Document:

KAI Form 10-Q 2Q 2007 Exhibit 10.3

    Exhibit
      10.3

     

    JPMorgan

    

     

    Date:
      July 30, 2007

    

    Short-Term
      Advised Credit Line Facility Agreement

    

    

    1.         
      Facility

    

    JPMorgan
      Chase Bank, N.A., Shanghai Branch (the “Bank”)
      is
      pleased to make available to Kadant Pulp and Paper Equipment (Yanzhou) Co.,
      Ltd.(凯登制浆濠纸瑂备ø兖州÷有榰公司),
      a
      company incorporated in P.R. China having its principal office at Chuang Ye
      Road
      (N), Yanzhou Economic Development Zone, Yanzhou, Shandong Province, P.R. China
      (the “Borrower”)
      a
      short term advised credit line facility (“Facility”)
      up to
      an aggregate principal amount not at any time exceeding RMB Fifteen million
      Only
      (RMB15,000,000) (the “Advised
      Amount”)
      subject to the terms and conditions of this Agreement.

    

    2.         
      Purpose

     

                   The
      Borrower will apply the proceeds of the Loan towards its general working capital
      requirements. The Loan will not be used for other purposes without the prior
      consent of the Bank provided that the Bank is not obliged to monitor or verify
      the application of the Loan.

    

    
      	
              3.

            	
              Availability

            

    

    

    
      	 	
              The
                Facility offered by the Bank is uncommitted. No Advance will be available
                for drawdown and no Bank Guarantee will be available for issuance
                after
                the expiration of the Drawdown Period after which time the Facility
                will
                automatically lapse. In any event, the availability of the Facility
                even
                during such Drawdown Period will be at the sole discretion of the
                Bank.
                The Bank may, in its sole and absolute discretion, agree to provide
                the
                Facility on such terms and conditions as the Bank deems appropriate.
                

            

    

    

    4.         
      Loans

    

    
      	
              4.1

            	
              Subject
                to the terms and conditions of this Agreement (including without
                limitation, clause 3 hereof), the Facility may be used by one or
                more
                Advances and or Bank Guarantees to the Borrower following receipt
                by the
                Bank of an irrevocable duly completed Request in respect of the particular
                Advance no later than 10:00am (Shanghai) time, three (3) Business
                Days
                immediately preceding the proposed Drawdown Date, provided that the
                aggregate amount of any and all Loans which may from time to time
                be
                outstanding, will not in any case exceed the Advised Amount (unless
                otherwise agreed by the Bank) and provided further that the Term
                of any
                Advance or Bank Guarantee will not exceed the Specified Period. The
                Borrower may at any time during the Drawdown Period re-borrow the
                Loan or
                any part thereof which may at that time have been repaid subject
                to and in
                accordance with the terms and conditions of this
                Agreement.

            

    

    

    4.2        
      The
      Request will not be regarded as having been duly completed unless:-

    

    
      	(a)        
               	
              the
                proposed Drawdown Date is a Business Day falling on or before the
                expiration of the Drawdown Period;

            

    

    

    
      
        
          
          

        

        
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      	(b)        
               	
              the
                amount of the relevant Advance is:

            

    

    

    
      	 	
              (i)

            	
              a
                minimum of RMB One million (RMB1,000,000) and an integral multiple
                of RMB
                One hundred thousand (RMB100,000) ;
                or

            

    

    

    
      	(ii)        
                	
              such
                other amount as the Bank may agree;
                and

            

    

     

    (c)        
      the
      amount selected under sub-clause 4.2(b) does not cause clause 4.1 to be
      contravened.

    

    5.         
      Conditions
      Precedent

    

    
      	
              5.1

            	
              In
                addition to the terms of clause 3, the availability of the Facility
                will
                be subject to the availability of funds, the availability of room
                within
                the Bank’s regulatory ceiling and completion or performance, as
                applicable, of each of the following conditions precedent to the
                satisfaction of the Bank: 

            

    

    

    
      	(a)         
               	
              receipt
                by the Bank of each of the following documents in form and substance
                acceptable to it not less than three (3) Business Days immediately
                preceding the earlier date on which (i) the first Advance is intended
                to
                be made or (ii) the first Bank Guarantee is intended to be issued
                (each
                such document (other than an original) being duly certified by an
                authorised officer of the Borrower as true, complete and
                up-to-date):

            

    

    

    
      	 	
              (i)

            	
              the
                original of this Agreement duly executed by the Borrower;
                

            

    

    

    
      	 	
              (ii)

            	
              copies
                of the constitutional documents of the Borrower and/or other relevant
                corporate documents, and the relevant internal rules of the
                Borrower;

            

    

    

    
      	 	
              (iii)

            	
              copy
                of each of the Borrower’s current valid business license and IC Card
                (Credit Information Card) issued by the People's Bank of
                China;

            

    

    

    
      	 	
              (iv)

            	
              copy
                of the supporting board resolution/s of the Borrower with respect
                to this
                Agreement, authorising the execution, delivery and performance of
                this
                Agreement and any Request;

            

    

    

    
      	 	
              (v)

            	
              the
                names and specimen signatures of the persons authorised to sign,
                on behalf
                of the Borrower, this Agreement, each Request and any other documents
                in
                connection with this Agreement;

            

    

    

    
      	 	
              (vi)

            	
              the
                original of each approval, authorisation, permit, registration and/or
                filing and any other document required by any applicable law for
                the
                Borrower to enter into and perform any and all terms of this Agreement,
                including the drawing of any Loans, issued by the applicable regulatory
                authority, entity or body, including without limitation, the relevant
                government authorities of the People’s Republic of
                China;

            

    

    

    
      	 	
               (vii)

            	
              original
                guarantee issued by Kadant Inc., parent company of the Borrower (the
                “Guarantor”),
                in favour of the Bank, in respect of the obligations of the Borrower
                under
                this Agreement, in form and substance satisfactory to the Bank (the
                “Guarantee”);

            

    

    

    
      
        
          
          

        

        
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              (viii)

            	
              Evidence
                that the Borrower has paid all the stamp duties chargeable on this
                Agreement (including the renewal or extension
                thereof);

            

    

    

    
      	 	
              (ix)

            	
              any
                other authorisation or other document, opinion or assurance which
                the Bank
                considers necessary or desirable in connection with the entry into
                and
                performance of, and the transactions contemplated by, any Finance
                Document
                or for the validity and enforceability of any Finance Document;
                and

            

    

    

    
      	 	
              (x)

            	
              the
                Borrower’s current financial information (including without limitation
                audited annual and unaudited semi-annual financial statements, promptly
                prepared and received), in form and substance satisfactory to the
                Bank;
                which information will be furnished to the Bank as it may from time
                to
                time reasonably request; and

            

    

    

    
      	(b)        
               	
              the
                Bank’s satisfaction with the business affairs, financial condition and
                prospects of the Borrower or the Guarantor; and there being in the
                opinion
                of the Bank no material adverse change in the financial condition
                of the
                Borrower or the Guarantor, in the financial, banking or capital market
                conditions, or in the international financial
                environment.

            

    

    

    
      	
              5.2

            	
              In
                addition to the terms of clauses 3 and 5.1, the availability of each
                Advance or Bank Guarantee subsequent to the initial Advance or Bank
                Guarantee is subject to each of the documents delivered or to be
                delivered
                under clause 5.1 remaining true complete and up to date as at the
                date
                upon which that relevant Advance or Bank Guarantee is made or issued
                by
                the Bank and to the Bank continuing to be satisfied as that date
                in
                relation to each of the matters referred to in sub-clauses 5.1 (b).
                

            

    

    

    6.        
      Borrowings
      in excess of the Advised Amount/Other Purposes

    

    Should
      the Bank, in its sole discretion, allow the aggregate drawings under the
      Facility at any time to exceed the Advised Amount or allow the Facility to
      be
      used for any purposes other than as set out in clause 2, such drawings will
      be
      subject to the same terms and conditions stipulated in this Agreement and for
      the purpose of such drawings, the Borrower shall from time to time at the
      request of the Bank, execute, sign, perfect, do and procure the doing of and
      if
      required, register every document, act or thing as, in the opinion of the Bank,
      may be necessary or desirable for the preservation and the perfection of all
      rights and powers of the Bank. The terms of this clause should not, however,
      be
      construed as agreement on the part of the Bank to make any modifications
      whatsoever to this Agreement or the Facility.

