.2.           Performance; No Default.  Each Company
shall have performed and complied with all agreements and conditions contained
in this Agreement and the other Note Documents required to be performed or
complied with by it prior to or at the Closing, and after giving effect to the
issue and sale of the Notes (and the application of the proceeds thereof as
contemplated by Section 5.14) no Default or Event of Default shall
have occurred and be continuing.

 

Section 4.3.           Certain
Documents.  Each
Purchaser shall have received the following, each dated the date of Closing
unless otherwise specified and in full force and effect:

 

(a)           the Notes to be issued to
such Purchaser pursuant to Section 2;

 

(b)           certificates of the
Secretary or an Assistant Secretary of each Company certifying (i) the
Organizational Documents of such Company, (ii) the resolutions of the
Governing Body of such Company approving the Note Documents to which such
Company is a party and the related transactions, (iii) all other documents
evidencing other necessary corporate action and governmental approvals, if any,
with respect to this Agreement and the other Note Documents to which such
Company is a party, and (iv) certifying the names and true signatures of
the officers of such Company authorized to sign this Agreement and the other
Note Documents to which such Company is a party and the other documents to be
delivered hereunder on behalf of such Company;

 

(c)           certificates of good
standing and existence for each Company from the State in which each Company is
organized;

 

(d)           results of searches of the
UCC records of the Secretary of State (or other applicable Governmental
Authority) of the jurisdiction of organization of each Company, reflecting no
Liens against any of the Collateral as to which perfection of a Lien is
accomplished by the filing of a financing statement other than Permitted Liens;

 

(e)           the Intercreditor Agreement
duly executed by the Purchasers, the Lender Parties and each Company;

 

2

 

(f)            certificate(s) of
insurance naming the Collateral Agent as loss payee or additional insured
evidencing insurance which meets the requirements of this Agreement and the
Security Documents and which is in amount, form and substance and from an
issuer satisfactory to the Purchasers;

 

(g)           a certified copy of each of (i) the
Credit Agreement, (ii) the other Security Documents, (iii) appropriate
Financing Statements naming the Collateral Agent as the secured party and each
Company as debtor, and (iv) the Air Products APA Documents;

 

(h)           each Company shall have
delivered to each Purchaser an Officer’s Certificate, dated the date of the
Closing, certifying that the conditions specified in Sections 4.1, 4.2,
4.13, 4.14 and 4.15 have been fulfilled;

 

(i)            the Most Recent Financial
Statements and the Closing Balance Sheet, each in form and substance acceptable
to the Purchasers;

 

(j)            additional documents or
certificates with respect to legal matters or corporate or other proceedings
related to the transactions contemplated hereby as may be reasonably requested
by such Purchaser.

 

Section 4.4.           Opinions of
Counsel.  Such Purchaser shall have
received opinions in form and substance satisfactory to such Purchaser, dated
the date of the Closing (a) from Haynes and Boone, LLP, counsel for the
Companies, covering the matters set forth in Exhibit 4.4(a) and
covering such other matters incident to the transactions contemplated hereby as
such Purchaser or its counsel may reasonably request (and each Company hereby
instructs its counsel to deliver such opinion to the Purchasers), (b) from
Senn Visciano Kirschenbaum P.C., special Colorado counsel for the Companies,
covering such matters incident to the applicable Mortgage as such Purchaser may
reasonably request, (c) from Stinson Morrison Hecker LLP, special Kansas
counsel for the Companies, covering such matters incident to the applicable
Mortgage as such Purchaser may reasonably request, and (d) from Baker
Botts L.L.P., the Purchasers’ special counsel in connection with such
transactions, covering such matters incident to such transactions as such
Purchaser may reasonably request.

 

Section 4.5.           Purchase Permitted By Applicable Law, Etc.  On the date of the Closing
such Purchaser’s purchase of Notes shall (a) be permitted by the laws and
regulations of each jurisdiction to which such Purchaser is subject, without
recourse to provisions (such as section 1405(a)(8) of the New York
Insurance Law) permitting limited investments by insurance companies without
restriction as to the character of the particular investment, (b) not
violate any applicable law or regulation (including, without limitation,
Regulation T, U or X of the Board of Governors of the Federal Reserve System)
and (c) not subject such Purchaser to any tax, penalty or liability under
or pursuant to any applicable law or regulation, which law or regulation was
not in effect on the date hereof.  If
requested by such Purchaser, such Purchaser shall have received an Officer’s
Certificate certifying as to such matters of fact as such Purchaser may
reasonably specify to enable such Purchaser to determine whether such purchase
is so permitted.

 

3

 

Section 4.6.           Sale of
Other Notes.  Contemporaneously
with the Closing the Companies shall sell to each other Purchaser and each
other Purchaser shall purchase the Notes to be purchased by it at the Closing
as specified in Schedule A.

 

Section 4.7.           Payment of
Fees.  The Companies shall have paid
to Prudential Investment Management, Inc. the $40,000 structuring fee
described in the letter dated December 3, 2007, among Prudential Investment
Management, Inc., KMG Chemicals and KMG-Bernuth.

 

Section 4.8.           Payment of
Special Counsel Fees.  Without
limiting the provisions of Section 15.1, the Companies shall have
paid on or before the Closing the fees, charges and disbursements of the Purchasers’
special counsel referred to in Section 4.4 to the extent reflected
in a statement of such counsel rendered to the Companies at least one Business
Day prior to the Closing.

 

Section 4.9.           Private Placement Number.  A Private
Placement Number issued by Standard & Poor’s CUSIP Service Bureau (in
cooperation with the SVO) shall have been obtained for the Notes.

 

Section 4.10.        Title.  Each Purchaser shall be satisfied in its
reasonable discretion as to the status of each Company’s title to such Company’s
properties.

 

Section 4.11.        Collateral
Agent’s Liens.  Each
Purchaser shall have received satisfactory evidence that the Liens granted to
the Collateral Agent under the Security Documents are subject to an Acceptable
Security Interest and that all actions or filings necessary to protect,
preserve and validly perfect such Liens on the Collateral have been made, taken
or obtained, as the case may be, and are in full force and effect.

 

Section 4.12.        Encumbrance
of Real Property Interests.  Each Purchaser shall be satisfied that the
Mortgages encumber substantially all of the owned real property interests held
by each Company as the Purchasers may require.

 

Section 4.13.        Changes in
Corporate Structure.  No Company
shall have changed its jurisdiction of incorporation or organization, as
applicable, or been a party to any merger or consolidation or succeeded to all
or any substantial part of the liabilities of any other entity, at any time
following October 31, 2007 through the date hereof.

 

Section 4.14.        No Material
Adverse Effect.  There shall
exist or have occurred since July 31, 2007 no condition, event or act
which could reasonably be expected to have a Material Adverse Effect.

 

Section 4.15.        Credit
Documents and Air Products APA Documents.  (a) The Credit Documents shall be in
full force and effect, (b) the Acquisition contemplated by the Air
Products APA Documents shall have been consummated according to the terms of
the Air Products APA Documents and (c) all transactions in connection with
the foregoing shall have been consummated prior to or concurrently with the
issuance of the Notes, and each Purchaser shall have received evidence
satisfactory to it of each of the foregoing.

 

4

 

Section 4.16.        Funding
Instructions.  At least one
Business Day prior to the date of the Closing, each Purchaser shall have
received written instructions signed by a Responsible Officer on letterhead of
KMG Chemicals confirming the information specified in Section 3
including (i) the name and address of the transferee bank, (ii) such
transferee bank’s ABA number and (iii) the account name and number into
which the purchase price for the Notes is to be deposited.

 

Section 4.17.        Proceedings and Documents.  All corporate
and other proceedings in connection with the transactions contemplated by this
Agreement and the other Note Documents and all documents and instruments
incident to such transactions shall be satisfactory to such Purchaser and its
special counsel, and such Purchaser and its special counsel shall have received
all such counterpart originals or certified or other copies of such documents
as such Purchaser or such special counsel may reasonably request.

 

SECTION 5.                                                    REPRESENTATIONS AND
WARRANTIES OF EACH COMPANY.

 

Each
Company represents and warrants to each Purchaser that:

 

Section 5.1.           Organization;
Power and Authority.  Each Company is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation, and is duly qualified as a foreign
corporation and is in good standing in each jurisdiction in which such
qualification is required by law, other than those jurisdictions as to which
the failure to be so qualified or in good standing could not, individually or
in the aggregate, reasonably be expected to have a Material Adverse
Effect.  Each Company has the corporate
power and authority to own or hold under lease the properties it purports to
own or hold under lease, to transact the business it transacts and proposes to
transact, to execute and deliver this Agreement, the Notes and the other Note
Documents and to perform the provisions hereof and thereof.

 

Section 5.2.           Authorization,
Etc.  This Agreement, the Notes
and the other Note Documents have been duly authorized by all necessary corporate
action on the part of each Company, and this Agreement constitutes, and upon
execution and delivery thereof each Note and each other Note Document will
constitute, a legal, valid and binding obligation of each Company enforceable
against each such Company in accordance with its terms, except as such
enforceability may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors’ rights generally and (ii) general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).

 

Section 5.3.           Disclosure.  Neither this
Agreement, any other Note Document nor any other document, certificate or
statement furnished to any Purchaser by or on behalf of any Company in
connection herewith contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements contained
herein and therein not misleading.  There
is no fact peculiar to any Company or any of its Subsidiaries that materially
and adversely affects or in the future may reasonably be expected (so far as
any Company can now reasonably foresee) to materially and adversely affect the
business, property or assets, condition (financial or otherwise) or operations
of any Company or any of its Subsidiaries and that has not been set forth in
this Agreement.

 

5

 

Section 5.4.           Organization
and Ownership of Shares of Subsidiaries.

 

(a)           Schedule 5.4 contains
(except as noted therein) a complete and correct list of each Company’s
Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the
jurisdiction of its organization, and the percentage of shares of each class of
its capital stock or similar equity interests outstanding owned by each Company
and each other Subsidiary.

 

(b)           All of the outstanding
shares of capital stock or similar equity interests of each Subsidiary shown in
Schedule 5.4 as being owned by any Company and its Subsidiaries have
been validly issued, are fully paid and nonassessable and are owned by such
Company or another Subsidiary free and clear of any Lien (except as otherwise
disclosed in Schedule 5.4).

 

(c)           Each Subsidiary identified
in Schedule 5.4 is a corporation or other legal entity duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization, and is duly qualified as a foreign corporation or other legal
entity and is in good standing in each jurisdiction in which such qualification
is required by law, other than those jurisdictions as to which the failure to
be so qualified or in good standing could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.  Each such Subsidiary has the corporate or
other power and authority to own or hold under lease the properties it purports
to own or hold under lease and to transact the business it transacts and
proposes to transact.

 

(d)           No Subsidiary is a party to,
or otherwise subject to any legal, regulatory, contractual or other restriction
(other than this Agreement, the Credit Agreement, the agreements listed on Schedule
5.4 and customary limitations imposed by applicable law) restricting the
ability of such Subsidiary to pay dividends out of profits or make any other
similar distributions of profits to any Company or any of its Subsidiaries that
owns outstanding shares of capital stock or similar equity interests of such
Subsidiary.

 

Section 5.5.           Financial Statements; Material Liabilities.  KMG Chemicals has delivered
to each Purchaser copies of the Most Recent Financial Statements.  All of said financial statements (including
in each case the related schedules and notes) fairly present in all material respects
the consolidated financial position of KMG Chemicals and its Subsidiaries as of
the respective dates of such financial statements and the consolidated results
of their operations and cash flows for the respective periods so specified and
have been prepared in accordance with GAAP consistently applied throughout the
periods involved except as set forth in the notes thereto (subject, in the case
of any interim financial statements, to normal year-end adjustments).  Each Company and its Subsidiaries do not have
any Material liabilities that are not disclosed on such financial statements.

 

Section 5.6.           Compliance
with Laws, Other Instruments, Etc.  The execution,
delivery and performance by each Company of this Agreement, the Notes and the
other Note Documents will not (a) contravene, result in any breach of, or
constitute a default under, or result in the creation of any Lien (other than
the Acceptable Security Interest) in respect of any property of any Company or
any Subsidiary under, any Credit Document, indenture, mortgage, deed of trust,
loan, purchase or credit agreement, lease, corporate charter or by-laws, or any
other agreement or instrument to which any Company or any Subsidiary is bound
or by which any 

 

6

 

Company or any Subsidiary or any of their respective
properties may be bound or affected, (b) conflict with or result in a
breach of any of the terms, conditions or provisions of any order, judgment,
decree, or ruling of any court, arbitrator or Governmental Authority applicable
to any Company or any Subsidiary or (c) violate any provision of any
statute or other rule or regulation of any Governmental Authority
applicable to any Company or any Subsidiary.

 

Section 5.7.           Governmental
Authorizations, Etc.  No consent,
approval or authorization of, or registration, filing or declaration with, any
Governmental Authority is required in connection with (a) the execution,
delivery or performance by any Company of this Agreement, the Notes or any
other Note Document, (b) the mortgage, pledge, assignment, or grant by
each Company of Collateral Agent’s Lien, (c) the perfection or maintenance
of Collateral Agent’s Lien, except for the recording of (i) the Mortgages,
(ii) the special warranty deed conveying the Mortgaged Property in Pueblo,
Colorado to KMG ECI pursuant to the Air Products APA Documents and (iii) the
Financing Statements, or (d) for the exercise by the holder of any Note or
the Collateral Agent of their respective rights or remedies provided for in
this Agreement, the Notes or in any of the other Note Documents (except as may
be required by applicable laws in connection with the foreclosure and
disposition of the Collateral).

 

Section 5.8.           Litigation;
Observance of Agreements, Statutes and Orders.

 

(a)           There are no actions, suits,
investigations or proceedings pending or, to the knowledge of any Company,
threatened against or affecting any Company or any Subsidiary or any property
of any Company or any Subsidiary in any court or before any arbitrator of any
kind or before or by any Governmental Authority that, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect.

 

(b)           Neither any Company nor any
Subsidiary is in default under any term of any agreement or instrument to which
it is a party or by which it is bound, or any order, judgment, decree or ruling
of any court, arbitrator or Governmental Authority or is in violation of any
applicable law, ordinance, rule or regulation (including without
limitation Environmental Laws or the USA Patriot Act) of any Governmental
Authority, which default or violation, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect.

 

Section 5.9.           Taxes.  Each Company and its
Subsidiaries have filed all tax returns that are required to have been filed in
any jurisdiction, and have paid all taxes shown to be due and payable on such
returns and all other taxes and assessments levied upon them or their
properties, assets, income or franchises, to the extent such taxes and assessments
have become due and payable and before they have become delinquent, except for
any taxes and assessments (a) the amount of which is not individually or
in the aggregate Material or (b) the amount, applicability or validity of
which is currently being contested in good faith by appropriate proceedings and
with respect to which such Company or a Subsidiary, as the case may be, has
established adequate reserves in accordance with GAAP.  Each Company knows of no basis for any other
tax or assessment that could reasonably be expected to have a Material Adverse
Effect.  The charges, accruals and
reserves on the books of each Company and its Subsidiaries in respect of
Federal, state or other taxes for all fiscal periods are adequate.  The Federal income tax liabilities of each
Company and its Subsidiaries have been finally determined (whether by reason of
completed audits or the statute of limitations having run) for all Fiscal Years
up to and including 

 

7

 

the Fiscal Year ended July 31, 2003, except
that in Mexico tax years subsequent to 2001 remain open and subject to
examination.

 

Section 5.10.        Title to Property; Leases.  Each Company and its
Subsidiaries have good and sufficient title to their respective properties that
individually or in the aggregate are Material, including all such properties
reflected in the most recent audited balance sheet referred to in Section 5.5
or purported to have been acquired by any Company or any Subsidiary after said
date (except as sold or otherwise disposed of in the ordinary course of
business), in each case free and clear of Liens prohibited by this
Agreement.  All leases that individually
or in the aggregate are Material are valid and subsisting and are in full force
and effect in all material respects.

 

Section 5.11.        Licenses,
Permits, Etc.

 

(a)           Each Company and its
Subsidiaries own or possess all licenses, permits, franchises, authorizations,
patents, copyrights, proprietary software, service marks, trademarks and trade
names, or rights thereto, that individually or in the aggregate are Material,
without known conflict with the rights of others.

 

(b)           To the best knowledge of
each Company, no product of any Company or any of its Subsidiaries infringes in
any material respect any license, permit, franchise, authorization, patent,
copyright, proprietary software, service mark, trademark, trade name or other
right owned by any other Person.

 

(c)           To the best knowledge of
each Company, there is no Material violation by any Person of any right of any
Company or any of its Subsidiaries with respect to any patent, copyright,
proprietary software, service mark, trademark, trade name or other right owned
or used by any Company or any of its Subsidiaries.

 

Section 5.12.        Compliance
with ERISA.

 

(a)           Each Company and each ERISA
Affiliate have operated and administered each Plan in compliance with all
applicable laws except for such instances of noncompliance as have not resulted
in and could not reasonably be expected to result in a Material Adverse
Effect.  Neither any Company nor any
ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA
or the penalty or excise tax provisions of the Code relating to employee
benefit plans (as defined in section 3 of ERISA), and no event, transaction or
condition has occurred or exists that could reasonably be expected to result in
the incurrence of any such liability by any Company or any ERISA Affiliate, or
in the imposition of any Lien on any of the rights, properties or assets of any
Company or any ERISA Affiliate, in either case pursuant to Title I or IV of
ERISA or to such penalty or excise tax provisions or to section 412 or 430 of
the Code or section 4068 of ERISA, other than such liabilities or Liens as
would not be individually or in the aggregate Material.

 

(b)           The present value of the
aggregate benefit liabilities under each of the Plans (other than Multiemployer
Plans), determined as of the end of such Plan’s most recently ended plan year
on the basis of the actuarial assumptions specified for funding purposes in
such Plan’s most recent actuarial valuation report, did not exceed the
aggregate current value of the assets of such Plan allocable to such benefit
liabilities.  The term “benefit liabilities” has the meaning 

 

8

 

specified in section 4001 of
ERISA and the terms “current value”
and “present value” have the
meanings specified in section 3 of ERISA.

 

(c)           Each Company and its ERISA
Affiliates have not incurred withdrawal liabilities (and are not subject to
contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in
respect of Multiemployer Plans that individually or in the aggregate are
Material.

 

(d)           The expected postretirement
benefit obligation (determined as of the last day of the Companies’ most
recently ended Fiscal Year in accordance with Financial Accounting Standards
Board Statement No. 106, without regard to liabilities attributable to
continuation coverage mandated by section 4980B of the Code) of the Companies
and their respective Subsidiaries is not Material.

