Document:

Exhibit 10.1

 

DITECH NETWORKS, INC.

825 E.
MIDDLEFIELD ROAD

MOUNTAIN VIEW, CA. 94043

 

September 2,
2009

 

Lamassu Holdings,
LLC

21 Whitesands Drive
Newport Coast, CA  92657

Attn:  Timothy Leehealey

 

Samuel Healey

21 Whitesands
Drive

Newport Coast,
CA  92657

 

Frank J. Sansone

2933 Arboridge
Court

Fullerton, CA  92835

 

The following sets
forth the agreement (the “Agreement”)
between Lamassu Holdings L.L.C. and each of its affiliates listed in the
signature blocks below (collectively, “Lamassu”),
and Ditech Networks, Inc. (“Ditech”):

 

1.                                       Ditech hereby covenants and agrees that
each of Mr. Alan Howe and Mr. Frank J. Sansone will be nominated by
the Ditech Board of Directors (the “Board”) for
election at the 2009 annual meeting of stockholders (the “2009
Annual Meeting”), to the class the term of office of which will
expire at the 2012 annual meeting of stockholders.  Mr. Howe and Mr. Sansone will
replace Mr. Avis and Mr. Manoliu, each of whom will cease to be
members of the Board at such time.

 

2.                                       Prior to the 2009 Annual Meeting, (i) the
Board shall recommend that Ditech’ stockholders vote in favor of Mr. Howe
and Mr. Sansone at the 2009 Annual Meeting and (ii) Ditech shall
solicit proxies for the election of Mr. Howe and Mr. Sansone at the
2009 Annual Meeting.

 

3.                                       For so long as Lamassu continues to
beneficially own not less than 5% of the outstanding shares of Ditech common
stock:  if the Lamassu Designee (as
defined below) is unable or unwilling to continue to serve on the Board and as
a result there is a vacancy created on the Board, the Board shall, consistent
with its fiduciary duties, appoint a replacement director designated by Lamassu
Holdings L.L.C. (other than Timothy Leehealey, who shall not be designated by
Lamassu Holdings L.L.C.) to fill the resulting vacancy, provided that
such replacement director is reasonably acceptable to Ditech (and the Board
will not unreasonably withhold acceptance of any such replacement director);
and Ditech will use its commercially reasonable efforts to secure the election to
the Board of such replacement director; provided, however, that 

 

1

 

the Board may determine, in its sole discretion, that
a replacement director is not reasonably acceptable if such replacement
director shall not have signed a conditional resignation as a director of
Ditech in the form attached here to as Schedule A.  Ditech hereby confirms that Mr. Sansone
is reasonably acceptable to the Nominating and Corporate Governance Committee (“NCGC”) and the Board (provided that
he has signed a conditional resignation as a director of Ditech in the form
attached here to as Schedule A),
and his nomination to the Board in satisfaction of the requirement of paragraph
1 meets the requirements of this paragraph 3.  
For purposes of this Agreement, Mr. Sansone and any replacement
director for Mr. Sansone shall each be deemed a “Lamassu
Designee”.

 

4.                                       Lamassu shall use its best efforts to
cause each Lamassu Designee to tender to Ditech a conditional resignation as a
director of Ditech in the form attached here to as Schedule
A.  If Lamassu shall cease
to beneficially own at least 5% of the outstanding shares of Ditech common
stock, the Board may accept the Lamassu Designee conditional resignation as a
director of Ditech referred to above.

 

5.                                       Lamassu will vote all of the shares it
beneficially owns in support of the slate of Directors nominated by the Board
for the 2009 Annual Meeting (and will not support or participate in any “withhold
the vote” or similar campaign, or support any other nominees other than the
slate of Directors nominated by the Board).

 

6.                                       For a period beginning on the date of
this letter agreement and continuing until 90 days from the date of the 2009
Annual Meeting, Lamassu will not (i) make any public statement
regarding Ditech, the Board or any of Ditech’s officers, directors or
employees, except for the press release attached hereto as Schedule A, or as
may be required by law, or (ii) disparage Ditech, the Board, or any of
Ditech’s officers, directors or employees, in any manner, including in any
manner which could be harmful to Ditech or its business, the Board or its
reputation, or the business reputation or personal reputation of any officer,
director or employee of Ditech.

 

7.                                       Subject to the nominations of Mr. Howe
and Mr. Sansone as specified in paragraph 1 as directors of Ditech,
Lamassu hereby withdraws its previously announced notice of its intent to
nominate directors with respect to the 2009 Annual Meeting.

 

8.                                      Promptly after the execution of this
Agreement, Ditech and Lamassu will issue a joint press release in the form
attached hereto as Schedule B.

 

9.                                       Each of Lamassu Holdings L.L.C. and the
other entities included within Lamassu agrees that it will cause its controlled
affiliates, current and future, to comply with the terms of this Agreement as
if a party hereto.

