REVOLVING CREDIT AGREEMENT

Exhibit 10(ab) ================================================================================ REVOLVING CREDIT AGREEMENT Dated as of September 28, 2004 By and Between LAZARE KAPLAN INTERNATIONAL INC. as Borrower and HSBC BANK USA, NATIONAL ASSOCIATION as Lender ================================================================================ TABLE OF CONTENTS

-ii- Revolving Credit Agreement This REVOLVING CREDIT AGREEMENT (this "Agreement") is made as of September 28, 2004, by and between LAZARE KAPLAN INTERNATIONAL INC. (the "Borrower"), a Delaware corporation having its principal place of business at 529 Fifth Avenue, New York, New York 10017, and HSBC BANK USA, NATIONAL ASSOCIATION, having an office at 452 Fifth Avenue, New York, New York 10016, as lender ("Bank"). WHEREAS, the Borrower has requested that Bank provide extensions of credit to the Borrower in the form of loans; WHEREAS, Bank is willing to extend credit to the Borrower in the form of loans on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, the Borrower hereby agrees with Bank as follows: SECTION 1. DEFINITIONS. Certain capitalized terms are defined below: ABN AMRO LEUMI CREDIT AGREEMENT: The unsecured Revolving Credit Agreement, dated as of August 14, 2002, by and among the Borrower, ABN AMBRO Bank N.V., as administrative agent, ABN AMBRO Bank N.V. as a lender and Bank Leumi USA, as a lender, as amended by the First Amendment to Revolving Credit Agreement dated May 28, 2003, the Second Amendment to Revolving Credit Agreement dated as of November 24, 2003 and the Third Amendment to Revolving Credit Agreement dated as of September 13, 2004, and as the same may be amended from time to time. Agreement: See preamble, which term shall include this Agreement and the schedules and exhibits hereto, all as amended and in effect from time to time. Antwerp Diamond Bank Line: Collectively, the $25,000,000 unsecured line of credit given to the Borrower by Antwerp Diamond Bank and the $15,000,000 unsecured line of credit given to the Borrower's wholly-owned Subsidiary, Lazare Kaplan Belgium (LKB) NV. Bank: HSBC Bank USA, National Association, its successors and assigns. Base Rate: With respect to Base Rate Loans hereunder, the higher of (i) the annual rate of interest announced from time to time by Bank at its head office as its "base rate" for U. S. dollar loans and (ii) one-half of one percent (1/2%) above the Federal Funds Effective Rate. Base Rate Loans: Loans bearing interest calculated by reference to the Base Rate. Borrower: See preamble. Borrowing: The total of Loans of a single type advanced, continued for an additional Interest Period, or converted from a different type into such type by Bank pursuant to this Agreement on a single date and, in the case of LIBOR Rate Loans, for a single Interest Period. Business Day: Any day on which banks in New York, New York, are open for business generally, and, in the case of LIBOR Rate Loans, also a day which is a LIBOR Business Day. Capital Expenditures: With respect to any Person for any period, the aggregate amount of all expenditures (whether paid in cash or accrued as a liability) by such Person during that period for the acquisition or leasing (pursuant to a Capitalized Lease) of fixed or capital assets or additions to property, plant or equipment (including replacements, capitalized repairs, and improvements) which should be capitalized on the balance sheet of such Person in accordance with GAAP. Capitalized Leases: Leases under which the Borrower is the lessee or obligor, the discounted, future rental payment obligations under which are required to be capitalized on the combined balance sheet of the Borrower in accordance with GAAP. Charter Documents: In respect of any entity, the certificate or articles of incorporation or organization and the by-laws of such entity, or other constitutive documents of such entity. Code: The Internal Revenue Code of 1986, as amended, and any successor statute thereto. Commitment: The obligation of Bank to make Loans to the Borrower up to an aggregate outstanding principal amount not to exceed $30,000,000, as such amount may be reduced from time to time or terminated according to the terms of this Agreement. Consent: In respect of any person or entity, any permit, license or exemption from, approval, consent of, registration or filing with any local, state or federal governmental or regulatory agency or authority, required under applicable law. Contingent Obligations: As to any Person, any obligation of such Person guaranteeing any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of -2- which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith from time to time. Controlled Group: All members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code. Conversion Request: A Notice given by the Borrower to Bank of the Borrower's election to convert or continue a Loan therewith in accordance with Section 2.1A hereof. Current Liabilities: As determined in accordance with