    

    7.        
      Covenants

    

    In
      consideration of the Bank entering into this Agreement, the Borrower undertakes
      to the Bank during the period while any sum is due or payable under this
      Agreement that it shall:

    

    
      	 	
              (i)

            	
              obtain
                and maintain in full force, validity and effect all governmental
                and other
                approvals, authorizations, licences, consents and registrations required
                in connection with the Facility and do or cause to be done all other
                acts
                and things necessary or desirable for the performance of its obligations
                under this Agreement;

               

            

    

    
      	(ii)        
                	
              within
                120 days after the end of each fiscal year, supply to the Bank audited
                financial statements of the Borrower of
                such fiscal year,
                provided that as to Guarantor, the filing of the Guarantor’s Annual Report
                on Form 10-K with the U.S. Securities and Exchange Commission on
                the
                Electronic Data Gathering, Analysis and Retrieval computer system
                (“EDGAR”) shall be deemed to satisfy such requirement;

            

    

    

    
      
        
        

      

      
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      	(iii)         
               	
              cause
                the Guarantor to comply with its obligations under (x) the Credit
                Agreement dated May 9, 2005, entered into between JPMorgan Chase
                Bank,
                N.A. as Agent, the Lenders named therein, the Foreign Subsidiary
                Borrowers
                from time to time parties thereto, and the Guarantor as Borrower,
                (as the
                same may be amended, supplemented, modified or extended from time
                to time,
                the “US Credit Agreement”); (y) any credit agreement that in whole
                substantially replaces the US Credit Agreement and in which JPMorgan
                Chase
                Bank, N.A. is a participant (the “Successor US Credit Agreement”) or (z)
                in the event of the termination of the US Credit Agreement or the
                Successor US Credit Agreement prior to the repayment of the loans
                hereunder, Sections 6, 7 and 8 of the US Credit Agreement or their
                equivalent sections of the Successor US Credit Agreement, as the
                same
                shall be in effect immediately prior to such termination (the agreements
                referred to in subclauses (x), (y) and (z) are collectively referred
                to as
                the “Guarantor
                Credit Agreement”).
                Any event of default which is continuing under the Guarantor Credit
                Agreement shall be deemed an event of default
                hereunder;

            

    

    

    
      	 	
              (iv)

            	
              ensure
                that at all times the claims of the Bank against it under this Agreement
                rank at least pari
                passu
                with the claims of all its other unsecured creditors;

            

    

    

    
      	 	
              (v)

            	
              notify
                the Bank immediately if the Guarantor ceases to hold a beneficial
                interest
                of greater than fifty per cent (50%) in the Borrower;
                

            

    

    

    
      	 	
              (vi)

            	
              on
                demand from the Bank, provide the Bank with full cash cover satisfactory
                to the Bank in immediately available funds in respect of any actual
                or
                contingent liability incurred by the Bank under the Facility;
                and

            

    

    

    
      	 	
              (vii)

            	
              other
                than Permitted Security Interests, not create or allow to exist any
                Security Interest on any of its
                assets;

            

    

    

    other
      than Permitted Security Interests, the Borrower may not:

     

    
      
        	 	
                 
                  (1)

              	
                sell,
                  transfer or otherwise dispose of any of its assets on terms where
                  it is or
                  may be leased to or re-acquired or acquired by it or any of its
                  related
                  entities;

              	 
	 	 	 	 
	 	
                 
                  (2)

              	
                sell,
                  transfer or otherwise dispose of any of its receivables on recourse
                  terms;

              	 
	 	 	 	 
	 	
                 
                  (3)

              	
                enter
                  into any arrangement under which money or the benefit of a bank
                  or other
                  account may be applied, set-off or made subject to a combination
                  of
                  accounts; or

              	 
	 	 	 	 
	 	
                 
                  (4)

              	
                enter
                  into any other preferential arrangement having a similar effect,
                  in
                  circumstances where the transaction is entered into primarily as
                  a method
                  of raising financial indebtedness or of financing the acquisition
                  of an
                  asset.

              	 

      

       

    

    

    
      
        
          
          

        

        
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    8. Representations
      and Warranties

    

    8.1       
      The
      Borrower represents and warrants to the Bank that:

    

    
      	
              a)

            	
              the
                Borrower is an enterprise duly registered and validly existing in
                accordance with the laws of The People's Republic of
                China;

            

    

    

    
      	
              b)

            	
              the
                Borrower, pursuant to applicable laws and its articles of association,
                has
                full power to enter into and perform, and has taken all necessary
                legal
                and other action to authorise the entry into, performance and delivery
                of,
                this Agreement, the relevant documents in connection herewith and
                the
                transactions contemplated by this
                Agreement;

            

    

    

    
      	
              c)

            	
              all
                verifications, business license, approvals, authorizations and other
                documents and permits required or desirable in connection with the
                entry
                into, performance, validity and enforceability of the Finance Documents
                and the transactions contemplated by, and the admissibility in evidence
                of, the Finance Documents have been obtained or effected and are
                in full
                force and effect;

            

    

    

    
      	
              d)

            	
              the
                Finance Documents constitute valid and legally binding obligations
                of the
                Borrower, enforceable in accordance with their respective
                terms;

            

    

    

    
      	
              e)

            	
              the
                Borrower’s obligations under each Finance Document constitute its direct,
                unconditional, unsubordinated and unsecured obligations and rank
                and will
                rank at least pari passu with all its other existing and future unsecured
                and unsubordinated obligations, except for obligations mandatorily
                preferred by law applying to companies
                generally;

            

    

    

    
      	
              f)

            	
              the
                entry into and performance by it of, and the transactions contemplated
                by,
                the Finance Documents do not and will not conflict with (a) any law
                or
                regulation or judicial or official order applicable to the Borrower;
                (b)
                the constitutional documents of the Borrower, or (c) any document
                which is
                binding upon the Borrower or any of its assets;

            

    

    

    
      	
              g)

            	
              it
                will use the Loan according to the purpose provided under this Agreement.
                The Borrower specifically warrants that it will not use any Advance
                outside the legal business scope of its business licence issued by
                the
                State Administration of Industry and Commerce,
                PRC;

            

    

    

    
      	
              h)

            	
              No
                litigation, arbitration or administrative proceedings are current
                or, to
                its knowledge, pending or threatened, which might, if adversely
                determined, have a material adverse effect on the
                Borrower;

            

    

    

    
      	
              i)

            	
              No
                breach of this Agreement by the Borrower has occurred or may result
                from
                the making of any Loan and no other event is outstanding which constitutes
                (or with the giving of notice, lapse of time, determination of materiality
                or the fulfilment of any other applicable condition or any combination
                of
                the foregoing, might constitute) a default under any
                

            

    

    

    
      
        
          
          

        

        
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    document
      which is binding on the Borrower or any of its assets to an extent or in a
      manner which might have a material adverse effect on the Borrower;
      and

    

    
      	
              j)

            	
              All
                amounts payable by the Borrower under the Finance Documents may be
                made
                free and clear of and without deduction for or on account of any
                tax.

            

    

    

    
      	
              8.2

            	
              The
                representations and warranties set out in clause 8.1 (a) are made
                on the
                date of this Agreement and (b) are deemed to be repeated by the Borrower
                on the date of each Request, the date of any Advance being made and
                the
                first day of each Interest Period with reference to the facts and
                circumstances then existing. 

            

    

    

    
      	
              9.

            	
              Repayment

            

    

    

    Each
      Advance or Bank Guarantee together with all interest accrued thereon to the
      date
      of repayment and all fees and other amounts due and payable under this Agreement
      are repayable upon the expiry of the Term of that Advance or Bank Guarantee
      or
      within 3 Business Days of any written demand for repayment thereof made by
      the
      Bank, whichever is earlier.

    

    10.       
      Prepayment

    

    The
      Borrower may prepay the Loan in full or any part thereof subject to the Borrower
      providing the Bank with not less than 15 Business Days’ prior written notice of
      such intention to prepay and obtaining the prior written consent of the Bank
      (such consent shall not be unreasonably withheld or delayed) and any necessary
      government approval thereto. In the event that a prepayment is accepted, the
      Bank reserves the right to charge penalties, break funding costs and fees
      arising from such prepayment at its sole discretion. Break funding costs are
      the
      amounts (if any) determined by the Bank which would indemnify the Bank against
      any loss or liability that it incurs as a consequence of any part of the Loan
      is
      prepaid on a date other than the expiry date of the Term of such Loan and
      includes any costs incurred as a result of the Bank terminating all or any
      part
      of its fixed rate, swap or other hedging arrangements. The Bank will supply
      to
      the Borrower applicable rate of break funding costs after claiming such break
      funding costs. 

