**EXHIBIT10.7**

**AMENDMENTNO. 9 TO**

**LOAN AND SECURITY AGREEMENT**

 

 

                **THIS AMENDMENT NO. 9 TO LOAN AND SECURITY AGREEMENT**(this “Amendment”), is entered into as of June 12, 2002, by and betweenSUNROCK CAPITAL CORP., a Delaware corporation (“Lender”), and DSI TOYS,INC., a Texas corporation (“Borrower”).

 

**RECITALS**

 

                A.            Borrowerand Lender have entered into that certain Loan and Security Agreement, dated asof February 2, 1999 (as the same has been, and may hereafter be, amended,modified, supplemented or restated from time to time, the “Loan Agreement”).

 

                B.            TheBorrower and Lender have agreed to amend and modify the Loan Agreement as setforth below, subject to the terms, conditions and limitations in the LoanAgreement and this Amendment.

 

                **NOW, THEREFORE,** in consideration of thepremises herein contained and other good and valuable consideration, thereceipt and sufficiency of which are hereby acknowledged, the parties,intending to be legally bound, hereby agree as follows:

 

**ARTICLE I**

**Incorporation of Definitions**

 

                **1.01**        Capitalizedterms used in this Amendment, to the extent not otherwise defined herein, shallhave the same meanings as in the Loan Agreement, as amended hereby.

 

**ARTICLE II**

**Amendments**

 

**                2.01        Definition of Ninth Amendment. **Section 1 of the Loan Agreement is hereby amended by adding thefollowing Subsection 1.36:

 

**                “**1.36       “NinthAmendment” shall mean that certain Amendment No. 9 to Loan and SecurityAgreement, executed as of June 12, 2002, by and between Lender and Borrower.”

 

**                2.02  Amendment to Section 2.2 of the LoanAgreement.** Section 2.2 of the Loan Agreement arehereby amended and restated to read in its entirety as follows:

 

                “2.2         Seasonal Inventory Advances; Overadvance Facility.

 

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                (a)           In addition to the Loans permitted under Section 2.1 aboveand 2.2(b) below, but subject to, and upon the terms and conditions containedherein (including, without limitation, the provisions set forth in Sections 2.4and 2.5 below), Lender agrees to make Loans to Borrower from time to time up tothe lesser of:

 

                (1)           the Maximum Credit less Loans extended underSection 2.1 above; and

 

                (2)           (i) during the period commencing January 1, 2002, andextending through July 26, 2002, (A) ten percent (10%) of the Value of EligibleInventory; and (B) ten percent (10%) of the Value of Eligible In-TransitInventory; or

 

                                (ii) during theperiod commencing January 1, 2003, and extending through June 30, 2003, the sumof: (A) ten percent (10%) of the Value of Eligible Inventory; and (B) tenpercent (10%) of the Value of Eligible In-Transit Inventory; or

 

                                (iii) during theperiod commencing January 1, 2004, and extending through June 30, 2004, the sumof: (A) ten percent (10%) of the Value of Eligible Inventory; and (B) tenpercent (10%) of the Value of Eligible In-Transit Inventory (All Loan amountscalculated pursuant to Section 2.2(a)(2)(i) through (iii), inclusive, shall besubject to reduction for all applicable Availability Reserves); and

 

                (b)           In addition to the Loans permitted under Sections 2.1and 2.2(a) above and notwithstanding the provisions of Section 2.4 tothe contrary, but otherwise subject to, and upon the terms and conditionscontained herein (including, without limitation, the provisions set forth in Sections2.4 and 2.5 below), Lender agrees to allow overadvances to remainoutstanding up to, but not greater than, the following amounts during thefollowing periods:

 

(1)           $900,000during the period commencing as of the date of the Ninth Amendment and endingJune 14, 2002;

 

(2)           $800,000during the period commencing June 15, 2002, and ending June 21, 2002;

 

(3)           $700,000during the period commencing June 22, 2002, and ending June 28, 2002;

 

(4)           $550,000during the period commencing June 29, 2002, and ending July 5, 2002;

 

(5)           $400,000during the period commencing July 6, 2002, and ending July 12, 2002;

 

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(6)           $250,000during the period commencing July 13, 2002, and ending July 19, 2002; and

 

(7)           $100,000during the period commencing July 20, 2002, and ending July 26, 2002.