 

10.                                 This Agreement may only be modified
through a written agreement signed by Ditech and by Lamassu Holdings
L.L.C.  This Agreement contains the
entire agreement between the parties with respect to the subject matter hereof
and thereof and supersedes all prior and contemplated arrangements and
understandings with respect 

 

2

 

thereto.  This
Agreement may be signed in counterparts, each of which shall constitute an
original and all of which together shall constitute one and the same Agreement.

 

11.                                 This Agreement and the legal relations
hereunder between the parties hereto shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and performed therein, without giving effect to the principles of conflicts of
law thereof.  Each of the parties hereto
hereby irrevocably and unconditionally consents to submit to the exclusive
jurisdiction of the courts of the State of Delaware and of the United States of
America, in each case located in the County of New Castle, for any action,
proceeding or investigation in any court or before any governmental authority
arising out of or relating to this Agreement and the transactions contemplated
hereby (and agrees not to commence any action, proceeding or investigation
relating thereto except in such courts), and further agrees that service of any
process, summons, notice or document by registered mail to its respective
address set forth in this Agreement shall be effective service of process for
any action, proceeding or investigation brought against it in any such court.
Each of the parties hereto hereby irrevocably and unconditionally waives any objection
to the laying of venue of any action, proceeding or investigation arising out
of this Agreement or the transactions contemplated hereby in the courts of the
State of Delaware or the United States of America, in each case located in the
County of New Castle, and hereby further irrevocably and unconditionally waives
and agrees not to plead or claim in any such court that any such action,
proceeding or investigation brought in any such court has been brought in an
inconvenient forum.

 

12.                                 Each party hereto shall do and perform or
cause to be done and performed all such further acts and things and shall
execute and deliver all such other agreements, certificates, instruments and
documents as any other party hereto reasonably may request in order to carry out
the intent and accomplish the purposes of this Agreement and the consummation
of the transactions contemplated hereby.

 

3

 

If you are in
agreement please sign below.

 

	
   

  	
  Very truly
  yours,

  
	
   

  	
   

  	
   

  
	
   

  	
  DITECH
  NETWORKS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Todd Simpson

  
	
   

  	
   

  	
  Todd Simpson

  
	
   

  	
   

  	
  Chief Executive
  Officer and President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address:

  	
  825 E.
  Middlefield Road

  
	
   

  	
   

  	
   

  	
  Mountain View,
  CA 94043

  
	
   

  	
   

  	
  Telephone:

  
	
   

  	
   

  	
  Facsimile:

  
					

 

Accepted and agreed as of the date set forth above.

 

LAMASSU
HOLDINGS L.L.C.

 

 

	
  By:

  	
  /s/ Timothy
  Leehealey

  	
   

  
	
   

  	
  Timothy
  Leehealey

  	
   

  
	
   

  	
  Managing Member

  	
   

  
	
   

  	
  Address:

  	
  21 Whitesands
  Dr.

  	
   

  
	
   

  	
   

  	
  Newport Coast,
  CA  92657

  	
   

  
	
   

  	
  Telephone:

  	
   

  
	
   

  	
  Facsimile:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Timothy
  Leehealey

  	
   

  
	
   

  	
  Timothy
  Leehealey

  	
   

  
	
   

  	
  Address:

  	
  21 Whitesands
  Dr.

  	
   

  
	
   

  	
   

  	
  Newport Coast,
  CA  92657

  	
   

  
	
   

  	
  Telephone:

  	
   

  
	
   

  	
  Facsimile:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Samuel
  Leehealey

  	
   

  
	
   

  	
  Samuel Healey

  	
   

  
	
   

  	
  Address:

  	
  21 Whitesands
  Dr.

  	
   

  
	
   

  	
   

  	
  Newport Coast,
  CA  92657

  	
   

  
	
   

  	
  Telephone:

  	
   

  
	
   

  	
  Facsimile:

  	
   

  

 

4

 

	
   

  	
  /s/ Frank J.
  Sansone

  	
   

  
	
   

  	
  Frank J. Sansone

  	
   

  
	
   

  	
  Address:

  	
  2933 Arboridge
  Court

  	
   

  
	
   

  	
   

  	
  Fullerton, CA
  92835

  	
   

  
	
   

  	
  Telephone:

  	
   

  
	
   

  	
  Facsimile:

  	
   

  

 

5

 

SCHEDULE
A

 

CONDITIONAL
RESIGNATION

 

September 2, 2009

 

Secretary

Ditech Networks, Inc.

825 E. Middlefield Road

Mountain View, CA 
94043

 

Dear Secretary:

 

I hereby tender my resignation as a member of the Board of
Directors of Ditech Networks, Inc., which shall be effective only in the
event that both (a) Lamassu Holdings L.L.C. and its affiliates shall cease
to beneficially own, collectively, at least 5% of the outstanding shares of
Ditech Networks, Inc., and (b) the Board of Directors of Ditech
Networks, Inc. accepts this resignation.