     

    11.       
      Modification
      and Cancellation of Facility and Terms

    

    The
      Bank
      has the right to revise, modify or cancel the un-drawn portion of the Facility
      at any time without prior notice to the Borrower. Further, the Bank has the
      right to review and supervise the Facility drawn by the Borrower and shall
      be
      entitled to accelerate the Loan pursuant to the provisions of this Agreement
      and
      PRC laws, rules and regulations. 

    

    12.       
      Interest
      and Fees

    

    12.1     
       Interest
      Periods

    

    Each
      Interest Period will be three months or such periods as the Bank and Borrower
      may mutually agree from time to time, provided that the first Interest Period
      for any Advance will commence on and include its Drawdown Date and extend up
      to
      and excluding the immediately succeeding Interest Settlement Date. Each
      subsequent Interest Period for that Advance will commence on and include
      Interest Settlement Date of the immediately 

    

    
      
        
          
          

        

        
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    preceding
      Interest Period for that Advance and extend up to and excluding the immediately
      succeeding Interest Settlement Date. If an Interest Period for a particular
      Advance would otherwise
      overrun the expiry date of the Term of that Advance, it will be shortened so
      that it ends on that expiry date.

    

    12.2    
       Interest

    

    
      	(i)           
               	
              The
                rate of interest per annum on each Advance shall be ninety per cent
                (90) %
                of the applicable short term interest rate for an RMB loan having
                a term
                equal to the Term of that Advance as published by The People's Bank
                of
                China prevailing as at the Drawdown Date of that
                Advance.

            

    

    

    
      	(ii)         
                	
              The
                Borrower shall pay the due and payable interest for each Advance on each
                Interest Settlement Date, and upon the expiry date of the Term of
                that
                Advance.

            

    

    

    
      	(iii)           	
              If
                the Borrower fails to pay any sum on its due date for payment under
                this
                Agreement or applies the proceeds of the Loan other than the purposes
                provided in clause 2 hereunder, the Borrower will pay interest at
                the rate
                per annum determined by the Bank according the regulations issued
                by the
                People's Bank of China.

            

    

    

    12.3      
      Commission

    

    The
      Borrower shall, in respect of each Bank Guarantee requested by it, pay to the
      Bank a commission in the amount of the higher of the following: (i) RMB1,200
      flat; and (ii) at the rate of 1.25% per annum on the maximum actual and
      contingent liability of the Bank under that Bank Guarantee. Such commission
      shall be paid on the issuance date of that Bank Guarantee.

    

    12.4      
      Fees
      for
      Bank Guarantee

    

    Notwithstanding
      otherwise provided in this Agreement, if the Borrower intends to amend any
      Bank
      Guarantee, the
      Borrower shall pay to the Bank an amendment fee in the amount of RMB600 flat.
      If
      any cable fee or postage or such other fees as customary from time to time
      is
      incurred by the Bank, the Borrower shall pay to the Bank a cable fee in the
      amount of RMB150 per page and shall reimburse the Bank with all postage or
      such
      other fees incurred. 

    

    13.       
      Set-Off 
      

    

    With
      notice to the Borrower and the Guarantor, the Bank may set off credits in any
      accounts at any time held by the Borrower with the Bank or any of its affiliates
      located anywhere in the world, whether in transit or for safe keeping, custody,
      pledge, transmission, collection, deposit or otherwise, which set off may be
      exercised at any time in satisfaction of all or any part of the amounts due
      and
      payable by the Borrower under the Facility. 

    

    The
      Borrower waives any rights of set-off it may have at law or otherwise against
      the Bank with respect to amounts owed by the Borrower to the Bank from time
      to
      time.

    

    
      
        
          
          

        

        
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    14.       
      Increased
      Costs

    

    The
      Borrower will forthwith on demand by the Bank pay to the Bank the amount of
      any
      increased cost incurred by the Bank as a result of the introduction of, or
      any
      change in, the interpretation or application of, any law or regulation or
      compliance with any regulation made after the date of this Agreement provided
      that this clause 14 does not apply to any change in the rate of, or change
      in
      the basis of calculating, tax on the overall net income of the Bank or any
      of
      its branches.

    

    The
      term
“increased cost” when used in this Agreement means an additional cost incurred
      by the Bank as a result of it having entered into, or performing, maintaining
      or
      funding its obligations under the Finance Documents or a reduction in any amount
      payable to the Bank or in the effective return to the Bank under this Agreement
      (or to the extent that it is attributable to this Agreement) on its capital
      but
      does not include any increased cost compensated for under clause
      15.

    

    15.      
      Taxes

    

    All
      payments made by the Borrower under the Finance Documents will be made without
      any deduction and free and clear of and without deduction for or on account
      of
      any taxes, except to the extent that the Borrower is required by law to make
      payment subject to any taxes. If any tax or amounts in respect of tax must
      be
      deducted, or any other deductions must be made, from any amounts payable or
      paid
      by the Borrower under the Finance Documents, the Borrower will pay such
      additional amounts as may be necessary to ensure that the Bank receives a net
      amount equal to the full amount which it would have received had payment not
      been made subject to tax or any other deduction. The Borrower will:

    

    
      	a)        
                	
              pay
                when due all taxes required by law to be deducted or withheld by
                it from
                any amounts paid or payable under the Finance
                Documents;

            

    

    

    
      	b)        
                	
              within
                15 days of the payment being made, deliver to the Bank evidence
                satisfactory to the Bank (including all relevant tax receipts) that
                the
                payment has been duly remitted to the appropriate authority;
                and

            

    

    

    
      	c)          
               	
              forthwith
                on demand indemnify the Bank against any loss or liability which
                the Bank
                incurs as a consequence of the payment or non-payment of those
                taxes.

            

    

     

    16.      
       Indemnity

    

    The
      Borrower will indemnify the Bank against any cost, liability, damage, loss
      or
      expense (including without limitation legal fees, costs and expenses) which
      the
      Bank may suffer, incur or sustain directly or indirectly, as a consequence,
      of
      or in connection with (a) any default or shortfall in payment by the Borrower
      of
      any sum due under this Agreement (including where the amount received by the
      Bank in a currency other than RMB when converted into RMB at a market rate
      in
      the usual course of the Bank’s business is less than the amount owed in RMB
      under this Agreement);(b) any prepayment of the Loan or an overdue amount being
      received otherwise than on the Interest Settlement Date; (c) a change in
      currency of the PRC; (d) any breach by the Borrower of any term of this
      Agreement or (e) an Advance not being made for any reason (excluding any default
      or negligence of the Bank) after a Request has been delivered or made by the
      Borrower. 

    

    
      
        
          
          

        

        
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    17.    
       
      Expenses

     

    The
      Borrower will pay the Bank upon demand all costs, charges and expenses
      (including any stamp taxes) incurred by the Bank in connection with the
      negotiation,   preparation,  execution, performance and
      enforcement of this Agreement (or any amendment, variation, extension or renewal
      thereof).

    

    18.        Disclosure

    

    The
      Bank
      may disclose confidential information and documents relating to the Borrower
      in
      connection with the Facility which are in the Bank’s possession if required
      under court orders or in order to comply with requests or orders made under
      applicable laws and regulations or in order to, in the Bank’s sole and absolute
      discretion, pass on such information and documents to bank examiners, the Bank’s
      head office and other branch offices, its affiliates and associates, assignees
      and prospective assignees and the Bank’s auditors, counsel and other
      professional advisers.

     

    
      	19.   
                    	
              SAFE
                registration upon claim

            

    

     

    Unless
      otherwise provided by the applicable laws and regulations, if the Guarantee
      is
      claimed, the Borrower shall register with State Admin. of Foreign Exchange
      for
      actual foreign debt registration according to the Notice regarding the
      Perfection of Foreign Debt Management (《国家外汇管理局关于完善外债管理有关樒杨的濦知》)issued
      by State Admin. of Foreign Exchange on 21 October 2005, whereby the same quota
      system (total investment of the Borrower minus registered capital of the
      Borrower) shall apply.

    

     

    
      	20.        
               	
              Notices

            

    

     

    
      	
              20.1

            	
              General
                Requirements for Notices

            

    

     

    
      	
              a)

            	
              Any
                communication in connection with this Agreement must be in writing
                and,
                unless otherwise stated, may be given in person, by post or
                fax.
                All communications and notices shall be written in English, or in
                Chinese
                if any law or regulation of the PRC requires, provided that any such
                notice provided to the Guarantor shall be translated into
                English.

            

    

     

    
      	
              b)

            	
              Unless
                it is agreed to the contrary, any consent or agreement required under
                this
                Agreement must be given in writing.

