Document:

EX-10.1

$2,000,000.00

TERM LOAN PROMISSORY NOTE

From

THE ALLIED DEFENSE GROUP, INC.

A Delaware Corporation

Borrower

To The Order Of

ROBERT P. DOWSKI, OR ASSIGNEE

Lender

Dated As of February 3, 2006

1

Vienna, Virginia $2,000,000.00

February 3, 2006

TERM LOAN PROMISSORY NOTE

FOR VALUE RECEIVED, the undersigned, THE ALLIED DEFENSE GROUP, INC., a Delaware corporation
(hereafter, the “BORROWER”), promises to pay to the order of ROBERT P. DOWSKI, or his assignee
(hereafter, the “LENDER”), at such place as the holder of this Promissory Note may from time to
time designate, the principal sum of Two Million Dollars ($2,000,000.00), or such lesser sum
actually advanced by the LENDER to the BORROWER hereunder at the request of the BORROWER (the
Lender has advanced to the BORROWER the principal sum of $1,000,000.00 on the date hereof),
together with interest thereon at the rate or rates hereafter specified. The following terms shall
apply to this Promissory Note.

1. Interest Rate. For the period from the date hereof until all unpaid sums
hereunder, whether principal, interest, charges, fees or other sums, have been paid in full,
interest shall accrue on the unpaid principal balance of this Promissory Note at twelve percent
(12%) per annum.

2. Calculation of Interest. Interest shall be calculated on the basis of a three
hundred sixty (360) days per year factor applied to the actual days on which there exists an unpaid
balance hereunder.

3. Repayment. Payment of accrued and unpaid interest and the unpaid principal sum
shall be made by the BORROWER to the holder of this Promissory Note in a lump sum on March 15,
2006.

4. Application Of Payments. All payments made hereunder shall be applied first to
accrued interest, and then to principal, or in such other order or proportion as the holder, in the
holder’s sole discretion, may elect from time to time.

5. Prepayment. The BORROWER may prepay this Promissory Note in whole or in part at
any time or from time to time without premium or additional interest.

6. Default Interest Rate. Upon a default in the payment of any sum due hereunder,
and without notice or demand, the rate of interest accruing on the unpaid principal balance shall
be automatically increased by two (2) percentage points until full and final payment of this
Promissory Note.

7. Expenses Of Collection. Should this Promissory Note be referred to any attorney
for collection, whether or not suit has been filed, the BORROWER shall pay all of the holder’s
reasonable costs, fees (including, but not limited to, reasonable attorneys’ fees) and expenses
resulting from such referral.

8. Subsequent Holders. In the event that any holder of this Promissory Note
transfers this Promissory Note for value, the BORROWER agrees that no subsequent holder of this
Promissory Note shall be subject to any claims or defenses which the BORROWER may have against a
prior holder, all of which are waived as to the subsequent holder, and that all subsequent holders
shall have all of the rights of a holder in due course with respect to the BORROWER even though the
subsequent holder may not qualify, under applicable law, absent this paragraph, as a holder in due
course.

9. Waiver Of Protest. The BORROWER, and all parties to this Promissory Note,
whether maker, endorser, or guarantor, waive presentment, notice of dishonor and protest.

10. Assignability. This Promissory Note may be assigned by the LENDER or any holder
at any time or from time to time.

11. Binding Nature. This Promissory Note shall inure to the benefit of and be
enforceable by the LENDER and the LENDER’S successors and assigns and any other person to whom the
LENDER may grant an interest in the BORROWER’S obligations to the LENDER, and shall be binding and
enforceable against the BORROWER and the BORROWER’S successors and assigns.

12. Invalidity Of Any Part. If any provision or part of any provision of this
Promissory Note shall for any reason be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provisions of this Promissory
Note and this Promissory Note shall be construed as if such invalid, illegal or unenforceable
provision or part thereof had never been contained herein, but only to the extent of its
invalidity, illegality, or unenforceability.

13. Choice Of Law; Consent To Venue And Jurisdiction. This Promissory Note shall
be governed, construed and interpreted strictly in accordance with the laws of the Commonwealth of
Virginia.

14. Subordination. It is understood that the BORROWER’S obligation to satisfy its
obligations to the LENDER under this Promissory Note is subordinate to the LENDER’S obligations to
Wilton Funding, LLC pursuant to the Loan and Security Agreement dated as of May 28, 2004, as
amended, and all ancillary documents and instruments thereto.

