LINE OF CREDIT AGREEMENT

Dated as of September 30, 2007

Between

LAZARE KAPLAN INTERNATIONAL INC.

as Borrower

 

 

and

 

BANK LEUMI USA

as Bank Lender

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TABLE OF CONTENTS

 

SECTION

 

HEADING

 

PAGE

SECTION 1.

 

DEFINITIONS

 

1

SECTION 2.

 

REVOLVING CREDIT FACILITY

 

9

Section 2.1.

 

Commitment to Lend

 

9

Section 2.1A.

 

Conversion Options

 

9

Section 2.2.

 

Interest

 

10

Section 2.3.

 

Repayments and Prepayments

 

10

SECTION 3.

 

INTENTIONALLY OMITTED

 

 

SECTION 4.

 

CHANGES IN CIRCUMSTANCES

 

11

Section 4.1.

 

Indemnity

 

11

SECTION 5.

 

FEES AND PAYMENTS

 

11

Section 5.1.

 

Revolving Credit Commitment Fees

 

11

Section 5.2

 

Intentionally Omitted

 

 

Section 5.3.

 

Payments

 

11

SECTION 6.

 

REPRESENTATIONS AND WARRANTIES

 

12

SECTION 7.

 

CONDITIONS PRECEDENT

 

14

Section 7.1.

 

Closing Conditions

 

14

Section 7.2.

 

Conditions to All Borrowings

 

15

SECTION 8.

 

COVENANTS

 

16

Section 8.1.

 

Affirmative Covenants

 

16

Section 8.2.

 

Negative Covenants

 

17

Section 8.3.

 

Financial Covenants

 

19

SECTION 9.

 

EVENTS OF DEFAULT; ACCELERATION

 

19

Section 9.1.

 

Events of Default

 

19

Section 9.2.

 

Intentionally Omitted

 

 

SECTION 10.

 

SETOFF

 

21

SECTION 11.

 

CHANGE IN CIRCUMSTANCES

 

22

Section 11.1.

 

Change of Law

 

22

 

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Section 11.2.

 

Unavailability of Deposits or Inability to Ascertain, or Inadequacy of, LIBOR

 

22

Section 11.3.

 

Increased Cost and Reduced Return

 

22

Section 11.4.

 

Intentionally Omitted

 

 

Section 11.5.

 

Discretion of Bank as to Manner of Funding

 

23

SECTION 12.

 

EXPENSES AND INDEMNIFICATION

 

24

Section 12.1.

 

Expenses

 

24

Section 12.2.

 

Indemnification

 

24

Section 12.3.

 

Survival

 

25

SECTION 13.

 

SURVIVAL OF COVENANTS, ETC.

 

25

SECTION 14.

 

ASSIGNMENT

 

25

SECTION 15.

 

BANK

 

24

Section 15.1.

 

Consultation with Experts

 

24

Section 15.2.

 

Liability of Bank; Credit Decision

 

24

SECTION 16.

 

NOTICES, ETC

 

26

SECTION 17.

 

GOVERNING LAW

 

26

SECTION 17.

 

HEADINGS

 

26

SECTION 19.

 

COUNTERPARTS

 

27

SECTION 20.

 

ENTIRE AGREEMENT, ETC

 

27

SECTION 21.

 

WAIVER OF JURY TRIAL

 

27

SECTION 22.

 

CONSENTS, AMENDMENTS, WAIVERS, ETC

 

27

SECTION 23.

 

SEVERABILITY

 

28

SECTION 24.

 

EXTENSION OF TERMINATION DATE

 

28

Signature Pages

 

 

 

29

 

 

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LINE OF CREDIT AGREEMENT

This LINE OF CREDIT AGREEMENT (this “Agreement”) is made as of September 30,
2007 by and among LAZARE KAPLAN INTERNATIONAL INC. (the “Borrower” ), a Delaware
corporation having its principal place of business at 19 West 44th Street N.Y.,
N.Y. 10036 and BANK LEUMI USA, as a lender (“Bank”).

WHEREAS, the Borrower has requested that the Bank provide extensions of credit
to the Borrower in the form of loans;

WHEREAS, the Bank is willing to extend credit to the Borrower in the form of
loans, on the terms and subject to the conditions set forth in this Agreement;

NOW, THEREFORE, the Borrower hereby agrees with the Bank as follows:

SECTION 1. DEFINITIONS.

Certain capitalized terms are defined below:

Agreement: See preamble, which term shall include this Agreement and the
schedules and exhibits hereto, all as amended and in effect from time to time.

Bank: See preamble.

Base Rate: With respect to Base Rate Loans hereunder with Bank, the higher of
(i) the annual rate of interest announced from time to time by Bank at its head
office as its “Reference Rate” for U. S. dollar loans and (ii) one-half of one
percent (1/2%) above the Federal Funds Effective Rate.

Base Rate Loans: Loans bearing interest calculated by reference to the Base
Rate.

Borrower: See preamble.

Borrowing: The total of Loans of a single type advanced, continued for an
additional Interest Period, or converted from a different type into such type by
Bank pursuant to this Agreement on a single date and, in the case of LIBOR Rate
Loans, for a single Interest Period.

Business Day: Any day on which banks in New York, New York, are open for
business generally, and, in the case of LIBOR Rate Loans, also a day which is a
LIBOR Business Day.

Capital Expenditures: With respect to any Person for any period, the aggregate
amount of all expenditures (whether paid in cash or accrued as a liability) by
such Person during that period for the acquisition or leasing (pursuant to a
Capitalized Lease) of fixed or capital assets or additions to property, plant or
equipment (including replacements, capitalized repairs, and

 

 

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improvements) which should be capitalized on the balance sheet of such Person in
accordance with GAAP.

Capitalized Leases: Leases under which the Borrower is the lessee or obligor,
the discounted, future rental payment obligations under which are required to be
capitalized on the combined balance sheet of the Borrower in accordance with
GAAP.

Charter Documents: In respect of any entity, the certificate or articles of
incorporation or organization and the by-laws of such entity, or other
constitutive documents of such entity.

Code: The Internal Revenue Code of 1986, as amended, and any successor statute
thereto.

Commitment: The obligation of Bank to make Loans to the Borrower up to an
aggregate outstanding principal amount not to exceed $7,800,000, as such amounts
may be reduced from time to time or terminated according to the terms of this
Agreement.

Consent: In respect of any person or entity, any permit, license or exemption
from, approval, consent of, registration or filing with any local, state or
federal governmental or regulatory agency or authority, required under
applicable law.

Contingent Obligations: As to any Person, any obligation of such Person
guaranteeing any Indebtedness, leases, dividends or other obligations (“primary
obligations”) of any other Person (the “primary obligor”) in any manner, whether
directly or indirectly, including, without limitation, any obligation of such
Person, whether or not contingent, (i) to purchase any such primary obligation
or any property constituting direct or indirect security therefor, (ii) to
advance or supply funds (x) for the purchase or payment of any such primary
obligation or (y) to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency of the primary
obligor, (iii) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability of
the primary obligor to make payment of such primary obligation or (iv) otherwise
to assure or hold harmless the holder of such primary obligation against loss in
respect thereof; provided, however, that the term Contingent Obligation shall
not include endorsements of instruments for deposit or collection in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof (assuming such Person is required to perform thereunder) as determined
by such Person in good faith from time to time.

Controlled Group: All members of a controlled group of corporations and all
trades or businesses (whether or not incorporated) under common control which,
together with the Borrower, are treated as a single employer under Section 414
of the Code.

Conversion Request: A Notice given by the Borrower to Bank of the Borrower’s
election to convert or continue a Loan therewith in accordance with Section 2.1A
hereof.

 

 

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Current Liabilities: As determined in accordance with GAAP, consistently
applied, and shall include, as of the date of determination thereof: (i) all
Indebtedness payable on demand or maturing within one year after such date
without any option on the part of the obligor to extend, renew or maintain as
non-current beyond such year; (ii) final maturities, installments and
prepayments of Indebtedness required to be made within one year after such date
(in each case, except as set forth in the proviso below); and (iii) all other
items (including taxes accrued as estimated and reserves for deferred income
taxes) that in accordance with GAAP would be included on a balance sheet as
current liabilities, provided, however, Current Liabilities shall not include:
(A)  any portion of any other committed bank debt unless (and only to the
extent) such amount is required to be repaid within nine months of such date of
determination; and (B)  the Pegasus Liabilities.

Default: An event or act which, with the giving of Notice and/or the lapse of
time, would become an Event of Default.

Drawdown Date: In respect of any Loan, the date on which such Loan is made to
the Borrower, and the date on which any Loan is converted or continued in
accordance with Section 2.lA hereof.

Duly Authorized Officer: The President of the Borrower or other officer or
employee of any such party who is authorized by such party’s Board of Directors
or an executive committee of such Board of Directors.

EBITDA: For any period, the sum of Net Income plus Interest Expense, plus income
tax expense, plus depreciation and amortization expense to the extent such
expense was deducted in arriving at Net Income for such period.

Environmental Claim: Any investigation, notice, violation, demand, allegation,
action, suit, injunction, judgment, order, consent decree, penalty, fine, lien,
proceeding or claim (whether administrative, judicial or private in nature)
arising (a) pursuant to, or in connection with an actual or alleged violation
of, any Environmental Law, (b) in connection with any Hazardous Material,
(c) from any abatement, removal, remedial, corrective or response action in
connection with a Hazardous Material, Environmental Law or order of a
governmental authority or (d) from any actual or alleged damage, injury, threat
or harm to health, safety, natural resources or the environment.

Environmental Laws: All laws pertaining to environmental matters, including
without limitation, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response Compensation and Liability Act of 1980, the
Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water
Act, the Federal Clean Air Act, the Toxic Substances Control Act, in each case
as amended, and all rules, regulations, judgments, decrees, orders and licenses
arising under all such laws.

ERISA: The Employee Retirement Income Security Act of 1974, as amended, and all
rules, regulations, judgments, decrees, and orders arising thereunder.

 

 

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Eurocurrency Reserve Rate: For any day with respect to a LIBOR Rate Loan, the
maximum rate (expressed as a decimal) at which any lender subject thereto would
be required to maintain reserves under Regulation D of the Board of Governors of
the Federal Reserve System (or any successor or similar regulations relating to
such reserve requirements) against “Eurocurrency Liabilities” (as that term is
used in Regulation D), if such liabilities were outstanding. The Eurocurrency
Reserve Rate shall be adjusted automatically on and as of the effective date of
any change in the Eurocurrency Reserve Rate.

Event of Default: Any of the events listed in Section 9 hereof.

Extraordinary Items of Income: Items which under GAAP are required to be
accounted for as “extraordinary items” and items which the Borrower, in
accordance with GAAP, accounts for as the “cumulative effect of a change in
accounting principles.”

Federal Funds Effective Rate: For any day, the rate per annum equal to the Daily
Effective Federal Funds Rate published for such day by the Federal Reserve.

Financials: In respect of any period, the balance sheet of the Borrower as at
the end of such period, and the related statement of income and combined
statement of cash flow for such period, each setting forth in comparative form
the figures for the previous comparable fiscal period, all in reasonable detail
and prepared in accordance with GAAP.

GAAP: Generally accepted accounting principles consistent with those adopted by
the Financial Accounting Standards Board and its predecessor, (i) generally, as
in effect from time to time, and (ii) for purposes of determining compliance by
the Borrower with its financial covenants set forth herein, as in effect for the
fiscal year ended May 31, 2007.

Guarantors: Each Subsidiary set forth on Schedule I hereto, or subsequently
added as a party to the Guaranty Agreement pursuant to Section 8.1(i) hereof.