GAAP, consistently applied, and shall include, as of the date of determination thereof: (i) all Indebtedness payable on demand or maturing within one year after such date without any option on the part of the obligor to extend, renew or maintain as non-current beyond such year; (ii) final maturities, installments and prepayments of Indebtedness required to be made within one year after such date (in each case, except as set forth in the proviso below); and (iii) all other items (including taxes accrued as estimated and reserves for deferred income taxes) that in accordance with GAAP would be included on a balance sheet as current liabilities, provided, however, Current Liabilities shall not include: (A) the portion of the Note to the extent that the same is required to be paid within one year after such date; (B) any portion of any other committed bank debt unless (and only to the extent) such amount is required to be repaid within nine months of such date of determination; and (C) the Pegasus Liabilities. Default: An event or act which, with the giving of Notice and/or the lapse of time, would become an Event of Default. Domestic Lending Office: Initially, the office of Bank designated as such by Notice to the Borrower; thereafter, such other office of Bank, if any, located within the United States that will be making or maintaining Base Rate Loans as designated by Notice to Borrower. Drawdown Date: In respect of any Loan, the date on which such Loan is made to the Borrower, and the date on which any Loan is converted or continued in accordance with Section 2.1A hereof. Duly Authorized Officer: The President of the Borrower or other officer or employee of any such party who is authorized by such party's Board of Directors or an executive committee of such Board of Directors. EBITDA: For any period, the sum of Net Income plus Interest Expense, plus income tax expense, plus depreciation and amortization expense to the extent such expense was deducted in arriving at Net Income for such period. Environmental Claim: Any investigation, notice, violation, demand, allegation, action, suit, injunction, judgment, order, consent decree, penalty, fine, lien, proceeding or claim (whether administrative, judicial or private in nature) arising (a) pursuant to, or in connection with an -3- actual or alleged violation of, any Environmental Law, (b) in connection with any Hazardous Material, (c) from any abatement, removal, remedial, corrective or response action in connection with a Hazardous Material, Environmental Law or order of a governmental authority or (d) from any actual or alleged damage, injury, threat or harm to health, safety, natural resources or the environment. Environmental Laws: All laws pertaining to environmental matters, including without limitation, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, in each case as amended, and all rules, regulations, judgments, decrees, orders and licenses arising under all such laws. ERISA: The Employee Retirement Income Security Act of 1974, as amended, and all rules, regulations, judgments, decrees, and orders arising thereunder. Eurocurrency Reserve Rate: For any day with respect to a LIBOR Rate Loan, the maximum rate (expressed as a decimal) at which any lender subject thereto would be required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System (or any successor or similar regulations relating to such reserve requirements) against "Eurocurrency Liabilities" (as that term is used in Regulation D), if such liabilities were outstanding. The Eurocurrency Reserve Rate shall be adjusted automatically on and as of the effective date of any change in the Eurocurrency Reserve Rate. Event of Default: Any of the events listed in Section 8 hereof. Extraordinary Items of Income: Items which under GAAP are required to be accounted for as "extraordinary items" and items which the Borrower, in accordance with GAAP, accounts for as the "cumulative effect of a change in accounting principles." Federal Funds Effective Rate: For any day, the rate per annum equal to the average of the quotations for such day on overnight federal funds transactions received by Bank from three funds brokers of recognized standing selected by Bank in good faith. Financials: In respect of any period, the balance sheet of the Borrower as at the end of such period, and the related statement of income and combined statement of cash flow for such period, each setting forth in comparative form the figures for the previous comparable fiscal period, all in reasonable detail and prepared in accordance with GAAP. GAAP: Generally accepted accounting principles consistent with those adopted by the Financial Accounting Standards Board and its predecessor, (i) generally, as in effect from time to time, and (ii) for purposes of determining compliance by the Borrower with its financial covenants set forth herein, as in effect for the fiscal year therein reported in the most recent Financials submitted to Bank prior to execution of this Agreement. -4- Guarantors: