Document:

Exhibit 10.31

 

TERM NOTE NO. 2

 

	
  $6,000,000.00

  	
   

  	
  Date: 
  December 5, 2003

  

 

FOR VALUE RECEIVED,
the undersigned KMG-BERNUTH, INC.,
a Delaware corporation (hereinafter referred to as “Borrower”), promises to pay
to the order of SOUTHTRUST BANK,
an Alabama banking corporation (hereinafter, together with any holder of this
Note, the “Bank”), at its main office in the City of Birmingham, Alabama, or at
such other address as the Bank may from time to time designate in writing, the
principal sum of Six Million and No/100 Dollars ($6,000,000.00) or so much as
may be advanced hereunder, together with interest thereon and other agreed
charges as provided herein.

 

I.                                         DEFINITIONS:

 

As used in
this Note, the term:

 

(a)                                  “Business Day”
shall mean a day of the year, other than Saturday or Sunday, on which dealings
in United States dollars are carried on in the London interbank market and
banks are open for business in London and banks (including SouthTrust Bank) in
Birmingham, Alabama, and New York, New York are not required or authorized to
close.

 

(b)                                 “Default Rate”
shall mean a variable per annum rate of interest equal to the lesser of (i) two
percent (2%) in excess of the Interest Rate otherwise applicable hereunder, or
(ii) the maximum rate allowed by applicable law.

 

(c)                                  “Event of
Default” shall have the meaning attributed to said term in Section VIII of
this Note.

 

(d)                                 “Guarantor”
shall mean KMG Chemicals, Inc., a Texas corporation.

 

(e)                                  “Guaranty”
shall mean the “Term Loan No. 2 Guaranty” as defined in the Loan Agreement.

 

(f)                                    “Interest Rate”
shall mean the actual interest rate at which the outstanding principal amount
bears interest from time to time during the term of this Note.

 

(g)                                 “LIBOR Rate”
shall mean the applicable 30-Day LIBOR Rate, 60-Day LIBOR Rate, or 90-Day LIBOR
Rate from time to time in effect.

 

(h)                                 “LIBOR Rate
Commencement Date” shall mean, with respect to the initial LIBOR Rate Interest
Period, the date of this Note, and, with respect to each other LIBOR Rate
Interest Period, the Payment Due Date on which any respective LIBOR Rate
Interest Period shall commence.

 

(i)                                     “LIBOR Rate
Election Notice” shall mean a written (or oral if approved by Bank, in its sole
discretion) notice given to Bank by Borrower, no later than two (2) Business
Days prior to the

 

 

commencement of any applicable LIBOR Rate Interest Period, providing
for Borrower’s exercise of a LIBOR Rate Election Option and specifying the
applicable 30-Day LIBOR Rate, 60-Day LIBOR Rate, or 90-Day LIBOR Rate being
elected by Borrower and the LIBOR Rate Commencement Date of the corresponding
LIBOR Rate Interest Period during which such 30-Day LIBOR Rate, 60-Day LIBOR
Rate, or 90-Day LIBOR Rate so elected shall be charged.

 

(j)                                     “LIBOR Rate
Election Option” shall mean any option of the Borrower as hereinafter set forth
in Paragraph (a) of Section III of this Note to elect for the outstanding
principal balance to bear interest at the 30-Day LIBOR Rate, 60-Day LIBOR Rate,
or 90-Day LIBOR Rate elected by Borrower in the applicable LIBOR Rate Election Notice
during the applicable LIBOR Rate Interest Period which corresponds with such
LIBOR Rate so elected.

 

(k)                                  “LIBOR Rate
Interest Period” shall mean any applicable 30-Day LIBOR Rate Interest Period,
60-Day LIBOR Rate Interest Period, or 90-Day LIBOR Rate Interest Period.

 

(l)                                     “Loan” shall
mean the loan from Bank to Borrower evidenced by this Note in a principal
amount not to exceed $6,000,000.00.

 

(m)                               “Loan
Agreement” shall mean that certain Term Loan Agreement between Borrower and
Bank dated as of June 26, 1998, together with any and all extensions,
revisions, modifications or amendments at any time made thereto.

 

(n)                                 “Loan
Documents” shall mean the Loan Agreement, this Note, each Security Agreement,
the Guaranty, each of the other “Loan Documents” as defined in the Loan
Agreement, and any other agreements, instruments or documents, now or hereafter
evidencing, securing or otherwise relating to the Loan, together with any and
all extensions, revisions, modifications or amendments heretofore,
simultaneously herewith or hereafter made to any of the foregoing.

 

(o)                                 “Margin” shall
mean, as of each Margin Determination Date, the applicable percentage as
determined based on the Pricing Matrix to be in effect during the Margin Period
commencing as of such Margin Determination Date.

 

(p)                                 “Margin
Determination Date” shall mean (i) in the case of the initial Margin
Determination Date, the date of this Note, (ii) in the case of the second
Margin Determination Date, the first (1st) day of October, 2004, and (iii) in
the case of each subsequent Margin Determination Date, the first (1st) day of
each month of January, April, July and October during the term of
this Note.

 

(q)                                 “Margin Period”
shall mean the period commencing as of each Margin Determination Date and
ending as of the calendar day immediately preceding the next following Margin
Determination Date.

 

(r)                                    “Maturity Date”
shall mean December 1, 2008.

 

(s)                                  “Payment Due
Date” shall mean the first (1st) day of each calendar month during the term of
this Note, commencing January 1, 2004, and the Maturity Date.

 

(t)                                    “Pricing
Matrix” shall mean the Pricing Matrix attached hereto as Exhibit A.

 

(u)                                 “Quarter” shall
mean any consecutive three (3) calendar month period of time ending the last
day of any month of October, January, April and July.

 

2

 

(v)                                 “Regulation D”
shall mean Regulation D of the Board of Governors of the Federal Reserve System
from time to time in effect and shall include any successor or other regulation
or official interpretation of said Board of Governors relating to reserve
requirements applicable to member banks of the Federal Reserve System.

 

(w)                               “Reserve
Requirement” with respect to a LIBOR Rate Interest Period shall mean the
weighted average during the LIBOR Rate Interest Period of the maximum aggregate
reserve requirement (including all basic, supplemental, marginal and other
reserves and taking into account any transitional adjustments or other
scheduled changes in reserve requirements during the LIBOR Rate Interest
Period) which is imposed under Regulation D.

 

(x)                                   “Security
Agreement” shall have the meaning attributed to said term in the Loan
Agreement.

 

(y)                                 “30-Day LIBOR
Rate”, as applicable to each respective 30-Day LIBOR Rate Interest Period,
shall mean a per annum rate of interest equal to the sum of (i) the quotient
obtained (stated as an annual percentage rate rounded upward to the next higher
1/100th of 1%) by dividing (A) the thirty (30) day London Interbank Offered
Rate (“LIBOR”), as determined by Bank from Telerate, as provided by the Dow
Jones Telerate British Bankers Association (or such other source as Bank may
select if such source is not available or if such a rate index is not available
from Telerate), as of the LIBOR Rate Commencement Date of the applicable 30-Day
LIBOR Rate Interest Period, by (B) 1.00 minus any Reserve Requirement for the
30-Day LIBOR Rate Interest Period (expressed as a decimal), plus (ii) the
applicable Margin in effect for the Margin Period during which such 30-Day LIBOR
Rate Interest Period shall commence.

 

(z)                                   “30-Day LIBOR
Rate Interest Period” shall mean, in the case of Borrower’s election of a
30-Day LIBOR Rate, a period beginning on the applicable LIBOR Rate Commencement
Date on which the applicable 30-Day LIBOR Rate shall take effect and ending one
(1) calendar month thereafter.