 

No overadvancesshall remain outstanding pursuant to this Section 2.2(b) from and afterJuly 27, 2002.  In addition to the otherrights and remedies available to Lender upon the occurrence of any Default orEvent of Default, Lender may demand immediate payment of any amountsoutstanding pursuant to this Section 2.2(b) upon the occurrence and during thecontinuation of any Default or Event of Default without exercising any otherrights or remedies or otherwise limiting the rights of Lender otherwise pursuantto this Agreement or applicable law.”

 

**2.03        Amendmentto Limit Payments on Certain Subordinated Indebtedness**. Section 9.9(c) of the Loan Agreement is hereby amended andrestated to read in its entirety as follows:

 

“(c)         Borrower may incurand suffer to exist unsecured indebtedness of Borrower to MVII, LLC, aCalifornia limited liability company (“MVII”), as evidenced by thatcertain Promissory Note, dated January 7, 2000, issued by Borrower and payableto the order of MVII, LLC (the “MVII Note”), which indebtedness issubject and subordinate in right of payment to the right of Lender to receivethe prior final payment and satisfaction in full of all of the Obligations; provided,that:  (i) the principal amountof such indebtedness shall not exceed $5,000,000.00, less the aggregate amountof all repayments, repurchases or redemptions, whether optional or mandatory inrespect thereof, plus interest thereon at the rate provided for in suchagreement or instrument as in effect on the date thereof, (ii) Borrower shallnot, directly or indirectly, make any payments in respect of such indebtedness,including, but not limited to, any prepayments or other non-mandatory payments,except to the extent expressly permitted under that certain Amended andRestated Subordination Agreement, dated of even date with the Ninth Amendment,by and among E. Thomas Martin, MVII and Lender (the “MVII SubordinationAgreement”), as acknowledged and received by Borrower, which MVIISubordination Agreement requires, among other conditions (A) that after givingeffect to each Permitted Payment (as defined in such Subordination Agreement)and any other payments then permitted under this Section 9.9, the ExcessAvailability (as defined in such MVII Subordination Agreement) shall be equalto, or greater than, $750,000, (B) that principal payments on the MVII Noteshall be made no more frequently than monthly or in amounts greater than$50,000 each month; provided, that an additional principalpayment not in excess of (x) $300,000, plus (y) the unpaid amount of previouslyscheduled payments of principal and interest that would have been paid in priorperiods but for the limitations set forth in the MVII Subordination Agreement,may be made on, or within ten (10) days after, the forty-fifth day followingdelivery by Borrower to the Lender of the audited annual financial statementsdescribed in Section 9.6(a)(ii) hereof to

 

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the extent theabove-stated Excess Availability requirement for Permitted Payments shallpermit such payment (iii) Borrower shall not, directly or indirectly, (A)amend, modify, alter or change any terms of such indebtedness or any agreement,document or instrument related thereto, or (B) redeem, retire, defease, purchaseor otherwise acquire such indebtedness, or set aside or otherwise deposit orinvest any sums for such purpose, and (iv) Borrower shall furnish to Lender allnotices, demands or other materials concerning such indebtedness eitherreceived by Borrower or on its behalf, promptly after receipt thereof, or sentby Borrower or on its behalf, concurrently with the sending thereof, as thecase may be.  Notwithstanding Section9.9(c)(i) above, Borrower shall be permitted to reborrow principal amountspaid on the MVII Note from time to time, provided, that, theoutstanding principal amount of the MVII Note shall not exceed the originalprincipal amount of the MVII Note; provided, further, that,the stated interest rate of such indebtedness shall not be increased, the frequencyof payments shall not be increased and the principal amount of the MVII Note,as increased from time to time, shall be payable no more frequently thanmonthly or in amounts greater than the amounts permitted by clause (ii)(B)above.  Borrower shall promptly providewritten notice to Lender of an increase in the outstanding principal amount ofthe MVII Note pursuant to the authority granted in this Section 9.9(c).”

 

**                2.04        Amendment to Clean Down Period.**  Section9.20 of the Loan Agreement is hereby amended and restated to read in itsentirety as follows:

 

                                “9.20       Clean Down Period.