 

Very truly yours,

 

 

	
   

  	
   

  
	
  [Name]

  	
   

  

 

6

 

SCHEDULE
B

 

PRESS
RELEASE

 

Ditech
Networks and Lamassu Holdings LLC Settle Proxy Contest

 

Parties
Reach an Agreement Related to Board Nominees for Ditech’s 2009 Annual Meeting

 

Mountain
View, CA – (BusinessWire – September 2, 2009) - Ditech Networks (NASDAQ:
DITC), a global leader in mobile voice processing solutions, today announced
that it has settled with Lamassu Holdings LLC on nominees to the company’s
Board of Directors.  Under the terms of
the settlement, the company has agreed to nominate Frank Sansone, Lamassu
Holding’s candidate and Alan B. Howe, an experienced industry veteran as new
directors.

 

In
view of the settlement agreement with Lamassu and the termination of the proxy
contest, Mr. Greg Avis, who has served on the company’s board of directors
since 1997, and Mr. Andrei Manoliu, who has served on the company’s board
of directors since 2000, have announced they will retire from the board of
directors and will not stand for re-election.

 

About Ditech Networks

 

Ditech
Networks is revolutionizing modern communications with advanced voice
processing solutions that perform tasks spanning from voice-enabled Web 2.0 and
unified communications services to voice quality enhancement. Ditech believes
in the power and simplicity of human speech; its solutions deliver high-quality
voice communication and will enable compelling voice capabilities to new
communications methods like social networking and text messaging, allowing
consumers to use voice in ways that make sense in today’s Web 2.0-savvy world.

 

	
  Press
  Contact:

  	
  Investor
  Contact:

  
	
  Rob Adler

  	
  Bill Tamblyn

  
	
  415 984 1970

  	
  650-623-1309

  

 

Ditech Networks,
Voice Quality Assurance, Quad Voice Processor, and Broadband Voice Processor
are trademarks or registered trademarks of Ditech Networks, Inc. All other
trademarks are the property of their respective owners.

 

#    #   
#

 

7ex10one.htm

     

     

    
      

      

    

     

     

    

     

    Mr.
Andrew Prince

    Freundlich
Supply Company, Inc.

    2200
Arthur Kill Road

    Staten
Island, NY 10309

    

    August
19, 2009

    

    
      
        	 
      	
                Re:

              	
                Line Letter for $2,800,000.00 Line of
      Credit

              

      

    

    

    Dear Mr.
Prince:

    

    Israel
Discount Bank of New York (“IDB”) is pleased to advise you that it is prepared
to extend to Freundlich Supply Company, Inc. (the “Borrower”), a corporation,
organized and in good standing under the laws of the State of New York, an
uncommitted discretionary demand line of credit (“Line” or “Credit Facility”) in
the maximum principal amount of $2,800,000.00,
subject to the following terms and conditions of this line letter agreement
(“Line Letter”) used forth below:

    

    Borrower
may utilize this Line until April 30,
2010 (the “Expiration Date”);  provided, however, that Borrower
acknowledges the continuing availability of this Line is at all times subject to
IDB’s sole and absolute discretion, and nothing in this Line Letter, the Note
(as defined below) or any other documents relating to this Line Letter, or the
enumeration in this Line Letter or the Note of specific events of default,
conditions and/or covenants shall be construed to qualify, define or otherwise
limit IDB's right, power, or ability, at any time, under applicable law, to (a)
cancel this Line without prior notice, (b) demand payment of the entire
outstanding principal amount, accrued interest and other fees and expenses due
under this Line and the Note or (c) deny any extension of credit under this
Line.  Borrower agrees that Borrower's breach of or default under any
enumerated obligations or conditions is not the only basis for demand to be made
or for a request for an extension of credit to be denied, as Borrower's
obligation to make payment shall at all times remain a demand obligation.
Notwithstanding anything in this Line Letter to the contrary, this Line Letter
does not create a commitment or obligation to lend by IDB and Borrower
acknowledges that IDB has no obligation to lend.

    

    
      	
              Credit
      Facility:

            	
              IDB
      establishes for the benefit of the Borrower the uncommitted Credit
      Facility pursuant to which IDB may, in its sole discretion and pursuant to
      the Borrower’s requests, make advances under a revolving credit line
      (“Revolving Credit Line” as further described below in subparagraph (a) in
      the aggregate amount of the lesser of: (i) $2,800,000.00;
      or (ii) Borrowing Base (“Maximum Credit Amount”). Subject to such
      availability, such extensions of credit shall be available under the Line
      and limited to the following
sublimits:

            

    

     

     

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

     

    

     

    
       

      
        
          	
                   (a)

                	
                   
      

                	
                  Revolving Credit
      Line.  Advances under the Revolving Credit Line shall be
      evidenced by IDB’s Demand Grid Promissory Note (the “Note”) in the
      principal amount of $2,800,000.00
      (revolving principal amount).  Any advance under the Line made
      at the discretion of IDB shall be in an amount not less than $50,000.

                

        

      

    

     

    

    Purpose:          The
purpose of the Credit Facility shall be for working capital.