 

(aa)                            “60-Day LIBOR
Rate”, as applicable to each respective 60-Day LIBOR Rate Interest Period,
shall mean a per annum rate of interest equal to the sum of (i) the quotient
obtained (stated as an annual percentage rate rounded upward to the next higher
1/100th of 1%) by dividing (A) the sixty (60) day London Interbank Offered Rate
(“LIBOR”), as determined by Bank from Telerate, as provided by the Dow Jones
Telerate British Bankers Association (or such other source as Bank may select
if such source is not available or if such a rate index is not available from
Telerate), as of the LIBOR Rate Commencement Date of the applicable 60-Day
LIBOR Rate Interest Period, by (B) 1.00 minus any Reserve Requirement for the
60-Day LIBOR Rate Interest Period (expressed as a decimal), plus (ii) the
applicable Margin in effect for the Margin Period during which such 60-Day
LIBOR Rate Interest Period shall commence.

 

(bb)                          “60-Day LIBOR
Rate Interest Period” shall mean, in the case of Borrower’s election of a
60-Day LIBOR Rate, a period beginning on the applicable LIBOR Rate Commencement
Date on which the applicable 60-Day LIBOR Rate shall take effect and ending two
(2) calendar months thereafter.

 

(cc)                            “90-Day LIBOR
Rate”, as applicable to each respective 90-Day LIBOR Rate Interest Period,
shall mean a per annum rate of interest equal to the sum of (i) the quotient
obtained (stated as an annual percentage rate rounded upward to the next higher
1/100th of 1%) by dividing (A) the ninety (90) day London Interbank Offered
Rate (“LIBOR”), as determined by Bank from Telerate, as provided by the Dow
Jones Telerate British Bankers Association (or such other source as Bank may
select if such source is not available or if such a rate index is not available
from Telerate), as of the LIBOR Rate Commencement Date of the applicable 90-Day
LIBOR Rate Interest Period, by (B) 1.00 minus any

 

3

 

Reserve Requirement for the 90-Day LIBOR Rate Interest Period
(expressed as a decimal), plus (ii) the applicable Margin in effect for the
Margin Period during which such 90-Day LIBOR Rate Interest Period shall
commence.

 

(dd)                          “90-Day LIBOR
Rate Interest Period” shall mean, in the case of Borrower’s election of a
90-Day LIBOR Rate, a period beginning on the applicable LIBOR Rate Commencement
Date on which the applicable 90-Day LIBOR Rate shall take effect and ending
three (3) calendar months thereafter.

 

Except as otherwise specifically defined in this
Note, all capitalized words and phrases used in this Note shall be as defined
in the Loan Agreement unless the context clearly requires to the contrary or
except as may be otherwise indicated.

 

II.                                     SECURITY;
INCORPORATION BY REFERENCE OF OTHER DOCUMENTS:

 

This Note is the “Term Note No. 2” referred
to in, and entitled to the security of, the Loan Agreement, and proceeds of
which shall be advanced in accordance with, the applicable provisions of the
Loan Agreement relating to the “Term Loan No. 2” (as defined in the Loan
Agreement).  This Note is secured by
each Security Agreement and any other Loan Documents which provide security for
the Loan.  The Loan Agreement, each Security
Agreement and each of such other Loan Documents, and all terms and conditions
thereof, are hereby incorporated herein by this reference.  This Note is guaranteed by the Guaranty of
the Guarantor.

 

III.                                 INTEREST
ACCRUAL:

 

(a)                                  During the
entire term of this Note (unless interest shall be accruing at the Default Rate
pursuant to the terms hereof), the outstanding principal amount shall bear
interest at the applicable LIBOR Rate from time to time in effect as
hereinafter provided (and each time the LIBOR Rate shall change, the Interest
Rate shall change contemporaneously with such change in the LIBOR Rate), with
such LIBOR Rate to be determined and/or elected by Borrower for each respective
LIBOR Rate Interest Period as follows:

 

(1)                                  Concurrently
with the execution of this Note and from time to time during the term of this
Note, Borrower shall deliver to Bank, for receipt by Bank at least two (2)
Business Days prior to the commencement of the applicable 30-Day LIBOR Rate
Interest Period, 60-Day LIBOR Rate Interest Period, or 90-Day LIBOR Rate
Interest Period, a LIBOR Rate Election Notice providing for Borrower’s election
(a “LIBOR Rate Election Option”) for the outstanding principal balance to bear
interest at either the 30-Day LIBOR Rate, the 60-Day LIBOR Rate, or the 90-Day
LIBOR Rate, and specifying the LIBOR Rate Commencement Date of the
corresponding LIBOR Rate Interest Period during which such LIBOR Rate shall be
charged; provided, however, that:

 

(A)                              In the event
that Borrower does not timely and properly deliver to Bank a LIBOR Rate
Election Notice electing the applicable LIBOR Rate to be in effect as of the
date of this Note, then the Borrower shall be deemed to have elected the 30-Day
LIBOR Rate for the 30-Day LIBOR Rate Interest Period commencing on the date of
this Note;

 

(B)                                In the event
that, as of the expiration of any applicable LIBOR Rate Interest Period, the
Borrower shall not have timely and properly delivered to Bank a LIBOR Rate
Election Notice electing the applicable LIBOR Rate to be in effect for the
period following such expiration, then the Borrower shall be deemed to have
exercised a LIBOR Rate Election Option making the same election of the 30-Day
LIBOR Rate, 60-Day LIBOR Rate, or 90-Day LIBOR Rate, as applicable, which was
elected, or deemed to have been elected, for the then expiring LIBOR Rate
Interest

 

4

 

Period, with such new election to be effective commencing immediately
upon the expiration of the expiring LIBOR Rate Interest Period and for the
LIBOR Rate Interest Period which corresponds with such LIBOR Rate so deemed to
have been elected and for each subsequent LIBOR Rate Interest Period for which
no new LIBOR Rate Election Notice is timely and properly given by Borrower to
Bank electing a different LIBOR Rate;

 

(C)                                No conversion
of the Interest Rate to any 30-Day LIBOR Rate, 60-Day LIBOR Rate, or 90-Day
LIBOR Rate elected in any LIBOR Rate Election Notice given by Borrower to Bank
shall be effective until the expiration of the then current LIBOR Rate Interest
Period;

 

(D)                               Except in the
case of the LIBOR Rate Interest Period commencing as of the date of this Note,
in no event may any LIBOR Rate Interest Period commence on any date other than
a Payment Due Date;

 

(E)                                 In no event may
any 60-Day LIBOR Rate or 90-Day LIBOR Rate be elected by Borrower at any time when
the corresponding LIBOR Rate Interest Period would extend beyond any applicable
Margin Determination Date or the Maturity Date of this Note; and

 

(F)                                 If any LIBOR
Rate Election Notice is not timely received or is otherwise not properly made,
such LIBOR Rate Election Notice, at Bank’s election, shall not be effective.

 

(2)                                  Notwithstanding
the fact that the Interest Rate pursuant to this Note shall be calculated based
upon Bank’s cost of funds in the Eurodollar market, Borrower agrees that Bank
shall not be required actually to obtain funds from such source at any time.

 

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

 

(c)                                  During the term
of this Note, Borrower and Bank may from time to time enter into an interest
rate swap agreement, International Swap Dealers Association, Inc. (ISDA) Master
Agreement or other similar agreement or arrangement to hedge the risk of
variable interest rate volatility or fluctuations of interest rates (any such
agreement or arrangement as it may hereafter be renewed, extended,
supplemented, increased or modified and in effect from time to time being
herein referred to as an “Interest Rate Protection Agreement”).  All fees, penalties and other amounts due
from Borrower to Bank under any such Interest Rate Protection Agreement shall,
for all purposes of this Note, be considered as obligations of the Borrower to
the Bank under this Note, and, notwithstanding anything contained herein or in
any of the other Loan Documents to the contrary, all such fees, penalties and
other amounts due from Borrower to Bank under any such Interest Rate Protection
Agreement shall further be considered to be part of the indebtedness owing by
the Borrower to Bank hereunder and under each of the other Loan Documents and
the repayment of which shall be secured by each of the Loan Documents which
secure the Loan.