 

(e)           The execution and delivery
of this Agreement and the issuance and sale of the Notes hereunder will not
involve any transaction that is subject to the prohibitions of section 406 of
ERISA or in connection with which a tax could be imposed pursuant to section
4975(c)(1)(A)-(D) of the Code.  The
representation by each Company to each Purchaser in the first sentence of this Section 5.12(e) is
made in reliance upon and subject to the accuracy of such Purchaser’s
representation in Section 6.2 as to the sources of the funds used
to pay the purchase price of the Notes to be purchased by such Purchaser.

 

Section 5.13.        Private
Offering by the Companies.  Neither any
Company nor anyone acting on its behalf has offered the Notes or any similar
securities for sale to, or solicited any offer to buy any of the same from, or
otherwise approached or negotiated in respect thereof with, any person other
than the Purchasers and not more than 10 other Institutional Investors, each of
which has been offered the Notes at a private sale for investment.  Neither any Company nor anyone acting on its
behalf has taken, or will take, any action that would subject the issuance or
sale of the Notes to the registration requirements of Section 5 of the
Securities Act or to the registration requirements of any securities or blue
sky laws of any applicable jurisdiction.

 

Section 5.14.        Use of
Proceeds; Margin Regulations.  Each Company
will apply the proceeds of the sale of the Notes (a) to repay amounts
outstanding under, and terminate, the Companies’ existing secured credit
facility with Wachovia Bank, National Association, (b) to partially
finance the Acquisition contemplated by the Air Products APA and (c) for
other general corporate purposes.  No
part of the proceeds from the sale of the Notes hereunder will be used,
directly or indirectly, for the purpose of buying or carrying any margin stock
within the meaning of Regulation U of the Board of Governors of the Federal Reserve
System (12 CFR 221), or for the purpose of buying or carrying or trading in any
securities under such circumstances as to involve any Company in a violation of
Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a
violation of Regulation T of said Board (12 CFR 220).  Margin stock does not constitute more than
25% of the value of the consolidated assets of the Companies and their
respective Subsidiaries and no Company has any present intention that margin
stock will constitute more than 25% of the value of such assets.   As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have
the meanings assigned to them in said Regulation U.

 

9

 

Section 5.15.        Existing
Indebtedness; Future Liens.

 

(a)           Except as
described therein, Schedule 5.15 sets forth a complete and correct list
of all Existing Indebtedness of each Company and its Subsidiaries arising under
clause (a) of the definition thereof as of the date of the Closing
(including a description of the obligors and obligees, principal amount
outstanding and collateral therefor, if any, and guarantees thereof, if
any).  Neither any Company nor any
Subsidiary is in default and no waiver of default is currently in effect, in
the payment of any principal or interest on any Indebtedness of such Company or
such Subsidiary and no event or condition exists with respect to any
Indebtedness of any Company or any Subsidiary that would permit (or that with
notice or the lapse of time, or both, would permit) one or more Persons to
cause such Indebtedness to become due and payable before its stated maturity or
before its regularly scheduled dates of payment.

 

(b)           Neither any
Company nor any Subsidiary has agreed or consented to cause or permit in the
future (upon the happening of a contingency or otherwise) any of its property,
whether now owned or hereafter acquired, to be subject to a Lien, other than
Permitted Liens.

 

(c)           Neither any
Company nor any Subsidiary is a party to, or otherwise subject to any provision
contained in, any instrument evidencing Indebtedness of such Company or such
Subsidiary, any agreement relating thereto or any other agreement (including,
but not limited to, its charter or other Organizational Document) which limits
the amount of, or otherwise imposes restrictions on the incurring of,
Indebtedness of any Company, except as specifically indicated in Schedule
5.15.

 

Section 5.16.        Foreign
Assets Control Regulations, Etc.

 

(a)           Neither the
sale of the Notes by any Company hereunder nor its use of the proceeds thereof
will violate the Trading with the Enemy Act, as amended, or any of the foreign
assets control regulations of the United States Treasury Department (31 CFR,
Subtitle B, Chapter V, as amended) or any enabling legislation or executive
order relating thereto.

 

(b)           Neither any
Company nor any Subsidiary (i) is a Person described or designated in the
Specially Designated Nationals and Blocked Persons List of the Office of
Foreign Assets Control or in Section 1 of the Anti Terrorism Order or (ii) knowingly
engages in any dealings or transactions with any such Person.  Each Company and its Subsidiaries are in
compliance, in all material respects, with the USA Patriot Act.

 

(c)           No part of the
proceeds from the sale of the Notes hereunder will be used, directly or
indirectly, for any payments to any governmental official or employee,
political party, official of a political party, candidate for political office,
or anyone else acting in an official capacity, in order to obtain, retain or
direct business or obtain any improper advantage, in violation of the United
States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases
that such Act applies to each Company.

 

Section 5.17.        Status
under Certain Statutes.  Neither any
Company nor any Subsidiary is subject to regulation under the Investment
Company Act of 1940, as amended, the Public Utility Holding Company Act of
2005, as amended, the ICC Termination Act of 1995, as amended, or the Federal
Power Act, as amended.

 

10

 

Section 5.18.        Environmental
Matters.

 

(a)           Neither any Company nor any
Subsidiary has knowledge of any claim or has received any notice of any claim,
and no proceeding has been instituted raising any claim against any Company or
any of its Subsidiaries or any of their respective real properties now or
formerly owned, leased or operated by any of them or other assets, alleging any
damage to the environment or violation of any Environmental Laws, except, in
each case, such as could not reasonably be expected to result in a Material
Adverse Effect.

 

(b)           Neither any Company nor any
Subsidiary has knowledge of any facts which would give rise to any claim,
public or private, of violation of Environmental Laws or damage to the
environment emanating from, occurring on or in any way related to real
properties now or formerly owned, leased or operated by any of them or to other
assets or their use, except, in each case, such as could not reasonably be
expected to result in a Material Adverse Effect.

 

(c)           Neither any Company nor any
Subsidiary has stored any Hazardous Materials on real properties now or
formerly owned, leased or operated by any of them and has not disposed of any
Hazardous Materials in a manner contrary to any Environmental Laws in each case
in any manner that could reasonably be expected to result in a Material Adverse
Effect; and

 

(d)           All buildings on all real
properties now owned, leased or operated by any Company or any Subsidiary are
in compliance with applicable Environmental Laws, except where failure to
comply could not reasonably be expected to result in a Material Adverse Effect.

 

Section 5.19.        Material
Contracts.  Set forth on
Schedule 5.19 is a complete and accurate list of all of the Material
Contracts.

 

Section 5.20.        Priority of
Liens.  Except with respect to Excluded
Collateral (as defined in the Credit Agreement) and vehicles for which the
Collateral Agent’s Lien has not yet been reflected on the certificate of title
therefor, the Collateral Agent’s Lien constitutes an Acceptable Security Interest.

 

Section 5.21.        Insurance.  The assets, properties and business of the
Company Consolidated Group are insured against such hazards and liabilities,
under such coverages and in such amounts, as are required under Section 9.9.

 

Section 5.22.        Delivery of
Credit Documents and Air Products APA Documents.  Each Company has delivered
to each Purchaser a true, correct and complete copy of each material Credit
Document and Air Products APA Document, including all amendments and waivers of
any provision thereof.

 

SECTION 6.                                                    REPRESENTATIONS OF
THE PURCHASER.

 

Section 6.1.           Purchase
for Investment.  Each Purchaser
severally represents that it is purchasing the Notes for its own account or for
one or more separate accounts maintained by such Purchaser or for the account
of one or more pension or trust funds and not with a view to the distribution
thereof, provided that the
disposition of such Purchaser’s or their property shall at all times be within
such Purchaser’s or their control.  Each
Purchaser understands that the 

 

11

 

Notes have not been registered under the
Securities Act and may be resold only if registered pursuant to the provisions
of the Securities Act or if an exemption from registration is available, except
under circumstances where neither such registration nor such an exemption is
required by law, and that the Companies are not required to register the Notes.

 

Section 6.2.           Source of
Funds.  Each Purchaser severally
represents that at least one of the following statements is an accurate
representation as to each source of funds (a “Source”)
to be used by such Purchaser to pay the purchase price of the Notes to be
purchased by such Purchaser hereunder:

 

(a)           the Source is
an “insurance company general account” (as the term is defined in the United
States Department of Labor’s Prohibited Transaction Exemption (“PTE”) 95-60) in respect of which the
reserves and liabilities (as defined by the annual statement for life insurance
companies approved by the National Association of Insurance Commissioners (the “NAIC Annual Statement”)) for the general
account contract(s) held by or on behalf of any employee benefit plan
together with the amount of the reserves and liabilities for the general
account contract(s) held by or on behalf of any other employee benefit
plans maintained by the same employer (or affiliate thereof as defined in PTE
95-60) or by the same employee organization in the general account do not
exceed 10% of the total reserves and liabilities of the general account
(exclusive of separate account liabilities) plus surplus as set forth in
the NAIC Annual Statement filed with such Purchaser’s state of domicile; or

 

(b)           the Source is a
separate account that is maintained solely in connection with such Purchaser’s
fixed contractual obligations under which the amounts payable, or credited, to
any employee benefit plan (or its related trust) that has any interest in such
separate account (or to any participant or beneficiary of such plan (including
any annuitant)) are not affected in any manner by the investment performance of
the separate account; or

 

(c)           the Source is
either (i) an insurance company pooled separate account, within the
meaning of PTE 90-1 or (ii) a bank collective investment fund, within the
meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the
Companies in writing pursuant to this clause (c), no employee benefit plan or
group of plans maintained by the same employer or employee organization
beneficially owns more than 10% of all assets allocated to such pooled separate
account or collective investment fund; or

 

(d)           the Source
constitutes assets of an “investment fund” (within the meaning of Part V
of PTE 84-14 (the “QPAM Exemption”))
managed by a “qualified professional asset manager” or “QPAM” (within the
meaning of Part V of the QPAM Exemption), no employee benefit plan’s
assets that are included in such investment fund, when combined with the assets
of all other employee benefit plans established or maintained by the same
employer or by an affiliate (within the meaning of Section V(c)(1) of
the QPAM Exemption) of such employer or by the same employee organization and
managed by such QPAM, exceed 20% of the total client assets managed by such
QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption
are satisfied, neither the QPAM nor a person controlling or controlled by the
QPAM (applying the definition of “control” in Section V(e) of the
QPAM Exemption) owns a 5% or more interest in any Company and (i) the
identity of such QPAM and (ii) the names of all employee benefit plans 

 

12

 

whose assets are included in such investment
fund have been disclosed to the Companies in writing pursuant to this clause
(d); or

 

(e)           the Source
constitutes assets of a “plan(s)” (within the meaning of Section IV of PTE
96-23 (the “INHAM Exemption”))
managed by an “in-house asset manager” or “INHAM” (within the meaning of Part IV
of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of
the INHAM Exemption are satisfied, neither the INHAM nor a person controlling
or controlled by the INHAM (applying the definition of “control” in Section IV(d) of
the INHAM Exemption) owns a 5% or more interest in any Company and (i) the
identity of such INHAM and (ii) the name(s) of the employee benefit
plan(s) whose assets constitute the Source have been disclosed to the
Companies in writing pursuant to this clause (e); or

 

(f)            the Source is a
governmental plan; or

 

(g)           the Source is
one or more employee benefit plans, or a separate account or trust fund
comprised of one or more employee benefit plans, each of which has been
identified to the Companies in writing pursuant to this clause (g); or

 

(h)           the Source does
not include assets of any employee benefit plan, other than a plan exempt from
the coverage of ERISA.

 

As used in this Section 6.2,
the terms “employee benefit plan,” “governmental plan,” and “separate
account” shall have the respective meanings assigned to such terms
in section 3 of ERISA.

 

SECTION 7.                                                    INFORMATION AS TO
COMPANIES

 

Section 7.1.           Financial
and Business Information.  The Companies
shall deliver to each holder of Notes that is an Institutional Investor:

 

(a)           Quarterly
Statements — within 45 days after each Quarter-End in each Fiscal
Year of the Companies, duplicate copies of,

 

(i)            an unaudited
(management-prepared) consolidated balance sheet of the Company Consolidated
Group as at the end of such Fiscal Quarter, and

 

(ii)           unaudited
(management-prepared) consolidated statements of income, changes in
shareholders’ equity and cash flows of the Company Consolidated Group, for such
Fiscal Quarter and (in the case of the second, third and fourth quarters) for
the portion of the Fiscal Year ending with such Fiscal Quarter,

 

setting forth in each case in comparative
form the figures for the corresponding periods in the previous Fiscal Year, all
in reasonable detail, prepared in accordance with GAAP applicable to quarterly
financial statements generally, and certified by a Senior Financial Officer as
fairly presenting, in all material respects, the financial position of the
companies being reported on and their results of operations and cash flows,
subject to changes resulting from year-end adjustments, provided that
delivery within the time 

 

13

 

period specified above of copies of KMG
Chemicals’ Form 10-Q prepared in compliance with the requirements therefor
and filed with the SEC shall be deemed to satisfy the requirements of this Section 7.1(a),
provided, further,
that the Companies shall be deemed to have made such delivery of such Form 10-Q
if it shall have timely made such Form 10-Q available on “EDGAR” and on
KMG Chemicals’ home page on the worldwide web (at the date of this
Agreement located at: 
http//www.kmgb.com) and shall have given each Purchaser prior notice of
such availability on EDGAR and on its home page in connection with each
delivery (such availability and notice thereof being referred to as “Electronic Delivery”);

 

(b)           Annual
Statements — within 120 days after each Fiscal Year-End of the
Companies, duplicate copies of

 

(i)            a consolidated
balance sheet of the Company Consolidated Group as at the end of such year, and

 

(ii)           consolidated
statements of income, changes in shareholders’ equity and cash flows of the
Company Consolidated Group for such year,

 

setting forth in each case in comparative
form the figures for the previous Fiscal Year, all in reasonable detail,
prepared in accordance with GAAP, and accompanied by an opinion thereon of
independent public accountants of recognized national standing, which opinion
shall state that such financial statements present fairly, in all material
respects, the financial position of the companies being reported upon and their
results of operations and cash flows and have been prepared in conformity with
GAAP, and that the examination of such accountants in connection with such
financial statements has been made in accordance with generally accepted
auditing standards, and that such audit provides a reasonable basis for such
opinion in the circumstances; provided that
the delivery within the time period specified above of KMG Chemicals’ Form 10-K
for such Fiscal Year (together with KMG Chemicals’ annual report to
shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange
Act) prepared in accordance with the requirements therefor and filed with the
SEC, shall be deemed to satisfy the requirements of this Section 7.1(b),
provided, further, that the Companies
shall be deemed to have made such delivery of such Form 10-K if it shall
have timely made Electronic Delivery thereof;

 

(c)           SEC and
Other Reports — promptly upon their becoming available, one copy
of (i) each material financial statement, report, notice or proxy
statement sent by any Company or any Subsidiary to its principal lending banks
as a whole (excluding information sent to such banks in the ordinary course of
administration of a bank facility, such as information relating to pricing and
borrowing availability) or to its public securities holders generally, and (ii) each
regular or periodic report, each registration statement (without exhibits
except as expressly requested by such holder), and each prospectus and all
amendments thereto filed by any Company or any Subsidiary with the SEC and of
all press releases and other statements made available generally by any Company
or any Subsidiary to the public concerning developments that are Material;

 

14

 

(d)           Notice
of Default or Event of Default — promptly, and in any event
within five days after a Responsible Officer becoming aware of the existence of
any Default or Event of Default or that any Person has given any notice or
taken any action with respect to a claimed default hereunder or that any Person
has given any notice or taken any action with respect to a claimed default of
the type referred to in Section 11(f), a written notice specifying
the nature and period of existence thereof and what action each Company is
taking or proposes to take with respect thereto;

 

(e)           ERISA
Matters — promptly, and in any event within five days after
a Responsible Officer becoming aware of any of the following, a written notice
setting forth the nature thereof and the action, if any, that each Company or
an ERISA Affiliate proposes to take with respect thereto:

 

(i)            with respect to
any Plan, any reportable event, as defined in section 4043(c) of ERISA and
the regulations thereunder, for which notice thereof has not been waived
pursuant to such regulations as in effect on the date hereof; or

 

(ii)           the taking by
the PBGC of steps to institute, or the threatening by the PBGC of the
institution of, proceedings under section 4042 of ERISA for the termination of,
or the appointment of a trustee to administer, any Plan, or the receipt by any
Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such
action has been taken by the PBGC with respect to such Multiemployer Plan; or

 

(iii)          any event,
transaction or condition that could result in the incurrence of any liability
by any Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the
penalty or excise tax provisions of the Code relating to employee benefit
plans, or in the imposition of any Lien on any of the rights, properties or
assets of any Company or any ERISA Affiliate pursuant to Title I or IV of ERISA
or such penalty or excise tax provisions, if such liability or Lien, taken
together with any other such liabilities or Liens then existing, could
reasonably be expected to have a Material Adverse Effect;

 

(f)            Notices
from Governmental Authority — promptly, and in any event
within 30 days of receipt thereof, copies of any notice to any Company or any
Subsidiary from any Federal or state Governmental Authority relating to any
order, ruling, statute or other law or regulation that could reasonably be
expected to have a Material Adverse Effect;

 

(g)           Other
Notices — prompt notice in writing if any Responsible
Officer of any Company obtains knowledge of any of the following:

 

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

 

(ii)           any default or
event of default (after the expiration of any applicable grace and cure period)
under any agreement of any Company Party with any Person and relating to the
borrowing of money;

 

15

 

(h)           Rule 144A
Information — with reasonable promptness, any information
necessary to permit any such holder to comply with Rule 144A under the
Securities Act, or any successor rule; and

 

(i)            Requested
Information — with reasonable promptness, such other data and
information relating to the business, operations, affairs, financial condition,
assets or properties of any Company or any of its Subsidiaries (including, but
without limitation, actual copies of KMG Chemicals’ Form 10-Q and Form 10-K)
or relating to the ability of any Company to perform its obligations hereunder
and under the Notes and the other Note Documents as from time to time may be
reasonably requested by any such holder of Notes.

 

Section 7.2.           Officer’s
Certificate.  Each set of
financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or
Section 7.1(b) shall be accompanied by a certificate of a
Senior Financial Officer setting forth (which, in the case of Electronic
Delivery of any such financial statements, shall be by separate concurrent
delivery of such certificate to each holder of Notes):

 

(a)           Covenant
Compliance — the information (including detailed calculations)
required in order to establish whether any Company was in compliance with the
requirements of Sections 10.1 and 10.12 during the quarterly or
annual period covered by the statements then being furnished (including with
respect to each such Section, where applicable, the calculations of the maximum
or minimum amount, ratio or percentage, as the case may be, permissible under
the terms of such Sections, and the calculation of the amount, ratio or
percentage then in existence); and

 

(b)           Event
of Default — a statement that such Senior Financial Officer has
reviewed the relevant terms hereof and has made, or caused to be made, under
his or her supervision, a review of the transactions and conditions of each
Company and its Subsidiaries from the beginning of the quarterly or annual
period covered by the statements then being furnished to the date of the
certificate and that such review shall not have disclosed the existence during
such period of any condition or event that constitutes a Default or an Event of
Default or, if any such condition or event existed or exists (including,
without limitation, any such event or condition resulting from the failure of
any Company or any Subsidiary to comply with any Environmental Law), specifying
the nature and period of existence thereof and what action each Company shall
have taken or proposes to take with respect thereto.