    

    Interest
and     Interest.

    Principal

    
      	
              Payments: 
      

            	
              (a)

            	
               

            	
              Rate.  Each
      advance under the Revolving Credit Line shall bear interest at a rate to
      be elected by the Borrower at the time of each advance request equal to
      either:

            

    

     

    
      	
               
      

            	
              (i)

            	
              Prime Rate
      Option:  A rate of interest established by IDB as
      its prime rate of interest, as determined by IDB from (the “Prime
      Rate”), plus a margin of One
      Hundred and fifty (150) basis points. Any change in the Prime Rate
      shall take effect on the date of the change in the Prime Rate;
      or

            

    

     

    
      	
               
      (b)

            	
               

            	
              Interest
      Payments.  Interest on the unpaid principal balance of
      the Note from time to time outstanding shall be payable monthly pursuant
      to the terms of the Note.

            

    

     

    
      	
               
      (c)

            	
               

            	
              Interest Rate
      Floor.  There shall be an interest rate floor of 4.25%
      for all borrowings under the Credit
Facility.

            

    

     

    
      	
               
      (d)

            	
               

            	
              Increased
      Costs.

            	
              If at any time during
      the term of the Line, IDB determines that the Prime Rate will not
      adequately and fairly reflect the cost to IDB of making or maintaining an
      advance, then IDB shall give notice thereof to the Borrower as promptly as
      practicable thereafter and, until IDB notifies the Borrower that the
      circumstances giving rise to such notice no longer
      exists.

            

    

     

     

     

     

     

     

     

    
 

    
      
        
           

          

          ISRAEL
DISCOUNT BANK OF NEW YORK · MEMBER FDIC

          511 FIFTH
AVE. NEW YORK, NY 10017-4997 · TEL: (212)
551-8500

        

         

      

      
        2

        
          

        

      

      
         

      

    

     

     

    

     

     

                                          Principal.

     

    
      	
               
      

            	
              Prior
      to the Expiration Date and further provided that no Event of Default has
      occurred, the unpaid principal amount due under the Line may be repaid and
      reborrowed in accordance with and pursuant to the terms of the
      Note.

            

    

    

    
      	
               
      

            	
              All
      amounts of interest, principal and other fees and other charges shall be
      payable no later than the Expiration Date, upon demand by IDB, or upon the
      occurrence and continuation of an Event of
  Default.

            

    

    

    
      	
              Borrowing
      Base:

            	
              As
      noted above, the Maximum Credit Amount for the Credit Facility shall be
      the lesser of: (i) $2,800,000.00;
      or (ii) the Borrowing Base.  The Borrowing Base shall mean that
      amount consisting of (a) 80%
      of Eligible Accounts Receivable, plus (b) (50%
      of Eligible Inventory, and reducing by 2.5% each month until the final
      advance rate is equal to 30%,  (c) minus any reserves
      required by IDB.  The specified advance rates and reserves
      required by IDB are subject to change following IDB’s review of the Field
      Exam.

            

    

     

    
    

     

    
      	 	
              The
      term “Eligible Accounts Receivables” as used herein means accounts
      receivables which are due and payable and not more than 120
      days from invoice due date and therefore excluding contra accounts,
      related accounts, foreign accounts, poor credit accounts or other accounts
      which, in the sole discretion of IDB, do not constitute acceptable
      collateral. 

            

    

     

    
      	
               
      

            	
              The
      term “Eligible Inventory” as used herein means finished goods on premises
      which are held for sale excluding any which are not currently saleable and
      any which, in the sole discretion of IDB, do not constitute acceptable
      collateral.  Eligible Inventory will be capped at $2,500,000.00.

            

    

    

    
      	
               
      

            	
              The
      term “Field Exam” as used herein generally means the engagement of
      financial professionals (in-house or external) by the Bank to perform
      certain limited procedures with respect to the Borrower’s operations,
      internal control structure, loan covenant compliance and adherence to
      reporting requirements.

            

    

    
      	
              Fees
      and

            	
               

            

    

    
      	
              Charges:

            	
              Fees
      and charges applicable to the Credit Facility are set forth on Schedule 1.  Additionally,
      other fees may be applicable to deposit accounts and other financial
      products and services offered by IDB, which are set forth in separate
      account agreements and schedules applicable to such accounts and products,
      and are subject to change.

            

    

     

     

    
      
        
          
             

            

            ISRAEL
DISCOUNT BANK OF NEW YORK · MEMBER FDIC

            511 FIFTH
AVE. NEW YORK, NY 10017-4997 · TEL: (212)
551-8500

          

           

        

        
          3

          
            

          

        

        
           

        

      

    

     

     

    

    
 

    
      	
              Collateral:

            	
              The
      Credit Facility shall be secured by a perfected first priority security
      interest in all assets and personal property of the Borrower, whether now
      owned or hereafter acquired, pursuant to IDB’s General Security Agreement,
      duly filed UCC financing statements and such other and further
      documentation as IDB determines necessary in its
    discretion.