 

                                                (a)  Except as otherwise provided in Section9.20(b) below, for not less than thirty (30) consecutive days during theperiod January 31 to and including April 30 of each year, the Borrower shallnot permit the aggregate outstanding principal amount of the Loans to equal orexceed $3,000,000.

 

                                                (b)  For not less than thirty (30) consecutivedays during the period January 31, 2003, to and including April 30, 2003, the Borrowershall not permit the aggregate outstanding principal amount of the Loans toequal or exceed $4,000,000.”

 

**ARTICLE III**

**Waiver**

 

                Upon satisfaction of the conditions set forth inArticle V of this Amendment, Lender hereby waives compliance with the provisionsof Section 9.20 of the Loan Agreement for the period commencing January31, 2002, and ending April 30, 2002. The waiver agreed to herein is strictly limited to Section 9.20of the Loan Agreement for the period described above, shall not impair, restrictor limit any right or remedy of Lender with respect to any Event of Defaultthat may now exist or hereafter arise under the Loan Agreement, and shall notconstitute any course of dealing or other basis for altering any obligation ofthe Borrower or any right, privilege or remedy of Lender under the LoanAgreement.

 

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**ARTICLE IV**

**Borrower Acknowledgement**

 

                Borrower acknowledges and agrees that the OveradvanceFacility does not create “excess availability” for advances of Loans ascalculated under Section 2.1 of the Loan Agreement, and that the abilityto make principal payments pursuant to Section 9.9(c) of the LoanAgreement is subject to the limitations set forth in Section 9.9(c) ofthe Loan Agreement, including the payment in full of the OveradvanceFacility.  Any payment of indebtednessin violation of Section 9.9(c) of the Loan Agreement will result in animmediate Event of Default under the Loan Agreement and the other FinancingAgreements.  The Lender will have all ofthe rights and remedies provided in the Loan Agreement, the other FinancingAgreements, the Uniform Commercial Code and other applicable law, all of whichrights and remedies may be exercised without notice to or consent by the Borroweror any Obligor.

 

**ARTICLE V**

**Conditions to Effectiveness**

 

                This Amendment shall becomeeffective upon satisfaction of the following conditions:

 

                (a)           theexecution of this Amendment by Borrower and Lender;  and

 

                (b)           paymentby Borrower of all fees and expenses required to be paid by Borrower pursuantto Section 6.03 of this Amendment.

 

**ARTICLE VI**

**Ratifications, Representations,Warranties and Covenants**

 

                **6.01**        **Ratifications**.Except as expressly amended hereby, the terms and provisions of the LoanAgreement are ratified and confirmed and shall continue in full force andeffect.  Borrower and Lender agree thatthe Loan Agreement, as amended hereby, and each agreement and instrumentexecuted in connection herewith, shall continue to be legal, valid, binding andenforceable in accordance with their respective terms.

 

                **6.02**        **Representationsand Warranties**.  Borrowerhereby represents and warrants to Lender that (a) the execution, delivery andperformance of this Amendment has been authorized by all requisite corporateaction on the part of Borrower and does not violate the Articles ofIncorporation or Bylaws of Borrower; (b) the representations and warrantiescontained in the Loan Agreement, are true and correct on and as of the datehereof; (c) upon the effectiveness of this Amendment, no Event of Default underthe Loan Agreement is continuing and no event or condition exists that with thegiving of notice or the lapse of time, or both, would be an Event of Default;and (d) Borrower is in full compliance with all covenants and agreementscontained in the Loan Agreement and each agreement and instrument entered intoin connection therewith (assuming execution and delivery of this Amendment).

 

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                **6.03**        **Fee Payableto Lender Payment of Legal and Other Expenses**.  Upon the execution of this Amendment byLender, Borrower hereby agrees to pay to Lender a commitment fee in the amountof $15,000.00, which may be charged by Lender to Borrower’s loan accountwithout further agreement or consent of Borrower.  In addition and as provided in the Loan Agreement, Borroweragrees to pay on demand all costs and expenses incurred by Lender in connectionwith the preparation, negotiation and execution of this Amendment, including,without limitation, the costs and fees of Lender’s legal counsel, and all costsand expenses incurred by Lender in connection with the enforcement orpreservation of any rights under the Loan Agreement, as amended hereby, or anyagreement, document or instrument executed in connection therewith.