Each Subsidiary set forth on Schedule I hereto, or subsequently added as a party to the Guaranty Agreement pursuant to Section 7.1(i) hereof. Guaranty Agreement: The guaranty agreement provided by the Guarantors substantially in the form attached hereto as Exhibit A. Hazardous Materials: Any substance, chemical, compound, product, solid, gas, liquid, waste, byproduct, pollutant, contaminant or material which is hazardous or toxic, and includes, without limitation, (a) asbestos, polychlorinated biphenyls and petroleum (including crude oil or any fraction thereof) and (b) any material classified or regulated as "hazardous" or "toxic" or words of like import pursuant to Environmental Law. Indebtedness: For any Person (without duplication) (a) all indebtedness of such Person for borrowed money, whether current or funded, or secured or unsecured, (b) all indebtedness for the deferred purchase price of property or services, (c) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of a default are limited to repossession or sale of such property), (d) all indebtedness secured by a purchase money mortgage or other Lien to secure all or part of the purchase price of property subject to such mortgage or Lien, (e) all obligations under leases which shall have been or must be, in accordance with GAAP, recorded as Capitalized Leases in respect of which such Person is liable as lessee, (f) any liability in respect of banker's acceptances, (g) any indebtedness, whether or not assumed, secured by Liens on property acquired by such Person at the time of acquisition thereof, (h) all obligations under any so-called "synthetic lease" transaction entered into by such Person, (i) all obligations under any so-called "asset securitization" transactions entered into by such Person, and (j) all Contingent Obligations, it being understood that the term "Indebtedness" shall not include trade payables and accrued expenses arising in the ordinary course of business. Inspection: See Section 7.1(g). Interest Expense: With reference to any period, the sum of all net interest charges (including imputed interest charges with respect to Capitalized Lease Obligations and all amortization of debt discount and expense) of the Borrower and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP. Interest Payment Date: (a) As to any Base Rate Loan, the tenth day of the calendar month following the calendar month which includes the Drawdown Date thereof, and (b) as to any LIBOR Rate Loan in respect of which the Interest Period is (i) three (3) months or less, the last day of such Interest Period and (ii) more than three (3) months, the date that is three (3) months from the first day of such Interest Period and, quarterly thereafter, including the last day of such Interest Period. Interest Period: With respect to each Loan (a) initially, the period commencing on the Drawdown Date of such Loan and ending on the last day of one of the periods set forth below, as selected by the Borrower in a Loan Request (i) for any Base Rate Loan, the last day of the -5- calendar month; and (ii) for any LIBOR Rate Loan, 1, 2, 3, 4, 5, 6, 9 or 12 months; and (b) thereafter, each period commencing on the last day of the immediately preceding Interest Period applicable to such Loan and ending on the last day of one of the periods set forth above, as selected by the Borrower in a Conversion Request or a Loan Request; provided that all of the foregoing provisions relating to Interest Periods are subject to the following: (a) if any Interest Period with respect to a LIBOR Rate Loan would otherwise end on a day that is not a LIBOR Business Day, that Interest Period shall be extended to the next succeeding LIBOR Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding LIBOR Business Day; (b) if any Interest Period with respect to a Base Rate Loan would end on a day that is not a Business Day, that Interest Period shall end on the next succeeding Business Day; (c) if the Borrower shall fail to give Notice as provided in Section 2.1A, the Borrower shall be deemed to have requested a conversion of the affected LIBOR Rate Loan to a Base Rate Loan, and the continuance of all Base Rate Loans as Base Rate Loans on the last day of the then current Interest Period with respect thereto; (d) any Interest Period relating to any LIBOR Rate Loan that begins on the last LIBOR Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last LIBOR Business Day of a calendar month; and (e) any Interest Period relating to any LIBOR Rate Loan that would otherwise extend beyond the Maturity Date shall end on the Maturity Date. Lending Office: See Section 10.4 hereof. LIBOR Business Day: Any day on which commercial banks are open for international business (including dealings in U.S. dollar deposits) in London. LIBOR Lending Office: Initially, the office of Bank designated as such by Notice to the Borrower thereby; thereafter, such other office of Bank, if any, that shall be making or maintaining LIBOR Rate Loans and designated by Notice to the Borrower. LIBOR