            

    

    

    
      	
              Guarantees:

            	
              The
      following guarantors (each, a “Guarantor”, collectively, “Guarantors”)
      shall guarantee the full and prompt repayment of all loans, extensions of
      credit and financial accommodations provided under the Credit Facility
      together with interest and costs thereon pursuant to IDB’s Guaranty
      Agreement (the “Guarantee”). In addition, the Line shall be guaranteed by
      all subsidiaries hereafter formed or acquired by the Borrower and each
      such new subsidiary shall execute a Guarantee promptly after the Bank’s
      request therefore.

            

    

     

    
      
        
          
            	 
      	
                    Name

                  	
                    Address

                  
	 
      	
                    Precision
      Aerospace

                    Components,
      Inc.

                  	
                    2200
      Arthur Kill Road

                    Staten
      Island, NY 10309

                  

          

        

      

       

    

    Covenants
and

    
      	
              Conditions:

            	
              The
      Credit Facility is subject to the following financial covenants and
      conditions:

            

    

    

    
      	
               
      

            	
              1.

            	
              Capital Funds.
      The Borrower must achieve at 12/31/2009 and maintain thereafter a minimum
      of $2,200,000.00
      in Capital Funds.  The term Capital Funds as used herein shall
      mean shareholder equity plus subordinated debt, in form satisfactory to
      IDB, less intangible assets, investments in other companies, and loans to
      officers and affiliates.

            

    

    
      	
               
      

            	
              2.

            	
              No
      Losses.  The Borrower agrees that, so long as any
      obligations under the Credit Facility remain outstanding, the Borrower
      shall not incur a net loss [on a combined basis] in any fiscal year
      determined for Borrower [and its subsidiaries on a consolidated
      basis].

            

    

    
      	
               
      

            	
              4.

            	
              No Change of
      Name.  The Borrower shall not change its name without the
      prior written consent of IDB.

            

    

    
      	
               
      

            	
              5.

            	
              Insurance.  The
      Borrower shall maintain hazard insurance, endorsed to name IDB as an
      additional loss payee, on its inventory [and other assets pledged to the
      Bank as collateral for the Line] with a financially sound and reputable
      insurance company in such amounts as are necessary to cover not less than
      the replacement cost of such inventory and covering such risks as are
      usually carried by companies engaged in the same or similar business. So
      long as no Event of Default has occurred and is continuing under the loan
      documents in respect of the Credit Facility, the Borrower shall be
      entitled to receive the full amount of all insurance proceeds, provided
      that said proceeds are used to purchase replacement inventory [and such
      other insured assets] of a type and quality satisfactory to
      IDB.

            

    

    
      
      

    

    
      
      

    

    
      
      

    

     

     

     

     

    
       

      
        
          
            
               

              

              ISRAEL
DISCOUNT BANK OF NEW YORK · MEMBER FDIC

              511 FIFTH
AVE. NEW YORK, NY 10017-4997 · TEL: (212)
551-8500

            

             

          

          
            4

            
              

            

          

          
             

          

        

      

    

     

     

    

     

     

    
      
        	
              	
                6.

              	
                Compliance;
      Existence.  The Borrower shall comply with laws and
      contractual obligations, payment of obligations and preserve its
      existence.

              

      

      
        	
                Conditions 
      

              	
                 

              

      

      
        	
                Precedent:

              	
                Prior
      to the Borrower’s initial and each subsequent request for an advance or
      financial accommodation under the Credit Facility, it shall have provided
      to IDB the following:

              

      

      
 

    

    
      	
               
      

            	
              1.

            	
              A
      copy of the resolutions passed by the Borrower’s Board of Directors,
      certified by its Secretary, as being in full force and effect authorizing
      the borrowing described herein, incumbency certificate for Borrower
      identifying all authorized officers with specimen signatures and the
      execution of all documents and agreements required by IDB to evidence and
      secure the Credit Facilities, which shall include this Line Letter, Note,
      General Security Agreements, Guaranty Agreements and such other documents,
      all in form and substance acceptable to IDB and its counsel in their sole
      discretion;

            

    

    
      	
               
      

            	
              2.

            	
              A
      copy of the resolutions passed by each Guarantor’s Board of Directors or
      other governing body, as applicable, certified by the Secretary of such
      Guarantor as being in full force and effect authorizing the guarantee
      described herein and the execution of all documents and agreements
      required by IDB to evidence and secure the
  guarantee;

            

    

    
      
        	
                 
      

              	
                3.

              	
                Copies
      of the certificates of incorporation of the Borrower and each Guarantor,
      as the case may be;

              
	 	4. 	Payment
      of all fees, expenses and charges invoiced by
  IDB; 

      

    

    
      	
               
      

            	
              5.

            	
              Insurance
      in amounts satisfactory to IDB, with IDB named as lender loss payee on
      such policy;

            

    

    
      	
               
      

            	
              6.