2

IN WITNESS WHEREOF, the BORROWER has executed this Promissory Note specifically intending this
Promissory Note to constitute an instrument under seal.

	 	 	 	 	 
	WITNESS/ATTEST:

	 	THE BORROWER:
	 	

	 
	 	 	 	 
	
 
	 	THE ALLIED DEFENSE GROUP, INC.

A Delaware Corporation
	 	

	 
	 	 	 	 
	
 
	 	By:
	 	(SEAL)
	 

	 	 
	 	 
	 
	 	 	 	 

3EX-10.2

SUBORDINATION AND INTERCREDITOR AGREEMENT

THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (this “Agreement”) is entered into as of
February 3, 2006, by and among Robert P. Dowski (“Subordinated Creditor”), The Allied Defense
Group, Inc., a Delaware corporation (“Company”), Patriot Capital Funding LLC I, a Delaware limited
liability company, as successor in interest to Wilton Funding, LLC, a Delaware limited liability
company (“Lender”).

R E C I T A L S

A. Company and Lender have entered into a Credit Agreement dated as of May 28, 2004, as
amended (as the same may be further amended, supplemented or otherwise modified from time to time,
the “Credit Agreement”) pursuant to which, among other things, Lender has agreed, subject to the
terms and conditions set forth in the Credit Agreement, to make certain loans and financial
accommodations to Company.

B. Company desires to obtain from Subordinated Creditor a short term loan in an amount not to
exceed $2,000,000.00 (“Subordinated Indebtedness”) and to execute and deliver to Subordinated
Creditor a Term Loan Promissory Note of even date herewith (as the same may be amended,
supplemented or otherwise modified from time to time as permitted hereunder, the “Subordinated
Note”).

D. As required by the Credit Agreement, the Company has requested the consent of the Lender to
obtain the Subordinated Indebtedness and to execute and deliver the Subordinated Note; the Lender
has agreed to provide its consent on the condition that the Subordinated Creditor and the Company
execute and deliver this Agreement in order to set forth the relative rights and priorities of the
Lender and Subordinated Creditor under the Senior Indebtedness and the Subordinated Indebtedness.

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable
consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto
hereby agree as follows:

1. Definitions. The following terms shall have the following meanings in this
Agreement:

"Enforcement Action” means, with respect to the Subordinated
Indebtedness, any action to collect all or any portion of the Subordinated
Indebtedness, to accelerate the Subordinated Indebtedness or to enforce any of the
rights and remedies of the holder of the Subordinated Note, either at law or in
equity, including, but not limited to: (i) commencing or pursuing legal proceedings
to collect any amounts owed with respect to the Subordinated Indebtedness; (ii)
execution upon, or otherwise enforcing any judgment obtained with respect to amounts
owed on the Subordinated Indebtedness; or (iii) commencing or pursuing any judicial
or non-judicial proceedings with respect to the Subordinated Indebtedness to
foreclose upon, or to acquire title in lieu of foreclosure as to, all or any portion
of the assets of Company.

"Finally Paid” or “Final Payment,” when used in connection with
the Senior Indebtedness, shall mean the full, final and indefeasible payment of all
of the Senior Indebtedness, and the irrevocable termination of Lender’s obligation
to make loans or other advances under the Credit Agreement .

"Lender” shall mean Patriot Capital Funding LLC I.

"Senior Indebtedness” shall mean the liabilities, obligations and other
indebtedness of Company under the Credit Agreement and all ancillary documents,
including, without limitation, any interest accruing on such liabilities,
obligations and other indebtedness after the commencement of a Proceeding, without
regard to whether or not such interest is an allowed claim.

"Senior Loan Documents” shall mean the Credit Agreement and any
documents, agreements and instruments executed and delivered in connection
therewith, and upon any refinance of the liabilities, obligations and other
indebtedness thereunder, such documents, agreements and instruments evidencing such
refinance.

"Person” shall mean any natural person, corporation, general or limited
partnership, limited liability company, firm, trust, association, government,
governmental agency or other entity, whether acting in an individual, fiduciary or
other capacity.