 

IV.                                PAYMENTS:

 

(a)                                  On the first
(1st) Payment Due Date following the date of this Note and on each successive
Payment Due Date thereafter until the entire indebtedness evidenced by this
Note is paid in full, Borrower shall pay to Bank all accrued and unpaid
interest on the outstanding principal balance.

 

(b)                                 In addition to
the monthly interest payments due under Paragraph (a) above, on the first (1st)
Payment Due Date following the date of this Note and on each successive Payment
Due Date

 

5

 

thereafter until the entire indebtedness evidenced by this Note is paid
in full, Borrower shall also pay to Bank monthly installments of principal as
follows:

 

(1)                                  On the first
(1st) Payment Due Date following the date of this Note (viz., on
January 1, 2004) and on each of the next eleven (11) Payment Due Dates
thereafter (viz., until and through December 1, 2004), Borrower shall pay
to Bank monthly installments of principal of $59,000.00 each.

 

(2)                                  On the
thirteenth (13th) Payment Due Date following the date of this Note (viz., on
January 1, 2005) and on each of the next eleven (11) Payment Due Dates
thereafter (viz., until and through December 1, 2005), Borrower shall pay
to Bank monthly installments of principal of $63,000.00 each.

 

(3)                                  On the
twenty-fifth (25th) Payment Due Date following the date of this Note (viz., on
January 1, 2006) and on each of the next eleven (11) Payment Due Dates
thereafter (viz., until and through December 1, 2006), Borrower shall pay
to Bank monthly installments of principal of $67,000.00 each.

 

(4)                                  On the
thirty-seventh (37th) Payment Due Date following the date of this Note (viz.,
on January 1, 2007) and on each of the next eleven (11) Payment Due Dates thereafter
(viz., until and through December 1, 2007), Borrower shall pay to Bank
monthly installments of principal of $71,000.00 each.

 

(5)                                  On the
forty-ninth (49th) Payment Due Date following the date of this Note (viz., on
January 1, 2008) and on each of the next ten (10) Payment Due Dates
thereafter (viz., until and through November 1, 2008), Borrower shall pay
to Bank monthly installments of principal of $75,000.00 each.

 

(c)                                  On the Maturity
Date, the Borrower shall pay to Bank the then outstanding principal balance,
together with all accrued and unpaid interest thereon.

 

V.                                    APPLICATION
OF PAYMENTS:

 

All payments shall be applied first to the payment of any interest then
due and payable, then to any principal then due and payable, and then to any
late charges due from Borrower to Bank, and any balance shall be applied in
further reduction of principal.  The
principal and interest shall be payable in lawful money of the United States
which shall be legal tender for public and private debts at the time of payment.

 

VI.                                PREPAYMENTS:

 

During the entire term of this Note, Borrower
shall have the right to prepay all or any part of the principal sum represented
by this Note or the interest thereon at any time and from time to time without
premium or penalty except as may otherwise be provided in any Interest Rate
Protection Agreement as may from time to time be in effect; provided, however,
that, notwithstanding the foregoing, if any prepayment of principal, whether in
whole or in part, is made during the first twelve (12) months of the term of
this Note, then such prepayment shall accrue a note prepayment penalty, due
concurrently with the prepayment, of one percent (1%) of the principal amount
so prepaid.  All prepayments of
principal will be applied to installments coming due hereunder in their inverse
order of maturity, and no prepayment shall delay any monthly installment or
other payment coming due.  Amounts
prepaid may not be reborrowed.

 

6

 

VII.                            LATE
PAYMENTS:

 

Borrower will pay to Bank a late charge equal
to five percent (5%) of any payment not received by Bank within ten (10) days
after the due date thereof.  Collection
or acceptance by Bank of such late charge shall not constitute a waiver of any
remedies of Bank provided herein.

 

VIII.                        EVENTS
OF DEFAULT; INTEREST ON DEFAULT; COLLECTION COSTS:

 

(a)                                  The principal
sum evidenced by this Note, together with accrued interest, shall become
immediately due and payable at the option of the Bank upon the occurrence of
any one or more of the following events (each of which events shall constitute
an “Event of Default” hereunder):  (i)
any failure to pay any installment of principal or interest or any other amount
due hereunder within ten (10) days of the date same comes due; or (ii) any
“Event of Default” under the terms of the Loan Agreement and/or any of the
other Loan Documents which is not cured within any applicable grace period set
forth therein.

 

(b)                                 Upon any Event
of Default, in addition to any late charge which may be due as provided for
hereinabove, Borrower agrees to pay interest to Bank at a rate equal to the
Default Rate from time to time accruing on the aggregate indebtedness
represented hereby, including accrued interest, until such aggregate
indebtedness is paid in full.  Borrower
will also pay to Bank, in addition to the amount due, all costs of collecting,
securing or attempting to collect or secure this Note, including without
limitation, court costs and attorneys’ fees, including attorneys’ fees on any
appeal by either Borrower or Bank.

 

IX.                                BORROWER’S
WAIVERS:

 

With respect to the amounts due pursuant to
this Note, Borrower waives the following:

 

(a)                                  All rights of
exemption of property from levy or sale under execution or other process for
the collection of debts under the Constitution or laws of the United States or
any state thereof;

 

(b)                                 Demand,
presentment, protest, notice of dishonor, notice of nonpayment, suit against
any party, diligence in collection, and all other requirements necessary to
enforce this Note; and

 

(c)                                  Any receipt for
or acknowledgment of any collateral now or hereafter given or deposited as
security for the obligations hereunder.

 

X.                                    WAIVER
OF JURY TRIAL:

 

BORROWER
HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF,
DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY
PERTAINING OR RELATING TO THIS NOTE, THE LOAN AGREEMENT, ANY OF THE OTHER LOAN
DOCUMENTS, OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED
IN CONNECTION WITH THIS NOTE, OR (B) IN ANY WAY CONNECTED WITH OR
PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALING WITH RESPECT TO THIS
NOTE, THE LOAN AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS, OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION THEREWITH
OR IN CONNECTION WITH THE TRANSACTIONS RELATED THERETO OR CONTEMPLATED THEREBY
OR THE EXERCISE OF ANY RIGHTS AND REMEDIES THEREUNDER, IN ALL OF THE FOREGOING
CASES WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT,
TORT OR OTHERWISE.  BORROWER AGREES THAT
BANK MAY FILE A COPY OF THIS SECTION

 

7

 

WITH ANY COURT AS WRITTEN EVIDENCE OF THE
KNOWING, VOLUNTARY AND BARGAINED AGREEMENT OF BORROWER WITH BANK IRREVOCABLY TO
WAIVE TRIAL BY JURY, AND THAT ANY DISPUTE OR CONTROVERSY WHATSOEVER BETWEEN
THEM SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE
SITTING WITHOUT A JURY.  BORROWER HEREBY
CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF BANK, INCLUDING BANK’S COUNSEL,
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT BANK WOULD NOT, IN THE EVENT OF
SUCH DISPUTE OR CONTROVERSY, SEEK TO ENFORCE THE PROVISIONS OF THIS SECTION,
AND BORROWER ACKNOWLEDGES THAT BANK HAS, IN PART, BEEN INDUCED TO MAKE THE
EXTENSION OF CREDIT EVIDENCED BY THIS NOTE IN RELIANCE ON THE PROVISIONS OF
THIS SECTION.