 

Section 7.3.           Visitation.  Each Company shall permit the representatives
of each holder of Notes that is an Institutional Investor:

 

(a)           No
Default — if no Default or Event of Default then exists, at
the expense of such holder and upon reasonable prior notice to the Companies,
to visit the principal executive office of the Companies, to discuss the
affairs, finances and accounts of each Company and its Subsidiaries with each
Company’s officers, and (with the consent of the Companies, which consent will
not be unreasonably withheld) its independent public accountants, and (with the
consent of the Companies, which consent will not be unreasonably withheld) to
visit the other offices and properties of each Company and each Subsidiary, all
at such reasonable times and as often as may be reasonably requested in
writing; and

 

16

 

(b)           Default
— if a Default or Event of Default then exists, at the joint and
several expense of the Companies to visit and inspect any of the offices or
properties of the Companies or any Subsidiary, to examine all their respective
books of account, records, reports and other papers, to make copies and
extracts therefrom, and to discuss their respective affairs, finances and
accounts with their respective officers and independent public accountants (and
by this provision each Company authorizes said accountants to discuss the
affairs, finances and accounts of such Company and its Subsidiaries), all at
such times and as often as may be requested.

 

SECTION 8.                                                    PAYMENT AND
PREPAYMENT OF THE NOTES.

 

Section 8.1.           Maturity.  As provided therein, the
entire unpaid principal balance of the Notes shall be due and payable on the
stated maturity date thereof.

 

Section 8.2.           Optional
Prepayments with Make-Whole Amount.  The Companies
may, at their option, upon notice as provided below, prepay at any time all, or
from time to time any part of, the Notes (in integral multiples of $100,000 and
in a minimum amount of $1,000,000), at 100% of the principal amount so prepaid,
and the Make-Whole Amount determined for the prepayment date with respect to
such principal amount.  The Companies
will give each holder of Notes written notice of each optional prepayment under
this Section 8.2 not less than 10 days and not more than 60 days
prior to the date fixed for such prepayment. 
Each such notice shall specify such date (which shall be a Business
Day), the aggregate principal amount of the Notes to be prepaid on such date,
the principal amount of each Note held by such holder to be prepaid (determined
in accordance with Section 8.4), and the interest to be paid on the
prepayment date with respect to such principal amount being prepaid, and shall
be accompanied by a certificate of a Senior Financial Officer as to the
estimated Make-Whole Amount due in connection with such prepayment (calculated
as if the date of such notice were the date of the prepayment), setting forth the
details of such computation.  Two
Business Days prior to such prepayment, the Companies shall deliver to each
holder of Notes a certificate of a Senior Financial Officer specifying the
calculation of such Make-Whole Amount as of the specified prepayment date.

 

Section 8.3.           Allocation
of Partial Prepayments.  In the case of
each partial prepayment of the Notes, the principal amount of the Notes to be
prepaid shall be allocated among all of the Notes at the time outstanding in
proportion, as nearly as practicable, to the respective unpaid principal
amounts thereof not theretofore called for prepayment.

 

Section 8.4.           Maturity;
Surrender, Etc.  In the case of
each prepayment of Notes pursuant to this Section 8, the principal
amount of each Note to be prepaid shall mature and become due and payable on
the date fixed for such prepayment (which shall be a Business Day), together
with interest on such principal amount accrued to such date and the applicable
Make-Whole Amount, if any.  From and
after such date, unless the Companies shall fail to pay such principal amount
when so due and payable, together with the interest and Make-Whole Amount, if
any, as aforesaid, interest on such principal amount shall cease to
accrue.  Any Note paid or prepaid in full
shall be surrendered to the Companies and cancelled and shall not be reissued,
and no Note shall be issued in lieu of any prepaid principal amount of any
Note.

 

17

 

Section 8.5.           Purchase of
Notes.  Each Company will not and
will not permit any Subsidiary to purchase, redeem, prepay or otherwise
acquire, directly or indirectly, any of the outstanding Notes except upon the
payment or prepayment of the Notes in accordance with the terms of this
Agreement and the Notes.  Each Company
will promptly cancel all Notes acquired by it or any Company pursuant to any
payment or prepayment of Notes pursuant to any provision of this Agreement and
no Notes may be issued in substitution or exchange for any such Notes.

 

Section 8.6.           Make-Whole
Amount.

 

“Make-Whole Amount” means, with respect to any Note, an
amount equal to the excess, if any, of the Discounted Value of the Remaining
Scheduled Payments with respect to the Called Principal of such Note over the
amount of such Called Principal, provided that
the Make-Whole Amount may in no event be less than zero.  For the purposes of determining the
Make-Whole Amount, the following terms have the following meanings:

 

“Called Principal” means, with respect to any Note, the
principal of such Note that is to be prepaid pursuant to Section 8.2
or has become or is declared to be immediately due and payable pursuant to Section 12.1,
as the context requires.

 

“Discounted Value” means, with respect to the Called
Principal of any Note, the amount obtained by discounting all Remaining
Scheduled Payments with respect to such Called Principal from their respective
scheduled due dates to the Settlement Date with respect to such Called
Principal, in accordance with accepted financial practice and at a discount
factor (applied on the same periodic basis as that on which interest on the
Notes is payable) equal to the Reinvestment Yield with respect to such Called
Principal.

 

“Reinvestment
Yield” means, with respect to the Called Principal of any Note, 1.0%
over the yield to maturity implied by (i) the yields reported as of 10:00 a.m.
(New York City time) on the second Business Day preceding the Settlement Date
with respect to such Called Principal, on the display designated as “Page PX1”
(or such other display as may replace Page PX1) on Bloomberg Financial
Markets for the most recently issued actively traded on the run U.S. Treasury
securities having a maturity equal to the Remaining Average Life of such Called
Principal as of such Settlement Date, or (ii) if such yields are not
reported as of such time or the yields reported as of such time are not
ascertainable (including by way of interpolation), the Treasury Constant
Maturity Series Yields reported, for the latest day for which such yields
have been so reported as of the second Business Day preceding the Settlement
Date with respect to such Called Principal, in Federal Reserve Statistical
Release H.15 (or any comparable successor publication) for U.S. Treasury
securities having a constant maturity equal to the Remaining Average Life of
such Called Principal as of such Settlement Date.

 

In the case of each
determination under clause (i) or clause (ii), as the case may be, of
the preceding paragraph, such implied yield will be determined, if necessary,
by (a) converting U.S. Treasury bill quotations to bond equivalent yields
in accordance with accepted financial practice and (b) interpolating
linearly between (1) the applicable U.S. Treasury security with the
maturity closest to and greater than such Remaining Average Life and (2) the
applicable U.S. Treasury security with the maturity closest to and less than
such Remaining Average Life.  The 

 

18

 

Reinvestment Yield shall be rounded to the
number of decimal places as appears in the interest rate of the applicable
Note.

 

“Remaining Average Life”  means, with
respect to any Called Principal, the number of years (calculated to the nearest
one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the
sum of the products obtained by multiplying (a) the principal component of
each Remaining Scheduled Payment with respect to such Called Principal by (b) the
number of years (calculated to the nearest one-twelfth year) that will elapse
between the Settlement Date with respect to such Called Principal and the
scheduled due date of such Remaining Scheduled Payment.

 

“Remaining Scheduled Payments”  means,
with respect to the Called Principal of any Note, all payments of such Called
Principal and interest thereon that would be due after the Settlement Date with
respect to such Called Principal if no payment of such Called Principal were
made prior to its scheduled due date, provided that
if such Settlement Date is not a date on which interest payments are due to be
made under the terms of the Notes, then the amount of the next succeeding
scheduled interest payment will be reduced by the amount of interest accrued to
such Settlement Date and required to be paid on such Settlement Date pursuant
to Section 8.2 or Section 12.1.

 

“Settlement Date”  means, with
respect to the Called Principal of any Note, the date on which such Called
Principal is to be prepaid pursuant to Section 8.2 or has become or
is declared to be immediately due and payable pursuant to Section 12.1,
as the context requires.

 

SECTION 9.                                                    AFFIRMATIVE
COVENANTS.

 

Each Company covenants that
so long as any of the Notes are outstanding:

 

Section 9.1.           Compliance
with Law.  Without
limiting Section 10.10, each Company will, and will cause each of
its Subsidiaries to, comply with all laws, ordinances or governmental rules or
regulations to which each of them is subject, including, without limitation,
ERISA, the USA Patriot Act and Environmental Laws, and will obtain and maintain
in effect all licenses, certificates, permits, franchises and other
governmental authorizations necessary to the ownership of their respective
properties or to the conduct of their respective businesses, in each case to
the extent necessary to ensure that non-compliance with such laws, ordinances
or governmental rules or regulations or failures to obtain or maintain in
effect such licenses, certificates, permits, franchises and other governmental
authorizations could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.

 

Section 9.2.           [Intentionally
Omitted].

 

Section 9.3.           Maintenance
of Properties.  Each Company
will, and will cause each of its Subsidiaries to, maintain and keep, or cause
to be maintained and kept, their respective properties in good repair, working
order and condition (other than ordinary wear and tear), so that the business
carried on in connection therewith may be properly conducted at all times, provided that this Section shall not
prevent any Company or any Subsidiary from discontinuing the operation and the
maintenance of any of its properties if such discontinuance is desirable in 

 

19

 

the conduct of its business and such Company
has concluded that such discontinuance could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.

 

Section 9.4.           Payment of
Taxes and Claims.  Each Company
will, and will cause each of its Subsidiaries to, file all tax returns required
to be filed in any jurisdiction and to pay and discharge all taxes shown to be
due and payable on such returns and all other taxes, assessments, governmental
charges, or levies imposed on them or any of their properties, assets, income
or franchises, to the extent the same have become due and payable and before
they have become delinquent and all claims for which sums have become due and
payable that have or might become a Lien on properties or assets of any Company
or any Subsidiary, provided that
neither any Company nor any Subsidiary need pay any such tax, assessment,
charge, levy or claim if (i) the amount, applicability or validity thereof
is contested by such Company or such Subsidiary on a timely basis in good faith
and in appropriate proceedings, and a Company or a Subsidiary has established
adequate reserves therefor in accordance with GAAP on the books of such Company
or such Subsidiary or (ii) the nonpayment of all such taxes, assessments,
charges, levies and claims in the aggregate could not reasonably be expected to
have a Material Adverse Effect.

 

Section 9.5.           Corporate
Existence, Etc.  Subject to Section 10.7,
each Company will at all times preserve and keep in full force and effect its
corporate existence.  Subject to Sections
10.7 and 10.8, each Company will at all times preserve and keep in
full force and effect the corporate existence of each of its Subsidiaries
(unless merged into a Company or a Wholly-Owned Subsidiary) and all rights and
franchises of each Company and its Subsidiaries unless, in the good faith
judgment of such Company, the termination of or failure to preserve and keep in
full force and effect such corporate existence, right or franchise could not,
individually or in the aggregate, have a Material Adverse Effect.

 

Section 9.6.           Books and
Records.  Each Company will, and will
cause each of its Subsidiaries to, maintain proper books of record and account
in conformity with GAAP and all applicable requirements of any Governmental
Authority having legal or regulatory jurisdiction over such Company or such Subsidiary,
as the case may be.

 

Section 9.7.           Environmental
Remediation and Indemnification.  If at any time any Hazardous Material is
discovered on, under or about any Mortgaged Property or any other property
owned or operated by any Company or any Subsidiary (“Other Property”) and failure to remediate the same would cause
any Company or any Subsidiary to be in violation of any Environmental Law that
could reasonably be expected to have a Material Adverse Effect, the Companies
will inform the holders of the Notes of the same and of such Company’s or such
Subsidiary’s proposed remediation program, and such Company or such Subsidiary
will, at no cost and expense to the Collateral Agent or the holders of the
Notes, and only to the extent of any legal requirement under applicable
Environmental Laws for such Company or such Subsidiary to do so, remediate or
remove such Hazardous Materials from such Mortgaged Property or Other Property
or the groundwater underlying such Mortgaged Property or Other Property in
accordance with (a) such remediation program as a prudent operator would
undertake, (b) the approval of the appropriate Governmental Authorities,
if any such approval is required under the applicable Environmental Laws, and (c) all
applicable Environmental Laws the noncompliance with which could reasonably be
expected to have a Material Adverse Effect. 
Each Company and any Subsidiary shall have the right to contest any
notice or directive by any appropriate 

 

20

 

Governmental Authority to remediate or remove
Hazardous Materials from any Mortgaged Property or Other Property so long as
such Company or such Subsidiary diligently prosecutes such contest to
completion and complies with any final order or determination.  Each Company shall be solely responsible for,
and will indemnify and hold harmless the Collateral Agent and the holders of
the Notes and their respective directors, officers, employees, agents,
successors and assigns from and against, any and all losses, damages, demands,
claims, causes of action, judgments, actions, assessments, penalties, costs,
expenses and liabilities to the extent that they directly or indirectly arise
out of or are attributable to the release of any Hazardous Materials at any
Mortgaged Property or Other Property, including the following: (i) all
foreseeable and unforeseeable consequential damages; (ii) the costs of any
repair, cleanup or detoxification of any Mortgaged Property or Other Property
required by any applicable Environmental Laws, and the preparation and
implementation of any closure, remedial or other plans required by any
applicable Environmental Laws; and (iii) all reasonable costs and expenses
incurred by the Collateral Agent or any holder of the Notes in connection with
clauses (i) and (ii) above, including reasonable attorneys’ fees; provided, however,
that the Companies shall not be liable for any of the foregoing if a final,
nonappealable judgment by a court of competent jurisdiction finds that such
release of Hazardous Materials resulted from the gross negligence or willful
misconduct of the Collateral Agent or a holder of the Notes.  The indemnities provided in this Section 9.7
shall survive the repayment or any other satisfaction of the Note Agreement
Obligations.

 

Section 9.8.           Information
Required by Rule 144A.  Each Company will, upon the request of the
holder of any Note, provide such holder, and any Qualified Institutional Buyer
designated by such holder, such financial and other information as such holder
may reasonably determine to be necessary in order to permit compliance with the
information requirements of Rule 144A under the Securities Act in
connection with the resale of Notes, except at such times as KMG Chemicals is
subject to the reporting requirements of section 13 or 15(d) of the
Exchange Act.

 

Section 9.9.           Insurance
and Insurance Proceeds.

 

(a)           Each Company
shall cause the assets, properties and business of the Company Consolidated
Group to be 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.  Upon request of the
Collateral Agent, the Companies shall provide (and shall cause the other
Members of the Company Consolidated Group to provide) the Collateral Agent with
insurance certificates and copies of insurance policies then in effect (it
being agreed that no Member of the Company Consolidated Group shall be required
to maintain coverages for (i) products liability insurance on the
Companies’ wood treating products, nor (ii) business interruption
insurance, except for the Mortgaged Property located in Pueblo, Colorado).

 

(b)           Each Company
shall cause (i) each general liability insurance policy to name the
Collateral Agent as additional insured, (ii) each casualty insurance
policy insuring any Collateral to name the Collateral Agent as loss payee (and
with respect to any Mortgaged Property, a mortgagee), and (iii) all such
policies to provide that such policies will not be canceled or materially
changed without 30 days prior written notice to the Collateral Agent.

 

21

 

(c)           Any Net Cash
Proceeds (as defined in the Credit Agreement) payable under any insurance
policy on account of damage or destruction to the Mortgaged Property shall be
paid to the Collateral Agent as a prepayment of the principal indebtedness
owing under the Term Note (as defined in the Credit Agreement); provided that such Net Cash Proceeds shall be paid to the
Companies so long as (i) no Event of Default exists at the time of
payment, and the Collateral Agent determines in its reasonable discretion that
the occurrence of such casualty event would not reasonably be expected to result
in an Event of Default (including an Event of Default on account of loss of
income occasioned by such casualty event); and (ii) as soon as reasonably
practicable following the casualty event, the Companies provide evidence
reasonably satisfactory to the Collateral Agent that such Net Cash Proceeds
will be applied (A) to the repair or restoration of the Mortgaged Property
so damaged, or to the construction of a replacement facility for the property
damaged or condemned, or to the expansion of the productive capacity of an
existing facility in lieu thereof (and, unless waived by the Required Holders,
the Companies shall execute such documents and instruments as may be necessary
or appropriate in the Collateral Agent’s reasonable discretion to cause such
replacement facility or expanded facility to constitute part of the
Collateral); or, (B) if approved by the Collateral Agent, to the purchase
of other assets to be used in the operation of the business of a Member of the
Company Consolidated Group.

 

Section 9.10.        Maintenance
of Lien.  In connection with the
Collateral Agent’s Lien, each Company will:

 

(a)           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 the Collateral Agent as the Collateral Agent or the
Required Holders, from time to time, may specify, and pay, or reimburse the
Collateral Agent upon demand for paying, all costs and taxes of filing or
recording the same in such Jurisdictions as the Collateral Agent may designate;
and

 

(b)           take such other
steps as the Collateral Agent or the Required Holders, from time to time, may
direct to protect, perfect, and maintain the Collateral Agent’s Lien.

 

Section 9.11.        General
Covenants and Agreements Pertaining to the Collateral.

 

(a)           The addresses
of each Company’s principal place of business (or chief executive office if
more than one), the office where such Company keeps and will keep such Company’s
Records, including, without limitation, those Records concerning all of Company’s
Accounts and the other Collateral, and the place or places at which all of
Company’s Inventory, Equipment and other Tangible Property is and will be
located are correctly set forth on Schedule 9.11(a); and each Company
shall promptly advise the holders of Notes in writing of any change in any of
said addresses.  No Company will remove
such Records from the place or places set forth on Schedule 9.11(a), nor
shall any Company keep any of such Records at any other locations unless (i) such
Company gives the holders of Notes 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.  The Companies
shall give the holders of Notes at least 10 days’ prior written notice of any
Company’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.

 

22

 

(b)           Subject to any
Permitted Transfers of Assets, each Company 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 the Collateral
Agent, such Company has heretofore obtained from each owner of said real estate
a written waiver or subordination (in form and substance reasonably
satisfactory to the Collateral Agent) of any landlord’s Lien or other Lien said
owner might have with respect to the Collateral, and such Company has delivered
the same to the holders of Notes.