 

                **6.04        Covenantto Obtain Amended and Restated Subordination Agreement.**  On or before July 1, 2002, Borrower shall(a) cause E. Thomas Martin and MVII, LLC, a California limited liabilitycompany, to execute and deliver to Lender an Amended and Restated SubordinationAgreement in substantially the same form as attached hereto as Exhibit Aand (b) execute such acknowledgements and covenants with respect to suchAmended and Restated Subordination Agreement as Lender may require.  The failure of Borrower to timely deliverexecuted copies of such Amended and Restated Subordination Agreement andacknowledgements shall be an Event of Default under the Loan Agreement withoutnotice or opportunity to cure, and Lender at its option shall be entitled tocease advancing sums to, or for the benefit of, Borrower and exercise suchother rights and remedies as may be available to Lender pursuant to the LoanAgreement, the other Financing Agreements or applicable law.

 

 

**ARTICLE VII**

**Miscellaneous Provisions**

 

                **7.01  Survivalof Representations and Warranties**. All representations and warranties made herein and in the Loan Agreementshall survive the execution and delivery of this Amendment, and noinvestigation by Lender shall affect the representations and warranties or theright of Lender to rely upon them.

 

**                7.02**        **Reference toLoan Agreement**.  The LoanAgreement, as amended hereby, and all other agreements, documents orinstruments now or hereafter executed and delivered pursuant to the termsthereof are hereby amended so that any reference in the Loan Agreement or suchother agreements, documents and instruments shall mean a reference to the LoanAgreement, as amended hereby.

 

                **7.03**        **Severability**.  Any provision of this Amendment held by acourt of competent jurisdiction to be invalid or unenforceable shall not impairor invalidate the remainder of this Amendment and the effect thereof shall beconfined to the provision so held to be invalid or unenforceable.

 

                **7.04**        **Successorsand Assigns**.  This Amendmentis binding upon and shall inure to the benefit of Lender and Borrower and theirrespective successors and assigns, except Borrower

 

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may not assign ortransfer any of its rights or obligations hereunder without the prior writtenconsent of Lender.

 

                **7.05**        **Counterparts**.  This Amendment may be executed in one ormore counterparts, each of which when so executed shall be deemed to be anoriginal, but all of which when taken together shall constitute one and thesame instrument.

 

                **7.06**        **Headings**.  The headings, captions, and arrangementsused in this Amendment are for convenience only and shall not affect theinterpretation of this Amendment.

 

                **7.07**        **ApplicableLaw.  THIS AMENDMENT AND ALL OTHER LOANDOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BEPERFORMABLE IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THELAWS OF THE STATE OF TEXAS.**

 

**                7.08        Final Agreement.  THE FINANCING AGREEMENTS (INCLUDING THE LOANAGREEMENT AND THIS AMENDMENT), AS AMENDED HEREBY, REPRESENT THE ENTIREEXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATETHIS AMENDMENT IS EXECUTED.  THEFINANCING AGREEMENTS, AS AMENDED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OFPRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTSBETWEEN THE PARTIES.  NO MODIFICATION,RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS AMENDMENTSHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY BORROWER AND LENDER.**

 

**                7.09        Release.  BORROWER HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE,COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATUREWHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITSLIABILITY TO REPAY THE OBLIGATIONS (AS DEFINED IN THE LOAN AGREEMENT) OR TOSEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM LENDER.  BORROWER HEREBY VOLUNTARILY AND KNOWINGLYRELEASES AND FOREVER DISCHARGES LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES,SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OFACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN,ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, ORCONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORETHE DATE THIS AMENDMENT IS EXECUTED, WHICH THE BORROWER MAY NOW OR HEREAFTERHAVE AGAINST LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS ANDASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OFCONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE,**

 

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**AND ARISING FROM ANY LOANS (AS DEFINED IN THE LOANAGREEMENT), INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING,TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHESTLAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE LOANAGREEMENT OR ANY FINANCING AGREEMENT, DOCUMENT OR INSTRUMENT ENTERED INTO INCONNECTION THEREWITH.**