Rate: For any Interest Period with respect to a LIBOR Rate Loan hereunder, the per annum interest rate equal to (i) the London Interbank Offered Rate shown on the display designated as "RMEY" to subscribers of the Reuters Monitor Money Rates Service, or any successor page thereto, as at 11:00 a.m. (London time) two LIBOR Business Days prior to the applicable Interest Period, for deposits of United States Dollars in an amount equal to such LIBOR Rate Loan for a period equal to the applicable Interest Period, divided by (ii) a number equal to 1.00 minus the Eurocurrency Reserve Rate, if applicable. -6- LIBOR Rate Loans: Loans bearing interest calculated by reference to the LIBOR Rate. LIBOR Rate Margin: One and sixty/one-hundredths of one percent (1.60%) per annum. Liens: Any encumbrance, mortgage, pledge, hypothecation, charge, restriction or other security interest of any kind securing any obligation of any entity or person. Loan: Any loan made or to be made to the Borrower pursuant to Section 2 hereof. Loan Documents: This Agreement, the Note and the Guaranty Agreement, in each case as from time to time amended or supplemented. Loan Request: See Section 2.1(b). Material Domestic Subsidiary: Any Subsidiary organized under the laws of any state of the United States in which the Borrower or its Subsidiaries have invested $1,000,000 or more (or the foreign currency equivalent thereof). Materially Adverse Effect: Any materially adverse effect on the financial condition or business operations of the Borrower or material impairment of the ability of the Borrower to perform its obligations hereunder or under any of the other Loan Documents. Maturity Date: The Termination Date, or such earlier date upon which all of the Obligations may become due and payable pursuant to the terms hereof. Net Income: The net income (or deficit) of the Borrower, after deduction of all expenses, taxes and other proper charges, determined in accordance with GAAP, after eliminating therefrom all Extraordinary Items of Income. Note: See Section 2.1(c). Notice or Notices: All requests, demands and other communications, in writing (including telecopy communications), sent by registered or certified mail, return receipt requested, overnight delivery service, telecopy or hand delivery to the other party at that party's Principal Office. Obligations: All indebtedness, obligations and liabilities of the Borrower to pay principal or interest of the Loans, all fees and charges payable hereunder, and all other payment obligations of the Borrower or any of its Subsidiaries arising under or directly in relation to any Loan Document, in each case whether now existing or hereinafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held or acquired. Pegasus: Pegasus Overseas Ltd., a company organized under the laws of the Bahamas, which is a subsidiary of the Borrower. -7- Pegasus Liabilities: The obligations and liabilities of Pegasus and its affiliates to the General Electric Company and its affiliates pursuant to an agreement between the parties for sourcing and high pressure, high temperature processing of gem diamonds. Person: Any individual, partnership, corporation, association, trust, joint venture, unincorporated organization, and any government, governmental department or agency or political subdivision thereof. Principal Office: With respect to each party, the following addresses: For Bank: HSBC Bank USA, National Association 452 Fifth Avenue New York, New York 10018 Attention: Jeffrey Pfeffer, Senior Vice President Telecopier Number: (212) 525-5257 Telephone Number: (212) 525-8216 For the Borrower: Lazare Kaplan International Inc. 19 West 44th Street New York, New York 10036 Attention: William H. Moryto Telecopier Number: (212) 697-3197 Telephone Number: (212) 857-7672 Release: Any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing or migration into the environment. Requirement of Law: In respect of any person or entity, any law, treaty, rule, regulation or determination of an arbitrator, court, or other governmental authority, in each case applicable to or binding upon such person or entity or affecting any of its property. Subsidiary: In respect of any Person, any business entity of which such Person at any time owns or controls directly or indirectly more than fifty percent (50%) of the outstanding shares of stock having voting power, regardless of whether such right to vote depends upon the occurrence of a contingency. Tangible Net Worth: The excess of (i) all assets of the Borrower determined in accordance with GAAP over (ii) all liabilities of the Borrower determined in accordance with GAAP, minus (iii) the sum of (A) the book value all intangibles determined in accordance with GAAP, including, without limitation, good will, patents and intellectual property, and (B) any write-up in the book value of assets since the most recent audited Financials in existence on the date hereof. -8- Termination Date: December 1, 2006, or such later date as may be extended pursuant to