"Proceeding” shall mean any voluntary or involuntary insolvency,
bankruptcy, receivership, custodianship, liquidation, dissolution, reorganization,
assignment for the benefit of creditors, appointment of a custodian, receiver,
trustee or other officer with similar powers or any other proceeding for the
liquidation, dissolution or other winding up of a Person.

"Senior Event of Default” shall mean any “event of default” as defined
in any Senior Loan Document that has not been waived in writing by Lender.

2. Subordination.

2.1. Subordination of Subordinated Indebtedness to Senior Indebtedness. Company
covenants and agrees, and Subordinated Creditor by its acceptance of the Subordinated Note (whether
upon original issue or upon transfer or assignment) likewise covenants and agrees, notwithstanding
anything to the contrary contained in the Subordinated Note, that the payment of any and all of the
Subordinated Indebtedness shall be subordinate and subject in right and time of payment, to the
extent and in the manner hereinafter set forth, to the payment in full of the Senior Indebtedness.
Each holder of Senior Indebtedness, whether now outstanding or hereafter created, incurred, assumed
or guaranteed, shall be deemed to have acquired Senior Indebtedness in reliance upon the provisions
contained in this Agreement.

2.2. Liquidation, Dissolution, Bankruptcy. In the event of any Proceeding involving
Company or any of its subsidiaries, (i) all Senior Indebtedness first shall be Finally Paid before
any payment of or with respect to the Subordinated Indebtedness shall be made; and (ii) any payment
which, but for the terms hereof, otherwise would be payable or deliverable in respect of the
Subordinated Indebtedness, shall be paid or delivered directly to Lender until all Senior
Indebtedness is Finally Paid. The Senior Indebtedness shall continue to be treated as Senior
Indebtedness and the provisions hereof shall continue to govern the relative rights and priorities
of Lender and Subordinated Creditor even if all or part of the Senior Indebtedness or the security
interests securing the Senior Indebtedness are subordinated, set aside, avoided or disallowed in
connection with any such Proceeding and the terms hereof shall be reinstated if at any time any
payment of any of the Senior Indebtedness is rescinded or must otherwise be returned by any holder
of the Senior Indebtedness or any representative of such holder.

2.3. Subordinated Indebtedness Payment Restrictions. No payment (whether made in
cash, by payment-in-kind, the issuance of securities or the distribution of any property) of
principal, interest or any other amount due with respect to the Subordinated Indebtedness shall be
made or received, and Subordinated Creditor shall not exercise any right of set-off or recoupment
with respect to the Subordinated Indebtedness, until all of the Senior Indebtedness is Finally
Paid.

2.4. Incorrect Payments. If any payment not permitted hereunder is received by
Subordinated Creditor on account of the Subordinated Indebtedness before all Senior Indebtedness is
Finally Paid, such payment shall not be commingled with any asset of Subordinated Creditor, shall
be held in trust by Subordinated Creditor for the benefit of Lender and shall be paid over to
Lender, or its designated representative, for application to the payment of the Senior Indebtedness
then remaining unpaid, until all of the Senior Indebtedness is Finally Paid.

2.5. Prohibition on Action by Subordinated Creditor. Until the Senior Indebtedness is
Finally Paid, Subordinated Creditor shall not take any Enforcement Action; provided, that
Subordinated Creditor may commence and pursue legal proceedings to collect any payment following
180 days prior written notice to Lender of its intent do so (but under no circumstances may
Subordinated Creditor accelerate the Subordinated Indebtedness under this proviso and Subordinated
Creditor shall not commence any such action, and shall cease any action commenced, if a Senior
Event of Default exists in the payment of any of the Senior Indebtedness). Further, until the
Senior Indebtedness is Finally Paid, Subordinated Creditor shall not obtain any guaranties, credit
support or liens with respect to the Subordinated Indebtedness.

2.6. Continued Effectiveness; Third Party Beneficiaries. The terms hereof, the
subordination effected hereby, and the rights and the obligations of Subordinated Creditor and
Lender arising hereunder, shall not be affected, modified or impaired in any manner or to any
extent by: (a) any amendment or modification of or supplement to any Credit Agreement or the
Subordinated Note; (b) the validity or enforceability of any of such documents; or (c) any exercise
or non-exercise of any right, power or remedy under or in respect of the Senior Indebtedness or the
Subordinated Indebtedness or any of the instruments or documents referred to in clause (a) above.
Each holder of Senior Indebtedness shall be deemed to be a third party beneficiary of the terms and
conditions set forth in this Agreement and, until all Senior Indebtedness has been Finally Paid,
none of such terms and conditions may be modified, rescinded or canceled without the prior written
consent of Lender.