 

[Signature Page Follows]

 

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Executed as of the day and year first written above.
|   |   |   |   |   |   |                      |                      |
|--------|--------|--------|--------|--------|--------|---------------------------|---------------------------|
|   |   |   |   |   |   | **DSI TOYS, INC.**        |
|   |   |   |   |   |   |                      |                      |
|   |   |   |   |   |   | By:                       | /s/ Robert L.  Weisgarber |
|   |   |   |   |   |   | Name:                     | Robert L.  Weisgarber     |
|   |   |   |   |   |   | Title:                    | Chief Financial  Officer  |
|   |   |   |   |   |   |                      |                      |
|   |   |   |   |   |   | **SUNROCK CAPITAL CORP.** |
|   |   |   |   |   |   |                      |                      |
|   |   |   |   |   |   | By:                       | /s/ Y. Renee  Hannah      |
|   |   |   |   |   |   | Name:                     | Y. Renee Hannah           |
|   |   |   |   |   |   | Title:                    | Account  Executive        |
|   |   |   |   |   |   |                      |                      |

 

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Exhibit A

 

**AMENDED AND RESTATED SUBORDINATIONAGREEMENT**

 

                This AMENDED AND RESTATED SUBORDINATION AGREEMENT(this “Subordination Agreement”) is made and entered into this        dayof                     ,2002, by and among E. Thomas Martin, an individual, and MVII, LLC, a Californialimited liability company (collectively, the “Subordinated Creditor”),and Sunrock Capital Corp., a Delaware corporation (“Sunrock”).

 

RECITALS

 

                A.            DSIToys, Inc., a Texas corporation (“Borrower”), is, or may become,indebted to Subordinated Creditor in the amount and on the evidences ofindebtedness described on Exhibit A attached hereto.

 

                B.            Borrowerand Sunrock have entered into that certain Loan and Security Agreement, datedas of February 2, 1999, as amended by that certain Amendment No. 1 to Loan andSecurity Agreement, dated effective as of June 30, 1999, by and between Sunrockand Borrower, that certain Amendment No. 2 to Loan and Security Agreement,dated as of the date hereof, by and between Sunrock and Borrower, that certainAmendment No. 3 to Loan and Security Agreement, dated July 13, 2000, betweenBorrower and Sunrock, that certain Amendment No. 4 to Loan and SecurityAgreement, dated March 30, 2001, between Borrower and Sunrock, that certainAmendment No. 5 to Loan and Security Agreement, dated July 1, 2001, betweenBorrower and Sunrock, that certain Amendment No. 6 to Loan and SecurityAgreement, dated August 13, 2001, between Borrower and Sunrock, that certainAmendment No. 7 to Loan and Security Agreement, dated March    ,2002, between Borrower and Sunrock, that certain Amendment No. 8 to Loan andSecurity Agreement, dated March 29, 2002, between Borrower and Sunrock, andthat certain Amendment No. 9 to Loan and Security Agreement, dated June 12,2002, between Borrower and Sunrock (as the same may be amended, modified orsupplemented from time to time, the “Loan Agreement”), pursuant to whichSunrock has a first priority lien in substantially all the assets and propertyof Borrower, including the proceeds thereof.

 

                C.            SubordinatedCreditor has benefited, and will continue to benefit, from Sunrock’s loans toBorrower.

 

                D.            Itis a condition precedent to Sunrock’s consent to the transactions currentlyproposed by Borrower that Subordinated Creditor subordinate its claims againstBorrower to the claims of Sunrock against the Borrower, to the extent and inthe manner provided by this Subordination Agreement.

 

                NOW, THEREFORE, to induce Sunrock to consent to thetransactions currently proposed by Borrower, Subordinated Creditor and Sunrockhereby agree as follows:

 

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                1.             Definitions.           The following terms shall have thefollowing definitions for purposes of this Subordination Agreement:

 

                                “Bankruptcy Code” shall meanChapter 11 of Title 11 of the United States Code (11 U.S.C. §101 etseq.).