 

XI.                                APPLICABLE
LAW AND CONSENT TO JURISDICTION:

 

This Note is being held by the Bank in the
State of Alabama, and the validity, interpretation, enforcement and effect of
this Note shall be governed by, and construed according to the laws of, the
State of Alabama.  By execution and
delivery of this Note, Borrower expressly and irrevocably assents and submits
to the personal jurisdiction of the state and federal courts presiding in and
over Jefferson County, Alabama, in any legal action or proceeding arising
under, out of, or in any manner relating to this Note or the extension of
credit evidenced hereby, and acknowledges that the negotiation, execution and
delivery of this Note constitute sufficient contacts with the State of Alabama
for purposes of independently conferring such jurisdiction.  The Borrower further agrees that the
exclusive venue of any such legal action or proceeding arising out of or in any
manner relating to this Note shall be in the state and/or federal courts
presiding in and over Jefferson County, Alabama, unless the Bank shall, at its
sole option, elect to bring or permit the maintenance of any such action in
another venue, and the Borrower hereby waives any and all rights under any
state or federal law to object to such venue on grounds of forum  non
conveniens or otherwise.

 

XII.                            NOTICES:

 

All notices provided for herein shall be
given personally, by mail, or by Federal Express or other similar national
overnight courier, and addressed to the appropriate party at the following
address, or such other single address as the party who is to receive such
notice may designate in writing:

 

	
  to Borrower:

  	
  KMG-Bernuth, Inc.

  
	
   

  	
  10611 Harwin, Suite 402

  
	
   

  	
  Houston, Texas 77036

  
	
   

  	
  ATTENTION: 
  Chief Financial Officer

  
	
   

  	
   

  
	
  to Bank:

  	
  SouthTrust Bank

  
	
   

  	
  420 North 20th Street (35203)

  
	
   

  	
  P. O. Box 2554

  
	
   

  	
  Birmingham, Alabama  35290

  
	
   

  	
  ATTENTION: 
  Middle Market Banking

  
	
   

  	
   

  
	
  with copy to:

  	
  Timothy D. Davis, Esq.

  
	
   

  	
  Sirote & Permutt, P.C.

  
	
   

  	
  2311 Highland Avenue South (35205)

  
	
   

  	
  P. O. Box 55727

  
	
   

  	
  Birmingham, Alabama  35255-5727

  

 

8

 

Notice by mail shall be by registered or
certified mail.  All fees or expenses of
mail or overnight courier shall be paid by the sender.  Notice shall be deemed received at the
earlier of the time actually received or two (2) days following the time
deposited when sent by mail or overnight courier in the manner aforesaid.  Actual receipt of notice shall not be
required to effect notice hereunder.

 

XIII.                        MISCELLANEOUS:

 

(a)                                  In no event
shall the amount of interest due or payable hereunder exceed the maximum rate
of interest allowed by applicable law, and in the event such payment is
inadvertently paid by Borrower or inadvertently received by Bank, then such
excess sum shall be credited as a payment of principal, unless Bank elects to
have such excess sum refunded to Borrower forthwith, which refund Borrower
hereby agrees to accept.  It is the
express intent hereof that Borrower not pay and Bank not receive, directly or
indirectly, interest in excess of that which may be legally paid by Borrower
under applicable law.

 

(b)                                 Bank shall not
by any act, delay, omission, or otherwise be deemed to have waived any of its
rights or remedies under the Loan Documents, and no waiver of any kind shall be
valid unless in writing and signed by Bank.

 

(c)                                  All rights and
remedies of Bank under the terms of this Note and the other Loan Documents and
under applicable statutes or rules of law shall be cumulative, and may be
exercised successively or concurrently.

 

(d)                                 Borrower agrees
that there are no defenses, equities or setoffs with respect to the obligations
set forth herein.

 

(e)                                  This Note and
the obligations of Borrower hereunder shall be binding upon and enforceable
against Borrower and Borrower’s successors and assigns, and shall inure to the
benefit of Bank and its successors and assigns, including any subsequent holder
of this Note.

 

(f)                                    Any provisions
of this Note which may be unenforceable or invalid under any applicable law
shall be ineffective to the extent of such unenforceability or invalidity
without affecting the enforceability or validity of any other provision hereof.

 

(g)                                 Bank may, at
its option, release any collateral given to secure the indebtedness evidenced
hereby or release the Guarantor from the Guaranty, and no such release shall
impair the obligations to Bank of Borrower under this Note and the other Loan
Documents not expressly released by Bank.

 

(h)                                 Section headings
are inserted for convenience of reference only and shall be disregarded in the
interpretation of this Note.  The
provisions of this Note shall be construed without regard to the party
responsible for the drafting and preparation hereof.

 

(i)                                     Time is of the
essence of this Note and the performance of each of the covenants and
agreements contained herein.

 

9

 

IN WITNESS WHEREOF,
Borrower has caused this instrument to be properly executed by its duly
authorized officer as of the day and year first above written.

 

	
   

  	
  KMG-BERNUTH, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/

  	
   

  
	
   

  	
  Its:

  	
  Vice President and Chief Financial Officer

  	
   

  
	
   

  	
   

  	
   

  
	
  STATE OF TEXAS

  	
  )

  	
   

  	
   

  
	
  COUNTY OF HARRIS

  	
  )

  	
   

  	
   

  

 

I, the undersigned, a Notary Public in and
for said County in said State, hereby certify that John V. Sobchak, whose name
as Vice President and Chief Financial Officer of KMG-Bernuth, Inc., a Delaware
corporation, is signed to the foregoing instrument, and who is known to me,
acknowledged before me on this day that, being informed of the contents of said
instrument, he, as such officer and with full authority, executed the same
voluntarily for and as the act of said corporation.

 

Given under my hand and official seal, this
the 5th day of December, 2003.

 

	
   

  	
   
  /s/

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (OFFICIAL SEAL)

  	
  Notary Public

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  My Commission Expires:

  	
   

  

 

10

 

EXHIBIT A

PRICING MATRIX

 

	
  Coverage Ratio

  (as defined in the Loan Agreement)

  	
   

  	
  Margin

  	
   

  
	
  < 1.75 to 1.0

  	
   

  	
  1.75%

  	
   

  
	
  > 1.75 to 1.0 but < 2.0 to 1.0

  	
   

  	
  2.00%

  	
   

  
	
  > 2.0 to 1.0

  	
   

  	
  2.25%

  	
   

  

 

 

The applicable Margin to be in effect for
each respective Margin Period will be determined by Bank on a quarterly basis
(based on a rolling four-quarter basis for any Margin Period commencing on or
after October 1, 2004) as of the Margin Determination Date on which the
applicable Margin Period commences based on the Borrower’s Coverage Ratio as of
the end of the Quarter immediately preceding the applicable Margin
Determination Date, as determined from the financial information provided by
Borrower to Bank pursuant to Section 6.1(B) of the Loan Agreement.  In the event the Borrower fails to provide
any of the financial information required by Section 6.1(B) of the Loan
Agreement as necessary for the Bank to determine the applicable Margin as of
any Margin Determination Date, the Margin which shall be in effect during the
Margin Period commencing as of the applicable Margin Determination Date shall
be 2.25%.

 

Notwithstanding anything contained herein to
the contrary, the Margin to be in effect as of the date of this Agreement and
until the second Margin Determination Date (i.e., up to and including
September 30, 2004) shall be 1.75%.

 

11Exhibit 10.32

 

SECOND AMENDMENT TO TERM LOAN AGREEMENT

 

THIS
SECOND AMENDMENT TO TERM LOAN AGREEMENT (this
“Amendment”) is entered into by and between KMG-BERNUTH,
INC., a Delaware corporation (hereinafter referred to as “Borrower”)
and SOUTHTRUST BANK, an Alabama
banking corporation, successor by conversion to SouthTrust Bank, National
Association (hereinafter referred to as “Bank”) as of the 5th day of December,
2003.