            

    

     

    
      	
              c)

            	
              In
                the event that (i) the Borrower failures to pay on the due date any
                amount
                payable by it under this Agreement; (ii) the Bank declares that all
                or
                part of any amounts outstanding under the Facility are immediately
                due and
                payable; (iii) the Bank provides any notice or communication relating
                to
                the Guaranty; or (iv) the Bank provides any notice or consent relating
                to
                prepayment and break funding costs under Section 10, the notices addressed
                to the Borrower in relation to the above-mentioned matters shall
                be copied
                to the Guarantor via air courier and provided in
                English.

            

    

     

    

    
      
        
          
          

        

        
          9

          
            

          

        

        
          
          

          JPMorgan

        

      

    

     

    
      	
              20.2

            	
              Contact
                details 

            

    

     

    The
      contact details of the Borrower are: 

    

    Address:           
      Chuang
      Ye
      Road (N)

    Yanzhou
      Economic Development Zone

    Yanzhou,
      Shandong Province

    P.R.
      China

    Fax
      number:        0537-2073189

    Attention:         
      Chairman

    

     

    The
      contact details of the Guarantor are: 

    

    Address:           
      One
      Technology Park Drive

    Westford,
      MA 01886 USA

    Fax
      number:        
      978-635-1593

    Attention:          
      Treasurer

     

    The
      contact details of the Bank are:

    

    Address:  31F,
      HSBC
      Building

    1000
      Lu
      Jia Zui Ring Road 

    Shanghai
      200120

    People’s
      Republic of China

    Fax
      number:       
      86-21-6160
      2707

    Attention:        
       Betty
      Wang/Christine
      Lin/Carol CZ Cai

    Commercial
      Banking

     

    Any
      party
      may change its contact details by giving five (5) Business Days' notice to
      the
      other parties.

    

    21.          Miscellaneous

    

    21.1      
      Certificates

    

    A
      certificate by the Bank shall be conclusive evidence of the indebtedness of
      the
      Borrower under this Agreement save in the case of manifest error on the Bank’s
      part.

    

    21.2      
      No
      waivers

    

    Any
      delay
      or omission by the Bank in enforcing its rights under this Agreement will not
      constitute a waiver of any of its rights at any time.

    

    21.3      
      Assignment,
      Transfer and Participation

    

    The
      Borrower hereby consents that the Bank may at any time assign or transfer to
      one
      or more banks or other entities all or a portion of its rights and/or
      obligations under the Facility and any Finance Documents without any further
      consent from the Borrower in relation thereto. 

    

    
      
        
          
          

        

        
          10

          
            

          

        

        
          
          

          JPMorgan

        

      

    

    

    The
      Borrower hereby consents that the Bank may at any time sell participations
      to
      one or more banks or other entities of all or a portion of its rights and
      obligations under the Facility without any further consent from the Borrower
      in
      relation thereto.

    

    The
      Bank
      may, in connection with (i) any assignment, or any proposed assignment, under
      the Facility; (ii) any participation, or any proposed participation, under
      the
      Facility; (iii) the purchase or sale of any credit insurance or any other
      contractual protection or hedging with respect to the Borrower’s obligations
      under the Facility; or (iv) the processing and management of data relating
      to
      the Facility, disclose to third parties any information relating to the Borrower
      furnished to the Bank by the Borrower, provided that, prior to such disclosure,
      such third party shall agree in writing to preserve the confidentiality of
      any
      confidential information relating to the Borrower received by it from the
      Bank.

    

    The
      Borrower may not assign, transfer or otherwise dispose of any of its rights,
      benefits or obligations under the Facility.

    

    21.4.     
      Severance

    

    If
      at any
      time any of the terms and conditions of the Offer Letter is or becomes illegal,
      invalid or unenforceable in any respect, the legality, validity or
      enforceability of the remaining terms and conditions shall not be affected
      thereby.

    

    21.5      
      Language

    

    This
      Agreement is written in both Chinese and English. If there is any inconsistency
      between the two versions in the interpretation or otherwise, the English version
      shall prevail.

    

    22.       
      Governing
      Law and Jurisdiction

    

    This
      Agreement shall be governed by and construed in all respects in accordance
      with
      the laws of the PRC and each of the parties to this Agreement, for the benefit
      of the Bank, hereby submits to the non-exclusive jurisdiction of the courts
      of
      the PRC.

    

    23.       
      Effectiveness

    

    This
      Agreement shall be effective on the date that the authorized representatives
      of
      the Bank and the Borrower have duly executed this Agreement (If the execution
      by
      the Bank and the Borrower is not at the same date, the effective date shall
      be
      the later date that this Agreement is executed). 

    

    24.       
      Definitions
      and Interpretation

    

    24.1      
      The
      following terms have the following meanings when used in this
      Agreement:

    

    “Advance”
      means the borrowing under the Facility of all or any portion of the Advised
      Amount by the Borrower or as the context may require, the principal amount
      of
      such borrowing;

    

    “Advised
      Amount” means RMB Fifteen million Only (RMB15,000,000);

    

    
      
        
          
          

        

        
          11

          
            

          

        

        
          
          

          JPMorgan

        

      

    

     

    “Agreement”
      means the agreement constituted by the acceptance by the Borrower of the terms
      and conditions of this Offer Letter, as the same may be amended, varied or
      extended from time to time;

    

    “Business
      Day” means a day (other than a Saturday, a Sunday or a public holiday) on which
      Banks are open for general business in Shanghai;

    

    “Drawdown
      Date” means in relation to any Advance, the date of that Advance or in relation
      to any Bank Guarantee, the date of issuance of that Bank Guarantee;

    

    “Drawdown
      Period” means in the period from the date of acceptance of this Offer Letter by
      the Borrower up to and including eleven (11) calendar months from the date
      of
      such acceptance;

    

    “Facility”
      means the
      short
      term advised credit line facility consisting of performance/financial guarantee
      (the “Bank
      Guarantee”),
      and
      Advance made available under this Agreement;

    

    “Finance
      Documents” means this Agreement, the Guarantee referred to in clause
      5.1(a)(vii); each Request and any other document designated as such by the
      Bank;

    

    “First
      Drawdown Date” means the date upon which the Borrower makes the first drawdown
      of the Loan under this Agreement;

    

    “Interest
      Period” means each period determined in accordance with clause
      12.1;

    

    “Interest
      Settlement Date” means in relation to any Advance, the 20th
      day of
      the last calendar month of each calendar quarter falling during each Interest
      Period for that relevant Advance provided that if such day is not a Business
      Day, the Business Day immediately after that day;

    

    “Loan”
      means the aggregate principal amount of the borrowing from time to time under
      any Advance or Bank Guarantee by the Borrower under this Agreement or the
      aggregate principal amount outstanding of that borrowing;

    

    “Offer
      Letter” means this letter;

    

    “Permitted
      Security Interest” means:

    

    
      	 	
              (i)

            	
              any
                Security Interest comprising a netting or set-off arrangement entered
                into
                by the Borrower in the ordinary course of its banking arrangements
                for the
                purpose of netting debit and credit
                balances;

            

    

    

    
      	 	
              (ii)

            	
              any
                Security Interest arising by operation of law and in the ordinary
                course
                of business; 

            

    

    

    (iii)        
      any
      Security Interest entered into pursuant to a Finance Document;

    

    
      	 	
              (iv)

            	
              any
                Security Interest created over real property (whether by mortgage
                or lien)
                owned by the Borrower and aggregate principal amount secured by all
                such
                

            

    

    

    
      
        
          
          

        

        
          12

          
            

          

        

        
          
          

          JPMorgan

        

      

    

    

    Security
      Interest does not, at any time, exceed RMB10,000,000 (or its equivalent in
      any
      other currencies);

    

    
      	 	
              (v)

            	
              any
                Security Interest created over the fixed assets acquired by the Borrower
                provided that aggregate principal amount secured by all such Security
                Interest is for the purpose of acquiring such fixed assets and does
                not,
                at any time, exceed RMB14,000,000 (or its equivalent in any other
                currencies); 

            

    

    

    
      	 	
              (vi)

            	
              any
                Security Interests created over assets of the Borrower and aggregate
                principal amount secured by all such Security Interest does not,
                at any
                time, exceed RMB5,000,000 (or its equivalent in any other currencies);
                and

            

    

    

    (vii)      
      any
      other Security Interest with the prior written consent of the Bank;

    

    “PRC”
      means The People’s Republic of China;

    

    “Request”
      means a request in writing made by the Borrower for an Advance, in the form
      of
      the Schedule to this Agreement;

    

    “RMB”
      means the lawful currency of the PRC; 

    

    “Security
      Interest” means any mortgage, pledge, lien, charge, assignment, hypothecation or
      security interest or any other agreement or arrangement having a similar effect,
      whether created pursuant to PRC law or any other applicable law.