Guaranty Agreement: The guaranty agreement provided by the Guarantors
substantially in the form attached hereto as Exhibit A.

Gulfdiam Obligation: Up to $50,000,000 of secured credit given by ABN AMRO Bank
to Gulfdiam DMCC (a company incorporated in the United Arab Emirates), pursuant
to which Borrower shall guarantee up to 50% of the net outstanding obligation
from time to time.

Hazardous Materials: Any substance, chemical, compound, product, solid, gas,
liquid, waste, byproduct, pollutant, contaminant or material which is hazardous
or toxic, and includes, without limitation, (a) asbestos, polychlorinated
biphenyls and petroleum (including crude oil or any fraction thereof) and (b)
any material classified or regulated as “hazardous” or “toxic” or words of like
import pursuant to Environmental Law.

Indebtedness: For any Person (without duplication) (a) all indebtedness of such
Person for borrowed money, whether current or funded, or secured or unsecured,
(b) all indebtedness for the deferred purchase price of property or services,
(c) all indebtedness created or arising under

 

 

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any conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of a default are limited to
repossession or sale of such property), (d) all indebtedness secured by a
purchase money mortgage or other Lien to secure all or part of the purchase
price of property subject to such mortgage or Lien, (e) all obligations under
leases which shall have been or must be, in accordance with GAAP, recorded as
Capitalized Leases in respect of which such Person is liable as lessee, (f) any
liability in respect of banker’s acceptances or Letters of Credit, (g) any
indebtedness, whether or not assumed, secured by Liens on property acquired by
such Person at the time of acquisition thereof, (h) all obligations under any
so-called “synthetic lease” transaction entered into by such Person, (i) all
obligations under any so-called “asset securitization” transactions entered into
by such Person, and (j) all Contingent Obligations, it being understood that the
term “Indebtedness” shall not include trade payables and accrued expenses
arising in the ordinary course of business.

Inspection: See Section 8.1(g).

Interest Expense: With reference to any period, the sum of all net interest
charges (including imputed interest charges with respect to Capitalized Lease
Obligations and all amortization of debt discount and expense) of the Borrower
and its Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP.

Interest Payment Date: (a) As to any Base Rate Loan, the last day of the
calendar month of the Drawdown Date thereof, and (b) as to any LIBOR Rate Loan
in respect of which the Interest Period is (i) three (3) months or less, the
last day of such Interest Period and (ii) more than three (3) months, the date
that is three (3) months from the first day of such Interest Period and, in
addition, the last day of such Interest Period.

Interest Period: With respect to each Loan (a) initially, the period commencing
on the Drawdown Date of such Loan and ending on the last day of one of the
periods set forth below, as selected by the Borrower in a Loan Request (i) for
any Base Rate Loan, the last day of the calendar month; and (ii) for any LIBOR
Rate Loan, 1, 2, 3, 4, 5, or 6 months; and (b) thereafter, each period
commencing on the last day of the immediately preceding Interest Period
applicable to such Loan and ending on the last day of one of the periods set
forth above, as selected by the Borrower in a Conversion Request or a Loan
Request; provided that all of the foregoing provisions relating to Interest
Periods are subject to the following:

(a) if any Interest Period with respect to a LIBOR Rate Loan would otherwise end
on a day that is not a LIBOR Business Day, that Interest Period shall be
extended to the next succeeding LIBOR Business Day unless the result of such
extension would be to carry such Interest Period into another calendar month, in
which event such Interest Period shall end on the immediately preceding LIBOR
Business Day;

(b) if any Interest Period with respect to a Base Rate Loan would end on a day
that is not a Business Day, that Interest Period shall end on the next
succeeding Business Day;

 

 

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(c) if the Borrower shall fail to give Notice as provided in Section 2.1A, the
Borrower shall be deemed to have requested a conversion of the affected LIBOR
Rate Loan to a Base Rate Loan, and the continuance of all Base Rate Loans as
Base Rate Loans on the last day of the then current Interest Period with respect
thereto;

(d) any Interest Period relating to any LIBOR Rate Loan that begins on the last
LIBOR Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest
Period) shall end on the last LIBOR Business Day of a calendar month; and

(e) any Interest Period relating to any LIBOR Rate Loan that would otherwise
extend beyond the Maturity Date shall end on the Maturity Date.

LIBOR Business Day: Any day on which commercial banks are open for international
business (including dealings in U.S. dollar deposits) in London.

LIBOR Rate: For any Interest Period with respect to a LIBOR Rate Loan hereunder
the rate of interest equal to (i) the rate determined by Bank at which U.S.
dollar deposits for such Interest Period are offered to Bank by prime banks in
the London interbank market as of 11:00 a.m. London time on the second LIBOR
Business Day prior to the first day of such Interest Period, divided by (ii) a
number equal to 1.00 minus the Eurocurrency Reserve Rate, if applicable.

LIBOR Rate Loans: Loans bearing interest calculated by reference to the LIBOR
Rate.

LIBOR Rate Margin: One and sixty/one-hundredths of one percent (1.60%) per
annum.

Liens: Any encumbrance, mortgage, pledge, hypothecation, charge, restriction or
other security interest of any kind securing any obligation of any entity or
person.

Loan: Any loan made or to be made to the Borrower pursuant to Section 2 hereof.

Loan Documents: This Agreement, any Note and the Guaranty Agreement, in each
case as from time to time amended or supplemented.

Loan Request: See Section 2.1(b).

Material Domestic Subsidiary: Any Subsidiary organized under the laws of any
state of the United States in which the Borrower or its Subsidiaries have
invested $1,000,000 or more (or the foreign currency equivalent thereof).

Materially Adverse Effect: Any materially adverse effect on the financial
condition or business operations of the Borrower or material impairment of the
ability of the Borrower to perform its obligations hereunder or under any of the
other Loan Documents.

 

 

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Maturity Date: The Termination Date, or such earlier date upon which all of the
Obligations may become due and payable pursuant to the terms hereof.

Nedbank Loan: Up to $6,000,000 in Indebtedness of the Borrower and/or any
Subsidiary thereof to Nedbank, Limited, South Africa, including any guaranties
thereof by the Borrower or Subsidiaries of the Borrower.

Net Income: The net income (or deficit) of the Borrower, after deduction of all
expenses, taxes and other proper charges, determined in accordance with GAAP,
after eliminating therefrom all Extraordinary Items of Income.

Note(s): See Section 2.1.

Notice or Notices: All requests, demands and other communications, in writing
(including telecopy communications), sent by registered or certified mail,
return receipt requested, overnight delivery service, telecopy or hand delivery
to the other party at that party’s Principal Office.

Obligations: All indebtedness, obligations and liabilities of the Borrower to
pay principal or interest of the Loans, all fees and charges payable hereunder,
and all other payment obligations of the Borrower or any of its Subsidiaries
arising under or directly in relation to any Loan Document, in each case whether
now existing or hereinafter arising, due or to become due, direct or indirect,
absolute or contingent, and howsoever evidenced, held or acquired.

Pegasus: Pegasus Overseas Ltd., a company organized under the laws of the
Bahamas, which is a subsidiary of the Borrower.

Pegasus Liabilities: The obligations and liabilities of Pegasus and its
affiliates to Diamond Innovations and/or its affiliates (and their successors
and assigns) pursuant to an agreement between the parties for sourcing and high
pressure, high temperature processing of gem diamonds.

Person: Any individual, partnership, corporation, association, trust, joint
venture, unincorporated organization, and any government, governmental
department or agency or political subdivision thereof.

Principal Office: With respect to each party, the following addresses:

For Bank:

Bank Leumi USA

562 Fifth Avenue

New York, New York 10036

Attention: David Selove

Telecopier Number: (212) 626-1311

Telephone Number: (212) 626-1288

 

 

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For the Borrower:

Lazare Kaplan International Inc.

19 West 44th Street

New York, New York 10036

Attention: William H. Moryto

Telecopier Number: 212-697-3197

Telephone Number: 212-857-7672

Release: Any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping, disposing or migration into
the environment.

Requirement of Law: In respect of any person or entity, any law, treaty, rule,
regulation or determination of an arbitrator, court, or other governmental
authority, in each case applicable to or binding upon such person or entity or
affecting any of its property.

Subsidiary: In respect of any Person, any business entity of which such Person
at any time owns or controls directly or indirectly more than fifty percent
(50%) of the outstanding shares of stock having voting power, regardless of
whether such right to vote depends upon the occurrence of a contingency.

Tangible Net Worth: The excess of (i) all assets of the Borrower determined in
accordance with GAAP over (ii) all liabilities of the Borrower determined in
accordance with GAAP, minus (iii) the sum of (A) the book value all intangibles
determined in accordance with GAAP, including, without limitation, good will,
patents and intellectual property, and (B) any write-up in the book value of
assets since the most recent audited Financials in existence on the date hereof.

Termination Date: December 1, 2008, or such later date as may be extended
pursuant to Section 24 hereof.

Total Dollar Outstandings: At any time of reference thereto, the sum of Loans
outstanding at such time.

Total Funded Debt: At any time the same is to be determined, the aggregate of
all Indebtedness of the Borrower and its Subsidiaries at such time, including
all Indebtedness of any other Person which is directly or indirectly guaranteed
by the Borrower (other than amounts guaranteed by Borrower in respect of the
Gulfdiam Obligation and the Nedbank Loan) or any of its Subsidiaries or which
the Borrower or any of its Subsidiaries has agreed (contingently or otherwise)
to purchase or otherwise acquire or in respect of which the Borrower or any of
its Subsidiaries has otherwise assured a creditor against loss.

Working Capital: At any time, current assets of the Borrower in accordance with
GAAP less Current Liabilities.

 

 

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SECTION 2.REVOLVING CREDIT FACILITY.

Section 2.1Commitment to Lend. (a) Upon the terms and subject to the conditions
of this Agreement, Bank agrees to lend to the Borrower sums that the Borrower
may request, from the date hereof until but not including the Termination Date,
provided that the sum of the outstanding principal amount of all Loans from Bank
(after giving effect to all amounts requested) shall not exceed Bank’s
Commitment. LIBOR Rate Loans shall be in the minimum aggregate amount of
$300,000 or whole multiples of $100,000 in addition thereto.

(b) The Borrower shall give to Bank, written Notice in the form of Exhibit B
attached hereto of each Loan requested to be made by Bank hereunder (a “Loan
Request”) (i) no later than 12:00 noon, New York time, on the proposed Drawdown
Date of any Base Rate Loan and (ii) no less than three (3) LIBOR Business Days
prior to the proposed Drawdown Date of any LIBOR Rate Loan. Each such Notice
shall specify (A) the principal amount of the Loan requested, (B) the proposed
Drawdown Date of such Loan (which must be a Business Day or a LIBOR Business
Day, as the case may be), (C) the Interest Period for such Loan and (D) whether
such Loan shall be a Base Rate Loan or a LIBOR Rate Loan. Each Loan Request
shall be irrevocable and binding on the Borrower and shall obligate the Borrower
to accept the Loan requested from Bank on the proposed Drawdown Date. Subject to
the foregoing, so long as Bank’s Commitment is then in effect and the applicable
conditions set forth in Section 7.2 hereof have been met, Bank shall advance the
amount requested to the Borrower’s bank account as designated on the applicable
Loan Request (or such other account as Bank may designate) in immediately
available funds not later than the close of business on such Drawdown Date.

(c) The obligation of the Borrower to repay Bank the principal of the Loans and
interest accrued thereon shall be evidenced by a promissory note (a “Note”)
substantially in the form of Exhibit C attached hereto, dated as of the date
hereof and completed with appropriate insertions. Such Note shall be executed
and delivered by the Borrower and payable to the order of Bank, in form and
substance satisfactory to Bank, in a principal amount equal to Bank’s Loan
Commitment.

