TERM NOTE NO. 2

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 xxxxxxx 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.

(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 Xxxxx 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 Xxxxxxxx’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 Xxxxx 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 Xxxxxxxx’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 Xxxxx 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

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 Xxxxxxxx’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

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, Xxxxxxxx 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

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.

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, Xxxxxxxx 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. XXXXXXXX’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. XXXXXXXX AGREES THAT BANK MAY FILE A COPY OF THIS SECTION

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, Xxxxxxxx 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.
	00000 Xxxxxx, Xxxxx 000
	Houston, Texas 77036
	ATTENTION: Chief Financial Officer

to Bank:	SouthTrust Bank
	000 Xxxxx 00xx Xxxxxx (35203)
	P. O. Box 2554
	Birmingham, Alabama 35290
	ATTENTION: Middle Market Banking

with copy to:	Xxxxxxx X. Xxxxx, Esq.
	Xxxxxx & Xxxxxxx, P.C.
	0000 Xxxxxxxx Xxxxxx Xxxxx (00000)
	P. O. Box 55727
	Birmingham, Alabama 35255-5727

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.

(x) Xxxxxxxx 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 Xxxxxxxx and Xxxxxxxx’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.

IN WITNESS WHEREOF, Xxxxxxxx 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 XXXXXX	)

I, the undersigned, a Notary Public in and for said County in said State, hereby certify that Xxxx X. Xxxxxxx, 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 5^th day of December, 2003.

	/s/

(OFFICIAL SEAL)	Notary Public

	My Commission Expires:

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%.

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TERM NOTE NO. 2

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