 

                “Excess Availability”shall mean as of any date, the average dollar amount of Loans (as defined inthe Loan Agreement) available to Borrower for the thirty (30) day periodimmediately preceding the applicable date of payment under the SubordinatedDebt.  For purposes of the foregoing,the amount of Loans available to Borrower as of any date shall be determined bySunrock in accordance with the formula set forth at Section 2.1 of the LoanAgreement, after giving effect to all Availability Reserves (as defined in theLoan Agreement) and the limitations set forth at Section 2.4 of the LoanAgreement.

 

                                “Event of Default” shall havethe meaning set forth from time to time under the Loan Agreement.

 

                                “Letter of Credit” shall meanIrrevocable Letter of Credit Number N75340949, dated January 7, 2000, issued byWells Fargo Bank, N.A., for the benefit of Walter S. Reiling and Susan Reiling,together with all replacements and substitutions thereof, which Letter ofCredit is the letter of credit referred to at, and fulfilling the requirementof, Section 4.1(i) of the Merger Agreement.

 

                                “Merger Agreement” shall meanthe Agreement and Plan of Merger, dated October 7, 1999, between Borrower andMeritus Industries, Inc., a New Jersey corporation, Meritus Industries, Ltd., aHong Kong corporation, Walter S. Reiling and Susan Reiling.

 

                                “Potential Default” shall meanthe occurrence of any event that Sunrock determines may, with the passage oftime or the giving of notice, or both, result in an Event of Default under theLoan Agreement.

 

                                “Property” shall mean all, orany portion of the assets and property of Borrower.

 

                                “Senior Debt” shall mean allloans, advances, debts, principal, interest (including any interest that, butfor the provisions of the Bankruptcy Code, would have accrued), contingentreimbursement obligations under any outstanding letters of credit, premiums(including early termination or prepayment premiums), liabilities (includingall amounts charged to Borrower’s loan accounts established pursuant to theSenior Debt Documents), obligations, fees, charges, costs, or expensesreimbursable or payable to Sunrock (including any fees or expenses that, butfor the provisions of the Bankruptcy Code, would have accrued), lease payments,guaranties, covenants, and duties owing by Borrower to Sunrock of any kind anddescription (whether pursuant to or evidenced by the Senior Debt Documents orpursuant to any other agreement between Sunrock and Borrower, and irrespectiveof whether for the payment of money), whether direct or indirect, absolute orcontingent, due or to become due, now existing or hereafter arising, andincluding any debt, liability, or obligation owing from Borrower to others thatSunrock may

 

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have obtained byassignment or otherwise, and further including all interest not paid when dueand all expenses that Borrower is required to pay or reimburse Sunrock pursuantto the Senior Debt Documents, by law or otherwise.

 

                                “Senior Debt Documents” shallmean, collectively, each promissory note, loan agreement, security agreement,pledge agreement, guaranty, financing statement, deed of trust, mortgage,assignment of leases and rents, and any and all other agreements executed ordelivered by Borrower in connection with the Senior Debt, and all amendments,renewals, extensions, increases or modifications thereof, including withoutlimitation the Loan Agreement, as the same has been, or may hereafter be,amended, renewed, extended, increased or modified from time to time.

 

                                “SubordinatedDebt” shall mean any and all indebtedness and financial obligations ofBorrower to Subordinated Creditor, whether now or hereafter existing, incurred,or created, whether the obligations of Borrower shall be direct, contingent,primary, secondary, several, joint and several, or otherwise, howsoever suchindebtedness may be hereafter extended, renewed or evidenced, including,without limitation, the indebtedness and financial obligations described on ExhibitA attached hereto.

 

                Capitalized terms used herein but not defined hereinshall have the meanings given them in the Loan Agreement.

 