Section 2.1A. Conversion Options. (a) The Borrower may elect from time to time
to convert any outstanding Loan with Bank from a Base Rate Loan to a LIBOR Rate
Loan or from a LIBOR Rate Loan to a Base Rate Loan, provided that (i) with
respect to any such conversion of a LIBOR Rate Loan to a Base Rate Loan, the
Borrower shall give Bank at least three (3) Business Days prior written Notice
of such election; (ii) with respect to any such conversion of a LIBOR Rate Loan
into a Base Rate Loan, such conversion shall only be made on the last day of the
Interest Period with respect thereto; (iii) with respect to any such conversion
of a Base Rate Loan to a LIBOR Rate Loan, the Borrower shall give Bank at least
three (3) LIBOR Business Days prior written Notice of such election; and (iv) no
Loan may be converted into a LIBOR Rate Loan when any Default or Event of
Default has occurred and is continuing. All or any part of the outstanding Loans
may be converted as provided herein, provided that any partial conversions shall
be in an aggregate principal amount of $300,000 or a whole multiple of $100,000
in addition thereto. Each Conversion Request relating to the conversion of a
Loan to a LIBOR Rate Loan shall be irrevocable by the Borrower.

 

 

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(b) Any Base Rate Loan or LIBOR Rate Loan may be continued as such upon the
expiration of an Interest Period with respect thereto by compliance by the
Borrower with the Notice provisions contained in Section 2.1A(a); provided that
no LIBOR Rate Loan may be continued as such when any Default or Event of Default
has occurred and is continuing, but shall be automatically converted to a Base
Rate Loan on the last day of the first Interest Period relating thereto ending
during the continuance of any Default or Event of Default. In the event that the
Borrower fails to provide any such Notice with respect to the continuation of
any LIBOR Rate Loan as such, then such LIBOR Rate Loan shall be automatically
converted to a Base Rate Loan on the last day of the first Interest Period
relating thereto.

(c) Any conversion to or from LIBOR Rate Loans shall be in such amounts and be
made pursuant to such elections so that, after giving effect thereto, (i) the
aggregate principal amount of all LIBOR Rate Loans having the same Interest
Period shall not be less than $300,000 or a whole multiple of $100,000 in
addition thereto.

Section 2.2. Interest. So long as no Event of Default is continuing, each Base
Rate Loan shall bear interest for the period commencing with the Drawdown Date
thereof and ending on the last day of the Interest Period with respect thereto
at a rate per annum equal to the Base Rate and each LIBOR Rate Loan shall bear
interest for the period commencing with the Drawdown Date thereof and ending on
the last day of the Interest Period with respect thereto at a rate per annum
equal to the sum of (i) the LIBOR Rate determined for such Interest Period plus
(ii) the LIBOR Rate Margin. The Borrower promises to pay interest on each Loan
in arrears on each Interest Payment Date with respect thereto. While an Event of
Default is continuing and Bank shall have exercised its rights pursuant to
Section 9.1(2) hereof or in the case of an Event of Default under clause (h) or
(i) of Section 9.1, amounts payable under any of the Loan Documents shall bear
interest (compounded monthly and payable on demand in respect of overdue
amounts) at a rate per annum which is equal to the Base Rate plus two percent
(2%) until such amount is paid in full or (as the case may be) such Event of
Default has been cured or waived in writing by Bank (after as well as before
judgment).

Section 2.3. Repayments and Prepayments. The Borrower hereby agrees to pay to
Bank, no later than the Maturity Date, the entire unpaid principal of and
interest on all Loans with Bank. The Borrower may elect to prepay the
outstanding principal of all or any part of any Loan, without premium or
penalty, provided that (a) any full or partial prepayment of the outstanding
amount of any LIBOR Rate Loans pursuant to this Section 2.3 may be made only on
the last day of the Interest Period relating thereto and (b) any such
prepayments of LIBOR Rate Loans shall be in a minimum amount of $300,000 or a
whole multiple of $100,000 in addition thereto. The Borrower shall give Bank
Notice of the date and amount of any proposed prepayment pursuant to this
Section 2.3 (y) no less than three (3) LIBOR Business Days prior to any such
proposed prepayment of any LIBOR Rate Loans, and (z) no later than 10:00 a.m.,
New York time, on the date of any such prepayment of any Base Rate Loan. The
Borrower shall be entitled to reborrow before the Termination Date such amounts,
upon the terms and subject to the conditions of this Agreement. Each repayment
or prepayment of principal of any Loan shall be accompanied by payment of the
unpaid interest accrued to such date on the principal being repaid or prepaid
and shall be applied, in the absence of instruction by the Borrower, first to
the principal of Base Rate Loans and then to the principal of LIBOR Rate Loans.
If at any time the aggregate amount of

 

 

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Loans outstanding shall exceed the Commitment, the Borrower shall immediately
pay the amount of such excess to Bank. The Borrower may elect to reduce or
terminate the Commitment with Bank by a minimum principal amount of $100,000 or
an integral multiple thereof of the amount reduced or, as the case may be,
terminated, upon Notice to the Bank given by 10:00 a.m., New York time, at least
two (2) Business Days prior to the date of such reduction or termination. The
Borrower shall not be entitled to reinstate the Commitment following such
reduction or termination.

SECTION 3. INTENTIONALLY OMITTED

SECTION 4. CHANGES IN CIRCUMSTANCES, ETC..

Section 4.1.   Indemnity. The Borrower agrees to indemnify Bank and to hold Bank
harmless from and against any loss, cost or expense (including loss of
anticipated profits) that Bank may sustain or incur as a consequence of (i)
default by the Borrower in payment of the principal amount of or any interest on
any LIBOR Rate Loans as and when due and payable, including any such loss, cost
or expense arising from interest or fees payable by Bank to lenders of funds
obtained by it in order to maintain its LIBOR Rate Loans or the cost of breaking
any swaps or other hedging agreements, (ii) default by the Borrower in making a
borrowing or conversion after the Borrower has given (or is deemed to have
given) a Loan Request or Conversion Request relating thereto in accordance with
Section 2.1A, and (iii) the making of any payment of a LIBOR Rate Loan or the
making of any conversion of any such Loan to a Base Rate Loan on a day that is
not the last day of the applicable Interest Period with respect thereto,
including interest or fees payable by Bank to lenders of funds obtained by it in
order to maintain any such Loans or the cost of breaking any swaps or other
hedging agreements.

SECTION 5. FEES AND PAYMENTS

Section 5.1.   Revolving Credit Commitment Fees. The Borrower shall pay to Bank
a commitment fee at the rate per annum equal to one-fourth of one percent (1/4
of 1%) (computed on the basis of a year of 360 days and the actual number of
days elapsed) on the average daily unused Commitment. Such commitment fee shall
be payable quarter-annually in arrears on the last Business Day of each
November, February, May and August in each year (commencing on the first such
date occurring after the date hereof) and on the Termination Date, unless the
Commitment is terminated in whole on an earlier date, in which event the
commitment fee for the period to the date of such termination in whole shall be
paid on the date of such termination.

Section 5.2. INTENTIONALLY OMITTED

Section 5.3. Payments. All payments to be made by the Borrower hereunder or
under any of the other Loan Documents shall be made in U.S. Dollars in
immediately available funds at the Bank’s Principal Office, without set-off or
counterclaim and without any withholding or deduction whatsoever. Bank shall be
entitled to charge any account of the Borrower with Bank for any sum due and
payable by the Borrower to Bank hereunder or under any of the other Loan
Documents. If any payment hereunder is required to be made on a day which is not
a Business Day, it shall be paid on the immediately succeeding Business

 

 

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Day, with interest and any applicable fees adjusted accordingly. All
computations of interest or fees payable hereunder shall be made by Bank on the
basis of actual days elapsed and on a 360-day year.

SECTION 6. REPRESENTATIONS AND WARRANTIES

The Borrower represents and warrants to Bank on the date hereof, on the date of
any Loan Request:

(a) the Borrower and each Subsidiary is duly organized, validly existing, and in
good standing under the laws of its jurisdiction of incorporation and is duly
qualified and in good standing in every other jurisdiction where it is doing
business (except where the failure to so qualify in any such jurisdiction would
not have a Materially Adverse Effect), and the execution, delivery and
performance by the Borrower and each Subsidiary of the Loan Documents to which
it is a party (i) are within its corporate authority, (ii) have been duly
authorized, (iii) do not conflict with or contravene its Charter Documents;

(b) upon execution and delivery thereof, each Loan Document shall constitute the
legal, valid and binding obligation of each of the Borrower and Guarantors party
thereto, enforceable in accordance with its terms;

(c) the Borrower and each of its Subsidiaries has good and marketable title to
all its material properties, subject only to Liens permitted hereunder, and
possesses all assets, including intellectual properties, franchises and
Consents, adequate for the conduct of its business as now conducted, without
known conflict with any rights of others. The Borrower and its Subsidiaries
maintain insurance with financially responsible insurers and copies of the
Borrower’s primary Jewelers Block Policy and a schedule of other insurance
policies have been previously delivered to Bank, covering such risks and in such
amounts and with such deductibles as are customary in the Borrower’s business
and are adequate;

(d) the Borrower has provided to Bank its Financials as at February 28, 2007,
and for the third quarter then ended, as filed with the Securities and Exchange
Commission, and such Financials are complete and correct and fairly present the
position of the Borrower in accordance with GAAP applied consistent with the
annual financial statements of the Borrower as filed with the Securities and
Exchange Commission as at such date and for such period in accordance with GAAP
consistently applied;

(e) since February 28, 2007, there has been no material adverse change of any
kind in the business or financial condition of the Borrower which would have a
Materially Adverse Effect;

(f) except as disclosed in the Financial statements referred to above, there are
no legal or other proceedings or investigations pending or, to the knowledge of
the Borrower, threatened against the Borrower before any court, tribunal or
regulatory

 

 

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authority which would, if adversely determined, alone or together, have a
Materially Adverse Effect;

(g)the execution, delivery and performance of its obligations, and the exercise
of its rights under the Loan Documents by the Borrower and each Guarantor,
including borrowing under this Agreement (i) do not require any Consents; and
(ii) are not and will not be in conflict with or prohibited or prevented by
(A) any Requirement of Law, or (B) any Charter Document, corporate minute or
resolution, instrument, agreement or provision thereof, in each case binding on
it or affecting its property;

(h) the Borrower and each Guarantor is not in violation of (i) any Charter
Document, corporate minute or resolution, (ii) any instrument or agreement, in
each case binding on it or affecting its property, or (iii) any Requirement of
Law, in a manner which could have a Materially Adverse Effect, including,
without limitation, all applicable federal and state tax laws, ERISA and
Environmental Laws;

(i) all information furnished by or on behalf of the Borrower or any of its
Subsidiaries in writing to Bank for purposes of or in connection with this
Agreement, or any transaction contemplated herein, is true and accurate in all
material respects and not incomplete by omitting to state any fact necessary to
make such information (taken as a whole) not misleading in light of the
circumstances under which such information was provided;

(j) all proceeds of Loans shall be used by the Borrower for working capital
purposes and other general corporate purposes of the Borrower and its
Subsidiaries and no part of the proceeds of any Loan or other extension of
credit hereunder will be used by the Borrower or any Subsidiary thereof to
purchase or carry any margin stock (within the meaning of the Regulations of the
Board of Governors of the Federal Reserve System) or to extend credit to others
for the purpose of purchasing or carrying any margin stock and neither the
making of any Loan or other extension of credit hereunder nor the use of the
proceeds thereof will violate or be inconsistent with the provisions of the
Regulations of the Board of Governors of the Federal Reserve System and any
successor to all or any portion of such regulations relating to Margin Stock;
Margin Stock (as defined above) constitutes less than 25% of the value of those
assets of the Borrower and its Subsidiaries that are subject to any limitation
on sale, pledge or other restriction hereunder;