Section 22 hereof. Total Dollar Outstandings: At any time of reference thereto, the sum of Loans outstanding at such time. Total Funded Debt: At any time the same is to be determined, the aggregate of all Indebtedness of the Borrower and its Subsidiaries at such time, including all Indebtedness of any other Person which is directly or indirectly guaranteed by the Borrower or any of its Subsidiaries or which the Borrower or any of its Subsidiaries has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which the Borrower or any of its Subsidiaries has otherwise assured a creditor against loss. Working Capital: At any time, current assets of the Borrower in accordance with GAAP less Current Liabilities. SECTION 2. REVOLVING CREDIT FACILITY. Section 2.1. Commitment to Lend. (a) Upon the terms and subject to the conditions of this Agreement, Bank agrees to lend to the Borrower such sums that the Borrower may request, from the date hereof until but not including the Termination Date, provided that the sum of the outstanding principal amount of all Loans (after giving effect to all amounts requested) shall not exceed the Commitment. LIBOR Rate Loans shall be in the minimum aggregate amount of $300,000 or whole multiples of $100,000 in addition thereto. (b) The Borrower shall give to Bank, written Notice in the form of Exhibit B attached hereto of each Loan requested to be made hereunder (a "Loan Request") (i) no later than 12:00 noon, New York time, on the proposed Drawdown Date of any Base Rate Loan and (ii) no less than three (3) LIBOR Business Days prior to the proposed Drawdown Date of any LIBOR Rate Loan. Each such Notice shall specify (A) the principal amount of the Loan requested, (B) the proposed Drawdown Date of such Loan (which must be a Business Day or a LIBOR Business Day, as the case may be), (C) the Interest Period for such Loan and (D) whether such Loan shall be a Base Rate Loan or a LIBOR Rate Loan. Each Loan Request shall be irrevocable and binding on the Borrower and shall obligate the Borrower to accept the Loan requested from Bank on the proposed Drawdown Date. Subject to the foregoing, so long as Bank's Commitment is then in effect and the applicable conditions set forth in Section 6.2 hereof have been met, Bank shall advance the amount requested to the Borrower's bank account as designated on the applicable Loan Request (or such other account as Bank may designate) in immediately available funds not later than the close of business on such Drawdown Date. (c) The obligation of the Borrower to repay Bank the principal of the respective Loans and interest accrued thereon shall be evidenced by a promissory note (a "Note") substantially in the form of Exhibit C attached hereto, dated as of the date hereof and completed with appropriate insertions. The Note shall be executed and delivered by the Borrower and payable to the order of Bank, in form and substance satisfactory to Bank, in a principal amount equal to the Commitment. -9- Section 2.1A. Conversion Options. (a) The Borrower may elect from time to time to convert any outstanding Loan from a Base Rate Loan to a LIBOR Rate Loan or from a LIBOR Rate Loan to a Base Rate Loan, provided that (i) with respect to any such conversion of a LIBOR Rate Loan to a Base Rate Loan, the Borrower shall give Bank at least three (3) Business Days prior written Notice of such election; (ii) with respect to any such conversion of a LIBOR Rate Loan into a Base Rate Loan, such conversion shall only be made on the last day of the Interest Period with respect thereto; (iii) with respect to any such conversion of a Base Rate Loan to a LIBOR Rate Loan, the Borrower shall give Bank at least three (3) LIBOR Business Days prior written Notice of such election; and (iv) no Loan may be converted into a LIBOR Rate Loan when any Default or Event of Default has occurred and is continuing. On the date on which such conversion is being made, Bank shall take such action as is necessary to transfer such Loans to its Domestic Lending Office or its LIBOR Lending Office, as the case may be. All or any part of the outstanding Loans may be converted as provided herein, provided that any partial conversions shall be in an aggregate principal amount of $300,000 or a whole multiple of $100,000 in addition thereto. Each Conversion Request relating to the conversion of a Loan to a LIBOR Rate Loan shall be irrevocable by the Borrower. (b) Any Base Rate Loan or LIBOR Rate Loan may be continued as such upon the expiration of an Interest Period with respect thereto by compliance by the Borrower with the Notice provisions contained in Section 2.1A(a); provided that no LIBOR Rate Loan may be continued as such when any Default or Event of Default has occurred and is continuing, but shall be automatically converted to a Base Rate Loan on the last day of the first Interest Period relating thereto ending during the continuance of any Default or Event of Default. In the event that the Borrower fails to provide any such Notice with respect to the