            	
              Release
      of all liens including those of refinanced lenders, prior to
      funding;

            

    

    
      	
               
      

            	
              7.

            	
              Satisfactory
      completion of standard due diligence, including Know Your Customer
      procedures, searches and reports required by IDB, including the Field Exam
      confirming parameters of Borrowing Base, with all costs for the account of
      the Borrower;

            

    

    
      	
               
      

            	
              8.

            	
              Receipt
      of satisfactory financial statements and projections for the current
      fiscal year, which reflect compliance with all covenants of this Line
      Letter;

            

    

    
      
      

    

    
      
      

    

    
      
      

    

     

     

     

    
       

      
        
          
            
               

              

              ISRAEL
DISCOUNT BANK OF NEW YORK · MEMBER FDIC

              511 FIFTH
AVE. NEW YORK, NY 10017-4997 · TEL: (212)
551-8500

            

             

          

          
            5

            
              

            

          

          
             

          

        

      

    

     

     

    

     

     

    
      	
            	
              9.

            	
              The
      Borrower shall open and maintain its operating deposit accounts with
      IDB;

            

      
        	
                 
      

              	
                10.

              	
                The
      absence of any action, suit, investigation or proceeding pending or
      threatened in any court of before any arbitrator or governmental authority
      that purports (a) to materially and adversely impact the Borrower, its
      subsidiaries or any Guarantor, or (b) to affect any transaction
      contemplated hereby or the ability of the Borrower, its subsidiaries or
      any Guarantor to perform their respective obligations under the Credit
      Facility.

              

      

      
        
          
            
              
                	
                        Financial

                      	 
	Information: 	 The borrower agrees that, so long as any
      obligations under the CreditFacility remain outstanding, the Borrower
      shall furnish to
IDB:

              

            

          

        

      

                                         

    

    
      	
               
      

            	
              1.

            	
              Within
      120
      days after the end of each of its fiscal years, the financial statements
      of the Guarantor
      dated as of the end of the reported fiscal year, which shall be audited
      by a certified public accountant acceptable to IDB and be without material
      exception or qualification.  Within 120 days after the end of
      each of its fiscal years, the financial statements of the Borrower
      dated as of the end of the reported fiscal year, which shall be prepared
      by the management of the Borrower, and confirmed by the Company’s
      certified public accountant.

            

    

    
      	
               
      

            	
              2.

            	
              Within
      60
      days of the fiscal quarter ending 3/31, 6/30 and 9/30 the financial
      statements of the Guarantor dated as of the end of the reported fiscal
      quarter. These statements shall be prepared by management and acceptable
      to IDB;

            

    

    
      	
               
      

            	
              3.

            	
              Within
      60
      days of the fiscal quarter ending 3/31, 6/30 and 9/30 the financial
      statements of the Borrower dated as of the end of the reported fiscal
      quarters. These statements may be prepared by
  management;

            

    

    
      	
               
      

            	
              4.

            	
              Within
      25
      days from every month end, monthly income statement, balance
      sheet;

            

    

    
      	
               
      

            	
              6.

            	
              Signed
      monthly Borrowing Base Certificates by the 20th of
      the following month in form satisfactory to IDB and an accounts receivable
      aging report, including a roll forward of accounts receivable reflecting
      sales, collections and credits for the prior month and such other
      information as IDB may require;

            

    

    
      	
               
      

            	
              7.

            	
              Monthly
      balance sheet and income statement forecasts for the 12-month fiscal
      period ending 12/31 shall be submitted no later than 60
      days after fiscal year end;

            

    

    
      	
               
      

            	
              8.

            	
              Notice
      of default, litigation, proceedings or investigations, and material
      changes in accounting or financing reporting
  practices.

            

    

     

     

     

    
       

      
        
          
            
               

              

              ISRAEL
DISCOUNT BANK OF NEW YORK · MEMBER FDIC

              511 FIFTH
AVE. NEW YORK, NY 10017-4997 · TEL: (212)
551-8500

            

             

          

          
            6

            
              

            

          

          
             

          

        

      

    

     

     

    

     

     

    
      	
              Examinations:

            	
              The
      Borrower shall allow representatives of IDB to examine any of its books,
      records and collateral, at any reasonable time.  Examinations
      will normally take place once a year but may be done more frequently at
      IDB’s discretion and shall be for the account of the
    Borrower.

            

    

    

    
      	
              Documentation:

            	
              The
      utilization of the Credit Facility will be subject to the execution and
      delivery to IDB of such agreements, documents, instruments, and
      certificates as may be requested by IDB and its counsel to evidence the
      Credit Facility, guarantees, security interests and other matters relating
      to the Credit Facility in form and substance satisfactory to IDB and its
      counsel, in their sole discretion.  The loan documents shall
      contain normal and customary default provisions, as
      applicable.  Reasonable legal fees and costs shall be for the
      account of the Borrower.