(k) the Borrower and each of its Subsidiaries has timely filed or caused to be
timely filed all tax returns required to be filed by the Borrower and/or any of
its Subsidiaries and the Borrower and each of its Subsidiaries has paid all
taxes, assessments and other governmental charges payable by them other than
taxes, assessments and other governmental charges which are not delinquent, and
other than those contested in good faith and for which adequate reserves have
been established in accordance with GAAP and as to which no Lien exists;

(l) the Borrower and each other member of its Controlled Group has fulfilled its
obligations under the minimum funding standards of, and is in compliance in all

 

 

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material respects with, ERISA and the Code to the extent applicable to it and,
other than a liability for premiums under Section 4007 of ERISA, has not
incurred any liability to the PBGC or a Plan under Title IV of ERISA and the
Borrower and its Subsidiaries have no unaccrued contingent liabilities with
respect to any post-retirement benefits under a welfare plan, as defined in
Section 3(i) of ERISA, other than liability for continuation coverage described
in article 6 of Title 1 of ERISA;

(m) Schedule I correctly sets forth, as of the Closing Date, each Subsidiary of
the Borrower, its respective jurisdiction of organization and the percentage
ownership (direct and indirect) of the Borrower in each class of capital stock
or other equity interests of each of its Subsidiaries and also identifies the
direct owner thereof;

(n)       the Borrower and each of its Subsidiaries is in compliance with all
applicable Environmental Laws and the requirements of any permits issued under
such Environmental Laws; there are no pending or, to the best knowledge of the
Borrower and its Subsidiaries after due inquiry, threatened Environmental
Claims, including any such claims (regardless of materiality) for liabilities
under CERCLA relating to the disposal of Hazardous Materials, against the
Borrower or any of its Subsidiaries or any real property, including leaseholds,
owned or operated by the Borrower or any of its Subsidiaries; there are no
facts, circumstances, conditions or occurrences on any real property, including
leaseholds, owned or operated by the Borrower or any of its Subsidiaries that,
to the best knowledge of the Borrower and its Subsidiaries after due inquiry,
could reasonably be expected (i) to form the basis of an Environmental Claim
against the Borrower or any of its Subsidiaries or any such real property, or
(ii) to cause any such real property to be subject to any restrictions on the
ownership, occupancy, use or transferability of such real property by the
Borrower or any of its Subsidiaries under any applicable Environmental Law;
Hazardous Materials have not been Released on or from any real property,
including leaseholds, owned or operated by the Borrower or any of its
Subsidiaries where such Release, individually, may reasonably be expected to
require in excess of $50,000 in response costs under any applicable
Environmental Law; and

(o) neither the Borrower nor any Subsidiary is an “investment company” or a
company “controlled” by an “investment company” within the meaning of the
Investment Company Act of 1940, as amended, or a “public utility holding
company” within the meaning of the Public Utility Holding Company Act of 1935,
as amended.

SECTION 7. CONDITIONS PRECEDENT.

Section 7.1.   Closing Conditions. In addition to the making of the foregoing
representations and warranties and the delivery of the Loan Documents and such
other documents and the taking of such actions as Bank may require at or prior
to the time of executing this Agreement, the obligation of Bank to make the
initial Loan is subject to the satisfaction of the following further conditions
precedent:

(a) all proceedings in connection with the transactions contemplated hereby
shall be in form and substance satisfactory to Bank shall have received all
information

 

 

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and documents as it may have reasonably requested, including without limitation,
the Charter Documents and good standing certificate of the Borrower and the
resolutions of the boards of directors of the Borrower and the Guarantors
authorizing the transactions contemplated hereby;

(b) Bank shall have received a Note in the amount of its Commitment;

(c) the Borrower and the Guarantors shall have provided certificates of
incumbency and specimen signatures as to the officers authorized to sign the
Loan Documents;

(d) Bank shall have received a legal opinion covering customary matters in an
unsecured credit facility, satisfactory in form and substance to Bank, from
counsel to the Borrower;

(e) Bank shall have received evidence of all hazard, property and liability
insurance maintained by the Borrower and copies of the primary Jewelers Block
insurance policy and such insurance shall be in such amounts and of such types
as shall be satisfactory to Bank;

(f) no material adverse change shall have occurred in the business or financial
condition of the Borrower since February 28, 2007;     

(g) all legal matters incident to the execution and delivery of the Loan
Documents should be satisfactory to Bank and its legal counsel.

Section 7.2.Conditions to All Borrowings. The obligation of Bank to make any
Loan is subject to the satisfaction of the following further conditions
precedent:

(a) each of the representations and warranties of the Borrower to Bank herein,
in any of the other Loan Documents or any documents, certificate or other paper
or Notice in connection herewith shall be true and correct in all material
respects as of the time made or claimed to have been made, except for
representations and warranties that are made as of a certain date, which shall
be true and correct in all material respects as of such date;

(b) no Default or Event of Default shall be continuing;

(c) Bank shall have received the most recent audited Financials of the Borrower
and quarterly unaudited Financials; and

(d) there shall have been no change in the business, assets, financial condition
of the Borrower since the date of the most recently delivered Financial
Statements which would have a Materially Adverse Effect.

 

 

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SECTION 8. COVENANTS.

Section 8.1. Affirmative Covenants. The Borrower agrees that so long as there
are any Loans outstanding and until the termination of the Commitment and the
payment and satisfaction in full of all the Obligations, the Borrower will
comply with its obligations as set forth throughout this Agreement and will:

(a) furnish Bank: (i) as soon as available but in any event within one hundred
and twenty (120) days after the close of each fiscal year, its audited and
unqualified Financials for such fiscal year, certified by the Borrower’s outside
accountants; (ii) as soon as available but in any event within sixty (60) days
after the end of each fiscal quarter, unaudited Financials for such fiscal
quarter certified by its chief financial officer; and (iii) together with the
items required pursuant to clauses (i) and (ii) above, a certificate of the
Borrower submitted by its Duly Authorized Officer thereof, in form and substance
satisfactory to such Bank, (A) setting forth computations demonstrating
compliance with the Borrower’s financial covenants set forth herein, (B)
providing a schedule, setting forth the name of the lender and the amount, of
the Borrower’s then outstanding unsecured Indebtedness, and (C) certifying that
no Default or Event of Default has occurred, or if it has, the actions taken by
the Borrower with respect thereto;

(b) keep true and accurate books of account in accordance with GAAP, maintain
its current fiscal year;

(c) (i) maintain its corporate existence, business and material assets,
(ii) keep its business and assets adequately insured, (iii) maintain its chief
executive office in the United States, (iv) continue to engage in substantially
the same lines of business, (v) comply with all Requirements of Law, including
ERISA and Environmental Laws, the violation of any of which would have a
Materially Adverse Effect and (vi) conduct annual physical inventory counts;

(d) notify Bank promptly in writing of (i)  the occurrence of any Default or
Event of Default, (ii) any non-compliance with ERISA or any Environmental Law or
proceeding in respect thereof which could have a Materially Adverse Effect,
(iii) any change of address and (iv) any pending, or to the knowledge of the
Borrower, threatened, litigation or similar proceeding affecting the Borrower,
which litigation or proceeding could reasonably be expected to result in the
imposition of a liability upon the Borrower in excess of $250,000, or any
material adverse change in any such litigation or proceeding previously
reported;

(e) use the proceeds of the Loans solely for working capital purposes and other
general corporate purposes and not use the Loans for the carrying of “margin
security” or “margin stock” within the meaning of Regulations U and X of the
Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224;

 

 

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(f) pay all taxes (including sales and withholding taxes) and other obligations
as and when due except where contested in good faith and by appropriate
proceedings for which the Borrower shall have set aside adequate reserves;

(g) permit Bank, and its duly authorized representatives and agents to visit and
inspect (an “Inspection”) any of its property, corporate books and financial
records annually, to examine and make copies of its books of accounts and other
financial records, and to discuss its affairs, finances and accounts with, and
to be advised as to the same by, its officers, employees and independent public
accountants (and by this provision the Borrower hereby authorizes such
accountants to discuss with Bank the finances and affairs of the Borrower and
its Subsidiaries) at such reasonable times and intervals as Bank may designate,
provided, however, if a Default or Event of Default has occurred and is
continuing, Bank may conduct an Inspection at any time;

(h) cooperate with Bank, take such action, execute such documents, and provide
such information as Bank may from time to time request in order further to
effect the transactions contemplated by and the purposes of the Loan Documents;

(i) cause each Material Domestic Subsidiary created after the date hereof to
become a Guarantor under the Guaranty Agreement; and

(j) at all times, maintain the Obligations owing to Bank on an equal and
pari-passu basis with all other unsecured and unsubordinated Indebtedness of the
Borrower from time to time outstanding, with Bank having the same rights and
privileges as Borrower’s other unsecured and unsubordinated creditors.

Section 8.2. Negative Covenants. The Borrower agrees that so long as there are
any Loans outstanding and until the termination of the Commitment and the
payment and satisfaction in full of all the Obligations, the Borrower will not:

(a) create, incur or assume any Indebtedness other than (i) Indebtedness to
Bank, (ii) up to $70,000,000 in Indebtedness of the Borrower and/or Subsidiaries
of the Borrower (including, without limitation, Material Domestic Subsidiaries)
under lines of credit from Antwerp Diamond Bank, including guaranties by
Subsidiaries of the Borrower, (iii) up to Five Hundred Fifty Million Yen in
unsecured Indebtedness to ABN AMRO or any affiliate thereof in Japan, including
guaranties by Subsidiaries of the Borrower (including, without limitation,
Material Domestic Subsidiaries) in connection with such Indebtedness, (iv) up to
$30,000,000 in unsecured Indebtedness to HSBC Bank USA, including guaranties by
Subsidiaries of the Borrower (including, without limitation, Material Domestic
Subsidiaries) in connection with such Indebtedness, (v) up to $6,000,000 in
Indebtedness of the Borrower and/or any Subsidiary thereof to Nedbank, Limited,
South Africa, including any guaranties thereof by the Borrower or Subsidiaries
of the Borrower, (vi) up to $35,000,000 in Indebtedness of the Borrower and/or
Subsidiaries of the Borrower (including without limitation, Material Domestic
Subsidiaries) under lines of credit from ABN AMRO Bank (including without
limitation guaranties by Subsidiaries of the Borrower, (vii) amounts guarantied
by Borrower

 

 

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pursuant to the Gulfdiam Obligation, (viii) current liabilities of the Borrower
not incurred through the borrowing of money or the obtaining of credit on an
open account customarily extended, (ix) Indebtedness in respect of taxes or
other governmental charges contested in good faith and by appropriate
proceedings and for which adequate reserves have been taken, and (x) other
unsecured Indebtedness not in excess of $250,000.