2.7. Modifications to Subordinated Note. Until the Senior Indebtedness has been
Finally Paid, Subordinated Creditor agrees that the Subordinated Note shall not, without the prior
written consent of Lender, be amended, modified or supplemented.

2.8. Legends. Until the termination of this Agreement in accordance with Section
13 hereof, Subordinated Creditor will cause to be clearly, conspicuously and prominently
inserted on the face of the Subordinated Note, as well as any replacements thereof, the following
legend:

“This instrument and the rights and obligations evidenced hereby are
subordinate in the manner and to the extent set forth in that certain Subordination
and Intercreditor Agreement (the “Subordination Agreement”) dated as of February 3,
2006 among Robert P. Dowski, The Allied Defense Group, Inc. and Patriot Capital
Funding LLC I; and each holder of this instrument, by its acceptance hereof,
irrevocably agrees to be bound by the provisions of the Subordination Agreement.”

3. Representations and Warranties of Subordinated Creditor. Subordinated
Creditor hereby represents and warrants to Lender that as of the date hereof: (a)
Subordinated Creditor has the power and authority to enter into, execute, deliver and carry
out the terms of this Agreement, all of which have been duly authorized by all proper and
necessary action; (b) the execution of this Agreement by Subordinated Creditor will not
violate or conflict with any material agreement binding upon Subordinated Creditor or any
law, regulation or order or require any consent or approval which has not been obtained; (c)
this Agreement is the legal, valid and binding obligation of Subordinated Creditor,
enforceable against Subordinated Creditor in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors’ rights generally and by
equitable principles; (d) Subordinated Creditor is the sole owner of record of the
Subordinated Note and the Subordinated Indebtedness; and (e) the Subordinated Indebtedness
is, and at all times prior to the termination of this Agreement shall remain, an unsecured
obligation of Company.

4. Modification. Any modification or waiver of any provision of this
Agreement, or any consent to any departure by any party from the terms hereof, shall not be
effective in any event unless the same is in writing and signed by Lender and Subordinated
Creditor, and then such modification, waiver or consent shall be effective only in the
specific instance and for the specific purpose given. Any notice to or demand on any party
hereto in any event not specifically required hereunder shall not entitle the party
receiving such notice or demand to any other or further notice or demand in the same,
similar or other circumstances unless specifically required hereunder.

5. Further Assurances. Each party to this Agreement promptly will execute and
deliver such further instruments and agreements and do such further acts and things as may
be reasonably requested in writing by any other party hereto that may be necessary or
desirable in order to effect fully the purposes of this Agreement.

6. Notices. Unless otherwise specifically provided herein, any notice
delivered under this Agreement shall be in writing addressed to the respective party as set
forth below and may be personally served, telecopied or sent by overnight courier service or
certified or registered United States mail and shall be deemed to have been given (a) if
delivered in person, when delivered; (b) if delivered by telecopy, on the date of
transmission if transmitted on a business day before 4:00 p.m. (New York time) or, if not,
on the next succeeding business day; (c) if delivered by overnight courier, one business day
after delivery to such courier properly addressed; or (d) if by United States mail, four
business days after deposit in the United States mail, postage prepaid and properly
addressed.

Notices shall be addressed as follows: (A) if to Subordinated Creditor: Robert P. Dowski,
The Allied Defense Group, Inc, 8000 Towers Crescent Drive, Suite 260, Vienna, Virginia 22182; (B)
if to Company: The Allied Defense Group, Inc., 8000 Towers Crescent Drive, Suite 260, Vienna
Virginia 22182, Attn: Chief Executive Officer; and (C) if to Lender: Patriot Capital Funding LLC
I, 274 Riverside Avenue First Floor, Westport CT 06880;

or in any case, to such other address as the party addressed shall have previously designated by
written notice to the serving party, given in accordance with this Section 6.