            

    

    Negative

    
      	
              Covenants:

            	
              The
      Borrower is prohibited from: (i) incurring additional debt; (ii) granting
      liens; (iii), entering into agreements for joint ventures, mergers or
      sales of all or substantially all of Borrower’s assets; (iv) guaranteeing
      the indebtedness of other persons or entities; (v) issuing dividends; (vi)
      making loans and advances to officers and related entities; (vii) entering
      into transactions with affiliates; or (viii) making material changes in
      the nature of its business.

            

    

    

    
      	
              USA
      Patriot Act:

            	
              To
      comply with applicable law, the Borrower, Guarantors and beneficial owners
      of the Borrower and Guarantors shall provide IDB with verifiable
      information including: name, address, and corporate tax identification
      number, date of birth and social security number (if an individual) and
      other information.  This information may be shared with
      government agencies and regulators as required by applicable
      law.  The Borrower further confirms and represents that it is in
      compliance with all applicable terms and conditions under the USA PATRIOT
      Act.

            

    

    
      	
              General 
      

            	
               

            

    

    
      	
              Information:

            	
              The
      Borrower shall supply IDB with other such information, reports, and
      statements as it may reasonably request, and agrees to cooperate with IDB
      in order to comply with the terms and conditions of this Line
      Letter.

            

    

    
      	
              Events of  

            	
               

            

    

    
      	
              Default:

            	
              The
      following shall constitute events of default (“Events of Default”) under
      the Line, entitling IDB to pursue all rights and remedies available under
      the loan documents and applicable
law:

            

    

     

     

     

    
       

      
        
          
            
               

              

              ISRAEL
DISCOUNT BANK OF NEW YORK · MEMBER FDIC

              511 FIFTH
AVE. NEW YORK, NY 10017-4997 · TEL: (212)
551-8500

            

             

          

          
            7

            
              

            

          

          
             

          

        

      

    

     

     

    

    
 

    
      	
               
      

            	
              1.

            	
              Nonpayment
      of principal or interest due under the Credit Facility and such nonpayment
      is not cured within 10 business days from the due
  date;

            

    

    
      	
               
      

            	
              2.

            	
              Nonpayment
      of fees or other amounts due under the Credit Facility and such nonpayment
      is not cured within 10 business days from the due
  date;

            

    

    
      	
               
      

            	
              3.

            	
              Any
      representation or warranty providing to have been materially incorrect
      when made or confirmed;

            

    

    
      	
               
      

            	
              4.

            	
              Failure
      to perform or observe covenants set forth in the loan documents within 10
      business days from such failure;

            

    

    
      	
               
      

            	
              5.

            	
              Commencement
      of a bankruptcy or insolvency proceeding against the Borrower or
      Guarantors (and, in cases of an involuntary proceeding only, such action
      is not dismissed within 20 days);

            

    

    
      
        	
                 
      

              	
                6.

              	
                Actual
      or asserted invalidity of any loan document related to the Credit
      Facility;

              
	 	7. 	Change
      in control or ownership of Borrower; and 
	 	8. 	Any
      other Events of Default set forth in the
Note. 

      

    

    General

    
      	
              Indemnity:

            	
              Borrower
      shall indemnify IDB, its affiliates and their officers, directors,
      employees, agents and advisors (each, an “Indemnitee”) against, and hold
      each Indemnitee harmless from, any and all losses, claims, damages,
      liabilities and related expenses (including the reasonable fees, charges
      and disbursements of any counsel of any Indemnitee), incurred by any
      Indemnitee or asserted against any Indemnitee by any third party,
      Borrower, its affiliates or any Guarantor arising out of, in connection
      with, or as a result of the execution and delivery of the loan documents
      for the Credit Facility or any related agreement or instrument
      contemplated, the performance by the parties to the loan documents or
      their respective obligations under such agreements or the consummation of
      the transactions contemplated by such
  agreements.

            

    

    Waiver;

    
      	
              Jurisdiction:

            	
              IT IS UNDERSTOOD AND AGREED THAT
      IN THE EVENT OF ANY LITIGATION OR ACTION ARISING OUT OF OR RELATING TO THE
      CREDIT FACILITY OR THEIR BANKING RELATIONSHIP, THE UNDERSIGNED PARTIES
      UNCONDITIONALLY AND IRREVOCABLY WAIVE TRIAL BY JURY AND CONSENT TO THE
      JURISDICTION OF THE COURTS OF (I) THE STATE OF NEW YORK OR (II) THE UNITED
      STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK LOCATED IN THE
      BOROUGH OF MANHATTAN, NEW YORK.  No waiver of any terms
      or conditions of this Line Letter or any other loan documents shall be
      effective unless set forth in writing and executed by the Borrower and
      officers of IDB.

            

    

     

     

     

    
       

      
        
          
            
               

              

              ISRAEL
DISCOUNT BANK OF NEW YORK · MEMBER FDIC

              511 FIFTH
AVE. NEW YORK, NY 10017-4997 · TEL: (212)
551-8500

            

             

          

          
            8

            
              

            

          

          
             

          

        

      

    

     

     

    

     

     

    
      	
              Applicable
      Law:

            	
              This
      Letter and the terms and conditions contained herein are to be construed
      according to and governed by the internal laws of the State of New
      York.