                2.             Subordination.Subordinated Creditor agrees to subordinate and does hereby subordinate paymentby Borrower of all and any part of the Subordinated Debt to the priorindefeasible payment in full, in cash, to Sunrock, its successors and assigns,of any and all of the Senior Debt. Subordinated Creditor acknowledges that the Subordinated Debt is notsecured by any Property of the Borrower, and Subordinated Creditor does notcurrently have, nor is Subordinated Creditor, entitled to the benefit of anyliens or security interests in or to the Property of Borrower.  All liens and security interests ofSubordinated Creditor, if any, whether now or hereafter arising or howsoeverexisting, in the Property of Borrower shall be and are hereby subordinated tothe rights and interests of Sunrock in or to such Property.  Subordinated Creditor shall have no right topossession of any portion of the Property or to foreclose upon any portion ofthe Property, whether by judicial action or otherwise, unless and until all ofthe Senior Debt shall have been indefeasibly paid in full, in cash.  In furtherance thereof, SubordinatedCreditor agrees, unless and until the Senior Debt shall have been indefeasiblypaid in full, in cash, Subordinated Creditor: (i) will not to ask for, demandor sue for all or any part of the Subordinated Debt; (ii) will not take orreceive all or any part of the Subordinated Debt (other than Permitted Paymentsto the extent allowed under Section 7 hereof); (iii) will not take or receiveany security for the Subordinated Debt or seek to enforce any claim against theProperty of Borrower; and (iv) upon Sunrock’s reasonable request, SubordinatedCreditor will execute and deliver to Sunrock documents confirming thesubordination of any and all of Subordinated Creditor’s liens, claims andsecurity interests against the Borrower or any of the Borrower’s Property.  Subordinated Creditor acknowledges andagrees that, in the event Permitted Payments (as defined in Section 7 hereof)are not made because the Excess Availability of Borrower as of the scheduledpayment date is less than $750,000.00, Subordinated Creditor shall take noaction

 

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to accelerate theSubordinated Debt or enforce its rights to receive payment from Borrower,except as otherwise expressly permitted under Section 7 below.

 

                3.             Subrogation.  Subordinated Creditor agrees that Sunrockshall be subrogated to Subordinated Creditor with respect to (i) SubordinatedCreditor’s claims against Borrower, and (ii) Subordinated Creditor’s rights,liens and security interests, if any, in any of Borrower’s assets or Propertyand the proceeds thereof until the Senior Debt shall have been indefeasiblypaid in full, in cash.

 

                4.             InsuranceClaims and Proceeds.  SubordinatedCreditor shall have no right to participate in the adjustment or settlement ofany insurance losses or condemnation claims with respect to the Property.  Subordinated Creditor hereby agrees, uponthe request and at the direction of Sunrock, to endorse in favor of Sunrock anyand all checks payable to Subordinated Creditor that represent insuranceproceeds paid for claims relating to the Property in any manner.  Subordinated Creditor agrees, upon requestby Sunrock, to assign to Sunrock any and all insurance proceeds payable toSubordinated Creditor for claims relating to the Property.  Subordinated Creditor hereby appointsSunrock as its attorney–in–fact to settle all insurance claimsrelating to the Property and to receive all payments and endorse all checkswith respect to such claims to the full extent of the Senior Debt.

 

                5.             Limitationon Subordinated Creditor’s Actions. So long as any of the Senior Debt remains unpaid, in whole or in part,Subordinated Creditor agrees: (i) not to commence, or to join with any othercreditor in commencing, any bankruptcy, reorganization or insolvencyproceedings with respect to Borrower without the prior written consent ofSunrock; and (ii) not to commence, prosecute, or participate in anyadministrative, legal, or equitable action that might adversely affect Borroweror Sunrock or any of their interests or Property, including without limitation,any claim of any fraudulent transfer or conveyance from any person or entity toany of the Borrower or Sunrock.  Nothingcontained in this Section 5 of this Subordination Agreement shall restrict theassignment of any claims possessed by Borrower in respect of the transactionscontemplated by the Letter of Credit to the Subordinated Creditor such thatSubordinated Creditor may pursue such claims directly against the issuer of saidLetter of Credit or the beneficiaries of such Letter of Credit.

 

6.             Readjustment of SubordinatedDebt.  Subordinated Creditor furtheragrees that, upon any distribution of the assets or readjustment of theindebtedness of Borrower, whether by reason of liquidation, composition,bankruptcy, arrangement, receivership, assignment for the benefit of creditorsor any other action or proceeding involving the readjustment of all or any ofthe Subordinated Debt, or the application of the assets of Borrower to thepayment or liquidation thereof, Sunrock shall be entitled to receive payment infull in cash of the Senior Debt prior to the payment of all or any part of theSubordinated Debt.