 

(c)           Upon request of
the Collateral Agent, each Company shall promptly deliver to the Collateral
Agent 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 the
Collateral Agent in executing any applications and other documents and taking
any other actions necessary or desirable in the Collateral Agent’s opinion to
perfect Collateral Agent’s Lien in such vehicles.  The Collateral Agent may retain possession of
such certificates of title until payment in full of all the Note Agreement
Obligations.

 

(d)           Each Company
shall furnish to the holders of Notes from time to time statements and
schedules further identifying and describing the Collateral and such other
reports in connection with the Collateral as the Required Holders or the
Collateral Agent may reasonably request, all in reasonable detail.

 

(e)           Each Company
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 the Collateral Agent, each Company shall make proper
entries in its books disclosing the assignment of the Collateral to Collateral
Agent, and each Company shall segregate its Records concerning the Collateral
and mark the Collateral with Collateral Agent’s name or in such other manner as
shall be satisfactory to the Required Holders and the Collateral Agent.  After the occurrence of and during the
continuance of any Default, each Company shall deliver and turn over to
Collateral Agent any such Records at any time on demand of the Required Holders
or the Collateral Agent.

 

(f)            Promptly upon
written request of the Collateral Agent, each Company shall exercise
commercially reasonable efforts to 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 Collateral Agent’s Lien in, on and upon the Collateral.

 

(g)           Promptly upon
written request of the Collateral Agent, each Company shall provide the holders
of Notes with copies of all agreements between any Company and any warehouse at
which any material Collateral may, from time to time, be kept and all lease or
similar agreements between any Company and any other Person, whether a Company
is lessor or lessee thereunder.

 

(h)           If any Account
arises out of a contract with the United States of America, or any other
Governmental Authority, each Company shall promptly notify the Collateral Agent
thereof 

 

23

 

in writing and execute any instruments and
take any other action, if any, required or requested by the Collateral Agent to
perfect Collateral Agent’s Lien on and right to collect such Account under the
provisions of the Assignment of Claims Act or other applicable law.

 

(i)            Each Company shall promptly notify
the holders of Notes in writing of the initiation of any Commercial Tort Claim
seeking damages on behalf of any Company in excess of $500,000.  Each Company shall execute and deliver such
statements, documents and notices and do and cause to be done all such things
as the Required Holders or the Collateral Agent may reasonably deem necessary
or appropriate to create, perfect and maintain Collateral Agent’s Lien upon any
Commercial Tort Claim.

 

Section 9.12.        Collateral
Evidenced by Instruments or Documents.  Each Company covenants and agrees that upon
such Company’s receipt of any Collateral which is evidenced or secured by an
agreement, Instrument, Document or Chattel Paper and upon demand of Collateral
Agent, such Company shall deliver the original thereof (or each executed or
original counterpart if more than one) to the Collateral Agent, together with
appropriate endorsements and/or assignments in form and substance acceptable to
the Collateral Agent.

 

Section 9.13.        Maintaining
Bank Accounts.

 

(a)           Except for bank
accounts that have average monthly collected balances of less than $100,000 (in
the aggregate), each Company shall maintain all of its bank accounts
(collectively, the “Bank Accounts”),
including any Deposit Accounts and disbursement accounts, only with Wachovia
Bank, National Association  (the “Approved Bank Accounts”); provided, however, during
the period of time that a Transition Services Agreement is in effect, the
Companies may maintain and make deposits to and disbursements from the bank
accounts established under and as contemplated by a Transition Services
Agreement.

 

(b)           Upon the
occurrence and during the continuance of a Default and the demand of the
Collateral Agent, each Company shall maintain lockboxes and blocked deposit
accounts (each a “Lockbox Account”)
only with Wachovia Bank, National Association 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 the Collateral Agent in
its discretion, provided that such Lockbox
Agreement is an Acceptable Security Interest.

 

(c)           Upon the
occurrence and during the continuance of a Default and the demand of the
Collateral Agent, each Company shall promptly instruct each Person obligated at
any time to make any payment to such Company for any reason to make such
payment to a Lockbox Account, and shall pay to the Collateral Agent for deposit
in an Approved Bank Account as may be from time to time designated by the
Collateral Agent, at the end of each Business Day, all proceeds of Collateral
and all other cash received by it on such day.

 

(d)           Each Company
shall instruct each Lockbox Bank to transfer to an Approved Bank Account
designated by the Collateral Agent, 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 any Company or any Lockbox Bank, each 

 

24

 

applicable Company 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 the Collateral Agent.  Each
Company agrees to terminate any or all Lockbox Account and Lockbox Agreements
upon request by the Collateral Agent.

 

Section 9.14.        Filing Fees
and Taxes.  Each Company
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 of the Note Documents, and the recording, filing, satisfaction,
continuation and release of any Mortgages, Financing Statements or other
instruments filed or recorded in connection herewith or therewith.

 

Section 9.15.        Assigned
Agreements.  Except in
the Ordinary Course of Business, each Company covenants and agrees that it
shall not (a) cancel or terminate any Assigned Agreement or consent to or
accept any cancellation or termination thereof; (b) amend or otherwise
modify any Assigned Agreement or give any consent, waiver or approval
thereunder; (c) waive any default or breach of any Assigned Agreement; or (d) take
any other action in connection with any Assigned Agreement, and,
notwithstanding the foregoing, in each case where any such action may give rise
to a Material Adverse Effect, such action shall only be taken with the prior
written consent of the Required Holders.

 

Section 9.16.        Air Products APA Documents.  Each Company shall (a) observe
and perform in all material respects all the obligations imposed upon such
Company under the Air Products APA Documents; (b) promptly send to the
holders of Notes copies of each material notice which any Company shall send or
receive under the Air Products APA Documents (including, but not limited to,
the “Statement” as defined in Section 2.01(a) of the Air Products
APA, any “Notice of Disagreement” as defined in Section 2.01(b) of
the Air Products APA, any updates to the Seller Disclosure Letter as provided
for in Section 5.02(b)(i) of the Air Products APA, and any notice of
termination as provided for in Section 8.01(a)(i) of the Air Products
APA); (c) enforce the performance and observance of the material
provisions of the Air Products APA Documents; (d) not alter, modify or
change the material terms of the Air Products APA Documents; and (e) not
cancel or terminate any material Air Products APA Document except in accordance
with its terms.

 

Section 9.17.        Underlying
Documentation.  Each Company
covenants and agrees that such Company will, at any time a Default exists and
upon the request therefor by the Collateral Agent, promptly deliver possession
to the Collateral Agent of any or all of the Material Contracts.

 

Section 9.18.        Further
Assurances.  Each Company
covenants and agrees that, at the Companies’ cost and expense, upon request of
Collateral Agent or the Required Holders, such Company shall duly execute and
deliver, or cause to be duly executed and delivered, to Collateral Agent 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 Collateral Agent,
the Required Holders or their respective counsel to carry out more effectively
the provisions and purposes of this Agreement and the other Note Documents.

 

25

 

Section 9.19.        Post
Closing Matters.  Each Company
shall satisfy the requirements set forth on Schedule 9.19 on or before
the date specified for such requirement or such later date to be determined by
the Required Holders.

 

SECTION 10.                                             NEGATIVE COVENANTS.

 

Each
Company covenants that so long as any of the Notes are outstanding:

 

Section 10.1.        Financial
Covenants.  Each Company
will cause the Company Consolidated Group to maintain:

 

(a)           a Fixed Charge
Coverage of not less than (i) from the date of this Agreement through July 31,
2008, 1.25 to 1.00, and (ii) thereafter, 1.50 to 1.00;

 

(b)           a ratio of (i) Funded
Debt to (ii) the sum of Funded Debt plus Equity Owners’ Equity of
not more than (x) from the date of this Agreement through April 30,
2009, 60%, (y) from May 1, 2009 through April 30, 2010, 50%, and
(z) thereafter, 45%; and

 

(c)           a ratio of
Funded Debt to EBITDA of not more than (i) from the date of this Agreement
through October 31, 2008, 3.50 to 1.00, and (ii) thereafter, 3.00 to
1.00.

 

For purposes of computation
of the financial covenants set forth in this Section 10.1, such
computation shall be (i) determined by the Required Holders as of each
Quarter-End, based on the Compliance Certificate most recently delivered by the
Companies in accordance with the terms of this Agreement, (ii) determined
on a Consolidated Basis, (iii) based on an Annualized Rolling Period, if
applicable, and (iv) determined exclusive of any and all expenses paid or
incurred by any Company (up to a maximum of $1,000,000) under any Transition
Services Agreement.  Notwithstanding the
foregoing or anything in this Agreement to the contrary, with respect to any
Acquisition for consideration in excess of $15,000,000 (including the
Acquisition being made pursuant to the Air Products APA Documents), for
purposes of computation of the financial covenants set forth in this Section 10.1,
such computation shall be made in good faith by the Companies (but subject to
the approval of the Required Holders) by taking into account the historical
results relating to such Acquisition as follows:  (A) for the Quarter-End immediately
following the closing of such Acquisition, the foregoing computation shall be
made by adding the income and deducting the expenses for the twelve-month
period immediately preceding such Quarter-End, excluding the days from the date
of such Acquisition to such Quarter-End; (B) for the second Quarter-End
following the closing of such Acquisition, the foregoing computation shall be
made by adding the income and deducting the expenses for the twelve-month
period immediately preceding such Quarter-End, excluding the days from the date
of such Acquisition to such Quarter-End; (C) for the third Quarter-End
following the closing of such Acquisition, the foregoing computation shall be
made by adding the income and deducting the expenses for the twelve-month
period immediately preceding such Quarter-End, excluding the days from the date
of such Acquisition to such Quarter-End; and (D) for the fourth Quarter-End
following the closing of such Acquisition, the foregoing computation shall be
made by adding the income and deducting the expenses for the twelve-month
period immediately preceding such Quarter-End, excluding the days from the date
of such Acquisition to such Quarter-End.

 

26

 

Section 10.2.        Dividends.  No Company will permit any
Member of the Company Consolidated Group to 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 10.1.

 

Section 10.3.        Liens.  No Company will permit any
Member of the Company Consolidated Group to 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.

 

Section 10.4.        Indebtedness.  No Company will permit any
Member of the Company Consolidated Group to incur, create, assume, or permit to
exist any Indebtedness, other than Permitted Indebtedness.

 

Section 10.5.        Investments
and Contingent Liabilities.  No Company will
permit any Member of the Company Consolidated Group to make any Investment,
other than Permitted Investments.  No
Company will permit any Member of the Company Consolidated Group to become
liable, directly or indirectly, as guarantor or otherwise for any obligation of
any other Person, provided that a
Company may guaranty Indebtedness of any other Member of the Company
Consolidated Group so long as such guaranty does not otherwise give rise to a
Default (and for purposes of this Section 10.5, such contingent
liability shall be included as Indebtedness of such Company unless the same is
already reflected as Indebtedness on a Consolidated Basis).

 

Section 10.6.        Sale
of Equity Interests.  No Company will
permit any Member of the Company Consolidated Group to 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 any
Company by any Company if the same would result in a Change in Control or a
Default or Event of Default.

 

Section 10.7.        Merger,
Consolidation, Etc.

 

(a)           No Company will permit any Member of
the Company Consolidated Group to wind up, liquidate or dissolve its affairs or
merge or consolidate with any other Person, except that the following shall be
permitted: (i) Permitted Acquisitions; (ii) Permitted Transfers of
Assets; (iii) any Subsidiary of KMG Chemicals (other than a Company) may
merge or consolidate with or into any other Subsidiary of KMG Chemicals; and (iv) any
Subsidiary of KMG Chemicals (other than a Company) may dissolve, liquidate or
wind up its affairs at any time, provided that
such dissolution, liquidation or winding up, as applicable, could not
reasonably be expected to have a Material Adverse Effect.

 

(b)           No Company will change (i) its
legal name or (ii) its jurisdiction of organization (in each case,
including by merging with or into any other entity, reorganizing, dissolving,
liquidating, reorganizing or organizing in any other jurisdiction), until (A) it
shall have given the Collateral Agent not less than 10 Business Days’ prior
written notice, or such lesser notice period 

 

27

 

agreed to by the Collateral
Agent, of its intention so to do, clearly describing such change and providing
such other information in connection therewith as the Collateral Agent may
reasonably request and (B) it shall have taken all action reasonably
satisfactory to the Collateral Agent to maintain the perfection and priority of
the Collateral Agent’s Lien in the Collateral, if applicable.

 

Section 10.8.        Sale
of Assets, Etc.  No Company will
permit any Member of the Company Consolidated Group to 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).

 

Section 10.9.        Lines
of Business.  No Company will
permit any Member of the Company Consolidated Group to engage in any business
other than the Permitted Lines of Business.

 

Section 10.10.      Terrorism
Sanctions Regulations.  No Company will
permit any Member of the Company Consolidated Group or any other Subsidiary of
any Company to (a) 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; (b) deal in, or otherwise engage in any transaction relating to,
any property or interests in property blocked pursuant to Executive Order No. 13224;
or (c) 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.  Each Company shall deliver
to each holder of Notes any certification or other evidence requested from time
to time by such holder, in its discretion, confirming compliance with this Section 10.10.

 

Section 10.11.      Affiliate
Transactions.  Except for
agreements reflected in the Most Recent Financial Statements, agreements
currently in effect and listed on Schedule 10.11 attached hereto,
agreements which provide only for either Permitted Investments or Permitted
Indebtedness, and agreements between or among Members of the Company
Consolidated Group, no Company will enter into any agreement, transaction or
series of transactions where any Affiliate of any Company is a party thereto, (a) except
in the Ordinary Course of Business or (b) unless the Governing Body of the
applicable Member of the Company Consolidated Group has approved such agreement
or transaction.

 

Section 10.12.      Capital
Expenditures.  No Company
will permit the Company Consolidated Group to make Capital Expenditures in an
aggregate amount in excess of $10,000,000 in any consecutive twelve-month
period.

 

Section 10.13.      Existing
Indebtedness and Credit Agreement Obligations. 
No Company will permit any Member of the Company Consolidated Group to
enter into any agreement with respect to any of its Existing Indebtedness which
is Indebtedness for borrowed money or with respect to any Credit Agreement
Obligations if the effect of such agreement is to:

 

(a)           increase the interest rate on such
Indebtedness or Credit Agreement Obligations, or materially change the
computation or component of the interest rate or yield provisions;

 

28

 

(b)           change the dates upon which payments
of principal, interest or other scheduled payments are due on such Indebtedness
or Credit Agreement Obligations (other than to extend such dates);

 

(c)           change any default or event of
default or any definition thereof (other than to delete or make less
restrictive any default provision), or shorten any grace or cure period with
respect to such Indebtedness or Credit Agreement Obligations;

 

(d)           add any material covenant with
respect to such Indebtedness or Credit Agreement Obligations;

 

(e)           change the redemption or prepayment
provisions of such Indebtedness or Credit Agreement Obligations (other than to
extend the dates therefore or to reduce the premiums payable in connection
therewith); or

 

(f)            materially increase the obligations
of the applicable Member of the Company Consolidated Group (including any
increase in the principal amount of any such Indebtedness) or confer additional
material rights to the holder of such Indebtedness or Credit Agreement
Obligations in a manner adverse to any Member of the Company Consolidated Group
or the holders of the Notes.

 

Section 10.14.      Acquisitions.  No Company will permit any
Member of the Company Consolidated Group to consummate any Acquisition (other
than Permitted Acquisitions).

 

Section 10.15.      New
Subsidiaries.  No Company will
permit any Member of the Company Consolidated Group to create, acquire or own
any Subsidiary in connection with an Acquisition or otherwise, except for
Subsidiaries with a Tangible Net Worth of less than $1,000,000 (each, an “Immaterial Subsidiary”), provided that the sum of the Tangible Net
Worth of all Immaterial Subsidiaries does not exceed $5,000,000.

 

Section 10.16.      Amendment
of Organizational Documents.  No Company will
permit any Member of the Company Consolidated Group to amend or modify in any
material respect any of its Organizational Documents.

 

Section 10.17.      Use
of Proceeds.  No Company will
directly or indirectly apply any part of the proceeds of any Note 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.

 

Section 10.18.      Environmental
Matters.  No Company will permit any
Member of the Company Consolidated Group to 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.

 

Section 10.19.      Accounting
Policies.  No Company will
permit any Member of the Company Consolidated Group to make or permit any
material changes in its accounting policies or reporting practices, except as
may be permitted or required by law or GAAP.

 

29

 

Section 10.20.      KMEX-Specific
Restrictions.  No Company
shall allow KMEX to (a) cease operations of the KMEX Plant or sell,
transfer, lease or otherwise dispose of the KMEX Plant, or (b) 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.

 

SECTION 11.                                             EVENTS OF DEFAULT.