 

W I T N E S S E T H:

 

WHEREAS,
Borrower and Bank are parties to that certain Term Loan Agreement dated as of
June 26, 1998, as amended by that certain First Amendment to Term Loan
Agreement dated as of December 30, 2002 (as so amended and as hereby
amended, the “Loan Agreement”), whereby Borrower became indebted to Bank for a
term loan (the “Term Loan”) made by Bank to Borrower in the original principal
amount of $6,000,000.00 and thereafter amended to a principal amount of
$5,050,000.00; and

 

WHEREAS,
Borrower’s payment and performance obligations in connection with the Term Loan
are evidenced by that certain Term Note dated as of June 26, 1998, as
amended by that certain First Amendment to Term Note dated as of
January 8, 2002, and as amended and restated by that certain Amended and
Restated Promissory Note dated as of December 30, 2002 (together with any
and all amendments thereto, the “Term Note”); and

 

WHEREAS, Borrower has requested that the Bank make available to Borrower an
additional sum of up to Six Million and No/100 Dollars ($6,000,000.00) on a
term loan basis as a second term loan, and the Bank is willing to do so upon
the terms and subject to the conditions hereinafter set forth; and

 

WHEREAS, Borrower and the Bank have agreed as to certain amendments of the Loan
Agreement, which amendments are specifically set forth below.

 

NOW,
THEREFORE, in consideration
of the sum of One and No/100 Dollar ($1.00) and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereby agree as follows:

 

1.                                       Section 1.1
of the Loan Agreement is hereby amended as follows:

 

(a)                                  Section 1.1
is hereby amended to add the following definitions as defined terms:

 

“Compliance
Certificate” means the Compliance Certificate in the form of Exhibit “E”
hereto, to be furnished by the Borrower to the Bank pursuant to
Section 6.1(B)(3) hereof.

 

“Coverage
Ratio” means, for any period, the ratio of (i) the principal amount of all
bank debt and capitalized lease obligations (excluding any prepayments or
principal at maturity) of Borrower and Guarantor as of the end of the
applicable period, to (ii) the sum of EBITDA for the Borrower and Guarantor for
the preceding four (4) fiscal quarters.

 

“EBITDA”
means, for any period, the income (or deficit) from all operations of the
Borrower before any deduction for the following items during such period:  (i) the interest charges paid or accrued
(including imputed interest on lease

 

 

(capital or
operating) obligations, but excluding amortization of debt discount and
expense), (ii) Income Taxes, and (iii) any amounts in respect of depreciation
and amortization.

 

“Income
Taxes” means any income, profit, franchise, corporate, capital stock or
other tax based upon or measured by the income of Borrower, including any
liability for income taxes of direct or indirect individual owners of Borrower
or direct or indirect entity members of Borrower because of pass through of
income taxes to the individual owners.

 

“Term Loan
Guaranty” means the Guaranty of Payment, dated as of June 26, 1998,
executed by the Guarantor in favor of the Bank, guaranteeing the payment and
performance to the Bank of the Borrower’s obligations hereunder relating to the
Term Loan, as amended or modified from time to time.

 

“Term Loan No. 2”
means the aggregate unpaid principal balance from time to time of the loan made
to the Borrower pursuant to Section 2A.1 of this Agreement.

 

“Term Loan
No. 2 Guaranty” means the Guaranty of Payment, dated as of December 5,
2003, executed by the Guarantor in favor of the Bank, guaranteeing the payment
and performance to the Bank of the Borrower’s obligations hereunder relating to
the Term Loan No. 2, as amended or modified from time to time.

 

“Term Note No. 2”
means the promissory note, in substantially the form of Exhibit “D” to this
Agreement, dated as of December 5, 2003, made by the Borrower to evidence
the Borrower’s obligation to repay the Term Loan No. 2 and the interest
thereon, and includes any amendment to or modification of such note and any
promissory note given in extension or renewal of, or in substitution for, such
note.

 

“Term Rate No. 2” is
defined in Section 2A.4(A) of this Agreement.

 

(b)                                 Section 1.1
is hereby amended by deleting the definitions of “Guaranty”, “Loan”, “Loan
Documents”, “Loan Fee”, “Note”, “Obligations”, “Participant”, and “Security
Agreement”, each as defined therein, in their entirety and substituting the
following new definitions in lieu thereof:

 

“Guaranty” means,
singularly and collectively, the Term Loan Guaranty and the Term Loan No. 2
Guaranty.

 

“Loan” means,
singularly and collectively, the Term Loan and the Term Loan No. 2.

 

“Loan Fee” means any
and all loan fees at any time charged by the Bank to the Borrower in connection
with the Loan, including, without limitation, a fee of $10,000.00 paid by
Borrower to paid concurrently with the execution of this Agreement, a fee of
$19,100.00 paid by the Borrower to the Bank concurrently with the execution of
the First Amendment to Term Loan Agreement, and a fee of $45,000.00 payable by
the Borrower to the Bank concurrently with the execution of the Second
Amendment to Term Loan Agreement.

 

2

 

“Loan Documents”
means this Agreement, each Note, each Security Agreement, each Guaranty, and
any and all other agreements, documents and instruments of any kind executed or
delivered in connection with, or evidencing, securing, guaranteeing or relating
to, any Loan, whether heretofore, simultaneously herewith or hereafter
delivered, together with any and all extensions, revisions, modifications or
amendments at any time made to any of the foregoing.

 

“Note” means,
singularly and collectively, the Term Note and the Term Note No. 2.

 

“Obligations” means
the obligations of Borrower:

 

(A)                              To pay the principal of and interest on each
Note in accordance with the respective terms thereof and to satisfy all of
Borrower’s other liabilities to the Bank, whether hereunder or otherwise,
whether now existing or hereafter incurred, matured or unmatured, direct or
contingent, joint or several, including any and all extensions, modifications,
and renewals thereof and substitutions therefor;

 

(B)                                To repay to the Bank all amounts advanced by
the Bank hereunder, under any of the other Loan Documents or otherwise on
behalf of the Borrower, including, but without limitation, advances for principal
or interest payments to prior secured parties, 
mortgagees, or lienors, or for taxes, levies, insurance, rent, or
repairs to or maintenance or storage of, any of the Collateral; and

 

(C)                                To reimburse the Bank, on demand, for all of
the Bank’s expenses and costs, including the reasonable fees and expenses of
its counsel, in connection with the preparation, administration, amendment,
modification, or enforcement of this Agreement and the documents required
hereunder, including, without limitation, any proceeding brought or threatened
to enforce payment of any of the obligations referred to in the foregoing
paragraphs (A) and (B).

 

“Participant” means
any bank, financial institution, Affiliate of the Bank, or other entity which
purchases an interest in any Note from the Bank.

 

“Security Agreement”
means, singularly and collectively, each and every document and instrument
heretofore, simultaneously herewith, or hereafter executed or delivered by
Borrower in favor of Bank, granting Bank a security interest in any property or
collateral of Borrower in order to secure Borrower’s payment of any
indebtedness owed to Bank or performance of any obligations owed to Bank,
whether under any Note or any of the other Loan Documents, including, but not
limited to, that certain Security Agreement executed by Borrower in favor of
Bank dated as of December 30, 2002, as amended by that certain First
Amendment to Security Agreement dated as of December 5, 2003, that certain
Purchase Money Security Agreement executed by Borrower in favor of Bank dated
as of June 26, 1998, and that certain Security Agreement executed by
Borrower in favor of Bank dated as of August 1, 1996, together with any
and all modifications or amendments at any time made to any of said documents
or instruments.

 

(c)                                  All
other capitalized terms used herein shall have the respective meanings assigned
thereto in the Loan Agreement, unless otherwise specifically defined herein.

 

3

 

2.                                       The
Loan Agreement is hereby amended by adding the following as a new
Article II(A) thereto:

 

ARTICLE II(A).

 

2A.                             THE TERM LOAN NO. 2

 

2A.1                       General Terms. 
Subject to the terms hereof, the Bank will lend the Borrower the
principal sum of Six Million and No/100 Dollars ($6,000,000.00) on a term
basis.

 

2A.2                       Disbursement of the Term Loan No. 2.  The
Bank will credit the proceeds of the Term Loan No. 2 to the principal deposit
account of the Borrower with the Bank, or in such other manner as the Borrower
and the Bank may agree.