(b) create or incur any Liens on any of the property or assets of the Borrower
or its Subsidiaries except (i) Liens granted by Pegasus in favor of Diamond
Innovations or an affiliate thereof and/or its successors and assigns (“Diamond
Innovations”) on inventories of gem diamonds purchased by Pegasus from Diamond
Innovations for processing; (ii) Liens securing taxes or other governmental
charges not yet due; (iii) deposits or pledges made in connection with social
security obligations; (iv) Liens of carriers, warehousemen, mechanics and
materialmen, less than 120 days old as to obligations not yet due,
(v) easements, rights-of-way, zoning restrictions and similar minor Liens which
individually and in the aggregate do not have a Materially Adverse Effect and
(vi) Liens granted by any Subsidiaries of the Borrower on the property of such
Subsidiaries located outside the United States to secure Indebtedness permitted
by Section 8.2(a) (ii) or Section 8.2 (a) (viii);

(c) make any investments which in the aggregate exceeds $150,000 in any one
fiscal year, other than investments in: (i) marketable obligations of the United
States maturing within one (1) year, (ii) certificates of deposit, bankers’
acceptances and time and demand deposits of Bank or of United States banks
having total assets in excess of $1,000,000,000, (iii) investments in Northbank
Diamonds Ltd., (iv) Subsidiaries or other equity investments existing on the
date hereof, (v) investments by Pegasus (net of related contra-accounts and
credits) in inventory of gem diamonds not to exceed $8,000,000 at any one time
outstanding, (vi) investments by the Borrower after the date hereof in
Subsidiaries and joint ventures in the ordinary course of Borrower’s business,
provided, however, that the aggregate amount of such additional investments, at
any one time outstanding shall not exceed 10% of the Tangible Net Worth of the
Borrower and its Subsidiaries on a consolidated basis or (vii) such other
investments as Bank may from time to time approve in writing;

(d) merge or consolidate with any other party (other than with Subsidiaries of
the Borrower so long as the Borrower is the survivor), or enter into any stock
acquisitions; enter into any wholly new lines of business or otherwise
materially change the conduct of the Borrower’s business as presently conducted;
or effect any significant change in the Borrower’s accounting practices or
treatment except as may be permitted or required by GAAP;

(e) purchase, lease or otherwise acquire assets other than in the ordinary
course, consistent with the past practices of the Borrower; or dispose of or
sell assets other than (i) the sale of inventory and excess or obsolete
equipment and other assets in the ordinary course of business and (ii) prior to
the occurrence of a Default or an Event of Default, the sale of assets (other
than inventory) on arms-length terms for fair value, provided that, in the case
of Section 8.2(e) (ii) the amount of such assets sold or disposed

 

 

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of, when combined with all other such sales or other dispositions of assets,
shall not exceed $500,000 in the aggregate during any fiscal year of the
Borrower.

(f) make any repurchases of any capital stock or other securities of the
Borrower in excess of $2,000,000 in the aggregate during any fiscal year of the
Borrower;

(g) conduct transactions with Subsidiaries of the Borrower or other affiliates
on anything other than an arm’s length basis and in the ordinary course of
business consistent with the past practices of the Borrower; or

(h) make, or become obligated to make any Capital Expenditures, except that
during any fiscal year the Borrower and its Subsidiaries may make, or become
obligated to make, Capital Expenditures so long as the aggregate amount of such
Capital Expenditures (net of proceeds from the sale of capital or fixed assets)
does not exceed $4,000,000 in any fiscal year through fiscal year ending May 31,
2007, and $1,500,000 in any fiscal year thereafter.

Section 8.3. Financial Covenants. The Borrower agrees that so long as there are
any Loans outstanding and until the termination of the Commitment and the
payment and satisfaction in full of all the Obligations, the Borrower will have
or maintain, on a consolidated basis with its Subsidiaries:

(a) as of the end of each of its fiscal quarters, Working Capital of not less
than Eighty Million Dollars ($80,000,000);

(b) as of the end of each of its fiscal quarters, Tangible Net Worth of not less
than Eighty-five Million ($85,000,000);

(c) as of the end of each of its fiscal quarters, a ratio of Total Funded Debt
to Tangible Net Worth at not more than 1.50 to 1.00; and

(d) as of the end of each of its fiscal years, commencing with the fiscal year
beginning June 1, 2007, a ratio of EBITDA to Interest Expense of not less than
1.25 to 1.00.

SECTION 9. EVENTS OF DEFAULT; ACCELERATION.

Section 9.1. Events of Default. If any of the following events (“Events of
Default”) shall occur:

(a) the Borrower shall fail to pay when due and payable any principal of the
Loans;

(b) the Borrower shall fail to pay interest on the Loans, any fee or any other
sum due under any of the Loan Documents when required to be made hereby;

 

 

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(c) default by the Borrower in the payment or performance of any other
obligation or agreement with the Bank relating to borrowed money after the
expiration of any grace period provided for therein and the failure to cure any
such default to the extent provided for therein;

(d) the Borrower shall fail to perform any term, covenant or agreement contained
in Sections 8.1(e), 8.2 (other than 8.2(c) and (h)) and 8.3, provided, however,
with regard to Section 8.3, if on any date (the “Compliance Date”) not later
than 30 days after the earlier of (i) delivery by Bank to the Borrower of a
Notice with respect to such default, or (ii) the date on which the Borrower
first obtains actual knowledge of any such default, there shall have been
contributed to the capital of the Borrower a sum in cash in immediately
available funds (and as evidenced by such written instruments or documents as
shall be reasonably satisfactory to Bank, upon satisfaction of which, such
contribution shall be considered an addition to Net Income for the period
tested), in an amount which, after giving effect thereto, would enable the
Borrower to meet the requirements as in effect on the Compliance Date of the
covenants of Section 8.3 giving rise to the default, then no Event of Default
shall be deemed to have occurred under this Section 9.1(d) with respect to such
default without any further action by Bank or the Borrower;

(e) the Borrower shall fail to perform any other term, covenant or agreement
contained in the Loan Documents within thirty (30) days after Bank has given
Notice of such failure to the Borrower, provided, however, that if such failure
is cured within such period there shall be no Event of Default under this clause
(e);

(f) any representation or warranty of the Borrower in the Loan Documents or in
any certificate or Notice given in connection therewith shall have been false or
misleading in any material respect at the time made or deemed to have been made;

(g) (i) any of the Borrower or its Subsidiaries shall be in default (after any
applicable period of grace or cure period) under any agreement or agreements
evidencing a Capitalized Lease or Indebtedness in excess of $100,000 owing to
any Person, or any affiliate thereof, or shall fail to pay such amounts
thereunder when due, or within any applicable period of grace or (ii) any lender
of the Borrower or its Subsidiaries (other than the Bank or ABN AMRO Bank) shall
demand repayment of any Indebtedness payable on demand under any uncommitted
borrowing facility;

(h) any of the Loan Documents shall be terminated or otherwise cease to be in
full force and effect;

(i) any of the Borrower or its Subsidiaries (i) shall make an assignment for the
benefit of creditors, (ii) shall be adjudicated bankrupt or insolvent,
(iii) shall seek the appointment of, or be the subject of an order appointing, a
trustee, liquidator or receiver as to all or part of its assets, (iv) shall
commence, approve or consent to, any case or proceeding under any bankruptcy,
reorganization or similar law and, in the case of an involuntary case or
proceeding, such case or proceeding is not dismissed within sixty (60)

 

 

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days following the commencement thereof, or (y) shall be the subject of an order
for relief in an involuntary case under federal bankruptcy law;

(j) any of the Borrower or its Subsidiaries shall be unable to pay its debts as
they mature;

(k) there shall remain undischarged for more than thirty (30) days any final
judgment or execution action against the Borrower or any of its Subsidiaries
that, together with other final judgments and execution actions against the
Borrower or any such Subsidiary exceeds $100,000 in the aggregate;

THEN, or at any time thereafter:

(1) In the case of any Event of Default under clause (i) or (j), (A) the
Commitment shall automatically terminate and Bank shall be relieved of all
further obligations, as provided herein, to make Loans to the Borrower, (B) the
entire unpaid principal amount of the Loans, all interest accrued and unpaid
thereon, all accrued and unpaid fees, and all other amounts payable hereunder
and under the other Loan Documents shall automatically become forthwith due and
payable, without presentment, demand, protest or Notice of any kind, all of
which are hereby expressly waived by the Borrower; and

(2) In the case of any Event of Default other than (i) and (j), Bank may, by
Notice to the Borrower, (A) terminate its Commitment, and/or (B) declare the
unpaid principal amount of its Loans, all interest accrued and unpaid thereon,
all accrued and unpaid fees and all other amounts payable hereunder and under
the other Loan Documents to be forthwith due and payable, without presentment,
demand, protest or further Notice of any kind, all of which are hereby expressly
waived by the Borrower.

No remedy herein conferred upon Bank is intended to be exclusive of any other
remedy and each and every remedy shall be cumulative and in addition to every
other remedy hereunder, now or hereafter existing at law.

Section 9.2. INTENTIONALLY OMITTED

SECTION 10. SETOFF.

Any deposits or other sums credited by or due from Bank to the Borrower (in
whatever currency denominated) may, from and after an Event of Default, be
applied to or set off by Bank against any principal, interest and any other
amounts due and payable from the Borrower to Bank in respect of the Obligations
at any time without Notice to the Borrower, or compliance with any other
procedure imposed by statute or otherwise, all of which are hereby expressly
waived by the Borrower.

 

 

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SECTION 11. CHANGE IN CIRCUMSTANCES.

Section 11.1. Change of Law. Notwithstanding any other provisions of this
Agreement or any Note, if at any time any change in applicable law or regulation
or in the interpretation thereof makes it unlawful for Bank to make or continue
to maintain any LIBOR Rate Loans or to perform its obligations as contemplated
hereby, Bank shall promptly give notice thereof to the Borrower and Bank’s
obligations to make or maintain LIBOR Rate Loans under this Agreement shall be
suspended until it is no longer unlawful for Bank to make or maintain LIBOR Rate
Loans. The Borrower shall prepay on demand the outstanding principal amount of
any such affected LIBOR Rate Loans, together with all interest accrued thereon
and all other amounts then due and payable to Bank under this Agreement;
provided, however, subject to all of the terms and conditions of this Agreement,
the Borrower may then elect to borrow the principal amount of the affected LIBOR
Rate Loans from Bank by means of Base Rate Loans from Bank.

Section 11.2. Unavailability of Deposits or Inability to Ascertain, or
Inadequacy of, LIBOR. If on or prior to the first day of any Interest Period for
any Borrowing of LIBOR Rate Loans:

(a) Bank determines that deposits in U.S. Dollars (in the applicable amounts)
are not being offered to it in the interbank eurodollar market for such Interest
Period, or that by reason of circumstances affecting the interbank eurodollar
market adequate and reasonable means do not exist for ascertaining the
applicable LIBOR, or

(b) Bank determines that the making or funding of LIBOR Rate Loans become
impracticable, then Bank shall forthwith give notice thereof to the Borrower,
whereupon until Bank notifies the Borrower that the circumstances giving rise to
such suspension no longer exist, the obligations of Bank to make LIBOR Rate
Loans shall be suspended.

Section 11.3. Increased Cost and Reduced Return.

(a) If, on or after the date hereof, the adoption of any applicable law, rule or
regulation, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Bank with any request or directive (whether or not having the force of law)
of any such authority, central bank or comparable agency:

(i) shall subject Bank to any tax, duty or other charge with respect to its
LIBOR Rate Loans or its Notes or its obligation to make LIBOR Rate Loans or
shall change the basis of taxation of payments to Bank of the principal of or
interest on its LIBOR Rate Loans or any other amounts due under this Agreement
or any other Loan Document in respect of its LIBOR Rate Loans, or its obligation
to make LIBOR Rate Loans (except for changes in the rate of tax on the overall
net income of Bank imposed by the jurisdiction in which Bank’s principal
executive office is located); or

 

 

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(ii) shall impose, modify or deem applicable any reserve, special deposit or
similar requirement (including, without limitation, any such requirement imposed
by the Board of Governors of the Federal Reserve System, but excluding with
respect to any LIBOR Rate Loans any such requirement included in an applicable
Eurocurrency Reserve Rate) against assets of, deposits with or for the account
of, or credit extended by, Bank or shall impose on Bank or on the interbank
market any other condition affecting its LIBOR Rate Loans or its Notes, or its
obligation to make LIBOR Rate Loans;

and the result of any of the foregoing is to increase the cost to Bank of making
or maintaining any LIBOR Rate Loan or to reduce the amount of any sum received
or receivable by Bank under this Agreement or under any other Loan Document with
respect thereto, by an amount deemed by Bank to be material, then, within
30 days after demand by Bank, the Borrower shall be obligated to pay to Bank
such additional amount or amounts as will compensate Bank for such increased
cost or reduction.