continuation of any LIBOR Rate Loan as such, then such LIBOR Rate Loan shall be automatically converted to a Base Rate Loan on the last day of the first Interest Period relating thereto. (c) Any conversion to or from LIBOR Rate Loans shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, (i) the aggregate principal amount of all LIBOR Rate Loans having the same Interest Period shall not be less than $300,000 or a whole multiple of $100,000 in addition thereto. Section 2.2. Interest. So long as no Event of Default is continuing, each Base Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto at a rate per annum equal to the Base Rate and each LIBOR Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto at a rate per annum equal to the sum of (i) the LIBOR Rate determined for such Interest Period plus (ii) the LIBOR Rate Margin. The Borrower promises to pay interest on each Loan in arrears on each Interest Payment Date with respect thereto. While an Event of Default is continuing and Bank shall have exercised its rights pursuant to Section 8.1(2) hereof or in the case of an Event of Default under clause (h) or (i) of Section 8.1, amounts payable under any of the Loan Documents shall bear interest (compounded monthly and payable on demand in respect of overdue amounts) at a rate per annum which is equal to the Base Rate plus two percent (2%) until such amount is paid in full or (as the case may be) such Event of Default has been cured or waived in writing by Bank (after as well as before judgment). -10- Section 2.3. Repayments and Prepayments. The Borrower hereby agrees to pay to Bank, no later than the Maturity Date, the entire unpaid principal of and interest on the Loans. The Borrower may elect to prepay the outstanding principal of all or any part of any Loan, without premium or penalty, provided that (a) any full or partial prepayment of the outstanding amount of any LIBOR Rate Loans pursuant to this Section 2.3 may be made only on the last day of the Interest Period relating thereto, and (b) any such prepayments of LIBOR Rate Loans shall be in a minimum amount of $300,000 or a whole multiple of $100,000 in addition thereto. The Borrower shall give Bank Notice of the date and amount of any proposed prepayment pursuant to this Section 2.3 (y) no less than three (3) LIBOR Business Days prior to any such proposed prepayment of any LIBOR Rate Loans, and (z) no later than 10:00 a.m., New York time, on the date of any such prepayment of any Base Rate Loan. The Borrower shall be entitled to reborrow before the Termination Date such amounts, upon the terms and subject to the conditions of this Agreement. Each repayment or prepayment of principal of any Loan shall be accompanied by payment of the unpaid interest accrued to such date on the principal being repaid or prepaid and shall be applied, in the absence of instruction by the Borrower, first to the principal of Base Rate Loans and then to the principal of LIBOR Rate Loans. If at any time the aggregate amount of Loans outstanding shall exceed the Commitment, the Borrower shall immediately pay the amount of such excess to Bank for application to the Loans. The Borrower may elect to reduce or terminate the Commitment by a minimum principal amount of $100,000 or an integral multiple thereof of the amount reduced or, as the case may be, terminated, upon Notice to Bank given by 10:00 a.m., New York time, at least two (2) Business Days prior to the date of such reduction or termination. The Borrower shall not be entitled to reinstate the respective Commitment following such reduction or termination. SECTION 3. INDEMNITY FOR CHANGES IN CIRCUMSTANCES, ETC. The Borrower agrees to indemnify Bank and to hold it harmless from and against any loss, cost or expense (including loss of anticipated profits) that Bank may sustain or incur as a consequence of (i) default by the Borrower in payment of the principal amount of or any interest on any LIBOR Rate Loans as and when due and payable, including any such loss, cost or expense arising from interest or fees payable by Bank to lenders of funds obtained by it in order to maintain its LIBOR Rate Loans or the cost of breaking any swaps or other hedging agreements, (ii) default by the Borrower in making a borrowing or conversion after the Borrower has given (or is deemed to have given) a Loan Request or Conversion Request relating thereto in accordance with Section 2.1A, and (iii) the making of any payment of a LIBOR Rate Loan or the making of any conversion of any such Loan to a Base Rate Loan on a day that is not the last day of the applicable Interest Period with respect thereto, including interest or fees payable by Bank to lenders of funds obtained by it in order to maintain any such Loans or the cost of breaking any swaps or other hedging agreements. SECTION 4. FEES AND PAYMENTS. Section 4.1. Revolving Credit Commitment Fees. The Borrower shall pay to Bank a commitment fee at the rate per annum equal to one-fourth of one percent (1/4 of 1%) (computed on the basis of a year