 

                An “Event of Default”
shall exist if any of the following conditions or events shall occur and be
continuing:

 

(a)           any Company defaults in the payment
of any principal or Make-Whole Amount, if any, on any Note when the same
becomes due and payable, whether at maturity or at a date fixed for prepayment
or by declaration or otherwise; or

 

(b)           any Company defaults in the payment
of any interest on any Note for more than three days after the same becomes due
and payable; or

 

(c)           any Company defaults in the
performance of or compliance with any term contained in Section 7.1(d),
Section 9.19, Section 10.1, Section 10.2, Section 10.3,
Section 10.4, Section 10.5, Section 10.6, Section 10.7
or Section 10.8; or

 

(d)           any Company defaults in the
performance of or compliance with any term contained herein (other than those
referred to in Sections 11(a), (b) and (c)) or in any
other Note Document and such default is not remedied within 30 days after the
earlier of (i) a Responsible Officer obtaining actual knowledge of such
default and (ii) the Companies receiving written notice of such default
from any holder of a Note (any such written notice to be identified as a “notice
of default” and to refer specifically to this Section 11(d)); provided that, with respect to any default in the
performance of or compliance with any term contained in Section 7.1(b),
such 30 day cure period shall be extended for up to an additional 30 days so
long as on or before the 30th day after such default the Companies have
provided the holders of Notes with unaudited financial statements of the type
required by Section 7.1(b) and the Companies have commenced and
continue to diligently pursue a cure of such default; provided,
further, that with respect to any
default in the performance of or compliance with any term contained herein
(other than those referred to in Sections 11(a), (b) and (c))
or in any other Note Document resulting from any Company’s failure to cause any
Foreign Subsidiary to comply with any such term, such 30 day cure period shall
be extended for up to an additional 30 days so long as such default is capable
of being cured and the Companies have commenced and continue to diligently
pursue a cure of such default; or

 

(e)           any financial statement, certificate,
representation or warranty made or furnished in writing by or on behalf of any
Company or by any officer of any Company in this Agreement or any in any other
Note Document or in any writing furnished in connection with the transactions
contemplated hereby or thereby proves to have been false or incorrect in any
material respect on the date as of which made; or

 

30

 

(f)            (i) any Company or any
Subsidiary is in default (as principal or as guarantor or other surety) in the
payment of any principal of or premium or make-whole amount or interest on any
Indebtedness that is outstanding in an aggregate principal amount of at least
$3,000,000 beyond any period of grace provided with respect thereto, or (ii) any
Company or any Subsidiary is in default in the performance of or compliance
with any term of any evidence of any Indebtedness in an aggregate outstanding
principal amount of at least $3,000,000 or of any mortgage, indenture or other
agreement relating thereto or any other condition exists, and as a consequence
of such default or condition such Indebtedness has become, or has been declared
(or one or more Persons are entitled to declare such Indebtedness to be), due
and payable before its stated maturity or before its regularly scheduled dates
of payment, or (iii) as a consequence of the occurrence or continuation of
any event or condition (other than the passage of time or the right of the
holder of Indebtedness to convert such Indebtedness into equity interests), (x) any
Company or any Subsidiary has become obligated to purchase or repay
Indebtedness before its regular maturity or before its regularly scheduled
dates of payment in an aggregate outstanding principal amount of at least
$3,000,000, or (y) one or more Persons have the right to require the
Company or any Subsidiary so to purchase or repay such Indebtedness;  or

 

(g)           any Company or any Subsidiary (i) is
generally not paying, or admits in writing its inability to pay, its debts as
they become due, (ii) files, or consents by answer or otherwise to the
filing against it of, a petition for relief or reorganization or arrangement or
any other petition in bankruptcy, for liquidation or to take advantage of any
bankruptcy, insolvency, reorganization, moratorium or other similar law of any
jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents
to the appointment of a custodian, receiver, trustee or other officer with
similar powers with respect to it or with respect to any substantial part of
its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes
corporate action for the purpose of any of the foregoing; or

 

(h)           a court or Governmental Authority of
competent jurisdiction enters an order appointing, without consent by such
Company or any of its Subsidiaries, a custodian, receiver, trustee or other
officer with similar powers with respect to it or with respect to any
substantial part of its property, or constituting an order for relief or
approving a petition for relief or reorganization or any other petition in bankruptcy
or for liquidation or to take advantage of any bankruptcy or insolvency law of
any jurisdiction, or ordering the dissolution, winding-up or liquidation of any
Company or any of its Subsidiaries, or any such petition shall be filed against
any Company or any of its Subsidiaries and such petition shall not be dismissed
within 60 days; or

 

(i)            a final judgment or judgments for
the payment of money aggregating in excess of $1,000,000 are rendered against
one or more of the Companies and its Subsidiaries and which judgments are not,
within 30 days after entry thereof, bonded, discharged or stayed pending
appeal, or are not discharged within 30 days after the expiration of such stay;
or

 

(j)            a judgment creditor of any Company
Party shall obtain possession of any of the Collateral with an aggregate value
of more than $1,000,000 by any means, including without limitation, levy,
distraint, replevin or self-help; or

 

31

 

(k)           there shall occur any default,
Default, event of default, Event of Default as defined and provided under any
other Note Document or any Credit Document (after the expiration of any
applicable grace and cure period); or

 

(l)            any material provision of any Note
Document for any reason ceases to be valid and binding on, or enforceable
against, any Company Party, as applicable (except (i) pursuant to the
terms of such Note Document, (ii) as permitted by this Agreement or (iii) to
the extent such provision is released in writing by the Required Holders), or
any Company Party, as applicable, so states in writing; or

 

(m)          any Security Document for any reason
(except pursuant to the terms hereof or thereof) ceases to create an Acceptable
Security Interest on any material portion of the Collateral purported to be
covered by such Security Document, and the same, if curable, is not cured
within 30 days after the Collateral Agent or the Required Holders notify the
applicable Company Party of the same; or

 

(n)           assignment or attempted assignment by
any Company Party of this Agreement, any rights hereunder, or any Note, or the
conveyance, lease, mortgage, or any other alienation or encumbrance of the
Collateral or any interest therein without the prior written consent of the
Required Holders, except for transfers permitted hereunder or under any other
Note Document; or

 

(o)           except as otherwise permitted herein,
the transfer of any Company’s interest in, or rights under, this Agreement or
any other Note Document by operation of law or otherwise, including, without limitation,
such transfer by any Company as debtor in possession under Bankruptcy Law, or
by a trustee for any Company under Bankruptcy Law, to any Person not a party to
this Agreement or such other Note Document, whether or not the obligations of
such Company under this Agreement or such other Note Document are assumed by
such third Person; or

 

(p)           the institution of a foreclosure or
other possessory action against (i) the Mortgaged Property, or (ii) any
of the Collateral other than the Mortgaged Property, except where such action
would not be reasonably expected to have a Material Adverse Effect; or

 

(q)           a Change in Control shall occur; or

 

(r)            the occurrence of any event, act,
condition or occurrence of whatever nature wherein the legality, validity or
enforceability of any provision of any Note Document is questioned or
challenged; or

 

(s)           any Casualty or Condemnation Event
occurs that results in the loss of (i) assets having an aggregate fair
market value (prior to such loss) exceeding $5,000,000 in any Fiscal Year or (ii) assets
having an aggregate fair market value (prior to such loss) exceeding
$10,000,000 on or after the date of Closing and, in each case, within 30 days
after the occurrence thereof, the Required Holders have not agreed in writing
that such Casualty or Condemnation Event does not constitute an Event of
Default; or

 

32

 

(t)            if (i) any Plan shall fail to
satisfy the minimum funding standard of ERISA or the Code for any plan year or
part thereof or a waiver of such standard is sought or granted under section
412 of the Code, (ii) a Plan is, or is expected to be, in “at-risk status”
(within the meaning of Section 430(i)(4) of the Code), (iii) a
notice of intent to terminate any Plan shall have been or is reasonably
expected to be filed with the PBGC or the PBGC shall have instituted
proceedings under ERISA section 4042 to terminate or appoint a trustee to
administer any Plan or the PBGC shall have notified any Company or any ERISA
Affiliate that a Plan may become a subject of any such proceedings, (iv) the
aggregate “amount of unfunded benefit liabilities” (within the meaning of
section 4001(a)(18) of ERISA) under all Plans, determined in accordance with
Title IV of ERISA, shall exceed $1,000,000, (v) any Company or any ERISA
Affiliate shall have incurred or is reasonably expected to incur any liability
pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of
the Code relating to employee benefit plans, (vi) any Company or any ERISA
Affiliate withdraws from any Multiemployer Plan, or (vii) any Company or
any Subsidiary establishes or amends any employee welfare benefit plan that
provides post-employment welfare benefits in a manner that would increase the
liability of any Company or any Subsidiary thereunder.

 

As used in Section 11(t),
the terms “employee benefit plan” and “employee welfare benefit plan” shall have the respective
meanings assigned to such terms in section 3 of ERISA.

 

SECTION 12.                                             REMEDIES ON DEFAULT, ETC.

 

Section 12.1.        Acceleration.

 

(a)           If an Event of Default with respect
to any Company described in Section 11(g) or (h) (other
than an Event of Default described in clause (i) of Section 11(g) or
described in clause (vi) of Section 11(g) by virtue of
the fact that such clause encompasses clause (i) of Section 11(g))
has occurred, all the Notes then outstanding shall automatically become
immediately due and payable.

 

(b)           If any other Event of Default has
occurred and is continuing, any holder or holders of more than 50% in principal
amount of the Notes at the time outstanding may at any time at its or their
option, by notice or notices to the Companies, declare all the Notes then
outstanding to be immediately due and payable.

 

(c)           If any Event of Default described in Section 11(a) or
(b) has occurred and is continuing, any holder or holders of Notes
at the time outstanding affected by such Event of Default may at any time, at
its or their option, by notice or notices to the Companies, declare all the
Notes held by it or them to be immediately due and payable.

 

Upon any Notes becoming due
and payable under this Section 12.1, whether automatically or by
declaration, such Notes will forthwith mature and the entire unpaid principal
amount of such Notes, plus (x) all accrued and unpaid interest
thereon (including, but not limited to, interest accrued thereon at the Default
Rate) and (y) the Make-Whole Amount determined in respect of such
principal amount (to the full extent permitted by applicable law), shall all be
immediately due and payable, in each and every case without presentment,
demand, protest or further notice, all of which are hereby waived.  Each Company acknowledges, and the parties 

 

33

 

hereto
agree, that each holder of a Note has the right to maintain its investment in
the Notes free from repayment by any Company (except as herein specifically
provided for) and that the provision for payment of a Make-Whole Amount by each
Company in the event that the Notes are prepaid or are accelerated as a result
of an Event of Default, is intended to provide compensation for the deprivation
of such right under such circumstances.

 

Section 12.2.        Other
Remedies; Application of Proceeds.  If any Default
or Event of Default has occurred and is continuing, and irrespective of whether
any Notes have become or have been declared immediately due and payable under Section 12.1,
the holder of any Note at the time outstanding may proceed to protect and
enforce the rights of such holder by an action at law, suit in equity or other
appropriate proceeding, whether for the specific performance of any agreement
contained herein or in any Note or any other Note Document, or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law or
otherwise.  All amounts recovered by any
holder of Notes as the result of the exercise of such remedies or from
distributions or other payments under the Intercreditor Agreement (after
application of amounts thereunder pursuant to the terms of Section 4.3
thereof) shall be applied in accordance with the following priorities (with all
partial payments of amounts owing within each category being allocated ratably
in accordance with the amounts so owing to each holder of Notes): first, to the payment of all fees,
indemnities, costs and expenses then owing to the holders of Notes under the
Note Documents; second, after
payment in full of the amounts set forth in clause first above, to the payment
of the Make-Whole Amount, if any, then owing; third,
after payment in full of the amounts set forth in clause second above, to the
payment of all accrued and unpaid interest then owing to the holders of Notes
under the Note Documents; and fourth,
after payment in full of the amounts set forth in clause third above, to the
payment of principal then outstanding under the Notes.

 

Section 12.3.        Rescission.  At any time after any Notes
have been declared due and payable pursuant to Section 12.1(b) or
(c), the holders of not less than 50% in principal amount of the Notes
then outstanding, by written notice to the Companies, may rescind and annul any
such declaration and its consequences if (a) the Companies have paid all
overdue interest on the Notes, all principal of and Make-Whole Amount, if any,
on any Notes that are due and payable and are unpaid other than by reason of
such declaration, and all interest on such overdue principal and Make-Whole
Amount, if any, and (to the extent permitted by applicable law) any overdue
interest in respect of the Notes, at the Default Rate, (b) neither any
Company nor any other Person shall have paid any amounts which have become due
solely by reason of such declaration, (c) all Events of Default and
Defaults, other than non-payment of amounts that have become due solely by
reason of such declaration, have been cured or have been waived pursuant to Section 17,
and (d) no judgment or decree has been entered for the payment of any
monies due pursuant hereto or to the Notes. 
No rescission and annulment under this Section 12.3 will
extend to or affect any subsequent Event of Default or Default or impair any
right consequent thereon.

 

Section 12.4.        No
Waivers or Election of Remedies, Expenses, Etc. 
No course of dealing and no delay on the part of any holder of any Note
in exercising any right, power or remedy shall operate as a waiver thereof or
otherwise prejudice such holder’s rights, powers or remedies.  No right, power or remedy conferred by this
Agreement or by any Note or any other Note Document upon any holder thereof
shall be exclusive of any other right, power or remedy referred to herein or
therein or now or hereafter available at law, in equity, by statute or 

 

34

 

otherwise.  Without limiting the obligations of each
Company under Section 15, the Companies will jointly and severally
pay to the holder of each Note on demand such further amount as shall be
sufficient to cover all costs and expenses of such holder incurred in any
enforcement or collection under this Section 12, including, without
limitation, reasonable attorneys’ fees, expenses and disbursements.

 

SECTION 13.                                             REGISTRATION;
EXCHANGE; SUBSTITUTION OF NOTES.

 

Section 13.1.        Registration
of Notes.  Each Company
shall keep at its principal executive office a register for the registration
and registration of transfers of Notes. 
The name and address of each holder of one or more Notes, each transfer
thereof and the name and address of each transferee of one or more Notes shall
be registered in such register.  Prior to
due presentment for registration of transfer, the Person in whose name any Note
shall be registered shall be deemed and treated as the owner and holder thereof
for all purposes hereof, and the Companies shall not be affected by any notice
or knowledge to the contrary.  Each
Company shall give to any holder of a Note that is an Institutional Investor
promptly upon request therefor, a complete and correct copy of the names and
addresses of all registered holders of Notes.

 

Section 13.2.        Transfer
and Exchange of Notes.  Upon surrender
of any Note to the Companies at the address and to the attention of the
designated officer (all as specified in Section 18(iii)), for
registration of transfer or exchange (and in the case of a surrender for
registration of transfer accompanied by a written instrument of transfer duly
executed by the registered holder of such Note or such holder’s attorney duly
authorized in writing and accompanied by the relevant name, address and other
information for notices of each transferee of such Note or part thereof),
within ten Business Days thereafter, each Company shall execute and deliver, at
each Company’s expense (except as provided below), one or more new Notes (as
requested by the holder thereof) in exchange therefor, in an aggregate
principal amount equal to the unpaid principal amount of the surrendered
Note.  Each such new Note shall be
payable to such Person as such holder may request and shall be substantially in
the form of Exhibit 1.  Each
such new Note shall be dated and bear interest from the date to which interest
shall have been paid on the surrendered Note or dated the date of the
surrendered Note if no interest shall have been paid thereon.  The Companies may require payment of a sum
sufficient to cover any stamp tax or governmental charge imposed in respect of
any such transfer of Notes.  Notes shall
not be transferred in denominations of less than $100,000, provided that if necessary to enable the
registration of transfer by a holder of its entire holding of Notes, one Note
may be in a denomination of less than $100,000. 
Any transferee, by its acceptance of a Note registered in its name (or
the name of its nominee), shall be deemed to have made the representation set
forth in Section 6.2.

 

Section 13.3.        Replacement
of Notes.  Upon receipt by
the Companies at the address and to the attention of the designated officer
(all as specified in Section 18(iii)) of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of any Note (which evidence shall be, in the case of an
Institutional Investor, notice from such Institutional Investor of such
ownership and such loss, theft, destruction or mutilation), and

 

(a)           in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to it (provided
that if the holder of such Note is, or is a nominee for, an original Purchaser
or another 

 

35

 

holder of a Note with a minimum
net worth of at least $100,000,000 or a Qualified Institutional Buyer, such
Person’s own unsecured agreement of indemnity shall be deemed to be
satisfactory), or

 

(b)           in the case of mutilation, upon
surrender and cancellation thereof,

 

within ten Business Days
thereafter, the Companies at their own expense shall execute and deliver, in
lieu thereof, a new Note, dated and bearing interest from the date to which
interest shall have been paid on such lost, stolen, destroyed or mutilated Note
or dated the date of such lost, stolen, destroyed or mutilated Note if no
interest shall have been paid thereon.

 

SECTION 14.                                             PAYMENTS ON NOTES.

 

Section 14.1.        Place
of Payment.  Subject to Section 14.2,
payments of principal, Make-Whole Amount, if any, and interest becoming due and
payable on the Notes shall be made in New York, New York at the principal
office of JPMorgan Chase Bank, N.A. in such jurisdiction.  The Companies may at any time, by notice to
each holder of a Note, change the place of payment of the Notes so long as such
place of payment shall be either the principal office of the Companies in such
jurisdiction or the principal office of a bank or trust company in such
jurisdiction.

 

Section 14.2.        Home
Office Payment.  So long as any
Purchaser or its nominee shall be the holder of any Note, and notwithstanding
anything contained in Section 14.1 or in such Note to the contrary,
each Company will jointly and severally pay all sums becoming due on such Note
for principal, Make-Whole Amount, if any, and interest by the method and at the
address specified for such purpose below such Purchaser’s name in Schedule A,
or by such other method or at such other address as such Purchaser shall have
from time to time specified to the Companies in writing for such purpose,
without the presentation or surrender of such Note or the making of any
notation thereon, except that upon written request of the Companies made
concurrently with or reasonably promptly after payment or prepayment in full of
any Note, such Purchaser shall surrender such Note for cancellation, reasonably
promptly after any such request, to the Companies at their principal executive
office or at the place of payment most recently designated by the Companies
pursuant to Section 14.1. 
Prior to any sale or other disposition of any Note held by a Purchaser
or its nominee, such Purchaser will, at its election, either endorse thereon
the amount of principal paid thereon and the last date to which interest has
been paid thereon or surrender such Note to the Companies in exchange for a new
Note or Notes pursuant to Section 13.2.  The Companies will afford the benefits of
this Section 14.2 to any Institutional Investor that is the direct
or indirect transferee of any Note purchased by a Purchaser under this
Agreement and that has made the same agreement relating to such Note as the
Purchasers have made in this Section 14.2.

 

SECTION 15.                                             EXPENSES, ETC.

 

Section 15.1.        Transaction Expenses.  Whether or not the
transactions contemplated hereby are consummated, each Company will jointly and
severally pay all costs and expenses (including reasonable attorneys’ fees of a
special counsel and, if reasonably required by the Required Holders, local or
other counsel) incurred by the Purchasers, each other holder of a Note 

 

36

 

and the Collateral Agent in
connection with such transactions and in connection with any amendments,
waivers or consents under or in respect of this Agreement, the Notes or any
other Note Document (whether or not such amendment, waiver or consent becomes
effective), including, without limitation: (a) the costs and expenses
incurred in enforcing or defending (or determining whether or how to enforce or
defend) any rights under this Agreement, the Notes or the other Note Documents
or in responding to any subpoena or other legal process or informal
investigative demand issued in connection with this Agreement, the Notes or the
other Note Documents, or by reason of being a holder of any Note, (b) the
costs and expenses, including financial advisors’ fees, incurred in connection
with the insolvency or bankruptcy of any Company or any Subsidiary or in
connection with any work-out or restructuring of the transactions contemplated
hereby and by the Notes and the other Note Documents, and (c) the costs
and expenses incurred in connection with the initial filing of this Agreement
and all related documents and financial information with the SVO.  Each Company will jointly and severally pay,
and will save each Purchaser and each other holder of a Note harmless from, all
claims in respect of any fees, costs or expenses, if any, of brokers and
finders (other than those, if any, retained by a Purchaser or other holder in
connection with its purchase of the Notes).

 

Section 15.2.        Survival.  The obligations of each
Company under this Section 15 will survive the payment or transfer
of any Note, the enforcement, amendment or waiver of any provision of this
Agreement or the Notes or any other Note Document, and the termination of this
Agreement.

 

SECTION 16.                                             SURVIVAL OF
REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.