 

2A.3                       The Term Note No. 2.  The
Borrower’s obligation to repay the Term Loan No. 2 shall be evidenced by the
Term Note No. 2.

 

2A.4                       Term Loan No. 2 Interest Rate and Payment of
Interest.

 

(A)                              Interest on the Term Loan No. 2 shall be
calculated and paid at such rate(s) and on such date(s) as provided in the Term
Note No. 2 (the rate of interest as may from time to time be accruing under the
Term Note No. 2 being herein referred to as the “Term Rate No. 2”).

 

(B)                                If, at any time, the Term Rate No. 2 shall be
deemed by any competent court of law, governmental agency or tribunal to exceed
the maximum rate of interest permitted by any applicable laws, then, for such
time as the Term Rate No. 2 would be deemed excessive, its application shall be
suspended and there shall be charged instead the maximum rate of interest
permissible under such Laws, and any excess interest actually collected by the
Bank shall be credited as a partial prepayment of principal.

 

2A.5                       Payments of Principal. 
Borrower shall make to Bank such payments of principal on the Term Loan
No. 2 as are required by the terms of the Term Note No. 2.

 

2A.6                       Payment to the Bank.  All
sums payable to the Bank hereunder shall be paid directly to the Bank in United
States Dollars and in immediately available funds at the place payment is
due.  If the Bank shall send the
Borrower statements of amounts due hereunder, such statements shall be
considered correct and conclusively binding on the Borrower unless the Borrower
notifies the Bank to the contrary within ninety (90) days of its receipt of any
statement which it deems to be incorrect.

 

2A.7                       Use of Proceeds of Term Loan No. 2.  The
proceeds of the Term Loan No. 2 shall be used by the Borrower solely to provide
financing for the purchase of the assets of the pentachlorophenol business
owned by Wood Protection Products, Inc.

 

3.                                       Article III
of the Loan Agreement is hereby amended by deleting Sections 3.2 thereof in its
entirety and substituting the following new Section 3.2 in lieu thereof:

 

3.2                                 Certain
Events.  At the time of disbursement
of each Loan:

 

4

 

(A)                              No
Event of Default shall have occurred
and be continuing, and no event shall have occurred and be continuing that,
with the giving of notice or passage or time or both, would be an Event of
Default;

 

(B)                                No
material adverse change shall have occurred in the financial condition of the
Borrower since the date of this Agreement;

 

(C)                                All
of the Loan Documents shall have remained in full force and effect;

 

(D)                               The
Borrower shall have paid any Loan Fee then due and payable.

 

4.                                       Article III
of the Loan Agreement is hereby amended by deleting Sections 3.3 thereof in its
entirety and substituting the following new Section 3.3 in lieu thereof:

 

3.3                                 Legal
Matters.  At the time of
disbursement of each Loan, all legal matters incidental thereto shall be
satisfactory to Sirote & Permutt, P.C., counsel to the Bank.

 

5.                                       Article V
of the Loan Agreement is hereby amended by deleting Section 5.8 thereof in
its entirety and substituting the following new Section 5.8 in lieu
thereof:

 

5.8                                 Environmental
Matters.  Neither any property of
the Borrower nor Borrower is in violation of or subject to any existing,
pending or threatened investigation or inquiry by any governmental authority or
any remedial obligations under any applicable laws, rules or regulations
pertaining to health or the environment, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended (“CERCLA”), the Resource Conservation and Recovery Act of 1976, as
amended (“RCRA”), and the Superfund Amendments and Reauthorization Act of 1986,
as amended (“SARA”), or any other federal, state, local or municipal laws,
statutes, regulations, rules or ordinances imposing liability or establishing
standards of conduct for protection of human health and the environment, and
there are no facts, conditions or circumstances known to Borrower which could
result in any such investigation or inquiry if such facts, conditions and circumstances,
if any, were fully disclosed to the applicable governmental authority, and
Borrower will promptly notify Bank if Borrower becomes aware of any such facts,
conditions or circumstances or any such investigation or inquiry; Borrower has
obtained any and all permits, licenses, or similar authorizations necessary to
construct, repair, occupy, operate or use any buildings, improvements, fixtures
or equipment in connection with any of Borrower’s property constructed or to be
constructed by reason of any environmental laws, statutes, ordinances, rules or
regulations and is in full compliance with the terms and conditions of such
permits, licenses, or similar authorizations; no oil, toxic or hazardous
substances, or toxic or hazardous wastes have been used, stored, generated or
otherwise handled at any of Borrower’s property except in quantities customary
and necessary for the intended use of such property, including but not limited
to cleaning supplies, insecticides, paints, paint removers, toner for copiers,
etc., provided the use, storing or handling of such amounts is in compliance
with all applicable federal, state, local or municipal laws, statutes,
regulations, rules or ordinances imposing liability or establishing standards
of conduct for protection of human health and the environment; and no oil,
toxic or hazardous substances, toxic or hazardous wastes, or solid wastes have

 

5

 

been disposed
of or released on any of Borrower’s property, and Borrower covenants and agrees
that it will not cause there to be, and will use its best efforts to prevent,
any violation of CERCLA, RCRA and/or SARA and any other federal, state, local
or municipal laws, statutes, regulations, rules or ordinances imposing liability
or establishing standards of conduct for protection of human health and the
environment in connection with the ownership and/or use of any of Borrower’s
property by the Borrower or any tenant of any of Borrower’s property, including
any violation arising from the disposal or release of oil, toxic or hazardous
substances, toxic or hazardous wastes, or solid wastes on any such property
(the terms “hazardous substance,” “hazardous waste,” and “release” shall have
the meanings specified in CERCLA, and the terms “solid waste” and “disposal”,
“dispose” or “disposed” shall have the meanings specified in RCRA, except that
if such acts are amended to broaden the meanings thereof, the broader meaning
shall apply herein).  Borrower hereby
further covenants and agrees that it will take all reasonable steps necessary
to avoid liability under CERCLA, including (1) taking reasonable steps to stop
and prevent any future continuing releases of pollutants which would subject
the Borrower or others associated with any of Borrower’s property to CERCLA
liability, (2) granting access for and fully cooperating with the performance
of environmental response actions by others on or about any of Borrower’s
property, and (3) complying with any applicable use restrictions imposed upon any
of Borrower’s property due to environmental conditions.  Notwithstanding anything to the contrary herein, Borrower shall
indemnify, defend and hold Bank harmless from and against any fines, charges,
claims, demands, penalties, liability (including strict liability), damages,
losses, expenses (including, without limitation, legal expenses, consultant
fees and laboratory fees), fees, attorney fees and costs incurred by Bank in
the event the Borrower or any of Borrower’s property (whether or not due to any
fault of Borrower) is hereafter determined to be in violation of any
environmental laws, statutes, ordinances, rules or regulations applicable
thereto (excluding, however, any conditions caused by materials placed on any
of Borrower’s property following foreclosure or acceptance by Bank of a deed in
lieu of foreclosure), and this indemnity shall survive any foreclosure or deed
in lieu of foreclosure and repayment of the Loan.

 

6.                                       Section 6.1
of the Loan Agreement is hereby amended by deleting Subsection (A) thereof
in its entirety and substituting the following new Subsection (A) in lieu
thereof:

 

(A)                              The Borrower will use the proceeds of the
Term Loan only for the purposes set forth in Section 2.7, will use the
proceeds of Term Loan No. 2 only for the purposes set forth in
Section 2A.7, and will furnish the Bank such evidence as it may reasonably
require with respect to such uses.