(b) If, after the date hereof, Bank shall have determined that the adoption of
any applicable law, rule or regulation regarding capital adequacy, or any change
therein, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Bank with any request
or directive regarding capital adequacy (whether or not having the force of law)
of any such authority, central bank or comparable agency, has had the effect of
reducing the rate of return on Bank’s capital as a consequence of its
obligations hereunder to a level below that which Bank could have achieved but
for such adoption, change or compliance (taking into consideration Bank’s
policies with respect to capital adequacy) by an amount deemed by Bank to be
material, then from time to time, within 30 days after demand by Bank, the
Borrower shall pay to Bank such additional amount or amounts as will compensate
Bank for such reduction.

(c) A certificate of Bank claiming compensation under this Section 11.3 and
setting forth the additional amount or amounts to be paid to it hereunder shall
be conclusive if reasonably determined. In determining such amount, Bank may use
any reasonable averaging and attribution methods.

Section 11.4. Intentionally Omitted

Section 11.5. Discretion of Bank as to Manner of Funding. Notwithstanding any
other provision of this Agreement, Bank shall be entitled to fund and maintain
its funding of all or any part of its Loans in any manner it sees fit, it being
understood, however, that for the purposes of this Agreement all determinations
hereunder with respect to LIBOR Rate Loans shall be made as if Bank had actually
funded and maintained each LIBOR Rate Loan through the purchase of deposits in
the interbank eurodollar market having a maturity corresponding to such Loan’s
Interest Period and bearing an interest rate equal to LIBOR for such Interest
Period.

 

 

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SECTION 12. EXPENSES AND INDEMNIFICATION.

Section 12.1. Expenses. The Borrower agrees to pay (i) the reasonable costs of
producing this Agreement, the other Loan Documents and the other agreements and
instruments mentioned herein, (ii) any taxes (including any interest and
penalties in respect thereto) payable by Bank (other than taxes based upon
Bank’s net income) on or with respect to the transactions contemplated by this
Agreement (the Borrower hereby agreeing to indemnify Bank with respect thereto),
(iii) the reasonable legal fees, expenses and disbursements incurred in
connection with the preparation or interpretation of the Loan Documents and
other instruments mentioned herein, each closing hereunder, any amendments,
modifications, approvals, consents or waivers hereto or hereunder, or the
cancellation of any Loan Document upon payment in full in cash of all of the
Obligations or pursuant to any terms of such Loan Document for providing for
such cancellation, (iv) the reasonable fees, expenses and disbursements of Bank
or any of its affiliates incurred by Bank or such affiliate in connection with
the preparation or interpretation of the Loan Documents and other instruments
mentioned herein, (v) all reasonable out-of-pocket expenses (including without
limitation attorneys’ fees and costs, which attorneys may be employees of Bank,
and consulting, accounting, appraisal, investment banking and similar
professional fees and charges) incurred by Bank in connection with (A) the
enforcement of or preservation of rights under any of the Loan Documents against
the Borrower or its Subsidiaries or the administration thereof after the
occurrence of a Default or Event of Default and (B) any litigation, proceeding
or dispute whether arising hereunder or otherwise, in any way related to Bank’s
relationship with the Borrower or any of its Subsidiaries.

Section 12.2. Indemnification. The Borrower agrees to indemnify and hold
harmless Bank and its respective affiliates (the “Indemnified Parties”) from and
against any and all claims, actions and suits whether groundless or otherwise
(“Claims”), and from and against any and all liabilities, losses, damages and
expenses of every nature and character (“Losses”) arising out of this Agreement
or any of the other Loan Documents or the transactions contemplated hereby
including, without limitation, (i) any actual or proposed use by the Borrower or
any of its Subsidiaries of the proceeds of any of the Loans, (ii) the reversal
or withdrawal of any provisional credits granted by Bank upon the transfer of
funds from lock box, bank agency or concentration accounts or in connection with
the provisional honoring of checks or other items, (iii)  the Borrower or any of
its Subsidiaries entering into or performing this Agreement or any of the other
Loan Documents or (iv) with respect to the Borrower and its Subsidiaries and
their respective properties and assets, the violation of any Environmental Law,
the presence, disposal, escape, seepage, leakage, spillage, discharge, emission,
release or threatened release of any toxic substances, oil or hazardous
materials or other chemicals or substances regulated by Environmental Laws
(“Hazardous Substances”) or any action, suit, proceeding or investigation
brought or threatened with respect to any Hazardous Substances (including, but
not limited to, claims with respect to wrongful death, personal injury or damage
to property), or (v) any sales, use, transfer, documentary and stamp taxes (but
excluding any taxes based upon or measured by the income or profits of Bank) and
any recording and filing fees paid by Bank and which arise by reason of the
transactions contemplated hereby or by any of the Loan Documents, in each case
including, without limitation, the reasonable fees and disbursements of counsel
and allocated costs of internal counsel incurred in connection with any such
investigation, litigation or other proceeding; provided, however, that the
Borrower shall not be obligated to indemnify any

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Indemnified Party for Claims or Losses arising out of (i) gross negligence or
willful misconduct of the Indemnified Party, or (ii) any breaches by the
Indemnified Party of its obligations under this Agreement or any of the Loan
Documents. In litigation, or the preparation therefor, Bank and its respective
affiliates shall be entitled to select its own counsel reasonably acceptable to
the Borrower and, in addition to the foregoing indemnity, the Borrower agrees to
pay promptly the reasonable fees and expenses of such counsel. If, and to the
extent that the obligations of the Borrower under this Section 12.2 are
unenforceable for any reason, the Borrower hereby agrees to make the maximum
contribution to the payment in satisfaction of such obligations which is
permissible under applicable law.

Section 12.3. Survival. The covenants contained in this Section 12.3 shall
survive payment or satisfaction in full of all other Obligations.

SECTION 13. SURVIVAL OF COVENANTS, ETC.

All covenants, agreements, representations and warranties made herein, in any
Note, in any of the other Loan Documents or in any documents or other papers
delivered by or on behalf of the Borrower or any of its Subsidiaries pursuant
hereto shall be deemed to have been relied upon by Bank, notwithstanding any
investigation heretofore or hereafter made by Bank, and shall survive the making
by Bank of any of the Loans, as herein contemplated, and shall continue in full
force and effect so long as any amount due under this Agreement or any Note or
any of the other Loan Documents remains outstanding or Bank has any obligation
to make any Loans and for such further time as may be otherwise expressly
specified in this Agreement. All statements contained in any certificate
delivered to Bank at any time by or on behalf of the Borrower or any of its
Subsidiaries pursuant hereto or in connection with the transactions contemplated
hereby shall constitute representations and warranties by the Borrower or such
Subsidiary hereunder.

SECTION 14. ASSIGNMENT.

The Borrower shall not assign or transfer any of its rights or obligations under
any of the Loan Documents without the prior written Consent of Bank.

SECTION 15. BANK.

Section 15.1. Consultation with Experts. Bank may consult with legal counsel,
independent public accountants, and other experts selected by it and shall not
be liable for any action taken or omitted to be taken by it in good faith in
accordance with the written advice of such counsel, accountants or experts.

Section 15.2. Liability of Bank; Credit Decision. Neither Bank nor any of its
directors, officers, agents or employees shall be liable for any action taken or
not taken by it in connection with the Loan Documents or in the absence of its
own gross negligence or willful misconduct. Neither Bank nor any of its
directors, officers, agents or employees shall be responsible for or have any
duty to ascertain, inquire into or verify: (i) any statement, warranty or
representation made in connection with this Agreement, any other Loan Document
or any Loan; (ii) the

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performance or observance of any of the covenants or agreements of the Borrower
or any Subsidiary contained herein or in any other Loan Document; (iii) the
satisfaction of any condition specified in Section 7 hereof; or (iv) the
validity, effectiveness, genuineness, enforceability, perfection, value, worth
or collectibility hereof or of any other Loan Document or of any other documents
or writing furnished in connection with any Loan Document; and Bank makes no
representation of any kind or character with respect to any such matter
mentioned in this sentence. Bank may execute any of its duties under any of the
Loan Documents by or through employees, agents, and attorneys-in-fact and shall
not be answerable to the Borrower or any other Person for the default or
misconduct of any such agents or attorneys-in-fact selected with reasonable
care. Bank shall not incur any liability by acting in reliance upon any notice,
consent, certificate, other document or statement (whether written or oral)
believed by it to be genuine or to be sent by the proper party or parties. In
particular and without limiting any of the foregoing, Bank shall have no
responsibility for confirming the accuracy of any compliance certificate or
other document or instrument received by it under the Loan Documents. Bank
acknowledges that based upon information, investigations and inquiries as it
deems appropriate, made its own credit analysis and decision to extend credit to
the Borrower in the manner set forth in the Loan Documents. It shall be the
responsibility of Bank to keep itself informed as to the creditworthiness of the
Borrower and its Subsidiaries.

SECTION 16. NOTICES, ETC.

Except as otherwise expressly provided in this Agreement, all Notices and other
communications made or required to be given pursuant to this Agreement or any
Note shall be addressed to such parties’ Principal Office or such other address
for Notice as such party shall have last furnished in writing to the Person
giving Notice.

SECTION 17. GOVERNING LAW.

THIS AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED THEREIN, EACH OF
THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK
AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF SAID STATE OF NEW YORK (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR
CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE
STATE OF NEW YORK OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE
NONEXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT
BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN SECTION 16. THE
BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE
VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN
INCONVENIENT COURT.

SECTION 18. HEADINGS.

The captions in this Agreement are for convenience of reference only and shall
not define or limit the provisions hereof.

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SECTION 19. COUNTERPARTS.

This Agreement and any amendment hereof may be executed in several counterparts
and by each party on a separate counterpart, each of which when executed and
delivered shall be an original, and all of which together shall constitute one
instrument. In proving this Agreement it shall not be necessary to produce or
account for more than one such counterpart signed by the party against whom
enforcement is sought.

SECTION 20. ENTIRE AGREEMENT, ETC.

The Loan Documents and any other documents executed in connection herewith or
therewith express the entire understanding of the parties with respect to the
transactions contemplated hereby. Neither this Agreement nor any term hereof may
be changed, waived, discharged or terminated, except as provided in Section 22.

SECTION 21. WAIVER OF JURY TRIAL.

The Borrower hereby waives its right to a jury trial with respect to any action
or claim arising out of any dispute in connection with this Agreement, any Note
or any of the other Loan Documents, any rights or obligations hereunder or
thereunder or the performance of which rights and obligations. Except as
prohibited by law, the Borrower hereby waives any right it may have to claim or
recover in any litigation referred to in the preceding sentence any special,
exemplary, punitive or consequential damages or any damages other than, or in
addition to, actual damages. The Borrower (i) certifies that no representative,
Bank or attorney of Bank has represented, expressly or otherwise, that Bank
would not, in the event of litigation, seek to enforce the foregoing waivers and
(ii) acknowledges that Bank has been induced to enter into this Agreement, the
other Loan Documents to which it is a party by, among other things, the waivers
and certifications contained herein.