    

    “Term”
      means the term of each Advance, not exceeding the Specified Period, as specified
      in the Request delivered in relation to that Advance and agreed by the Bank;
      and

    

    “Specified
      Period” means in relation to each Advance or Bank Guarantee, the period of one
      year from and including the date of acceptance of this Offer Letter by the
      Borrower.

    

    
      	
              24.2

            	
              In
                this Agreement, to the extent not inconsistent with the subject or
                context, words importing the singular number shall include the plural
                number and vice versa, words importing any gender shall include other
                genders; references to “persons”
                shall include any body of persons, corporate or unincorporate and
                references to a “year”
                will mean a period of 365 days. The headings are inserted for reference
                only and shall not affect the construction of the terms and conditions
                of
                this Agreement.

            

    

    

    
      
        
          
          

        

        
          13

          
            

          

        

        
          
          

          JPMorgan

        

      

    

    

    Kindly
      acknowledge your acceptance and agreement with the terms of this Offer Letter
      by
      signing where indicated below and returning your duly completed acknowledgement
      to the Bank at the place indicated above. We look forward to being of service
      to
      you.

    

    Yours
      faithfully

    

    

    /s/
      Q.C.
      Hua.......[Legal Chop]

    JPMorgan
      Chase Bank, N.A.

    Shanghai
      Branch

    Name:
      Q.C. Hua 

    Title:
      Managing Director & General Manager

    Date:
      July 30, 2007

    

    

    Acknowledged
      and agreed:

    

    

    /s/
      Peter
      J. Flynn........[Legal Chop]

    For
      and
      on behalf of 

    Kadant
      Pulp and Paper Equipment (Yanzhou) Co., Ltd. 

    Name:
      Peter J. Flynn

    Title:
      Legal Representative

    Date:
      July 30, 2007

    

    

    
      
        
          
          

        

        
          14

          
            

          

        

        
          
          

          JPMorgan

        

      

    

    

    SCHEDULE

    

    FORM
      OF REQUEST

    

    

    To:       
      JPMorgan
      Chase Bank,N.A.

    Shanghai
      Branch

    

    From:    
      Kadant
      Pulp and Paper Equipment (Yanzhou) Co., Ltd. 

    

    Short
      Term Advised Credit Line Facility Agreement dated July 30,
      2007

    

    1.        
      We
      wish to borrow a Loan as follows:-

    

    (a)       
      Drawdown
      Date: [        ]

    (b)       Type:
      Advance / Bank Guarantee

    (c)      
      Amount:
      [        ]

    (d)      
      Payment
      instructions / Beneficiary: [       
]

    (e)     
       Term:
      [        ]

    

    

    
      	2.      
               	
              We
                confirm that each condition specified in Clause 5 is satisfied on
                the date
                of this Request.

            

    

    

    
      	3.      
               	
              This
                request is irrevocable.

            

    

    

    

    By:

    

    

    [       
      ]

    Authorised
      Signatory

    

    
      
        
        

      

      
        15KAI Form 10-Q 2Q 2007 Exhibit 10.4

    

      Exhibit
        10.4

      

      EXECUTION
        COPY

      GUARANTY

      

      Dated
        as
        of July 30, 2007.

      

      Guaranty.
        To
        induce
JPMORGAN
        CHASE BANK, N.A.,
        SHANGHAI BRANCH, with
        an
        address of
        31F,
        HSBC
        Tower, 1000 Lu Jia Zui Ring Road, Shanghai, P.R. China, 200120 Attn: Betty
        Wang,
        Fax No.:8621-61602707, its successors and assigns, directly or through any
        of
        its branches, offices, subsidiaries, or affiliates (collectively, the
“Bank”),
        to
        provide: (a) a credit facility in
        the
        original principal amount of up to
        RMB
        Forty Million (RMB40,00,000) to be entered into with KADANT
        JINING LIGHT MACHINERY CO., LTD,
        a
        company incorporated in Jining, China (“K-Jining”)
        pursuant to a RMB40,000,000 Term Loan Agreement, among K-Jining and the Bank
        (“Term
        Credit Agreement”),
        (b) a
        credit facility in
        the
        original principal amount of up to
        RMB
        Forty Five Million (RMB45,00,000) to
        K-Jining pursuant
        to a Short-Term Advised Credit Line Facility Agreement, dated as of July
        30,
        2007, among K-Jining and the Bank (“364
        Day KJ Credit Agreement”),
        (c) a
        credit facility in
        the
        original principal amount of up to
        RMB
        Fifteen Million (RMB15,00,000) to KADANT
        PULP AND PAPER EQUIPMENT (YANZHOU) CO. LTD. ,
        a
        company incorporated in Yanzhou, China (“K-Yanzhou”)
        pursuant to a Short-Term Advised Credit Line Facility Agreement, dated as
        of
        July 30, 2007, among K-Jining and the Bank (“364
        Day KY Credit Agreement”)
        and
        (d) foreign exchange facilities and cash management services to KADANT
        JOHNSON (WUXI) TECHNOLOGY CO. LTD.,
        a
        company incorporated in Wuxi, China (“K-Wuxi”;
        together with K-Jining and K-Yanzhou, the “Borrowers”)
        pursuant to (i) in the case of foreign exchange facilities, any agreement
        with
        respect to any swap, forward, future or derivative transaction or option
        or
        similar agreement involving, or settled by reference to, one or more rates,
        currencies, commodities, equity or debt instruments or securities, or economic,
        financial or pricing indices or measures of economic, financial or pricing
        risk
        or value or any similar transaction or any combination of these transactions
        (“Foreign
        Exchange Facility”)
        and
        (ii) in the case of cash management services, any agreement providing for
        treasury, depositary or cash management services, including in connection
        with
        any automated clearing house transfers of funds or any similar transactions
        (“Cash
        Management Facility”;
        together with the Term Credit Agreement, 364 Day KJ Credit Agreement, 364
        Day KY
        Credit Agreement and Foreign Exchange Facility, the “Loan
        Documents”),
        and
        because the undersigned (the “Guarantor”)
        has
        determined that executing this Guaranty is in its interest and to its financial
        benefit, the Guarantor absolutely, unconditionally and irrevocably guarantees
        to
        the Bank, as primary obligor and not merely as surety, the full and prompt
        payment of the Liabilities when due (whether on demand, at stated maturity,
        by
        acceleration or otherwise) in accordance with the Facility Documents. The
        Guarantor will not only pay the Liabilities when due in accordance with the
        Facility Documents, but will also reimburse the Bank for any fees, charges,
        costs and expenses, including reasonable attorneys' fees, that the Bank may
        pay
        in collecting from the Borrower or the Guarantor, and for liquidating any
        Collateral or this Guaranty. Subject to the provisions in “Payments Generally”
below, the Guarantor’s obligations under this Guaranty shall be payable in the
        currency or currencies specified in the Facility Documents (as defined below).
        Unless otherwise defined herein, terms used in this Guaranty have the meanings
        provided in the Loan Documents. As used herein, the term “Collateral” in this
        Guaranty means all real or personal property of each of the Borrowers described
        in (if any) all security agreements, pledge agreements, mortgages, deeds
        of
        trust, assignments, or other instruments previously, concurrently, or hereafter
        executed in connection with any of the Liabilities.

      

      Liabilities.
        The
        term
“Liabilities” in this Guaranty means all obligations, indebtedness, and
        liabilities of the Borrowers to the Bank, now existing or later arising,
        related
        to certain credit facilities being provided by the Bank to each of the
        Borrowers, as described in the Loan
        Documents;
        all
        monetary obligations of each of the Borrowers to the Bank incurred or accrued
        during the pendency of any bankruptcy, insolvency, receivership

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      or
        similar proceedings related to the Loan Documents, regardless of whether
        allowed
        or allowable in such proceeding, and all renewals, extensions, modifications,
        consolidations or substitutions of any of the foregoing, whether the Borrowers
        may be liable jointly with others or individually liable as a debtor, maker,
        co-maker, drawer, endorser, guarantor, surety or otherwise, and whether
        voluntarily or involuntarily incurred, due or not due, absolute or contingent,
        direct or indirect, liquidated or unliquidated.
        The
        Guarantor acknowledges that, without limiting the scope of the foregoing
        or any
        other provision of this Guaranty, including any provisions in the paragraph
        below captioned “Payments Generally,” the term “Liabilities” in addition to the
        above definition, includes, but is not limited to, any
        loss
        that the Bank may incur on account of prohibitions or limitations that may
        exist
        under the laws or regulations of the State Administration of Foreign Exchange
        or
        other regulatory authorities in the Peoples Republic of China regarding the
        conversion into RMB of U.S. dollars that may be paid by the Guarantor to
        the
        Bank to satisfy any of the Guarantor’s obligations under this
        Guaranty.