 

7.                                       Section 6.1
of the Loan Agreement is hereby amended by deleting Subsection (B) thereof
in its entirety and substituting the following new Subsection (B) in lieu
thereof:

 

(B)                                The
Borrower will furnish, or cause to be furnished, the Bank:

 

(1)                                  Within
forty-five (45) days after the close of each calendar month (a) an income
statement of the Borrower for such period and (b) a balance sheet of the
Borrower as of the end of such period, adjusted to U.S. Dollars, all in
reasonable detail with Bank having full access to all supporting schedules and
comments, subject to year-end audit adjustments, and certified by the
Borrower’s president or principal financial officer to have been prepared in
accordance with Generally

 

6

 

Accepted
Accounting Principles consistently applied by the Borrower, except for any
inconsistencies explained in such certificate;

 

(2)                                  Within
one hundred twenty (120) days after the close of each fiscal year (a) a
statement of Stockholders’ Equity and a statement of cash flows of the Borrower
for such fiscal year, (b) an income statement of the Borrower for such fiscal year,
and (c) a balance sheet of the Borrower as of the end of such fiscal year;
adjusted to U. S. Dollars, all in reasonable detail, including all supporting
schedules and comments; and certified by the Borrower’s president or principal
financial officer to have been prepared in accordance with Generally Accepted
Accounting Principles consistently applied by the Borrower, except for any
inconsistencies explained in such certificate;

 

(3)                                  Contemporaneously
with each monthly and year-end financial report required by the foregoing
paragraphs, a Compliance Certificate of the principal financial officer of the
Borrower stating that, to the best of his knowledge, the Borrower has observed
and performed each and every undertaking contained in this Agreement and is not
at the time in default in the observance or performance of any of the terms and
conditions hereof or, if the Borrower shall be so in default, specifying all
such defaults and events of which he may have knowledge;

 

(4)                                  Monthly,
within forty-five (45) days after the end of the prior month, and at such other
times as the Bank may request, a Collateral Report (as required by, and as
defined in, the Revolving Loan Agreement) for the immediately preceding month,
certified to be correct by the president or controller of the Borrower.

 

(5)                                  Within
forty-five (45) days after the close of each calendar month (a) a consolidated
income statement of the Guarantor such period and (b) a consolidated balance
sheet of the Guarantor as of the end of such period, adjusted to U.S. Dollars,
all in reasonable detail with Bank having full access to all supporting
schedules and comments, subject to year-end audit adjustments, and certified by
the Guarantor’s president or principal financial officer to have been prepared
in accordance with Generally Accepted Accounting Principles consistently
applied by the Guarantor, except for any inconsistencies explained in such
certificate;

 

(6)                                  Within
one hundred twenty (120) days after the close of each fiscal year (a) a
consolidated statement of Stockholders’ Equity and a consolidated statement of
cash flows of the Guarantor for such fiscal year, (b) a consolidated income
statement of the Guarantor for such fiscal year, and (c) a consolidated balance
sheet of the Guarantor as of the end of such fiscal year; adjusted to U. S.
Dollars, all in reasonable detail, including all supporting schedules and
comments; the statements and balance sheets to be audited by an independent
certified public accountant selected by the

 

7

 

Guarantor and
acceptable to the Bank, and certified by such accountants to have been prepared
in accordance with Generally Accepted Accounting Principles consistently
applied by the Guarantor, except for any inconsistencies explained in such
certificate; the Bank shall have the right, from time to time, to discuss the
Guarantor’s affairs directly with the Guarantor’s independent certified public
accountant after notice to the Guarantor and opportunity of the Guarantor to be
present at any such discussions;

 

(7)                                  Promptly
after sending or making available or filing of the same, copies of all reports,
proxy statements and financial statements that the Borrower or Guarantor sends
or makes available to its stockholders and all registration statements and
reports that the Borrower or Guarantor files with the Securities and Exchange
Commission or any successor Person, including, without limitation, the delivery
to Bank of all Form 10-Qs within sixty (60) days of the end of each fiscal quarter
and all Form 10-Ks within one hundred twenty (120) days of the end of each
fiscal year.

 

8.                                       Section 6.1
of the Loan Agreement is hereby amended by deleting Subsection (F) thereof
in its entirety and substituting the following new Subsection (F) in lieu
thereof:

 

(F)                                 The
Borrower will maintain during the term of this Agreement (determined on a
consolidated basis with the Guarantor):

 

(1)                                  Tangible
Net Worth of, at minimum: (a) $8,700,000.00 as of July 31, 2004; (b)
$11,000,000.00 as of July 31, 2005; (c) $15,000,000.00 as of July 31,
2006; and (d) $17,000,000.00 as of July 31, 2007, and at all times
thereafter.

 

(2)                                  A
Fixed Charge Coverage of not less than 1.25 to 1.0 as of April 30, 2004,
and at any time thereafter; such Fixed Charge Coverage to be measured quarterly
based on a rolling four-quarter basis.

 

(3)                                  A
ratio of Liabilities to Tangible Net Worth of not more than: (a) 2.0 to 1.0 as
of July 31, 2004; (b) 1.65 to 1.0 as of July 31, 2005; and (c) 1.25
to 1.0 as of July 31, 2006, and at all times thereafter.

 

(4)                                  A
Coverage Ratio of not greater than: (a) 2.25 to 1.0 as of July 31, 2004;
(b) 1.75 to 1.0 as of October 31, 2004, and through July 31, 2005;
and (c) 1.5 to 1.0 as of October 31, 2005, and at all times thereafter;
said Coverage Ratio to be measured quarterly based on a rolling four-quarter
basis.

 

9.                                       Section 7.1
of the Loan Agreement is hereby amended by deleting Subsection (A) thereof
in its entirety and substituting the following new Subsection (A) in lieu
thereof:

 

(A)                              The
Borrower shall fail to pay any installment of principal or interest or fee
payable hereunder or under any Note within ten (10) days of the due date
thereof.

 

8

 

10.                                 Section 7.1
of the Loan Agreement is hereby amended by deleting Subsection (J) thereof
in its entirety and substituting the following new Subsection (J) in lieu
thereof:

 

(J)                                   The
validity or enforceability of this Agreement, any Note, or any of the other
Loan Documents shall be contested by the Borrower or the Guarantor and/or
Borrower or Guarantor shall deny that such party has any or further liability
or obligation hereunder or thereunder.

 

11.                                 Section 7.1
of the Loan Agreement is hereby amended by adding thereto the following new
Subsections (N) and (O) as additional Events of Default:

 

(N)                               If
all tangible assets purchased from Wood Protection Products, Inc. are not located or, in the case of motor vehicles,
principally garaged, at Borrower’s place of business in Tuscaloosa, Alabama, by
March 31, 2004.

 

(O)                               If all title vehicles are not re-titled in
Borrower’s name in the State of Alabama with the Bank’s lien noted thereon by
March 31, 2004.

 

12.                                 Article VIII
of the Loan Agreement is hereby amended by deleting Section 8.4 thereof in
its entirety and substituting the following new Section 8.4 in lieu
thereof:

 

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

 

13.                                 Article VIII
of the Loan Agreement is hereby amended by deleting Section 8.5 thereof in
its entirety and substituting the following new Section 8.5 in lieu
thereof:

 

8.5                                 Expenses
of the Bank.  The Borrower will, on
demand, reimburse the Bank for all expenses, including the fees and expenses of
legal counsel for the Bank, incurred in connection with the preparation,
administration, amendment, modification or enforcement of this Agreement and
the other Loan Documents and the collection or attempted collection of any Loan
and any Note.

 

14.                                 Section 8.10
of the Loan Agreement is hereby amended by deleting Subsection (B) thereof
in its entirety and substituting the following new Subsection (B) in lieu
thereof:

 

(B)                               THE
BORROWER AND THE BANK HEREBY:

 

(1)                                 IRREVOCABLY
AND UNCONDITIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING OR COUNTERCLAIM OF ANY TYPE AS TO ANY MATTER ARISING DIRECTLY OR
INDIRECTLY OUT OF OR WITH RESPECT TO

 

9

 

THIS AGREEMENT, ANY NOTE, ANY OF THE OTHER
LOAN DOCUMENTS OR ANY OTHER DOCUMENT EXECUTED IN CONNECTION HEREWITH OR
THEREWITH; AND

 

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

 

15.                                 Article VIII
of the Loan Agreement is hereby amended by deleting Section 8.13 thereof
in its entirety and substituting the following new Section 8.13 in lieu
thereof:

 

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

 

16.                                 The
Loan Agreement is hereby amended by adding as Exhibit “D” thereto the attached
Exhibit “D”, which provides the form of the Term Note No. 2.