of 360 days and the actual number of days elapsed) on the average daily -11- unused Commitment. Such commitment fee shall be payable quarter-annually in arrears on the last Business Day of each November, February, May and August in each year (commencing on the first such date occurring after the date hereof) and on the Termination Date, unless the Commitment is terminated in whole on an earlier date, in which event the commitment fee for the period to the date of such termination in whole shall be paid on the date of such termination. Section 4.2. Payments. All payments to be made by the Borrower hereunder or under any of the other Loan Documents shall be made in U.S. Dollars in immediately available funds at Bank's Principal Office, without set-off or counterclaim and without any withholding or deduction whatsoever. The Bank shall be entitled to charge any account of the Borrower with Bank for any sum due and payable by the Borrower to Bank hereunder or under any of the other Loan Documents. If any payment hereunder is required to be made on a day which is not a Business Day, it shall be paid on the immediately succeeding Business Day, with interest and any applicable fees adjusted accordingly. All computations of interest or fees payable hereunder shall be made by Bank on the basis of actual days elapsed and on a 360-day year. SECTION 5. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to Bank on the date hereof, on the date of any Loan Request: (a) the Borrower and each Subsidiary is duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation and is duly qualified and in good standing in every other jurisdiction where it is doing business (except where the failure to so qualify in any such jurisdiction would not have a Materially Adverse Effect), and the execution, delivery and performance by the Borrower and each Subsidiary of the Loan Documents to which it is a party (i) are within its corporate authority, (ii) have been duly authorized, (iii) do not conflict with or contravene its Charter Documents; (b) upon execution and delivery thereof, each Loan Document shall constitute the legal, valid and binding obligation of each of the Borrower and Guarantors party thereto, enforceable in accordance with its terms; (c) the Borrower and each of its Subsidiaries has good and marketable title to all its material properties, subject only to Liens permitted hereunder, and possesses all assets, including intellectual properties, franchises and Consents, adequate for the conduct of its business as now conducted, without known conflict with any rights of others. The Borrower and its Subsidiaries maintain insurance with financially responsible insurers and copies of the Borrower's primary Jewelers Block Policy and a schedule of other insurance policies have been previously delivered to Bank, covering such risks and in such amounts and with such deductibles as are customary in the Borrower's business and are adequate; (d) the Borrower has provided to Bank its Financials for the fiscal year ended May 31, 2004, and for the fourth quarter then ended, as filed with the Securities and -12- Exchange Commission, and such Financials are complete and correct and fairly present the position of the Borrower in accordance with GAAP applied consistent with the annual financial statements of the Borrower as filed with the Securities and Exchange Commission as at such date and for such period in accordance with GAAP consistently applied; (e) since May 31, 2004, there has been no material adverse change of any kind in the business or financial condition of the Borrower which would have a Materially Adverse Effect; (f) there are no legal or other proceedings or investigations pending or, to the knowledge of the Borrower, threatened against the Borrower before any court, tribunal or regulatory authority which would, if adversely determined, alone or together, have a Materially Adverse Effect; (g) the execution, delivery and performance of its obligations, and the exercise of its rights under the Loan Documents by the Borrower and each Guarantor, including borrowing under this Agreement (i) do not require any Consents (other than the Consent of Antwerp Diamond Bank in connection with the Antwerp Diamond Bank Line and the Consent of the agent and each of the lenders under the ABN AMBRO LEUMI Credit Agreement), to the Borrower borrowing up to $30,000,000 from time to time from Bank on an unsecured basis, guaranteed by such Subsidiaries of the Borrower as Bank may require; and (ii) are not and will not be in conflict with or prohibited or prevented by (A) any Requirement of Law, or (B) any Charter Document, corporate minute or resolution, instrument, agreement or provision thereof, in each case binding on it or affecting its property other than for which the Consents referred to in clause (i) above were obtained and are in full force and effect; (h) the Borrower and each Guarantor is not in violation of (i) any Charter Document, corporate minute or resolution, (ii) any instrument or a