SECTION 22. CONSENTS, AMENDMENTS, WAIVERS, ETC.

Any Consent or approval required or permitted by this Agreement to be given by
Bank may be given, and any term of this Agreement, the other Loan Documents or
any other instrument related hereto or mentioned herein may be amended, and the
performance or observance by the Borrower or any of its Subsidiaries of any
terms of this Agreement, the other Loan Documents or such other instrument or
the continuance of any Default or Event of Default may be waived (either
generally or in a particular instance and either retroactively or prospectively)
with, but only with, the written Consent of the Borrower and the written Consent
of Bank. No course of dealing or delay or omission on the part of Bank in
exercising any right shall operate as a waiver thereof or otherwise be
prejudicial thereto. No Notice to or demand upon the Borrower shall entitle the
Borrower to other or further Notice or demand in similar or other circumstances.

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SECTION 23. SEVERABILITY.

The provisions of this Agreement are severable and if any one clause or
provision hereof shall be held invalid or unenforceable in whole or in part in
any jurisdiction, then such invalidity or unenforceability shall affect only
such clause or provision, or part thereof, in such jurisdiction, and shall not
in any manner affect such clause or provision in any other jurisdiction, or any
other clause or provision of this Agreement in any jurisdiction.

SECTION 24. EXTENSION OF TERMINATION DATE.

The Borrower may annually request that Bank’s Commitment be extended for an
additional one-year period by providing notice of such request to Bank no later
than 40 days prior to November 30 of each year, commencing November 30, 2007. If
a Bank agrees, in its individual and sole discretion, to extend its Commitment
it will promptly notify the Borrower, in writing, of its decision to do so.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the
date first above written.

 

 

 

LAZARE KAPLAN INTERNATIONAL INC.

 

By: 

 

 

 

--------------------------------------------------------------------------------

 

 

 

William H. Moryto

Vice President and

Chief Financial Officer

 

 

 

 

BANK LEUMI USA

 

By: 

 

 

 

--------------------------------------------------------------------------------

 

 

 

Benjamin Naveh

Executive Vice President

-and-

 

 

 

 

 

 

By: 

 

 

 

--------------------------------------------------------------------------------

 

 

 

David Selove

Vice President

 

STATE OF NEW YORK

}

 

} ss.:

COUNTY OF NEW YORK

}

On the ____ day of October, 2007, before me, the undersigned, personally
appeared WILLIAM H. MORYTO, personally known to me or proved to me on the basis
of satisfactory evidence to be the individual(s) whose name(s) is (are)
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their capacity(ies), and that by his/her/their
signature(s) on the instrument, the individual(s), or the person upon behalf of
which the individual(s) acted, executed the instrument.

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

 

 

Notary Public

 

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STATE OF NEW YORK

}

 

} ss.:

COUNTY OF NEW YORK

}

 

On the ____ day of October, 2007, before me, the undersigned, personally
appeared BENJAMIN NAVEH, personally known to me or proved to me on the basis of
satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed
to the within instrument and acknowledged to me that he/she/they executed the
same in his/her/their capacity(ies), and that by his/her/their signature(s) on
the instrument, the individual(s), or the person upon behalf of which the
individual(s) acted, executed the instrument.

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

 

 

Notary Public

 

STATE OF NEW YORK

}

 

} ss.:

COUNTY OF NEW YORK

}

 

On the ____ day of October, 2007, before me, the undersigned, personally
appeared DAVID SELOVE, personally known to me or proved to me on the basis of
satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed
to the within instrument and acknowledged to me that he/she/they executed the
same in his/her/their capacity(ies), and that by his/her/their signature(s) on
the instrument, the individual(s), or the person upon behalf of which the
individual(s) acted, executed the instrument.

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

 

 

Notary Public

 

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EXHIBIT A

GUARANTY

This Guaranty Agreement (the “Guaranty”) dated as of this 30th day of September,
2007, from each of the parties who have executed this Guaranty (being herein
referred to collectively, as the “Guarantors” and individually, as a
“Guarantor”) in favor of BANK LEUMI USA ("Bank").

WITNESSETH THAT:

WHEREAS, LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation, (the
“Borrower”) and Bank have entered into the Line of Credit Agreement, dated as of
September 30, 2007 (such Line of Credit Agreement as the same may be amended,
modified, supplemented, restated and/or replaced from time to time being
hereinafter referred to as the “Bank Credit Agreement”), pursuant to which Bank
has agreed, subject to certain terms and conditions, to extend credit and make
certain other financial accommodations to the Borrower;

WHEREAS, pursuant to the Bank Credit Agreement, the Bank has required, among
other things, that each Guarantor provide to Bank its payment guarantee of the
credit facilities under the Bank Credit Agreement;

WHEREAS, the Borrower provides each Guarantor that is a subsidiary of the
Borrower (whether directly or indirectly) with substantial financial,
management, administrative, and technical support, and each Guarantor will
benefit, directly or indirectly, from credit and other financial accommodations
extended by the Bank to the Borrower;

WHEREAS, as to each Guarantor that is not a subsidiary of the Borrower, it is in
the best business interest of such Guarantor and its stockholders that the
Borrower receive credit and other financial accommodations extended by the Bank
because of the mutual business interests and endeavors of the Borrower and such
Guarantor;

NOW, THEREFORE, for and in consideration of the benefits accruing to each
Guarantor, the receipt and sufficiency are hereby acknowledged, each Guarantor
hereby makes the following representations and warranties to Bank and hereby
covenants and agrees with Bank as follows:

Section 1. All capitalized terms used herein without definition shall have the
same meanings herein as such terms have in the Bank Credit Agreement.

Section 2. Each Guarantor hereby jointly and severally guarantees to Bank, the
due and punctual payment when due of (a) any and all indebtedness, obligations,
and liabilities of whatsoever kind and nature of the Borrower under the Bank
Credit Agreement (whether arising before or after the filing of a petition in
bankruptcy), whether direct or indirect, absolute or contingent, due or to
become due, and whether now existing or hereafter arising and howsoever held,
evidenced, or acquired, and whether several, joint, or joint and several (the
“Bank Obligations”), (b) any and all reasonable expenses and charges, legal or
otherwise, suffered or

 

 

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incurred by Bank, in collecting or enforcing any of such indebtedness,
obligations, or liabilities or in realizing on or protecting or preserving any
security therefor, if any (all of the foregoing being hereinafter referred to as
the “Guaranteed Indebtedness”). In case of failure by the Borrower to punctually
pay any Guaranteed Indebtedness, each Guarantor hereby jointly and severally
agrees to make such payment or to cause such payment to be made punctually as
and when the same shall become due and payable, whether at stated maturity, by
acceleration or otherwise. All payments hereunder by any Guarantor shall be made
in immediately available and freely transferable funds in Dollars without
set-off, counterclaim or other defense or withholding or deduction of any
nature. Notwithstanding anything in this Guaranty to the contrary, the right of
recovery against a Guarantor under this Guaranty shall not exceed $1.00 less
than the amount which would render such Guarantor’s obligations under this
Guaranty void or voidable under applicable law, including fraudulent conveyance
law.

Section 3. Each Guarantor further jointly and severally agrees to pay on demand
all reasonable out of pocket expenses, legal and/or otherwise (including court
costs and reasonable attorneys’ fees), paid or incurred by Bank in endeavoring
to collect the Guaranteed Indebtedness or any part thereof, or in enforcing or
endeavoring to enforce any Guarantor’s obligations hereunder, or any part
thereof, or in protecting, defending or enforcing this Guaranty in any
litigation, bankruptcy or insolvency proceedings or otherwise.

Section 4. Each Guarantor agrees that, upon demand, such Guarantor shall pay to
Bank for the benefit of Bank the full amount of the indebtedness hereby
guaranteed then due (subject to the right of recovery from such Guarantor
pursuant to the last sentence of Section 2 above) whether or not any one or more
of the other Guarantors shall then or thereafter pay any amount whatsoever in
respect to their obligations hereunder, provided, however, that the aggregate
amount payable by the Guarantors shall in no event exceed the amount due and
owing to Bank by the Borrower.

Section 5. Each Guarantor agrees that such Guarantor will not exercise or
enforce any right of exoneration, contribution, reimbursement, recourse or
subrogation available to such Guarantor against any Person liable for payment of
the indebtedness hereby guaranteed, or as to any security therefor, unless and
until the full amount owing and payable to Bank of the Guaranteed Indebtedness
has been fully paid and satisfied and all commitments by Bank to extend any
Guaranteed Indebtedness shall have expired or otherwise terminated. The payment
by any Guarantor of any amount or amounts to Bank pursuant hereto shall not in
any way entitle any such Guarantor, either at law, in equity or otherwise, to
any right, title or interest (whether by way of subrogation or otherwise) in and
to the Guaranteed Indebtedness or any part thereof or any collateral security
therefor, if any, or any other rights or remedies in any way relating thereto or
in and to any amounts theretofore, then or thereafter paid or applicable to the
payment thereof howsoever such payment may be made and from whatsoever source
such payment may be derived unless and until all of the Guaranteed Indebtedness
and all costs and expenses suffered or incurred by Bank in enforcing this
Guaranty have been paid and satisfied in full and all commitments by Bank to
extend any Guaranteed Indebtedness shall have expired or otherwise terminated,
and any payments made by any Guarantor hereunder and any other payments from
whatsoever source derived on account of or applicable to the Guaranteed
Indebtedness or any

 

 

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part thereof shall be held and taken to be merely payments to Bank reducing pro
tanto the indebtedness hereby guaranteed.

Section 6. This Guaranty is a continuing, absolute and unconditional guaranty of
payment and not merely of collection, and shall remain in full force and effect
as against each Guarantor until all of the Guaranteed Indebtedness shall be
fully paid and satisfied and all commitments by Bank to extend any Guaranteed
Indebtedness shall have expired or have been terminated. Bank may at any time or
from time to time release any Guarantor from its obligations hereunder or effect
any compromise with any Guarantor and no such release or compromise shall in any
manner impair or otherwise affect the obligations hereunder of the other
Guarantors. No release, compromise, or discharge of any one or more of the
Guarantors shall release, compromise or discharge the obligations of the other
Guarantors hereunder.

Section 7. In case of the dissolution, liquidation or insolvency (howsoever
evidenced) of, or the institution of voluntary bankruptcy or receivership
proceedings against the Borrower or the institution of involuntary bankruptcy
proceedings against the Borrower that are not dismissed within sixty (60) days
following the commencement thereto, all of the Guaranteed Indebtedness relating
to the Borrower which is then existing shall immediately become due or accrued
and payable from the Guarantors. All payments received from the Borrower or on
account of the Guaranteed Indebtedness from whatsoever source, shall be taken
and applied as payment on the indebtedness hereby guaranteed, and this Guaranty
shall apply to and secure any ultimate balance that shall remain owing to Bank.