 

17.                                 The
Loan Agreement is hereby amended by adding as Exhibit “E” thereto the attached
Exhibit “E”, which provides the form of the Compliance Certificate.

 

18.                                 Borrower
represents and warrants to the Bank that as of the date hereof:  (a) all representations and warranties given
by the Borrower in Article V of the Loan Agreement are true and correct,
except to the extent affected by this Amendment; and (b) the Borrower is in
full compliance with all of the covenants of the Borrower contained in
Article VI of the Loan Agreement, except to the extent affected by this
Amendment.  The Borrower further
represents that the Borrower has full power and authority to enter into this
Amendment and to consummate the transactions contemplated hereby, and the
Borrower agrees to pay directly, or reimburse the Bank for, all reasonable
expenses, including the reasonable fees and expenses of legal counsel, incurred
in connection with the preparation of the documentation to evidence this
Amendment and any documents executed in connection herewith.

 

19.                                 Except
as may be modified or waived by the Bank, in its sole discretion, the
effectiveness of this Amendment shall be subject to full and complete
satisfaction of the following conditions:

 

(a)                                  Payment
of Fees and Expenses.  Bank shall
have received from Borrower payment of the additional Loan Fee in the amount of
$45,000.00 and all other fees and expenses required by the Loan Agreement, as
further amended by this Amendment, and any of the other Loan Documents then
due.

 

(b)                                 Term
Note No. 2.  The Bank shall have
received the Term Note No. 2, duly executed and delivered by the Borrower.

 

10

 

(c)                                  Borrower’s
Resolutions.  The Bank shall have
received from Borrower resolutions of the Borrower’s board of directors, in a
form satisfactory to Bank, authorizing the Borrower to enter into the
transactions contemplated by this Amendment.

 

(d)                                 Term
Loan No. 2 Guaranty.  The Bank shall
have received the Term Loan No. 2 Guaranty, in a form satisfactory to Bank,
duly executed and delivered by the Guarantor.

 

20.                                 Except
as expressly modified by this Amendment, the parties agree that:

 

(a)                                  In
all other respects, all the terms, conditions, obligations and provisions of
the Loan Agreement shall be unchanged and remain the same and in full force and
effect, and all terms of the Loan Agreement, as herein modified, are expressly
ratified and confirmed in all respects; and

 

(b)                                 In
the event that there shall be any conflict between the terms of this Amendment
and any of the terms of any of the other Loan Documents not amended
concurrently herewith, the terms and provisions of this Amendment shall govern
and each of such other Loan Documents are deemed automatically amended and
modified without any further action upon the execution and delivery of this
Amendment.

 

(c)                                  In
the event that there shall be any conflict between the amendments contained in
Paragraphs 6 and 7 of this Amendment with any of the terms of the Revolving
Loan Agreement, the terms and provisions of Paragraphs 6 and 7 of this
Amendment shall govern and the Revolving Loan Agreement is hereby automatically
amended and modified without any further action upon the execution and delivery
of this Amendment.

 

21.                                 Borrower
hereby acknowledges that the preparation, negotiation, execution and delivery
of this Amendment have been completed on an expedited basis, in order to
accommodate Borrower’s purchase of certain assets from Wood Protection
Products, Inc. in a timely fashion. 
Borrower agrees to undertake any additional action, to execute and
deliver to Bank any additional document and to cooperate fully with Bank as may
be reasonably required to address and resolve, to Bank’s sole satisfaction, any
issue or concern of Bank.

 

22.                                 The
undersigned KMG Chemicals, Inc. (the “Guarantor”), executes this Amendment to
expressly evidence its assent to all the terms of this Amendment, and to
further acknowledge and agree that the Guaranty of Payment dated as of
June 26, 1998 (the “Guaranty”), delivered by it to the Bank remains in
full force and effect and that the “Obligations” of the Guarantor as the
“Guarantor” under the Guaranty shall include, without limitation, all
obligations of the Borrower under the Loan Agreement, as amended by this Amendment.

 

23.                                 This
Amendment may be executed in several counterparts, each of which shall be
deemed an original, and all of such counterparts together shall constitute one
and the same instrument.  Signature and
acknowledgment pages, if any, may be detached from the counterparts and
attached to a single copy of this document to physically form one document.

 

SIGNATURES FOLLOW ON SEPARATE PAGES

 

11

 

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

 

	
   

  	
  BORROWER:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  KMG-BERNUTH, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/

  	
   

  
	
   

  	
  Its:

  	
  Vice President and Chief Financial Officer

  
	
   

  	
   

  	
   

  
	
  STATE OF TEXAS

  	
  )

  	
   

  	
   

  
	
  COUNTY OF HARRIS

  	
  )

  	
   

  	
   

  
						

 

I, the undersigned, a Notary Public in and
for said County in said State, hereby certify that John V. Sobchak, whose name
as Vice President and Chief Financial Officer of KMG-Bernuth, Inc., a Delaware
corporation, is signed to the foregoing Second Amendment to Term Loan
Agreement, and who is known to me, acknowledged before me on this day that,
being informed of the contents of said instrument, he, as such officer and with
full authority, executed the same voluntarily for and as the act of said
corporation.

 

Given under my hand and official seal this
the 5th day of December, 2003.

 

	
   

  	
   
  /s/

  	
  (SEAL)

  
	
   

  	
  Notary Public

  	
   

  
	
   

  	
  My Commission Expires:

  	
   

  	
   

  	
   

  
						

 

12

 

	
   

  	
  BANK:

  
	
   

  	
   

  
	
   

  	
  SOUTHTRUST BANK

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/

  	
   

  
	
   

  	
  Its:

  	
  Group Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  STATE OF ALABAMA

  	
  )

  	
   

  	
   

  
	
  COUNTY OF JEFFERSON

  	
  )

  	
   

  	
   

  

 

I, the undersigned, a Notary Public in and
for said County in said State, hereby certify that Alan T. Drennen, III, whose
name as Group Vice President of SouthTrust Bank, an Alabama banking
corporation, is signed to the foregoing Second Amendment to Term Loan
Agreement, and who is known to me, acknowledged before me on this day that,
being informed of the contents of said instrument, he, as such officer and with
full authority, executed the same voluntarily for and as the act of said
banking corporation.

 

Given under my hand and official seal this
the 5th day of December, 2003.

 

	
   

  	
   
  /s/

  	
  (SEAL)

  
	
   

  	
  Notary Public

  	
   

  
	
   

  	
  My Commission Expires:

  	
   

  	
   

  	
   

  
						

 

13

 

	
   

  	
  GUARANTOR:

  
	
   

  	
   

  
	
   

  	
  KMG CHEMICALS, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/

  	
   

  
	
   

  	
  Its:

  	
  Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
  STATE OF TEXAS

  	
  )

  	
   

  
	
  COUNTY OF HARRIS

  	
  )

  	
   

  

 

I, the undersigned, a Notary Public in and
for said County in said State, hereby certify that John V. Sobchak, whose name
as Vice President and Chief Financial Officer of KMG Chemicals, Inc., a Texas
corporation, is signed to the foregoing Second Amendment to Term Loan
Agreement, and who is known to me, acknowledged before me on this day that, being
informed of the contents of said instrument, he, as such officer and with full
authority, executed the same voluntarily for and as the act of said
corporation.

 

Given under my hand and official seal this
the 5th day of December, 2003.

 

 

	
   

  	
   
  /s/

  	
  (SEAL)

  
	
   

  	
  Notary Public

  	
   

  
	
   

  	
  My Commission Expires:

  	
   

  	
   

  	
   

  
						

 

14

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