      

      Facility
        Documents.
        All
        writings evidencing, supporting, securing, or otherwise executed in connection
        with any of the Liabilities, including but not limited to this Guaranty and
        the
        Loan Documents, as such writings may be amended, modified, replaced, or
        supplemented from time to time, are referred to collectively as the
“Facility
        Documents”
and
        individually as a “Facility
        Document”.

      

      Continued
        Reliance.
        Subject
        to the provisions in “Reinstatement” below, this Guaranty shall in all respects
        be a continuing, absolute, unconditional and irrevocable guaranty of payment,
        and shall remain in full force and effect until the Liabilities under the
        Loan
        Documents by the Borrowers have been paid and satisfied in full. In the event
        of
        any future termination for any reason (including as a result of a prepayment
        by
        the Guarantor) of (i) the Credit
        Agreement, dated as of May 9, 2005 (as may be amended, supplemented, modified
        or
        extended from time to time), among the Guarantor, the Foreign Subsidiary
        Borrowers from time to time parties thereto, the several Lenders from time
        to
        time parties thereto and JPMorgan Chase Bank, N.A., as Administrative Agent
        (the
“ US Credit Agreement”) or (ii) any credit agreement that in whole substantially
        replaces the Credit Agreement and in which JPMorgan Chase Bank, N.A., is
        a
        participant (the “Successor US
        Credit Agreement”),
        prior
        to the satisfaction of all the obligations as provided for in the Loan
        Documents, then Sections 6, 7 and 8 of the US Credit Agreement or their
        equivalent sections of the Successor US Credit Agreement, as the same shall
        be
        in effect immediately prior to such termination, shall be incorporated herein
        by
        reference and shall remain in full force and effect until the Liabilities
        under
        the Loan Documents by the Borrowers have been paid and satisfied in
        full.

      

      Bank's
        Right of Setoff. The
        Bank
        is authorized to setoff and apply, all Accounts, Securities and Other Property,
        and Bank Debt against any and all obligations of the Guarantor under this
        Guaranty in accordance with the provisions of this paragraph. Subject to
        applicable law, this right of setoff may be exercised at any time and from
        time
        to time, without prior notice to the Guarantor, after demand has been made
        under
        any of the Liabilities (if any such Liabilities are payable on demand) or
        after
        a default has occurred and is continuing under any of the Liabilities and
        there
        has been a failure to cure any such default within any applicable cure period,
        in each case, the giving effect to any grace or cure periods for payments
        under
“Payments Generally” below. This security interest and right of setoff may be
        enforced or exercised by the Bank regardless of whether or not the Bank has
        made
        any demand on the Guarantor under this paragraph or whether the Liabilities
        are
        contingent, matured, or unmatured, so long as demand has been made under
        any of
        the Liabilities (if any such Liabilities are payable on demand) or after
        a
        default has occurred and is continuing under any of the Liabilities and there
        has been a failure to cure any such default within any applicable cure period.
        Any delay, neglect or conduct by the Bank in exercising its rights under
        this
        paragraph will not be a waiver of the right to exercise this right of setoff.
        The rights of the Bank under this paragraph are in addition to other rights
        the
        Bank may have by law. In this paragraph: (a) the term “Accounts” means any and
        all accounts and deposits of the Guarantor (whether general, special, time,
        demand, provisional or final), in U.S. dollars or any other currency, regardless
        of whether such accounts or deposits are then due to the Guarantor, at any
        time
        held by the Bank or any Lending Installation (as defined below) (including
        all
        Accounts held 

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      

      jointly
        with another, but excluding any IRA or Keogh Account, or any trust or other
        type
        of Account in which a right of setoff would be prohibited by law); (b) the
        term
“Securities and Other Property” means any and all securities and other property
        of the Guarantor in the custody, possession or control of the Bank or any
        Lending Installation (other than property held by the Bank or any Lending
        Installation in a fiduciary capacity); and (c) the term “Bank Debt” means all
        indebtedness at any time owing by the Bank or any Lending Installation to
        or for
        the credit or account of the Guarantor.

      

      Remedies.
        If
        the
        Guarantor fails to pay any amount owing under this Guaranty, the Bank shall
        have
        all of the rights and remedies provided by law or under any other agreement.
        The
        Guarantor is liable to the Bank for all reasonable costs and expenses of
        any
        kind incurred in the making and collection of this Guaranty, including without
        limitation reasonable attorneys' fees and court costs. These costs and expenses
        include without limitation any costs or expenses incurred by the Bank in
        any
        bankruptcy, reorganization, insolvency or other similar proceeding.

      

      Permissible
        Actions. If
        any
        monies become available from any source other than the Guarantor that the
        Bank
        can apply to the Liabilities, the Bank may apply them in any manner it chooses,
        including but not limited to applying them against obligations, indebtedness
        or
        liabilities which are not covered by this Guaranty. The Bank may take any
        action
        against the Borrower, the Collateral, or any other person liable for any
        of the
        Liabilities. The Bank may release the Borrower or anyone else from the
        Liabilities, either in whole or in part, or release the Collateral, and need
        not
        perfect a security interest in or lien on the Collateral. The Bank does not
        have
        to exercise any rights that it has against the Borrower or anyone else, or
        make
        any effort to realize on the Collateral or any other collateral for the
        Liabilities, or exercise any right of set-off. The Guarantor authorizes the
        Bank, without notice or demand and without affecting the Guarantor's obligations
        hereunder, from time to time, to: (a) renew, modify, compromise, extend,
        accelerate or otherwise change the time for payment of, or otherwise change
        the
        terms of the Liabilities or any part thereof, including increasing or decreasing
        the rate of interest thereon; (b) release, substitute or add any one or more
        endorsers, Guarantor or other guarantors; (c) take and hold Collateral for
        the
        payment of the Liabilities, and enforce, exchange, substitute, subordinate,
        waive or release any such Collateral; (d) proceed against such Collateral
        and
        direct the order or manner of sale of such Collateral as the Bank in its
        discretion may determine; and (e) apply any and all payments from the Borrower,
        the Guarantor or any other guarantor, or recoveries from such Collateral,
        in
        such order or manner as the Bank in its discretion may determine. The
        Guarantor's obligations under this Guaranty shall not be released, diminished
        or
        affected by (i) any act or omission of the Bank, (ii) the voluntary or
        involuntary liquidation, sale or other disposition of all or substantially
        all
        of the assets of the Borrower, or any receivership, insolvency, bankruptcy,
        reorganization, or other similar proceedings affecting the Borrower or any
        of
        its assets, (iii) any change in the composition or structure of the Borrower
        or
        the Guarantor, including a merger or consolidation with any other person
        or
        entity, or (iv) any payments (other than payment in full) made upon the
        Liabilities. The Guarantor hereby expressly consents to any impairment of
        Collateral, including, but not limited to, failure to perfect a security
        interest and release Collateral and any such impairment or release shall
        not
        affect the Guarantor's obligations hereunder.

      

      Nature
        of Guaranty. This
        Guaranty is a guaranty of performance and payment when due and not of
        collectibility. Therefore, the Bank may insist that the Guarantor pay
        immediately, and the Bank is not required to attempt to collect first from
        the
        Borrower, the Collateral, or any other person liable for the Liabilities.
        The
        obligation of the Guarantor shall be unconditional and absolute even if all
        or
        any part of any agreement between the Bank and the Borrower is unenforceable,
        void, voidable or illegal, and regardless of the existence of any defense,
        setoff or counterclaim which the Borrower may assert. If the Borrower is
        a
        corporation, limited liability company, partnership or trust, it is not
        necessary for the Bank to inquire into the powers of the Borrower or the
        officers, directors, members, managers, partners, trustees or agents acting
        or
        purporting to act on its behalf, and any of the Liabilities made or created
        in
        reliance upon the professed exercise of such powers shall be guaranteed
        hereunder.

      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      

      Rights
        of Subrogation. The
        Guarantor waives and agrees not to enforce any rights of subrogation,
        contribution or indemnification that it may have against the Borrower, any
        person liable on the Liabilities, or the Collateral, in each case, arising
        from
        payments under this Guaranty, until the Borrower and the Guarantor have fully
        performed all their obligations to the Bank under the Loan Documents and
        the
        Loan Documents have been terminated and all amounts due thereunder have been
        paid and satisfied in full.