 

All representations and
warranties contained herein shall survive the execution and delivery of this
Agreement, the Notes and the other Note Documents, the purchase or transfer by
any Purchaser of any Note or portion thereof or interest therein and the
payment of any Note, and may be relied upon by any subsequent holder of a Note,
regardless of any investigation made at any time by or on behalf of such
Purchaser or any other holder of a Note. 
All statements contained in any certificate or other instrument
delivered by or on behalf of any Company pursuant to this Agreement or any
other Note Document shall be deemed representations and warranties of such
Company under this Agreement.  Subject to
the preceding sentence, this Agreement, the Notes and the other Note Documents
embody the entire agreement and understanding between each Purchaser and each
Company and supersede all prior agreements and understandings relating to the subject
matter hereof.

 

SECTION 17.                                             AMENDMENT AND WAIVER.

 

Section 17.1.        Requirements.  This Agreement and the Notes
may be amended, and the observance of any term hereof or of the Notes may be
waived (either retroactively or prospectively), with (and only with) the
written consent of the Companies and the Required Holders, except that (a) no
amendment or waiver of any of the provisions of Section 1, 2,
3, 4, 5, 6 or 21 hereof, or any defined term
(as it is used therein), will be effective as to any Purchaser unless consented
to by such Purchaser in writing, and (b) no such amendment or waiver may,
without the written consent of the holder of each Note at the time outstanding
affected thereby, (i) subject to the provisions of Section 12
relating to acceleration or rescission, change the 

 

37

 

amount or time of any
prepayment or payment of principal of, or reduce the rate or change the time of
payment or method of computation of interest or of the Make-Whole Amount on,
the Notes, (ii) change the percentage of the principal amount of the Notes
the holders of which are required to consent to any such amendment or waiver or
(iii) amend any of Sections 8, 11(a), 11(b), 12,
17 or 20.

 

Section 17.2.        Solicitation of Holders of Notes.

 

(a)           Solicitation.  The Companies will provide each holder of the
Notes (irrespective of the amount of Notes then owned by it) with sufficient
information, sufficiently far in advance of the date a decision is required, to
enable such holder to make an informed and considered decision with respect to
any proposed amendment, waiver or consent in respect of any of the provisions
hereof or of the Notes.  The Companies
will deliver executed or true and correct copies of each amendment, waiver or consent
effected pursuant to the provisions of this Section 17 to each
holder of outstanding Notes promptly following the date on which it is executed
and delivered by, or receives the consent or approval of, the requisite holders
of Notes.

 

(b)           Payment.  Each Company will not directly or indirectly
pay or cause to be paid any remuneration, whether by way of supplemental or
additional interest, fee or otherwise, or grant any security or provide other
credit support, to any holder of Notes as consideration for or as an inducement
to the entering into by any holder of Notes of any waiver or amendment of any
of the terms and provisions hereof unless such remuneration is concurrently
paid, or security is concurrently granted or other credit support concurrently
provided, on the same terms, ratably to each holder of Notes then outstanding
even if such holder did not consent to such waiver or amendment.

 

Section 17.3.        Binding
Effect, etc.  Any amendment
or waiver consented to as provided in this Section 17 applies equally
to all holders of Notes and is binding upon them and upon each future holder of
any Note and upon each Company without regard to whether such Note has been
marked to indicate such amendment or waiver. 
No such amendment or waiver will extend to or affect any obligation,
covenant, agreement, Default or Event of Default not expressly amended or
waived or impair any right consequent thereon. 
No course of dealing between any Company and the holder of any Note nor any
delay in exercising any rights hereunder or under any Note shall operate as a
waiver of any rights of any holder of such Note.  As used herein, the term “this Agreement” and
references thereto shall mean this Agreement as it may from time to time be
amended or supplemented.

 

Section 17.4.        Notes
Held by Any Company, etc.  Solely for the
purpose of determining whether the holders of the requisite percentage of the
aggregate principal amount of Notes then outstanding approved or consented to
any amendment, waiver or consent to be given under this Agreement, the Notes or
any other Note Document, or have directed the taking of any action provided
herein or in the Notes or in any other Note Document to be taken upon the
direction of the holders of a specified percentage of the aggregate principal amount
of Notes then outstanding, Notes directly or indirectly owned by any Company or
any of its Subsidiaries shall be deemed not to be outstanding.

 

38

 

SECTION 18.                                             NOTICES.

 

All notices and
communications provided for hereunder shall be in writing and sent (a) by
telecopy if the sender on the same day sends a confirming copy of such notice
by a recognized overnight delivery service (charges prepaid), or (b) by
registered or certified mail with return receipt requested (postage prepaid),
or (c) by a recognized overnight delivery service (with charges
prepaid).  Any such notice must be sent:

 

(i)            if to any Purchaser or its nominee, to such Purchaser or
nominee at the address specified for such communications in Schedule A,
or at such other address as such Purchaser or nominee shall have specified to
the Companies in writing,

 

(ii)           if to any other holder of any Note, to such holder at such
address as such other holder shall have specified to the Companies in writing,
or

 

(iii)          if to any Company, to such Company at its address set forth
at the beginning hereof to the attention of John Sobchak, Vice President and
Chief Financial Officer, or at such other address as such Company shall have
specified to the holder of each Note in writing.

 

Notices under this Section 18
will be deemed given only when actually received.

 

SECTION 19.                                             REPRODUCTION OF
DOCUMENTS.

 

This Agreement and all
documents relating thereto, including, without limitation, (a) consents,
waivers and modifications that may hereafter be executed, (b) documents
received by any Purchaser at the Closing (except the Notes themselves), and (c) financial
statements, certificates and other information previously or hereafter
furnished to any Purchaser, may be reproduced by such Purchaser by any
photographic, photostatic, electronic, digital, or other similar process and
such Purchaser may destroy any original document so reproduced.  Each Company agrees and stipulates that, to
the extent permitted by applicable law, any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding (whether or not the original is in existence and whether or not such
reproduction was made by such Purchaser in the regular course of business) and
any enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.  This
Section 19 shall not prohibit any Company or any other holder of
Notes from contesting any such reproduction to the same extent that it could
contest the original, or from introducing evidence to demonstrate the
inaccuracy of any such reproduction.

 

SECTION 20.                                             CONFIDENTIAL
INFORMATION.

 

For the purposes of this Section 20,
“Confidential Information” means information delivered to any Purchaser by or
on behalf of any Company or any Subsidiary in connection with the transactions
contemplated by or otherwise pursuant to this Agreement that is proprietary in
nature and that was clearly marked or labeled or otherwise adequately identified
when received by such Purchaser as being confidential information of such
Company or such Subsidiary, provided that
such term does not include information that (a) was publicly known or
otherwise 

 

39

 

known
to such Purchaser prior to the time of such disclosure, (b) subsequently
becomes publicly known through no act or omission by such Purchaser or any
person acting on such Purchaser’s behalf, (c) otherwise becomes known to
such Purchaser other than through disclosure by any Company or any Subsidiary
or (d) constitutes financial statements delivered to such Purchaser under Section 7.1
that are otherwise publicly available. 
Each Purchaser will maintain the confidentiality of such Confidential
Information in accordance with procedures adopted by such Purchaser in good
faith to protect confidential information of third parties delivered to such
Purchaser, provided that such Purchaser may deliver
or disclose Confidential Information to (i) its directors, officers,
employees, agents, attorneys, trustees and affiliates (to the extent such
disclosure reasonably relates to the administration of the investment
represented by its Notes), (ii) its financial advisors and other
professional advisors who agree to hold confidential the Confidential
Information substantially in accordance with the terms of this Section 20,
(iii) any other holder of any Note, (iv) any Institutional Investor
to which it sells or offers to sell such Note or any part thereof or any participation
therein (if such Person has agreed in writing prior to its receipt of such
Confidential Information to be bound by the provisions of this Section 20),
(v) any Person from which it offers to purchase any security of any
Company (if such Person has agreed in writing prior to its receipt of such
Confidential Information to be bound by the provisions of this Section 20),
(vi) any federal or state regulatory authority having jurisdiction over
such Purchaser, (vii) the NAIC or the SVO or, in each case, any similar
organization, or any nationally recognized rating agency that requires access
to information about such Purchaser’s investment portfolio, or (viii) any
other Person to which such delivery or disclosure may be necessary or
appropriate (w) to effect compliance with any law, rule, regulation or
order applicable to such Purchaser, (x) in response to any subpoena or
other legal process, (y) in connection with any litigation to which such
Purchaser is a party or (z) if an Event of Default has occurred and is
continuing, to the extent such Purchaser may reasonably determine such delivery
and disclosure to be necessary or appropriate in the enforcement or for the
protection of the rights and remedies under such Purchaser’s Notes and this
Agreement and the other Note Documents. 
Each holder of a Note, by its acceptance of a Note, will be deemed to
have agreed to be bound by and to be entitled to the benefits of this Section 20
as though it were a party to this Agreement. 
On reasonable request by any Company in connection with the delivery to
any holder of a Note of information required to be delivered to such holder
under this Agreement or requested by such holder (other than a holder that is a
party to this Agreement or its nominee), such holder will enter into an
agreement with such Company embodying the provisions of this Section 20.

 

SECTION 21.                                             SUBSTITUTION OF
PURCHASER.

 

Each Purchaser shall have
the right to substitute any one of its Affiliates as the purchaser of the Notes
that it has agreed to purchase hereunder, by written notice to the Companies,
which notice shall be signed by both such Purchaser and such Affiliate, shall
contain such Affiliate’s agreement to be bound by this Agreement and shall
contain a confirmation by such Affiliate of the accuracy with respect to it of
the representations set forth in Section 6.  Upon receipt of such notice, any reference to
such Purchaser in this Agreement (other than in this Section 21),
shall be deemed to refer to such Affiliate in lieu of such original Purchaser.  In the event that such Affiliate is so
substituted as a Purchaser hereunder and such Affiliate thereafter transfers to
such original Purchaser all of the Notes then held by such Affiliate, upon
receipt by the Companies of notice of such transfer, any reference to such
Affiliate as a “Purchaser” in this Agreement (other 

 

40

 

than
in this Section 21), shall no longer be deemed to refer to such
Affiliate, but shall refer to such original Purchaser, and such original
Purchaser shall again have all the rights of an original holder of the Notes
under this Agreement.

 

SECTION 22.                                             JOINT AND SEVERAL
LIABILITY OF COMPANIES.

 

Each Company is accepting
joint and several liability hereunder and under the Notes in consideration of
the financial accommodation to be provided by the Purchasers of the Notes, for
the mutual benefit, directly and indirectly, of each Company and in
consideration of the undertakings of each Company to accept joint and several
liability for the obligations of each other Company.  Each Company jointly and severally
irrevocably and unconditionally accepts, not merely as a surety but also as a
co-obligor, joint and several liability with the other Companies with respect
to the payment and performance of the Notes, it being the intention of the
parties hereto that the Notes shall be the joint and several obligations of
each and all of the Companies without preferences or distinction among
them.  If and to the extent that any
Company shall fail to make any payment with respect to all or any portion of
the Notes as and when due or to perform any other obligation hereunder or under
any other Note Document in accordance with the terms hereof or thereof, then in
each such event, the other Companies will make such payment with respect to, or
perform, such obligation.  The
obligations of each Company under the Note Documents constitute full recourse
obligations of such Company, 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 Note Document or any other
circumstances whatsoever.  Except as
otherwise expressly provided in any Note Document, each Company hereby waives
notice of acceptance of its joint and several liability, notice of any issuance
of any Note 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
Note Document, notice of any action at any time taken or omitted by the
Collateral Agent or any holder of any Note under or in respect of any of the
obligations of the Companies under the Note Documents, any requirement of
diligence and, generally, all demands, notice and other formalities of every
kind in connection with this Agreement or any other Note Document.  Each Company hereby assents to, and waives
notice of, any extension or postponement of the time for the payment of the
Notes, the acceptance of any partial payment thereon, any waiver, consent or
other action or acquiescence by the Collateral Agent or any holder of any Note
at any time or times in respect of any default by any Company in the
performance or satisfaction of any term, covenant, condition or provision of
this Agreement or any other Note Document, any and all other indulgences
whatsoever by the Collateral Agent or any holder of any Note in respect of any
of the obligations of the Companies under the Note Documents, 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 of the Companies under the Note
Documents or in part, at any time or times, of any security for any of the
obligations of the Companies under the Note Documents or the addition,
substitution or release, in whole or in part, of any Company.  Without limiting the generality of the
foregoing, each Company assents to any other action or delay in acting or
failure to act on the part of the Collateral Agent or any holder of any Note,
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 22,
afford grounds for terminating, discharging or relieving such Company, in whole
or in part, from any of its obligations under this Agreement or any other Note
Document, it being the intention of each 

 

41

 

Company
that, so long as any portion of the Notes remain unsatisfied, the obligations
of such Company under this Agreement and the other Note Documents shall not be
discharged except by performance and then only to the extent of such
performance.  The obligations of each
Company under this Agreement and the other Note Documents shall not be
diminished or rendered unenforceable by any winding up, reorganization,
arrangement, liquidation, reconstruction or similar proceeding with respect to
any Company.  The joint and several
liability of the Companies 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
Company.  The provisions of this Section 22
are made for the benefit of each holder of Notes and their respective
successors and assigns, and may be enforced from time to time against any of
the Companies as often as occasion therefor may arise and without requirement
on the part of the Collateral Agent or any holder of Notes first to marshal any
of its claims or to exercise any of its rights against any Company or to
exhaust any remedies available against any other Company or to resort to any
other source or means of obtaining payment of any of the obligations of the
Companies under the Note Documents or to elect any other remedy.  The provisions of this Section 22
shall remain in effect until all the obligations of the Companies under the
Note Documents 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 of the Companies under the
Note Documents, is rescinded or must otherwise be restored or returned by any
holder of any Note upon the insolvency, bankruptcy or reorganization of any
Company, or otherwise, the provisions of this Section 22 will
forthwith be reinstated in effect, as though such payment had not been
made.  Notwithstanding any provision of
any Note Document, the liability of each Company under the Note Documents as of
any date shall be limited to an amount equal to the greatest amount that would
not render such Company’s obligations under the Note Documents subject to
avoidance, discharge or reduction as of such date as a fraudulent transfer or conveyance
under applicable Bankruptcy Law or other laws, in each instance after giving
effect to all other liabilities of such Company, contingent or otherwise, that
are relevant under applicable Bankruptcy Law or other laws (specifically
excluding, however, any liabilities of such Company to the extent that such
liabilities would be discharged by payments made by such Company hereunder, and
after giving effect to any rights of subrogation, contribution, reimbursement,
indemnity or similar rights of such Company pursuant to applicable laws or
otherwise, including any agreement of such Company with any other Person
providing for an equitable allocation of such liability).  Each Company acknowledges and agrees that the
obligations of such Company under the Note Documents 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 Company
under the Note Documents or the rights and remedies of any holder of any Note.

 

SECTION 23.                                             MISCELLANEOUS.

 

Section 23.1.        Successors
and Assigns.  All covenants
and other agreements contained in this Agreement by or on behalf of any of the
parties hereto bind and inure to the benefit of their respective successors and
assigns (including, without limitation, any subsequent holder of a Note)
whether so expressed or not.

 

Section 23.2.        Payments
Due on Non-Business Days.  Anything in
this Agreement or the Notes to the contrary notwithstanding (but without
limiting the requirement in Section 8.5  

 

42

 

that the notice of any
optional prepayment specify a Business Day as the date fixed for such
prepayment), any payment of principal of or Make-Whole Amount or interest on
any Note that is due on a date other than a Business Day shall be made on the
next succeeding Business Day without including the additional days elapsed in
the computation of the interest payable on such next succeeding Business Day; provided that if the maturity date of any
Note is a date other than a Business Day, the payment otherwise due on such
maturity date shall be made on the next succeeding Business Day and shall
include the additional days elapsed in the computation of interest payable on
such next succeeding Business Day.

 

Section 23.3.        Accounting
Terms.  All accounting terms used
herein which are not expressly defined in this Agreement have the meanings
respectively given to them in accordance with GAAP.  Except as otherwise specifically provided
herein, (a) all computations made pursuant to this Agreement shall be made
in accordance with GAAP, and (b) all financial statements shall be
prepared in accordance with GAAP.

 

Section 23.4.        Severability.  Any provision of this
Agreement that is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall (to the full
extent permitted by law) not invalidate or render unenforceable such provision
in any other jurisdiction.

 

Section 23.5.        Transaction
References.  Each Company
agrees that Prudential Capital Group may (a) refer to its role in
originating the purchase of the Notes from the Companies, as well as the
identity of the Companies and the aggregate principal amount and issue date of
the Notes, on its internet site or in marketing materials, press releases,
published “tombstone” announcements or any other print or electronic medium and
(b) display each Company’s corporate logo in conjunction with any such
reference.

 

Section 23.6.        Construction,
etc.  Each covenant contained
herein shall be construed (absent express provision to the contrary) as being
independent of each other covenant contained herein, so that compliance with
any one covenant shall not (absent such an express contrary provision) be
deemed to excuse compliance with any other covenant.  Where any provision herein refers to action
to be taken by any Person, or which such Person is prohibited from taking, such
provision shall be applicable whether such action is taken directly or
indirectly by such Person.

 

For the avoidance of doubt,
all Schedules and Exhibits attached to this Agreement shall be deemed to be a
part hereof.

 

Section 23.7.        Counterparts.  This Agreement may be
executed in any number of counterparts, each of which shall be an original but
all of which together shall constitute one instrument.  Each counterpart may consist of a number of
copies hereof, each signed by less than all, but together signed by all, of the
parties hereto.

 

Section 23.8.        Governing
Law.  This Agreement shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the law of the State of New 

 

43

 

York excluding choice-of-law
principles of the law of such State that would permit the application of the
laws of a jurisdiction other than such State.

 

Section 23.9.        Jurisdiction
and Process; Waiver of Jury Trial.

 

(a)           Each Company irrevocably submits to
the non-exclusive jurisdiction of any New York State or federal court sitting
in the Borough of Manhattan, The City of New York, over any suit, action or
proceeding arising out of or relating to this Agreement or the Notes or any
other Note Document.  To the fullest
extent permitted by applicable law, each Company irrevocably waives and agrees
not to assert, by way of motion, as a defense or otherwise, any claim that it
is not subject to the jurisdiction of any such court, any objection that it may
now or hereafter have to the laying of the venue of any such suit, action or
proceeding brought in any such court and any claim that any such suit, action
or proceeding brought in any such court has been brought in an inconvenient
forum.