7. Successors and Assigns. This Agreement shall inure to the benefit of, and
shall be binding upon, the respective successors and assigns of Lender, Subordinated
Creditor and the Company. To the extent permitted under the Senior Loan Documents, Lender
may, from time to time, without notice to Subordinated Creditor, assign or transfer any or
all of the Senior Indebtedness or any interest therein to any Person and, notwithstanding
any such assignment or transfer, or any subsequent assignment or transfer, the Senior
Indebtedness shall, subject to the terms hereof, be and remain Senior Indebtedness for
purposes of this Agreement, and every permitted assignee or transferee of any of the Senior
Indebtedness or of any interest therein shall, to the extent of the interest of such
permitted assignee or transferee in the Senior Indebtedness, be entitled to rely upon and be
the third party beneficiary of the subordination provided under this Agreement and shall be
entitled to enforce the terms and provisions hereof to the same extent as if such assignee
or transferee were initially a party hereto. Subordinated Creditor further agrees that it
will, at the request of Lender, enter into an agreement, in the form of this Agreement,
mutatis mutandis, with any party that refinances any Senior Indebtedness;
provided, that the failure of Subordinated Creditor to execute such an agreement
shall not affect such party’s right to rely on and enforce the terms of this Agreement.
Subordinated Creditor agrees that it shall not assign or transfer any of the Subordinated
Indebtedness without the prior consent of Lender unless any assignee signs a counterpart of
this Agreement pursuant to which such assignee agrees to be bound by all of the provisions
of this Agreement as if it had originally executed this Agreement as Subordinated Creditor..

8. Relative Rights. This Agreement shall define the relative rights of Lender
and Subordinated Creditor. Nothing in this Agreement shall (a) impair, as among Company,
Lender and as between Company and Subordinated Creditor, the obligations of Company with
respect to the payment of the Senior Indebtedness and the Subordinated Indebtedness in
accordance with their respective terms or (b) affect the relative rights of Lender or
Subordinated Creditor with respect to any other creditors of Company.

9. Conflict. In the event of any conflict between any term, covenant or
condition of this Agreement and any term, covenant or condition of the Subordinated Note,
the provisions of this Agreement shall control and govern.

10. Headings. The paragraph headings used in this Agreement are for
convenience only and shall not affect the interpretation of any of the provisions hereof.

11. Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall constitute one
and the same instrument.

12. Severability. In the event that any provision of this Agreement is deemed
to be invalid, illegal or unenforceable by reason of the operation of any law or by reason
of the interpretation placed thereon by any court or governmental authority, the validity,
legality and enforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby, and the affected provision shall be modified to the
minimum extent permitted by law so as most fully to achieve the intention of this Agreement.

13. Continuation of Subordination; Termination of Agreement. This Agreement
shall remain in full force and effect until all the Senior Indebtedness has been Finally
Paid after which this Agreement shall terminate without further action on the part of the
parties hereto.

14. Applicable Law. This Agreement shall be governed by and shall be construed
and enforced in accordance with the internal laws of the State of New York, without regard
to conflicts of law principles.

15. CONSENT TO JURISDICTION. EACH PARTY HERETO HEREBY CONSENTS TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE CITY OF NEW YORK, STATE OF NEW
YORK AND IRREVOCABLY AGREES THAT, SUBJECT TO LENDER’S ELECTION, ALL ACTIONS OR PROCEEDINGS
ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE LITIGATED IN SUCH COURTS. EACH PARTY
HERETO EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES
ANY DEFENSE OF FORUM NON CONVENIENS. EACH PARTY HERETO HEREBY WAIVES PERSONAL SERVICE OF
ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON IT BY
CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO SUCH PARTY AT ITS
ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE 10 DAYS AFTER THE
SAME HAS BEEN POSTED.

16. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES ITS RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE
SUBORDINATED NOTE OR ANY OF THE SENIOR LOAN DOCUMENTS. EACH OF SUBORDINATED CREDITOR,
COMPANY AND LENDER ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A
BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT
AND THE SENIOR LOAN DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR
RELATED FUTURE DEALINGS. EACH PARTY HERETO WARRANTS AND REPRESENTS THAT IT HAS HAD THE
OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH LEGAL COUNSEL, AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS.

[SIGNATURE PAGE FOLLOWS]

1

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the
date first above written.

	 
	 

	Robert P. Dowski

THE ALLIED DEFENSE GROUP, INC,

a Delaware corporation

By

Its

PATRIOT CAPITAL FUNDING LLC I,

a Delaware limited liability company

By

Its

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