      

      Waivers.
        The
        Guarantor waives (a) to the extent permitted by law, all rights and benefits
        under any laws or statutes regarding sureties, as may be amended, and (b)
        any
        right the Guarantor may have to receive notice of the following matters before
        the Bank enforces any of its rights: (i) the Bank's acceptance of this Guaranty,
        (ii) any credit that the Bank extends to the Borrower, (iii) the Borrower's
        default, (iv) any demand, diligence, presentment, dishonor and protest, or
        (v)
        any action that the Bank takes regarding the Borrower, anyone else, the
        Collateral, or any of the Liabilities, which it might be entitled to by law
        or
        under any other agreement, (c) any right it may have to require the Bank
        to
        proceed against the Borrower, any other obligor or guarantor of the Liabilities,
        or the Collateral for the Liabilities or the Guarantor's obligations under
        this
        Guaranty, or pursue any remedy in the Bank's power to pursue, (d) any defense
        based on any claim that the Guarantor's obligations exceed or are more
        burdensome than those of the Borrower, (e) any defense arising by reason
        of any
        disability or other defense of the Borrower or by reason of the cessation
        from
        any cause whatsoever (other than payment in full) of the obligation of the
        Borrower for the Liabilities, and (f) any defense based on or arising out
        of any
        defense that the Borrower may have to the payment or performance (other than
        payment in full) of the Liabilities. The Bank may waive or delay enforcing
        any
        of its rights without losing them. Any waiver affects only the specific terms
        and time period stated in the waiver. No modification or waiver of this Guaranty
        is effective unless it is in writing and signed by the party against whom
        it is
        being enforced.

      

      Payments
        Generally.
        Upon
        demand by the Bank or otherwise when such payments are due and payable, all
        payments by the Guarantor shall be made in (i) U.S. dollars to the Bank at
        its
        principal office the equivalent amount in U.S. dollars computed at the selling
        rate of the Bank or a selling rate chosen by the Bank, most recently in effect
        on or prior to the date the Liability becomes due, for cable transfers of
        the
        Payment Currency to the place where the Liability is payable or (ii) in the
        absence of any Event of Default (as defined by the US Credit Agreement or
        the
        Successor US Credit Agreement) by the Guarantor, RMB; provided
        that,
        such payment shall be made within 60 days after such demand or otherwise
        and
        when such payments are due and payable; provided further
        that,
        the
        Guarantor shall use State Administration of Foreign Exchange (“SAFE”)
        system
        for making such payments, including but not limited to, registering with
        SAFE
        for actual foreign debt registration according to the Notice regarding the
        Perfection of Foreign Debt Management (《国家外汇管理局关于完善外债管理有关樒杨的濦知》)
        issued
        by SAFE on 21 October 2005 (as may be amended from time to time), whereby
        the
        same quota system (total investment of the Borrower minus registered capital of
        the Borrower) shall apply. Notwithstanding anything else stated in this
        Agreement, the
        Guarantor shall hold the Bank harmless from any loss incurred by the Bank
        arising from any change in the value of U.S. dollars in relation to RMB between
        the date the Liability becomes due and the date the Bank is actually able,
        following the conversion of the U.S. dollars paid by the Guarantor into RMB
        and
        remittance of RMB to the place where such Liability is payable, to apply
        such
        Payment Currency to such Liability

      

      Judgment
        Currency.
        Notwithstanding anything else stated to the contrary in this Agreement, if,
        for
        the purpose of obtaining judgment in any court, it is necessary to convert
        a sum
        owing hereunder in one currency into another currency, each party hereto
        agrees,
        to the fullest extent that it may effectively do so, that the rate of exchange
        used shall be that at which, in accordance with normal banking procedures
        in the
        relevant jurisdiction, the first currency could be purchased with such other
        currency on the business day immediately preceding the day on which final
        judgment is given. The obligations of the Guarantor in respect of any sum
        due to
        any party hereto or any holder of the obligations owing hereunder (the
“Applicable
        Creditor”)
        shall,
        notwithstanding any judgment in a currency (the “Judgment
        Currency”)
        other
        than the currency in which such sum is stated to be due hereunder (the
“Agreement
        Currency”),
        be
        discharged only to the extent that, on the business day following

      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      

      receipt
        by the Applicable Creditor of any sum adjudged to be so due in the Judgment
        Currency, the Applicable Creditor may in accordance with normal banking
        procedures in the relevant jurisdiction purchase the Agreement Currency with
        the
        Judgment Currency; if the amount of the Agreement Currency so purchased is
        less
        than the sum originally due to the Applicable Creditor in the Agreement
        Currency, the Guarantor as a separate obligation and notwithstanding any
        such
        judgment, agrees to indemnify the Applicable Creditor against such loss.
        The
        obligations of the relevant contained in herein shall survive the termination
        of
        this Agreement and the payment of all other amounts owing
        hereunder.

      

      Certain
        Taxes.
        The
        Guarantor further agrees that all payments to be made hereunder shall be
        made
        without setoff or counterclaim and free and clear of, and without deduction
        for,
        any taxes, levies, imposts, duties, charges, fees, deductions, withholdings
        or
        restrictions or conditions of any nature whatsoever now or hereafter imposed,
        levied, collected, withheld or assessed by any country or by any political
        subdivision or taxing authority thereof or therein (”Tax”
or
        “Taxes”).
        If
        any Tax is required to be withheld from any amounts payable to the Bank
        hereunder, the amounts so payable to the Bank shall be increased to the extent
        necessary to yield to the Bank (after payment of the Tax) the amounts payable
        hereunder in the full amounts so to be paid. Whenever any Tax is paid by
        the
        Guarantor, as promptly as possible thereafter, the Guarantor shall send the
        Bank
        an official receipt showing payment thereof, together with such additional
        documentary evidence as may be required from time to time by the
        Bank.

      

      Lending
        Installations. Each
        of
        the Liabilities may be booked at any office, branch, subsidiary, or affiliate
        of
        the Bank, as selected by the Bank (each, a “Lending
        Installation”).
        All
        terms of this Guaranty apply to and may be enforced by or on behalf of any
        Lending Installation. 

      

      Reinstatement.
        The
        Guarantor agrees that to the extent any payment by a Borrower is received
        by the
        Bank in connection with the Liabilities, and all or any part of such payment
        is
        subsequently invalidated, declared to be fraudulent or preferential, set
        aside
        or required to be repaid by the Bank or paid over to a trustee, receiver
        or any
        other entity, whether under any bankruptcy act, foreign or domestic, or
        otherwise (any such payment is hereinafter referred to as a “Preferential
        Payment”),
        then
        this Guaranty shall continue to be effective or shall be reinstated, as the
        case
        may be, and whether or not the Bank is in possession of this Guaranty, and,
        to
        the extent of such payment or repayment by the Bank, the Liabilities or part
        thereof intended to be satisfied by such Preferential Payment shall be revived
        and continued in full force and effect as if said Preferential Payment had
        not
        been made.

      

      Information.
        The
        Guarantor assumes all responsibility for being and keeping itself informed
        of
        the Borrower's financial condition and assets, and of all other circumstances
        bearing upon the risk of nonpayment of the Liabilities and the nature, scope
        and
        extent of the risks that the Guarantor assumes and incurs under this Guaranty,
        and agrees that the Bank does not have any duty to advise the Guarantor of
        information known to it regarding those circumstances or risks.

      

      Severability.
        The
        provisions of this Guaranty are severable; if
        any of
        the obligations of the Guarantor under this Guaranty is invalid, illegal
        or
        unenforceable in any jurisdiction, the validity, legality and enforceability
        of
        the remaining obligations of the
        Guarantor
        shall
        not in any way be affected or impaired, and the invalidity, illegality or
        unenforceability in one jurisdiction shall not affect the validity, legality
        or
        enforceability of the obligations of the Guarantor under this Guaranty in
        any
        other jurisdiction. Further, in
        any
        action or proceeding involving any state corporate law, or any state, federal
        or
        foreign bankruptcy, insolvency, reorganization or other law affecting the
        rights
        of creditors generally, if the obligations of the Guarantor under this Guaranty
        would otherwise be held or determined to be avoidable, invalid or unenforceable
        on account of the amount of the Guarantor's liability under this Guaranty,
        then,
        notwithstanding any other provision of this Guaranty to the contrary, the
        amount
        of such liability shall, without any further action by the Guarantor or the
        Bank, be automatically limited and reduced to the highest amount that is
        valid
        and enforceable as determined in such action or proceeding.