 

(b)           Each Company consents to process
being served by or on behalf of any holder of Notes in any suit, action or
proceeding of the nature referred to in Section 23.9(a) by
mailing a copy thereof by registered or certified mail (or any substantially
similar form of mail), postage prepaid, return receipt requested, to it at its
address specified in Section 18 or at such other address of which
such holder shall then have been notified pursuant to said Section.  Each Company agrees that such service upon
receipt (i) shall be deemed in every respect effective service of process
upon it in any such suit, action or proceeding and (ii) shall, to the
fullest extent permitted by applicable law, be taken and held to be valid
personal service upon and personal delivery to it.  Notices hereunder shall be conclusively
presumed received as evidenced by a delivery receipt furnished by the United
States Postal Service or any reputable commercial delivery service.

 

(c)           Nothing in this Section 23.9 shall
affect the right of any holder of a Note to serve process in any manner
permitted by law, or limit any right that the holders of any of the Notes may
have to bring proceedings against any Company in the courts of any appropriate
jurisdiction or to enforce in any lawful manner a judgment obtained in one
jurisdiction in any other jurisdiction.

 

(d)           THE PARTIES HERETO HEREBY WAIVE TRIAL
BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS AGREEMENT, THE NOTES,
THE OTHER NOTE DOCUMENTS OR ANY OTHER DOCUMENT EXECUTED IN CONNECTION HEREWITH
OR THEREWITH.

 

*    *   
*    *    *

 

44

 

If you are in
agreement with the foregoing, please sign the form of agreement on a
counterpart of this Agreement and return it to the Companies, whereupon this
Agreement shall become a binding agreement between you and the Companies.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  KMG CHEMICALS, INC.

  
	
   

  
	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  
	
   

  
	
   

  
	
   

  	
  KMG-BERNUTH, INC.

  
	
   

  
	
   

  
	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  
	
   

  
	
   

  
	
   

  	
  KMG ELECTRONIC CHEMICALS, INC.

  
	
   

  	
   

  
	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  

 

 

This Agreement is hereby

accepted and agreed to as

of the date thereof.

 

	
  THE
  PRUDENTIAL INSURANCE COMPANY

  
	
    OF
  AMERICA

  
	
   

  
	
  By:

  	
   

  	
   

  
	
         Vice
  President

  

 

Signature Page to Note Purchase Agreement

 

 

SCHEDULE A

 

PURCHASER SCHEDULE

 

KMG Chemicals, Inc.

KMG-Bernuth, Inc.

KMG Electronic Chemicals, Inc.

7.43% Senior Secured Notes due 2014

 

	
   

  	
   

  	
   

  	
   

  	
  Aggregate

   Principal

  Amount of Notes

  to be Purchased

  	
   

  	
  Note

  Denomination(s)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

  	
   

  	
  $

  	
  20,000,000

  	
   

  	
  $

  	
  10,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  (“Note No. R-01”)

  	
   

  
	
  (1)

  	
   

  	
  All payments
  on account of Notes held by such purchaser shall be made by wire transfer of
  immediately available funds for credit to:

  	
   

  	
   

  	
   

  	
  $

  	
  10,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  (“Note No. R-02”)

  	
   

  
	
   

  	
   

  	
  Account
  Name: Prudential Managed Portfolio Account No.: P86188 (please do not include
  spaces) (in the case of payments on account of the Note No. R-01)

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Account
  Name: Privest Plus

  Account No.: P86288 (please do not include spaces) (in the case of payments
  on account of the Note No. R-02)

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  JPMorgan
  Chase Bank

  New York, NY

  ABA No.: 021-000-021

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Each such
  wire transfer shall set forth the name of the Company, a reference to “7.43%
  Senior Secured Notes due 2014, Security No. INV 10971, PPN 48256@ AA6”
  and the due date and application (as among principal, interest and Make-Whole
  Amount) of the payment being made.

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (2)

  	
   

  	
  Address for
  all notices relating to payments:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  The
  Prudential Insurance Company of America

  c/o Investment Operations Group

  Gateway Center Two, 10th Floor

  100 Mulberry Street

  Newark, NJ 07102-4077

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Attention: Manager,
  Billings and Collections

  	
   

  	
   

  	
   

  	
   

  	
   

  
										

 

A-1

 

	
  (3)

  	
   

  	
  Address for
  all other communications and notices:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  The
  Prudential Insurance Company of America 

  c/o Prudential Capital Group

  2200 Ross Avenue, Suite 4200E

  Dallas, TX 75201

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Attention:
  Managing Director

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (4)

  	
   

  	
  Recipient of
  telephonic prepayment notices:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Manager,
  Trade Management Group

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Telephone:
  (973) 367-3141

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Facsimile: (888)
  889-3832

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (5)

  	
   

  	
  Address for
  Delivery of Notes:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Send
  physical security by nationwide overnight delivery service to: 

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Prudential
  Capital Group

  2200 Ross Avenue, Suite 4200E

  Dallas, TX 75201 

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Attorney:
  Thomas P. Donahue

  Telephone: (214) 720-6202

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (6)

  	
   

  	
  Tax
  Identification No.: 22-1211670

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

A-2

 

SCHEDULE B

 

DEFINED
TERMS

 

As used
herein, the following terms have the respective meanings set forth below or set
forth in the Section hereof following such term:

 

“Acceptable Security Interest” in any property means a Lien
which (a) exists in favor of the Collateral Agent for its benefit and the
ratable benefit of the holders of the Notes and the Lender Parties, (b) is
superior to all other Liens, except Permitted Liens, (c) secures the Note
Agreement Obligations and, if outstanding, the Credit Agreement Obligations and
(d) is perfected and enforceable.

 

“Accounts” has the meaning specified for such term in the
UCC.

 

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

 

“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
cause the direction of the management or policies of any Person, whether
through ownership of voting securities, by contract or otherwise.  Unless the context otherwise clearly
requires, any reference to an “Affiliate” is a reference to an Affiliate of a
Company.

 

“Air Products APA” means the Asset Purchase Agreement dated
as of October 19, 2007 by and between Air Products and Chemicals, Inc.
and KMG Chemicals.

 

“Air Products APA Documents” means the Air Products APA and
the other documents and instruments executed by or in favor of any Member of
the Company Consolidated Group in connection therewith.

 

“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 GAAP.

 

“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.

 

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

 

B-1

 

“Bankruptcy Law” means Title 11, U.S. Code, or any similar
laws of any jurisdiction for the relief of debtors.

 

“Blocked Person” means any of the following:

 

(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.

 

“Business Day” means (a) for the purposes of Section 8.7
only, any day other than a Saturday, a Sunday or a day on which commercial banks
in New York City are required or authorized to be closed, and (b) for the
purposes of any other provision of this Agreement, any day other than a
Saturday, a Sunday or a day on which commercial banks in New York, New York are
required or authorized to be closed.

 

“Capital Expenditures” means the sum of (a) 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 GAAP,
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 (b) 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 GAAP.

 

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

 

“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, 

 

B-2

 

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 any Company representing Voting Power having the right to elect at least 50%
of the members of the Governing Body of such Company; 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) the Companies shall cease to own at least 99%
of the Equity Interests and Voting Power of KMEX and KMG Italia.

 

“Chattel Paper” has the meaning specified for such term in
the UCC.

 

“Closing”  is defined in Section 3.

 

“Closing Balance Sheet” means an unaudited balance sheet of
the Company Consolidated Group dated as of the time immediately following the
Closing, such balance sheet to be calculated based upon the most recent
financial statements available to the Companies, but on a pro-forma basis after
taking into account the transactions that are to occur on the date of Closing.

 

“Code”  means the
Internal Revenue Code of 1986, as amended from time to time, and the rules and
regulations promulgated thereunder from time to time.

 

“Collateral” has the meaning specified for such term in the
Credit Agreement, as in effect on the date of Closing unless any amendment
thereto has been consented to by the Required Holders.

 

“Collateral Agent” means Wachovia Bank, National Association,
in its capacity as Collateral Agent under the Intercreditor Agreement, together
with its successors and assigns in such capacity.

 

“Collateral Agent’s Lien” means the Lien granted to
Collateral Agent by any Company Party pursuant to the Credit Agreement and the
other Security Documents, provided that
such Lien secures the Note Agreement Obligations on a pari passu basis with the
Credit Agreement Obligations.

 

“Commercial Tort Claim” has the meaning specified for such
term in the UCC.

 

“Company”  and “Companies” are defined in the first paragraph of this
Agreement.

 

“Company Consolidated Group” means the Companies, KMEX, KMG
Italia, and any other Person who, after the date of this Agreement,
unconditionally guarantees the payment and performance when due of the Note
Agreement Obligations (each such Person referred to singularly as a “Member of the Company Consolidated Group”).

 

B-3

 

“Company Parties” means the Companies and any other Person
that hereafter becomes a party to this Agreement or any other Note Document,
and which Person is responsible in whole or in part for the payment or
performance of any of the Note Agreement Obligations.

 

“Confidential Information”  is
defined in Section 20.

 

“Consolidated Basis” means the consolidation of the assets,
liabilities, income and losses, as applicable, of the Company Consolidated
Group; provided, however,
that there shall be excluded:

 

(a)           KMEX if (i) the gross revenues
of KMEX arising from sales to any Person other than the Companies for the
trailing 12 months exceeds $2,000,000, or (ii) the Equity Owner’s Equity,
as reflected on KMEX’s balance sheet, is more than $5,000,000; and

 

(b)           KMG Italia if (i) the EBIDA of
KMG Italia exceeds 15% of the EBIDA of the Company Consolidated Group
(including KMG Italia), or (ii) the Tangible Net Worth of KMG Italia
exceeds 15% of the Tangible Net Worth of the Company Consolidated Group
(including KMG Italia).

 

“Credit Agreement” means the Amended and Restated Credit
Agreement dated as of December 31, 2007, among the Companies and the
Lender Parties, as the same may be amended, modified or supplemented from time
to time in accordance with its terms to the extent permitted by this Agreement.

 

“Credit Agreement Agent” means Wachovia Bank, National
Association, in its capacity as Agent under the Credit Agreement, together with
its successors and assigns in such capacity.

 

“Credit Agreement Obligations” means the “Credit Agreement
Obligations” as defined in the Intercreditor Agreement.

 

“Credit Documents” has the meaning specified for the term “Loan
Documents” in the Credit Agreement, as in effect on the date of Closing

 

“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 GAAP, excluding, however, any such payment required to be made on
the ultimate maturity date of such Indebtedness.

 

“Default” means an event or condition the occurrence or
existence of which would, with the lapse of time or the giving of notice or
both, become an Event of Default.

 

“Default Rate” means that rate of interest that is the
greater of (a) 2.0% per annum above the rate of interest stated in clause (a) of
the first paragraph of the Notes or (b) 2.0% over the rate of interest
publicly announced by JPMorgan Chase Bank, N.A. in New York, New York as its “base”
or “prime” rate.

 

“Deposit Accounts” has the meaning specified for such term in
the UCC.

 

B-4

 

“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 GAAP.

 

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

 

“Documents” has the meaning specified for such term in the
UCC.

 

“EBIDA” means, with respect to an applicable Person for the
applicable period, Net Income, plus, to the extent deducted in
determining Net Income, the sum of (without duplication) Interest Expense,
Amortization Expense, Depreciation Expense and all other non-cash charges, all
determined in accordance with GAAP.

 

“EBITDA” means, with respect to an applicable Person for the
applicable period, Net Income, plus, to the extent deducted in
determining Net Income, the sum of (without duplication) Interest Expense,
Income Tax Expense, Amortization Expense, Depreciation Expense and all other
non-cash charges, all determined in accordance with GAAP.

 

“Electronic Delivery” is defined in Section 7.1(a).

 

“Environmental Laws” means any and all Federal, state, local,
and foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or
governmental restrictions relating to pollution and the protection of the
environment or the release of any materials into the environment, including but
not limited to those related to Hazardous Materials.

 

“Equipment” has the meaning specified for such term in the
UCC.

 

“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 GAAP:

 

(a)           the par or stated value of all
outstanding Equity Interests;

 

(b)           capital surplus; and

 

(c)           retained earnings.

 

“ERISA” means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the rules and regulations
promulgated thereunder from time to time in effect.

 

B-5

 

“ERISA Affiliate” means any trade or business  (whether or not incorporated) that is treated
as a single employer together with any Company under section 414 of the Code.

 

“Event of Default” is defined in Section 11.

 

“Exchange Act” means the Securities Exchange Act of 1934, as
amended.

 

“Existing Indebtedness” means Indebtedness of the Company
Consolidated Group (a) as reflected on the Most Recent Financial
Statements or the Closing Balance Sheet, and which Indebtedness is not being
paid or defeased at Closing; and (b) incurred in the Ordinary Course of
Business of a Member of the Company Consolidated Group subsequent to the date
of the Most Recent Financial Statements, and which Indebtedness is not for
borrowed money.

 

“Existing Investments” means Investments of the Company
Consolidated Group (a) as reflected on the Most Recent Financial
Statements or the Closing Balance Sheet; and (b) made subsequent to the
date of the Most Recent Financial Statements, and which Investments would
otherwise be Permitted Investments.

 

“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.

 

“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 (a) 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, plus Dividends for the 12-month
period preceding the applicable date, by (b) 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.

 

“Foreign Subsidiary” shall mean a Subsidiary that is
organized under the laws of a jurisdiction other than the United States of
America or any state thereof or the District of Columbia.

 

“Form 10-K” means KMG Chemicals’ Annual Report on Form 10-K
filed with the SEC, regardless of whether any Company is subject to the filing
requirements thereof.

 

B-6

 

“Form 10-Q” means KMG Chemicals’ Quarterly Report on Form 10-Q
filed with the SEC, regardless of whether any Company is subject to the filing
requirements thereof.

 

“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 GAAP, classified as a
current Liability or Long-Term Indebtedness at such date, and whether secured
or unsecured, excluding, however, (b) Indebtedness that is accounts
payable and accrued expenses and other similar current Liabilities incurred in
such Person’s Ordinary Course of Business.

 

“GAAP” means generally accepted principles of accounting in
effect from time to time in the United States of America applied in a manner
consistent with those used in preparing such financial statements as have
heretofore been furnished to the Purchasers 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 Authority” means

 

(a)           the government of

 

(i)                                     the
United States of America or any State or other political subdivision thereof,
or

 

(ii)                                  any
other jurisdiction in which any Company or any Subsidiary conducts all or any
part of its business, or which asserts jurisdiction over any properties of any
Company or any Subsidiary, or

 

(b)                                 any
entity exercising executive, legislative, judicial, regulatory or
administrative functions of, or pertaining to, any such government.

 

“Hazardous Material” means any and all pollutants, toxic or
hazardous wastes or other substances that might pose a hazard to health and
safety, the removal of which may be required or the generation, manufacture,
refining, production, processing, treatment, storage, handling, transportation,
transfer, use, disposal, release, discharge, spillage, seepage or
filtration of which is or shall be restricted, prohibited or penalized by any
applicable law including, but not limited to, asbestos, urea formaldehyde foam
insulation, polychlorinated biphenyls, petroleum, petroleum products, lead
based paint, radon gas or similar restricted, prohibited or penalized
substances.

 

“holder” means, with respect to any Note the Person in whose
name such Note is registered in the register maintained by the Companies
pursuant to Section 13.1.

 

B-7

 

“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 GAAP.

 

“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:

 

(i)            to purchase such indebtedness; or

 

(ii)           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

 

(iii)          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 GAAP, should
be reflected on the lessee’s balance sheet.

 

“Institutional Investor” means (a) any Purchaser of a
Note, (b) any holder of a Note holding (together with one or more of its
affiliates) more than 10% of the aggregate principal amount of the Notes then
outstanding, (c) any bank, trust company, savings and loan association or
other financial institution, any pension plan, any investment company, any
insurance company, any broker or dealer, or any other similar financial
institution or entity, regardless of legal form, and (d) any Related Fund
of any holder of any Note.

 

“Instruments” has the meaning specified for such term in the
UCC.

 

“Intercreditor Agreement” means the Intercreditor and
Collateral Agency Agreement of even date herewith among the Lender Parties, the
Purchasers and the Companies, as it may be amended, modified or supplemented
from time-to-time in accordance with its terms.

 

B-8

 

“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 GAAP.

 

“Inventory” has the meaning specified for such term in the
UCC.

 

“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.

 

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

 

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

 

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

 

“KMG-Bernuth” is defined in the first paragraph of this
Agreement.

 

“KMG Chemicals” is defined in the first paragraph of this
Agreement.

 

“KMG ECI” is defined in the first paragraph of this
Agreement.

 

“KMG Italia” means KMG Italia S.r.l., a company organized
under the laws of Italy

 

“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
Governmental Authority, 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 GAAP.

 

“Lender Parties” means the Credit Agreement Agent, the
Collateral Agent, the Lenders (as such term is defined in the Credit
Agreement), the Swing Line Lender (as such term is defined in the Credit
Agreement), the Issuing Lender (as such term is defined in the Credit
Agreement) and any Lender Party (or an Affiliate of a Lender Party) that is now
or hereafter becomes a party to any Lender Party Swap Document (as such term is
defined in the Credit Agreement).

 

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

 

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

 

B-9

 

“Liquid Assets” means, as of an applicable time, the
following, so long as the same is not subject to any Lien (other than an
Acceptable Security Interest)  nor subject to
any restriction on transferability, whether imposed under applicable law, by
agreement, or otherwise: (a) 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 of
America, in each case maturing within one year from the applicable time; (b) 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; (c) 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; (d) 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 of America, 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;
(e) securities with maturities of six months or less from the applicable
time and backed by standby letters of credit by any Lender (as defined in the
Credit Agreement) or any commercial bank satisfying the requirements of clause (b) of
this definition; (f) shares of money market mutual or similar funds which
invest exclusively in assets satisfying the requirements of clauses (a) through
(c) of this definition; and (g) publicly traded securities listed on
a nationally recognized securities exchange in the United States of America.

 

“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.

 

“Make-Whole Amount” is defined in Section 8.7.

 

“Material” means material in relation to the business,
operations, affairs, financial condition, assets or properties of the Companies
and their respective Subsidiaries taken as a whole.

 

“Material Adverse Effect” means a material adverse effect on (a) the
business, operations, affairs, financial condition, assets or properties of the
Companies and their respective Subsidiaries taken as a whole, or (b) the
ability of any Company to perform its obligations under this Agreement, the
Notes or any other Note Document, or (c) the validity or enforceability of
this Agreement, the Notes or any other Note Document.

 

“Material Contract” means any contract or agreement (other
than contracts or agreements with respect to Asset Acquisitions) to which any
Company is a party, by which any Company or its properties are bound, or to
which any Company is subject and which contract or agreement (a) pursuant
to its terms provides for payments or receipts by any Company which might
reasonably be expected to exceed $5,000,000 during any Fiscal Year; or (b) if
on account 

 

B-10

 

of any breach or termination thereof, would reasonably be expected to
cause a Material Adverse Effect.

 

“Mortgaged Property” means the “Mortgaged Property” as
defined in the Mortgages.