            

    

    

    
      	
              Acceptance:

            	
              By
      signing below, the Borrower and Guarantors agrees to the terms and
      conditions set forth in this Line Letter, which terms may not be amended
      or modified unless in a writing executed by the Borrower and
      IDB.  The Guarantors unconditionally and irrevocably waive
      notice of any such amendments or
modifications.

            

    

    

    Please
indicate your agreement and acceptance of the foregoing by signing and returning
the enclosed copy of this letter by 8/27/2009.  Should
you have any questions, please contact the undersigned at your convenience at
(212) 551- 8723.

     

    
      

      
        
          
            	 
      	 
      	
                    Very
      truly yours,

                  
	 
      	 
      	 
      
	 
      	 
      	
                    ISRAEL
      DISCOUNT BANK OF NEW YORK

                  
	 
      	 
      	 
      
	 
      	 
      	
                    By:
      ________________________________________

                  
	 
      	 
      	
                            James
      M. Morton

                  
	 
      	 
      	
                            First
      Vice President

                  
	 
      	 
      	 
      
	 
      	 
      	
                    By:
      ________________________________________

                  
	 
      	 
      	
                           Leon
      Terrano

                  
	 
      	 
      	
                           Senior
      Vice President

                  
	 
      	 
      	 
      

          

        

      

      

    

    

    AGREED
AND ACCEPTED:

    

    Borrower:

    

    Freundlich
Supply Company,
Inc.                                                                                                Attest:

    

    

    By:  ____________________________________                                                               By:  ______________________________________

    
      	
              Name:
      Andrew Prince

            	
              Name:

            

    

    
      	
              Title:

            	
              Title:  Corporate
      Secretary

            

    

    

    Guarantor:

     

    

     

    
      	Precision Aerospace
      Components, Inc. 	Attest: 

    

     

    

    By:  ____________________________________                                                               By:  ______________________________________

    
      	
              Name:

            	
              Name:

            

    

    
      	
              Title:

            	
              Title:  Corporate
      Secretary

            

    

    
      
        
           

          

          ISRAEL
DISCOUNT BANK OF NEW YORK · MEMBER FDIC

          511 FIFTH
AVE. NEW YORK, NY 10017-4997 · TEL: (212)
551-8500

        

         

      

      
        9

        
          

        

      

      
         

      

    

    

    Schedule
1

    (Loan
Fees1)

    

    
      
        	
                Description
      of Fee, Charge or Premium

              	
                Amount

              
	
                Administration
      Fee (administrative costs associated with each amendment, modification and
      renewal of credit facility)

              	
                $1,000.00

              
	
                Annual
      Line Fee

              	
                $5,000

              
	
                Audit
      Confirmation Fee (administrative costs associated with each responses to
      auditors, accountants and other professionals)

              	
                $50.00

              
	
                Closing
      Fee

              	
                $0.00

              
	
                Collateral
      Monitoring Fee (monthly administrative costs associated with IDB’s review
      of Borrowing Base and pledged accounts)

              	
                $500.00

              
	
                Field
      Exam Fee (Initial)

              	
                Actual
      Fees

              
	
                Field
      Exam Fee (Annual) (to be paid directly to field examiner)

              	
                Actual
      Fees

              
	
                Late
      Payment Premium (imposed after ten days from due date)2

              	
                Greater
      of: (a) 5% of Late 

                Payment
      Amount; or (b) $200.00

              
	
                Legal
      Fee (actual fees for IDB’s counsel, or market rate for IDB’s in-house
      counsel, for services rendered to and costs incurred by IDB in connection
      with the review and preparation of loan documents and other banking
      related services)

              	
                $350.00

              
	
                Overadvance
      Fee (administrative costs associated with each advance exceeding approved
      Maximum Credit Amount)

              	
                $500.00

              
	
                Small
      Item Advances (for each advance under the credit facility that is less
      than $50,000)

              	
                $150.00

              
	
                Small
      Item Paydowns (for each principal paydown under the credit facility that
      is less than $50,000)

              	
                $150.00

              

      

    

    

    
______________________________

      
      1           This
Schedule of Loan Fees is applicable to the subject Line and supplements all
other schedules of fees and charges, as may be amended and updated by the Bank
from time to time, for financial services and products offered by
Bank.  The Schedule does not include additional fees that may become
due and payable upon a Default or an Event of Default.

    

      
      2           The Late Payment Premium is a separate
from and in addition to the payment of any default rate of interest due under
the subject credit facility.

    

    
      
        
           

          

          ISRAEL
DISCOUNT BANK OF NEW YORK · MEMBER FDIC

          511 FIFTH
AVE. NEW YORK, NY 10017-4997 · TEL: (212)
551-8500

        

         

      

      
        10

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