Section 8. The liability hereunder shall in no way be affected or impaired by
(and Bank is hereby expressly authorized to make from time to time, without
notice to any of the Guarantors), any sale, pledge, surrender, compromise,
settlement, release, renewal, extension, impairment, indulgence, alteration,
substitution, exchange, change in, modification or other disposition of any of
the Guaranteed Indebtedness, either express or implied, or of any Loan Document
or any other contract or contracts evidencing any thereof, or of any security or
collateral therefor or any guaranty thereof. The liability hereunder shall in no
way be affected or impaired by any acceptance or release by Bank of any security
for or other guarantors upon any of the Guaranteed Indebtedness, or by any
failure, neglect or omission on the part of Bank to realize upon or protect any
of the Guaranteed Indebtedness, or any collateral or security therefor, if any,
(including, without limitation, impairment of collateral and failure to perfect
security interest in any collateral), or to exercise any lien upon or right of
appropriation of any moneys, credits or property of the Borrower or any
Guarantor, possessed by Bank, toward the liquidation of the Guaranteed
Indebtedness, or by any application of payments or credits thereon. In order to
hold any Guarantor liable hereunder, there shall be no obligation on the part of
Bank, at any time, to resort for payment to the Borrower or to any other
Guarantor, or to any other Person, its property or estate, or resort to any
collateral, security, property, liens or other rights or remedies whatsoever,
and Bank shall have the right to enforce this Guaranty against any Guarantor
irrespective of whether or not other proceedings or steps seeking resort to or
realization upon or from any of the foregoing are pending.

Section 9. All diligence in collection or protection, and all presentment,
demand, protest and/or notice, as to any and everyone, whether or not the
Borrower or the Guarantors or

 

 

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others, of dishonor and of default and of non-payment and of the creation and
existence of any and all of said Guaranteed Indebtedness, and of any security
and collateral therefor, and of the acceptance of this Guaranty, and of any and
all extensions of credit and indulgence hereunder, are expressly waived.

Section 10. The Guarantors waive any and all defenses, claims and discharges of
the Borrower, or any other obligor or guarantor, pertaining to the Guaranteed
Indebtedness, except the defense of discharge by irrevocable payment in full.
Without limiting the generality of the foregoing, the Guarantors will not
assert, plead or enforce against Bank any defense of waiver, release, discharge
in bankruptcy, statute of limitations, res judicata, statute of frauds,
anti-deficiency statute, fraud, incapacity, minority, usury, illegality or
unenforceability which may be available to the Borrower or any other Person
liable in respect of any of the Guaranteed Indebtedness, or any set-off
available against Bank to the Borrower or any such other Person, whether or not
on account of a related transaction. The Guarantors agree that the Guarantors
shall be and remain jointly and severally liable for any deficiency remaining
after foreclosure or other realization on any lien or security interest, if any,
securing the Guaranteed Indebtedness, whether or not the liability of the
Borrower or any other obligor for such deficiency is discharged pursuant to
statute or judicial decision.

Section 11. If any payment applied by Bank to the indebtedness hereby guaranteed
is thereafter set aside, recovered, rescinded or required to be returned for any
reason (including, without limitation, the bankruptcy, insolvency or
reorganization of the Borrower or any other obligor), the Guaranteed
Indebtedness to which such payment was applied shall for the purposes of this
Guaranty be deemed to have continued in existence, notwithstanding such
application, and this Guaranty shall be enforceable as to such of the Guaranteed
Indebtedness as fully as if such application had never been made.

Section 12. The liability of the Guarantors under this Guaranty is in addition
to and shall be cumulative with all other liabilities of the Guarantors after
the date hereof to Bank as a guarantor of the indebtedness hereby guaranteed,
without any limitation as to amount, unless the instrument or agreement
evidencing or creating such other liability specifically provides to the
contrary.

Section 13. Any invalidity or unenforceability of any provision or application
of this Guaranty shall not affect other lawful provisions and applications
hereof, and to this end the provisions of this Guaranty are declared to be
severable. Without limiting the generality of the foregoing, any invalidity or
unenforceability against any Guarantor of any provision or application of the
Guaranty shall not affect the validity or enforceability of the provisions or
application of this Guaranty as against the other Guarantors.

Section 14. Any demand for payment on this Guaranty or any other notice required
or desired to be given hereunder to any Guarantor shall be in writing
(including, without limitation, notice by telecopy) and shall be given to the
relevant party at its address or telecopier number set forth on the appropriate
signature page hereof, or such other address or telecopier number as such party
may hereafter specify by notice to Bank given by United States certified or
registered mail or by telecopy. Each such notice, request or other communication
shall be effective (i) if given

 

 

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by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section and a confirmation of such telecopy has been received
by the sender, or (ii) if given by mail, 5 days after such communication is
deposited in the mail, certified or registered with return receipt requested,
addressed as aforesaid.

Section 15. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE
LAW OF THE STATE OF NEW YORK (without regard to principles of conflicts of laws)
in which state it shall be performed by the Guarantors and may not be waived,
amended, released or otherwise changed except by a writing signed by Bank. This
Guaranty and every part thereof shall be effective upon delivery to Bank,
without further act, condition or acceptance by Bank, shall be binding upon the
Guarantors and upon the legal representatives, successors and assigns of the
Guarantors, and shall inure to the benefit of Bank, their successors, legal
representatives and assigns. The Guarantors waive notice of Bank’s acceptance
hereof. This Guaranty may be executed in counterparts and by different parties
hereto on separate counterparts each of which shall be an original, but all
together to be one and the same instrument.

Section 20. Each Guarantor hereby submits to the nonexclusive jurisdiction of
the United States District Court for the Southern District of New York and of
any State court sitting in New York City, for purposes of all legal proceedings
arising out of or relating to this Guaranty or the transactions contemplated
hereby. Each Guarantor irrevocably waives, to the fullest extent permitted by
law, any objection which it may now or hereafter have to the laying of the venue
of any such proceeding brought in such a court and any claim that any such
proceeding brought in such court has been brought in an inconvenient forum. EACH
GUARANTOR AND, BY ACCEPTING THE BENEFITS OF THIS AGREEMENT, BANK HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED
HEREBY.

[SIGNATURE PAGES TO GUARANTY AGREEMENT TO FOLLOW]

 

 

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IN WITNESS WHEREOF, the Guarantors have caused this Guaranty to be executed and
delivered as of the date first above written.

 

 

 

GUARANTORS:

 

 

 

Address: _____________________________________

 

LAZARE KAPLAN EUROPE INC.
 

_____________________________________________
_____________________________________________

 

By: 

 

 

 

--------------------------------------------------------------------------------

_____________________________________________
Telecopier No. _________________________________

 

 

William H. Moryto
Secretary

 

Address: _____________________________________

 

LAZARE KAPLAN JAPAN INC.
 

_____________________________________________
_____________________________________________

 

By: 

 

 

--------------------------------------------------------------------------------

_____________________________________________
Telecopier No. _________________________________

 

 

William H. Moryto
Secretary

 

Address: _____________________________________

 

LAZARE KAPLAN AFRICA INC.
 

_____________________________________________
_____________________________________________

 

By: 

 

 

--------------------------------------------------------------------------------

_____________________________________________
Telecopier No. _________________________________

 

 

William H. Moryto
Secretary

 

 

-6-

 

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STATE OF NEW YORK

}

 

 

} ss.:

 

COUNTY OF NEW YORK

}

 

On the ____ day of October, 2007, before me, the undersigned, personally
appeared WILLIAM H. MORYTO, personally known to me or proved to me on the basis
of satisfactory evidence to be the individual(s) whose name(s) is (are)
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their capacity(ies), and that by his/her/their
signature(s) on the instrument, the individual(s), or the person upon behalf of
which the individual(s) acted, executed the instrument.

 

 

 

 

 

 

 

 

 

 

 

 

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Notary Public

 

 

-7-

 

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SCHEDULE I

TO

LAZARE KAPLAN INTERNATIONAL INC.

REVOLVING CREDIT AGREEMENT

DATED SEPTEMBER 30, 2007

 

Subsidiary Guarantors

 

Jurisdiction of
Organization

 

Percentage ownership of
the Borrower in each class
of capital stock or other
equity interests

--------------------------------------------------------------------------------

 

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LAZARE KAPLAN EUROPE INC.

 

Delaware

 

100%

LAZARE KAPLAN JAPAN INC.

 

Delaware

 

100%

LAZARE KAPLAN AFRICA INC.

 

Delaware

 

100%

 

 

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EXHIBIT B

_____________, 20__

Bank Leumi USA

562 Fifth Avenue

New York, New York 10036

Attention: David Selove

Re: Additional Borrowing Under Line of Credit

Ladies and Gentlemen:

We refer to our Promissory Note dated September 30, 2007, payable to your order
in the face principal sum of $7,800,000 (the “Note”). We hereby request a
borrowing from you under our revolving credit in the amount of $____________,
which borrowing shall be made against and evidenced by the Note. The borrowing
shall be delivered to our bank account no. [_____/_____] with you. We promise to
pay such borrowing in accordance with the Note or upon termination of the
Agreement or acceleration of the advances in accordance with the Agreement as
hereinafter described.

We hereby elect the following interest rate for said borrowing:

Base Rate Loan: _____; or

Libor Rate Loan: _____, with Interest Period of ____ months.

In order to induce you to make the advance hereby requested, we hereby certify
to you that as of the date hereof, each of our representations and warranties
(except for representations and warranties that are made as of a certain date,
which shall be true and correct in all material respects as of such date) in the
Line of Credit Agreement dated as of September 30, 2007, currently in effect by
and among LAZARE KAPLAN INTERNATIONAL INC., and BANK LEUMI USA (the “Agreement”)
remains true and correct and we are in full compliance with all of the terms and
conditions of the Agreement.

We hereby certify that the proceeds of this borrowing will be used solely for
general working capital purposes in our business as presently conducted in the
ordinary course.

 

 

 

LAZARE KAPLAN INTERNATIONAL INC.

 

By: 

 

 

 

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Authorized Signature

 

 

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EXHIBIT C

PROMISSORY NOTE

 

 

 

New York, New York

$7,800,000

 

September 30, 2007

On December 1, 2008, FOR VALUE RECEIVED, the undersigned, LAZARE KAPLAN
INTERNATIONAL INC., a Delaware corporation (the “Borrower”) promises to pay to
the order of BANK LEUMI USA at its office at 562 Fifth Avenue New York, N.Y.
10036 the principal sum of Seven Million Eight Hundred Thousand Dollars
($7,800,000), or such lesser amount as may be advanced to the Borrower hereon
pursuant to the Agreement hereinafter identified.

The Borrower hereby promises to pay interest (computed on the basis of a year of
360 days for the actual number of days elapsed) on the principal amount from
time to time remaining unpaid hereon from the date hereof until paid at the
rates, and payable in the manner and on the dates, specified in the Agreement.

All loans made by the payee hereof against this Note, and all payments made by
the Borrower on account of the unpaid principal amount hereof, shall be recorded
on the books and records of the holder hereof and endorsed hereon prior to any
transfer hereof, and the Borrower agrees that in any action or proceeding
instituted to collect or enforce collection of this Note, the amount shown as
owing on this Note on the books and records of the holder hereof shall be deemed
prima facie correct.

This Note is issued under the terms and provisions of a Line of Credit Agreement
bearing even date herewith by and among the Borrower and Bank Leumi USA (the
“Agreement”), and this Note and the holder hereof are entitled to all of the
benefits provided for by said Agreement or referred to therein, including the
ability of the Bank to accelerate this payment of their Note upon the occurrence
of an Event of Default, to which Agreement reference is hereby made for a
statement thereof.

This Note shall be construed in accordance with, and governed by, the internal
laws of the State of New York.

The Borrower hereby promises to pay all costs and expenses (including attorneys’
fees) suffered or incurred by the holder hereof in collecting this Note or in
enforcing any rights in any collateral therefor. The Borrower hereby waives
presentment for payment and notice of dishonor.

 

 

 

LAZARE KAPLAN INTERNATIONAL INC.

 

By: 

 

 

 

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William H. Moryto
Vice President and
Chief Financial Officer

 

 

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