 

“Mortgages” means (a) the Deed of Trust and Security
Agreement  dated as of December 31, 2007,
executed by KMG ECI in favor of the Collateral Agent, with respect to the
Mortgaged Property located in Pueblo County, Colorado; and (b) the
Mortgage and Security Agreement dated as of December 31, 2007, executed by
KMG-Bernuth in favor of the Collateral Agent, with respect to the Mortgaged
Property located in Doniphan County, Kansas, and includes any and all
extensions, revisions, modifications or amendments at any time made to any of
the foregoing.

 

 “Most Recent Financial
Statements” means the audited balance sheet and income statement of
the Company Consolidated Group dated as of July 31, 2007, as supplemented
by management-prepared financial statements dated as of each Quarter-End
through the Quarter-End of October 31, 2007.

 

“Multiemployer Plan” means any Plan that is a “multiemployer
plan” (as such term is defined in section 4001(a)(3) of ERISA).

 

“NAIC” means the National Association of Insurance
Commissioners or any successor thereto.

 

“Net Income” means the net income of an applicable Person for
the applicable period as determined in accordance with GAAP, 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.

 

“Note Agreement Obligations” means the “Note Agreement
Obligations” as defined in the Intercreditor Agreement.

 

“Note Documents” means collectively, this Agreement, the
Notes, the Security Documents, the Intercreditor Agreement and each other
agreement, instrument or document executed at any time in connection with the
foregoing documents, as each such Note Document may be amended, modified or
supplemented from time-to-time to the extent not prohibited by this Agreement; provided that, although the Credit Agreement is a Security
Document, the term Note Documents shall only include the provisions of the
Credit Agreement directly or indirectly related to the granting of the
Collateral Agent’s Lien and the enforcement of such Lien.

 

“Notes” is defined in Section 1.

 

“Officer’s Certificate” means a certificate of a Senior
Financial Officer or of any other officer of the Companies whose
responsibilities extend to the subject matter of such certificate.

 

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

 

B-11

 

(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 (a) the articles of
incorporation and the bylaws of a corporation, (b) the partnership
agreement and any statement of partnership of a general partnership, (c) the
limited partnership agreement and the certificate of limited partnership of a
limited partnership, (d) the articles of organization and the operating
agreement of a limited liability company, (e) any charter or similar
document adopted or filed in connection with the creation, formation, or
organization of a Person, and (f) any amendment to any of the foregoing.

 

“PBGC” means the Pension Benefit Guaranty Corporation
referred to and defined in ERISA or any successor thereto.

 

“Permitted Acquisition” means:

 

(a)           the Acquisition being made pursuant
to the Air Products APA Documents;

 

(b)           any Acquisition if the total
consideration paid or payable is less than $15,000,000 and if (i) the
Companies give the holders of Notes not less than 10 days prior written notice
of such Acquisition; (ii) no later than 30 days after the Acquisition,
each Company shall have executed and delivered such documentation (if any) as
may be required by the Collateral Agent such that it 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 such Acquisition;

 

(c)           any Acquisition made by any Company
if the total consideration paid or payable is equal to or greater than
$15,000,000 and if (i) the Companies give the holders of Notes not less
than 30 days prior written notice of such Acquisition, which written notice
shall be accompanied by a pro-forma compliance certificate demonstrating that,
on a pro-forma basis, after giving effect to the Acquisition, such Acquisition
would not give rise to a Default as of the consummation of the Acquisition, or
during the one-year period following the consummation of such Acquisition; (ii) the
Required Holders consent to such Acquisition (and in granting or denying such
consent, the holders of Notes 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 any Company; (z) immediately
after the Acquisition, the Companies shall have executed and delivered such
documentation (if any) as may be required by the Collateral Agent so that the
Collateral Agent shall have a first Lien with respect to any assets acquired in
connection with such Acquisition (other than real property with a value of less
than $1,000,000); and provided that
in any event the holders of Notes 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; and

 

B-12

 

(d)           any Acquisition made by any Member of
the Company Consolidated Group (other than a Company), whether in a single
transaction or a series of related transactions, if the total consideration
paid or payable is equal to or greater than $15,000,000 and if (i) the
Companies give the holders of Notes not less than 30 days prior written notice
of such Acquisition, which written notice shall be accompanied by a pro-forma
compliance certificate demonstrating that, on a pro-forma basis, after giving
effect to the Acquisition, such Acquisition would not give rise to a Default as
of the consummation of the Acquisition, or during the one-year period following
the consummation of such Acquisition; and (ii) the Required Holders
consent to such Acquisition (and in granting or denying such consent, the
holders of Notes may consider, among other things, whether the business
acquired is a Permitted Line of Business); and provided
that in any event the holders of Notes 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 Credit Agreement Obligations;

 

(b)           the Note Agreement Obligations;

 

(c)           the Existing Indebtedness;

 

(d)           any Indebtedness arising under any
Swap Document (as defined in the Credit Agreement) entered into as a result of
the compliance with any affirmative covenant of any Company Party set forth in
any Credit Document;

 

(e)           Indebtedness incurred in the Ordinary
Course of Business of the Company Consolidated Group and not incurred through
the borrowing of money, provided that
such Indebtedness is either Unsecured Indebtedness or Indebtedness secured by a
Permitted Lien;

 

(f)            Indebtedness of any Member of the
Company Consolidated Group owed (i) to any Member of the Company
Consolidated Group (other than a Company) and (ii) to any Company so long
as the same constitutes a Permitted Investment by such Company under clause (ii) of
clause (f) of the definition of Permitted Investment; and

 

(g)           Indebtedness (other than Indebtedness
specified in clauses (a) through (f) above) incurred by any Member of
the Company Consolidated Group in an aggregate amount not to exceed $15,000,000
at any time outstanding.

 

 “Permitted Investments”
means:

 

(a)           Liquid Assets;

 

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

 

B-13

 

(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;

 

(e)           Existing Investments;

 

(f)            Investments made by a Member of the
Company Consolidated Group (i) in any Company and (ii) in any Member
of the Company Consolidated Group (other than a Company), provided
that the sum of (x) the aggregate amount of Investments made pursuant to
this clause (ii) plus (y) the aggregate value of assets
transferred to Members of the Company Consolidated Group (other than a Company)
pursuant to clause (ii) of clause (f) of the definition of Permitted
Transfers of Assets is equal to or less than $5,000,000; and

 

(g)           Investments (other than Investments
specified in clauses (a) through (f) above) in an aggregate amount
that shall not exceed $15,000,000.

 

 “Permitted Liens”
means:

 

(a)           Collateral Agent’s Lien; provided, that the obligations of the Company Parties to the
Lender Parties in respect of Lender Party Swap Documents (as defined in the
Credit Agreement) may be secured by such Liens only so long as, with respect to
each Lender (as defined in the Credit Agreement) or Affiliate thereof, (i) the
Lender remains a Lender under the Credit Agreement and (ii) such Lender or
Affiliate thereof is a party to the Intercreditor Agreement;

 

(b)           Liens, if any, as reflected on the
Title Insurance Policies;

 

(c)           those Liens identified on Schedule
C  attached to this Agreement;

 

(d)           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 or any other
Note Document, and (ii) does not give rise to a Material Adverse Effect:

 

(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 GAAP:

 

(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;

 

B-14

 

(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 (other than any such Lien incurred
pursuant to ERISA);

 

(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 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

 

(4)           purchase money security interests granted in the Ordinary
Course of Business to secure not more than 100% of the purchase price of
assets, provided that the Indebtedness secured
by such security interests is permitted by clause (g) of the definition of
Permitted Indebtedness; and

 

(e)           Easements over the Mortgaged Property
arising by reason of zoning restrictions, easements, licenses, reservations,
covenants, rights-of-way, utility easements, building restrictions and other
similar encumbrances on the use of real property which do not materially
detract from the value of such Mortgaged Property or interfere with the
ordinary conduct of the business conducted and proposed to be conducted at such
Mortgaged Property.

 

“Permitted Line of Business” means the business engaged in by
Company 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 any Company in the
Ordinary Course of Business;

 

(c)           the sale or disposition of assets
outside the Ordinary Course of Business, provided that (i) the
aggregate value of assets sold or disposed of pursuant to this clause (c) in
any Fiscal Year shall not exceed $5,000,000, (ii) the aggregate value of
assets sold or disposed of pursuant to this clause (c) on or after the
date of Closing shall not exceed $10,000,000, 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 (as defined in the Credit Agreement), if such
termination does not give rise to a Default;

 

B-15

 

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

 

(f)            any transfer of assets by a Member
of the Company Consolidated Group (i) to a Company, so long as such
transfer of assets would not otherwise give rise to a Default and (ii) to
a Member of the Company Consolidated Group (other than a Company), so long as
such transfer of assets would not otherwise give rise to a Default, provided that the sum of (x) the aggregate value of
assets transferred to Members of the Company Consolidated Group (other than a
Company) pursuant to this clause (ii) plus (y) the amount of
Investments made pursuant to clause (ii) of clause (f) of the definition
of Permitted Investments is equal to or less than $5,000,000; and

 

(g)           the lease of a portion of the
Mortgaged Property located in Doniphan County, Kansas, pursuant to that certain
Lease dated as of February 22, 2006 between KMG-Bernuth, as lessor, and
Boehringer Ingelheim Vetmedica, Inc., as lessee, as amended from time to
time.

 

“Person” means an individual, partnership, corporation,
limited liability company, association, trust, unincorporated organization,
business entity or Governmental Authority.

 

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

 

“Plan” means an “employee benefit plan” (as defined in
section 3(3) of ERISA) subject to Title I of ERISA that is or, within the
preceding five years, has been established or maintained, or to which
contributions are or, within the preceding five years, have been made or
required to be made, by any Company or any ERISA Affiliate or with respect to
which any Company or any ERISA Affiliate may have any liability.

 

“Preferred Stock” means any class of capital stock of a
Person that is preferred over any other class of capital stock (or similar
equity interests) of such Person as to the payment of dividends or the payment
of any amount upon liquidation or dissolution of such Person.

 

“property” or “properties”
means, unless otherwise specifically limited, real or personal property of any
kind, tangible or intangible, choate or inchoate.

 

“PTE” is defined in Section 6.2(a).

 

“Purchaser” is defined in the first paragraph of this
Agreement.

 

“Qualified Institutional Buyer” means any Person who is a “qualified
institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(1) under
the Securities Act.

 

“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.

 

“Records” means correspondence, memoranda, tapes, discs,
microfilm, microfiche, papers, books and other documents, or transcribed
information of any type, whether expressed in 

 

B-16

 

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.

 

“Related Fund” means, with respect to any holder of any Note,
any fund or entity that (a) invests in Securities or bank loans, and (b) is
advised or managed by such holder, the same investment advisor as such holder
or by an affiliate of such holder or such investment advisor.

 

“Required Holders” means, at any time, the holders of at
least a majority in principal amount of the Notes at the time outstanding
(exclusive of Notes then owned by any Company or any of its Affiliates).

 

“Responsible Officer” means any Senior Financial Officer and
any other officer of any Company with responsibility for the administration of
the relevant portion of this Agreement.

 

“SEC” shall mean the Securities and Exchange Commission of
the United States of America, or any successor thereto.

 

“Securities” or “Security” shall
have the meaning specified in Section 2(1) of the Securities
Act.

 

“Securities Act” means the Securities Act of 1933, as amended
from time to time, and the rules and regulations promulgated thereunder
from time to time in effect.

 

“Security Documents” means all documents or instruments of
any kind executed or delivered in connection with the Notes, whether delivered
prior to, at, or after the Closing, wherein the Collateral Agent is granted a
Lien in any Company Party’s assets, and all documents and instruments executed
and delivered in connection with any of the foregoing, including, without
limitation, the Credit Agreement and the Mortgages, as each such Security
Document may be amended, modified or supplemented from time-to-time to the
extent not prohibited by this Agreement; provided that,
although the Credit Agreement is a Security Document, the term Security
Documents shall only include the provisions of the Credit Agreement directly or
indirectly related to the granting of the Collateral Agent’s Lien and the
enforcement of such Lien.

 

“Senior Financial Officer” means the chief financial officer,
principal accounting officer, treasurer or comptroller of KMG Chemicals.

 

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

 

B-17

 

“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).  Unless the context otherwise clearly requires,
any reference to a “Subsidiary” is a reference to a Subsidiary of KMG
Chemicals.

 

“SVO” means the Securities Valuation Office of the NAIC or
any successor to such Office.

 

“Tangible Net Worth” means, at any time with respect to an
applicable Person, Equity Owner’s Equity, less the sum of:

 

(a)           any surplus resulting from any
write-up of assets subsequent to the date of Closing;

 

(b)           goodwill, including any amounts,
however designated on a balance sheet of such Person, representing the excess
of the purchase price paid for assets or stock acquired over the value assigned
thereto;

 

(c)           patents, trademarks, trade names and
copyrights;

 

(d)           any amount at which Equity Interests
appear as an asset on a balance sheet of such Person;

 

(e)           loans and advances to Affiliates,
stockholders, directors, officers or employees;

 

(f)            deferred expenses (to the extent
included as an asset on a balance sheet);

 

(g)           Investments in Affiliates of any
nature; and

 

(h)           any other amount in respect of an
intangible that, in accordance with GAAP, should be classified as an asset on a
balance sheet of the applicable Person.

 

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

 

“Title Insurance Policies” means standard ALTA form title
insurance policies with respect to the Mortgaged Property and acceptable to the
Collateral Agent in its discretion, dated the date of Closing, and issued by a
Title Insurance Company to the Collateral Agent upon the applicable Mortgaged
Property, subject only to those exceptions and matters of title acceptable to
the Collateral Agent, in the Collateral Agent’s discretion.

 

“Transition Services Agreement” means any agreement between
any Company and Air Products and Chemicals, Inc. relating to the provision
of administrative and other services for the orderly transition of the assets
the subject of the Air Products APA Documents.

 

B-18

 

“UCC” means the Uniform Commercial Code as presently adopted
and in effect (a) with respect to KMG Chemicals and KMG ECI, in the State
of Texas, and (b) with respect to KMG-Bernuth, in 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).

 

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

 

“USA Patriot Act” means United States Public Law 107-56,
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from
time to time, and the rules and regulations promulgated thereunder from
time to time in effect.

 

“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.

 

“Wholly-Owned Subsidiary” means, at any time, any Subsidiary
one hundred percent of all of the equity interests (except directors’
qualifying shares) and voting interests of which are owned by any one or more
of the Companies and any Company’s other Wholly-Owned Subsidiaries at such
time.

 

B-19Exhibit 10.1

 

 

January 7, 2008

 

Mr. Russell A. Whitney

1612 E. Cape Coral Blvd. 

Cape Coral, FL  33904

 

                RE:          Termination
of Employment Agreement

 

Dear Mr. Whitney:

 

Reference is made to that
certain Employment Agreement (“Employment Agreement”), dated as of June 30,
2003, by and between Whitney Education Group, Inc. (“WEG”), a Florida
corporation, a wholly-owned subsidiary of Whitney Information Network, Inc.
(“WIN”), a Colorado corporation (together, WEG and WIN along with each of their
wholly-owned subsidiaries are referred to herein collectively as the “Company”),
and Russell A. Whitney.

 

This letter agreement will
confirm that you have informed the Company of your resignation as Chief
Executive Officer of the Company, and of the termination of the Employment
Agreement, both effective as of December 31, 2007.  The Board of Directors accepts your
resignation.  Furthermore, the Board of
Directors of WEG and the Special Committee of the Board of Directors of WIN
have determined that for purposes of the Employment Agreement your resignation
will be treated as a “Termination Other Than For Cause” under Section 2.4
of the Employment Agreement.  The parties
have agreed that WIN will pay severance compensation in the amount of
$1,950,000 in twelve, equal monthly installments of $162,500 to you over a
period of 12 months, the first such payment to be made January 1, 2008 and
continuing on the first day of each calendar month thereafter, less applicable
taxes and withholdings (“Severance Compensation”); except that consistent with
the Company’s past practice, you at your option may at any time request that
the balance of the Severance Compensation be paid to you in a lump sum within
30 days following your written request. 
To secure its obligation to pay the Severance Compensation to you, the
Company agrees to place a lien immediately upon its Citation VII aircraft
(Serial Number 650-7068, Tail # N7AB) in your favor.  You agree to terminate this lien immediately
upon the payment in full of the Severance Compensation to you.  If the aircraft is sold by the Company at any
time prior to the payment in full of the Severance Compensation, you agree to
terminate your lien and the Company agrees that the balance of the then unpaid
Severance Compensation will be accelerated and paid to you from the proceeds of
the sale of the aircraft at that time.

 

You acknowledge that you
have been paid all salary and bonuses and any and all other pay and incentives
due to you under the Employment Agreement or otherwise, except those payments
otherwise payable under this letter agreement; that you have been provided with
all leave (including leave under the Family and Medical Leave Act) to which you
may have been entitled, if any; and that you have not suffered any workplace
illness or injury other than any injury or illness of which you have already
advised the Company about, if any. 
Furthermore, you hereby affirm, to the best of your knowledge as of the
date hereof, that you at present are not aware of any potential claims or
causes of action that you may have against the Company.  Neither this letter agreement, nor anything
contained herein, shall be construed as an admission or concession by the
Company or by you of any liability, unlawful conduct, or wrongdoing whatsoever.

 

 

Please be advised that,
under the terms of that certain Confidentiality, Non-Compete and
Non-Solicitation Agreement by and between you and WEG, you are and remain
subject to certain post-termination restrictive covenants.

 

Notwithstanding the
termination of the Employment Agreement, the Company agrees that it will
indemnify and hold you harmless to the fullest extent permitted by applicable
law under Section 7.10 of the Employment Agreement and under Article VI
of the Bylaws of WIN.  Without limiting
the foregoing, you shall be entitled to advancement of your fees and expenses
of legal counsel, incurred in connection with any legal proceeding arising out
of or relating to your service as an officer, director or employee of the
Company.  Your acceptance of this letter
constitutes your undertaking to repay any sums advanced in the event so ordered
by a court of competent jurisdiction.

 

You acknowledge by signing
below that you have read this letter agreement in its entirety, understand all
of its terms, and knowingly and voluntarily assent to those terms.  You further acknowledge that you have been
advised of your right to consult with counsel in connection with this letter
agreement, and that you have consulted with your own counsel.

 

Please sign and date this
agreement in the space provided and return the original to WIN within seven (7) days.

 

Very
truly yours,

 

WHITNEY
INFORMATION NETWORK, INC.

 

	
  By:

  	
   

  
	
  Name:

  
	
  Title:

  

 

WHITNEY
EDUCATION GROUP, INC.

 

	
  By:

  	
   

  
	
  Name:

  
	
  Title

  

 

ACKNOWLEDGED
AND AGREED:

 

 

	
  Russell
  A. Whitney

  	
   

  
	
  Date:

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