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

      Representations
        by Guarantor. The
        Guarantor represents that: (a) the execution and delivery of this Guaranty
        and
        the performance of the obligations it imposes do not violate any law, do
        not
        conflict with, result in a breach of or constitute a default under any agreement
        or instrument by which it is bound, or require the consent or approval of
        any
        governmental authority or any third party and (b) this Guaranty is a valid
        and
        binding agreement, enforceable according to its terms. The Guarantor further
        represents that: (a) it is duly organized, existing and in good standing
        under
        the laws where it is organized, and (b) the execution and delivery of this
        Guaranty and the performance of the obligations it imposes (i) are within
        its
        powers and have been duly authorized by all necessary action of its governing
        body, and (ii) do not contravene the terms of its articles of incorporation
        or
        organization, its by-laws, or any agreement governing its affairs.

      

      Notices.
        All
        notices, requests and other communications to any party under this Guaranty
        must
        be in writing in English (including bank wire, facsimile transmission or
        similar
        writing) and must be given to that party, in the case of the Guarantor, at
        its
        address or facsimile number set forth on the signature page of this Guaranty,
        and, in the case of the Bank, at the address or facsimile number stated above,
        with a copy concurrently sent to:

      

      
        	 	
                JPMorgan
                  Chase Bank, N.A.

              
	 	
                Attn:
                  Division Manager

              
	 	
                Mail
                  Code IL1-1742

              
	 	
                120
                  South La Salle Street

              
	 	
                Chicago,
                  IL 60603-3403 United States  

              
	 	
                Fax
                  No.: 312-661-3566

              

      

      

      Either
        party may change the address or facsimile number to which notice is to be
        sent
        for that party by sending a written notice to the other party specifying
        the
        change. Each notice, request or other communication is effective (i) if given
        by
        facsimile transmission, when transmitted to the facsimile number(s) for the
        other party and confirmation of receipt is received, (ii) if given by mail,
        72
        hours after the communication is deposited in the mails with first class
        postage
        prepaid, to the address(es) for the other party, or (iii) if given by any
        other
        means, when delivered at the address(es) for the other party.

      

      Governing
        Law and Venue. THIS
        AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE
        WITH, THE LAW OF THE STATE OF NEW YORK.
        The
        Guarantor hereby irrevocably and unconditionally: (i) submits for itself
        and its
        property in any legal action or proceeding relating to this Agreement, or
        for
        recognition and enforcement of any judgment in respect thereof, to the non
        exclusive general jurisdiction of the courts of the State of New York, the
        courts of the United States of America for the Southern District of New York,
        and appellate courts from any thereof, (ii) consents that any such action
        or
        proceeding may be brought in such courts and waives any objection that it
        may
        now or hereafter have to the venue of any such action or proceeding in any
        such
        court or that such action or proceeding was brought in an inconvenient court
        and
        agrees not to plead or claim the same, (iii) agrees that service of process
        in
        any such action or proceeding may be effected by mailing a copy thereof by
        registered or certified mail (or any substantially similar form of mail),
        postage prepaid, to the Guarantor at its address as set forth on the signature
        page of this Guaranty and (iv) agrees that nothing herein shall affect the
        right
        to effect service of process in any other manner permitted by law or shall
        limit
        the right to sue in any other jurisdiction.

      

      Miscellaneous.
        The
        Guarantor's liability under this Guaranty is independent of its liability
        under
        any other guaranty previously or subsequently executed by the Guarantor or
        any
        one of them, singularly or together with others, as to all or any part of
        the
        Liabilities, and may be enforced for the full amount of this Guaranty regardless
        of the Guarantor's liability under any other guaranty. This Guaranty binds
        the
        Guarantor's heirs, successors and assigns, and benefits the Bank and its
        successors and assigns. Guarantor may not assign or otherwise transfer any
        of
        its rights or obligations under this Guaranty without the written prior consent
        of the Bank. The Bank may assign this Guaranty in whole or in part without
        notice, but only together with the Liabilities to which it relates. The use
        of
        headings have been inserted in this Guaranty as a matter of 

      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      

      convenience
        for reference only and it is agreed that such headings are not apart of this
        Guaranty and does not limit the provisions of this Guaranty and shall not
        be
        used in the interpretation of any provision of this Guaranty. The Guarantor
        agrees that the Bank may provide any information or knowledge the Bank may
        have
        about the Guarantor or about any matter relating to this Guaranty to JPMorgan
        Chase & Co. (“JPMC”),
        or
        any of its subsidiaries or affiliates or their successors, or to one or more
        purchasers or potential purchasers of this Guaranty or the Liabilities
        guaranteed hereby; provided,
        that
        prior to any such disclosure, each such purchasers or potential purchasers
        are
        advised of and agree to be bound by either the provisions in “Confidentiality”
below or other provisions at least as restrictive as contained
        therein.

      

      Confidentiality.
        The Bank
        agrees to keep any information delivered or made available by the Guarantor
        to
        it confidential from anyone other than persons employed or retained by the
        Bank
        who are or are expected to become engaged in evaluating, approving, structuring
        or administering the Loan Documents, and who are advised by the Bank of the
        confidential nature of such information; provided, that nothing herein shall
        prevent the Bank from disclosing such information (a) to affiliates of JPMC
        (it
        being
        understood that such affiliates of JPMC will be informed of the confidential
        nature of such information and instructed to keep such information confidential)
        ,
        (b)
        upon the order of any court or administrative agency, (c) upon the request
        or
        demand of any regulatory agency or authority, (d) which has been publicly
        disclosed other than as a result of a disclosure by the Bank which is not
        permitted by this Guaranty, (e) in connection with any litigation to which
        the
        Bank may be a party to the extent reasonably required, (f) to the extent
        reasonably required in connection with the exercise of any remedy hereunder,
        (g)
        to the Bank’s legal counsel and independent auditors, and (h) to any actual or
        proposed participant or assignee of all or part of its rights hereunder or
        to
        any direct or indirect contractual counterparty (or the professional advisors
        thereto) to any swap or derivative transaction relating to the Borrower and
        its
        obligations, in each case, subject to the proviso in the last sentence of
        in
“Miscellaneous” above. If the Bank is in any manner requested or required to
        disclose any of the information delivered or made available to it by the
        Guarantor under clauses (b) or (e) of this provision, the Bank will, to the
        extent permitted by law, provide the Guarantor with prompt notice, to the
        extent
        reasonable, so that the Guarantor may seek, at its sole expense, a protective
        order or other appropriate remedy or may waive compliance with this
        provision.

      

      WAIVER
        OF IMMUNITY. TO THE EXTENT THAT THE GUARANTOR HAS OR HEREAFTER MAY BE ENTITLED
        TO CLAIM OR MAY ACQUIRE, FOR ITSELF OR ANY OF ITS ASSETS, ANY IMMUNITY FROM
        SUIT, JURISDICTION OF ANY COURT, OR FROM ANY LEGAL PROCESS (WHETHER FROM
        SERVICE
        OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OF
        A
        JUDGMENT, EXECUTION OR OTHERWISE) AS TO ITSELF OR ITS PROPERTY, AND TO THE
        EXTENT PERMITTED BY LAW THE GUARANTOR HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY
        IN
        REGARD TO ITS OBLIGATIONS UNDER THIS GUARANTY.

      

      WAIVER
        OF SPECIAL DAMAGES. THE GUARANTOR WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED
        BY LAW, ANY RIGHT THE UNDERSIGNED MAY HAVE TO CLAIM OR RECOVER FROM THE BANK
        IN
        ANY LEGAL ACTION OR PROCEEDING ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
        DAMAGES.

       

      JURY
        WAIVER. THE
        GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN
        ANY
        LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM
        THEREIN.

      

      [SIGNATURE
        PAGE FOLLOWS]

      

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      

       

      
        
          
            	 	 	
                    Guarantor:

                  	 	 
	 	 	 	 	 
	
                    Address:

                  	
                    One
                      Technology Park Drive

                  	
                    KADANT
                      INC.

                  	 	 
	 	
                    Westford
                      MA 01886 U.S.A.

                  	 	 	 
	
                    Attn:

                  	
                    Chief
                      Financial Officer, Treasurer

                  	 	 	 
	 	
                    And
                      Chief Legal Officer

                  	 	 	 
	 	 	
                    By:

                  	
                    /s/
                      Daniel J. Walsh

                  	 
	
                    Fax
                      No.:

                  	
                    +1
                      978-635-1593

                  	 	 	 
	 	 	
                    Its:

                  	
                    Treasurer

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