 

                7.             PermittedPayments.  Notwithstanding theforegoing provisions, but subject to the limitations set forth below, untilsuch time as Subordinated Creditor shall have received, or be deemed to havereceived, written notice in accordance with the terms hereof from Sunrock orits agents of the occurrence of an Event of Default or Potential Default,Subordinated Creditor may

 

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accept and retain fromBorrower payments in respect of the Subordinated Debt to the extent expresslyset forth on Exhibit A hereto (collectively, the “Permitted Payments”); provided,however: (i) after giving effect to each such Permitted Payment and anyother payments then permitted under Section 9.9 of the Loan Agreement, theExcess Availability shall be equal to, or greater than, $750,000.00; (ii)Permitted Payments shall include only payments in respect of the originalamortization schedule, if any, of the stated principal amount of theSubordinated Debt as set forth in the instruments described on Exhibit Awithout regard to any future amendment of such instruments (unless suchamendment shall delay or reduce the otherwise scheduled principal payments) andonly to the extent permitted by Exhibit A; (iii) Permitted Paymentsshall not include any amounts due and owing by Borrower to SubordinatedCreditor in respect of reimbursement obligations (whether through contract,common law right of contribution or otherwise) related to the Letter of Creditor any increase in the stated principal amount of the Subordinated Debt as aresult of any draw on the Letter of Credit; and (iv) to the extent anyPermitted Payment is not permitted to be made when scheduled as a result of theforegoing conditions, such payment shall be deferred until the maturity of theSubordinated Debt. The original stated principal amount of the SubordinatedDebt is hereby acknowledged and agreed to be as set forth on Exhibit A.  From and after Subordinated Creditor’sreceipt, or deemed receipt, of written notice of an Event of Default orPotential Default, Permitted Payments may not be accepted or retained bySubordinated Creditor until all Events of Default and Potential Defaults shallhave been cured or otherwise waived by Sunrock.  Upon receipt, or deemed receipt, of notice from Sunrock that allEvents of Default and Potential Defaults have been cured or otherwise waived bySunrock, Permitted Payments may resume.

 

                8.             PropertyHeld in Trust.  If (i) any money orother Property (other than the Permitted Payments that Subordinated Creditor ispermitted to receive and retain under Section 7 preceding) is received bySubordinated Creditor for application on the Subordinated Debt or (ii) anymoney or other Property shall be disbursed to Subordinated Creditor at any timeafter (a) Sunrock’s delivery to Subordinated Creditor of notice of an Event ofDefault or Potential Default and prior to Sunrock’s delivery of notice that allEvents of Default and Potential Defaults have been cured or otherwise waived bySunrock or (b) during any time when the Excess Availability shall be less than$750,000.00, Subordinated Creditor will hold such money and other Property intrust for Sunrock and, promptly after receipt thereof and written request fromSunrock, deliver such money and other Property to Sunrock.  Notwithstanding the foregoing, in the eventdisbursement of a Permitted Payment results in the occurrence of an Event ofDefault, Potential Default or Excess Availability less than $750,000.00,Subordinated Creditor will hold such money or other Property disbursed in suchPermitted Payment in trust for Sunrock and, promptly following Sunrock’srequest, deliver such money or other Property to Sunrock.  No payment or distribution to Sunrockpursuant to the provisions of this Subordination Agreement shall entitleSubordinated Creditor to exercise any rights of subrogation in respect thereofuntil the Senior Debt shall have been indefeasibly paid in full in cash.

 

                9.             Assignmentor Amendment of Subordinated Debt. Subordinated Creditor hereby agrees not to assign or transfer, at anytime while this Subordination Agreement remains in effect, any rights, claim orinterest of any kind in or to any of the Subordinated Debt without (i) firstnotifying Sunrock and (ii) making such assignment expressly subject to thisSubordination

 

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Agreement. SubordinatedCreditor will, upon request from Sunrock, deliver any note or other evidence ofthe Subordinated Debt to Sunrock, and Sunrock may (or Subordinated Creditor,upon request from Sunrock, will) add a legend, substantially in the form setforth on Exhibit B, to such note or other evidence of the SubordinatedDebt stating that payment thereof is subject to the provisions of thisSubordination Agreement.  SubordinatedCreditor shall not subordinate any of the Subordinated Debt to any indebtednessof the Borrower or any affiliate of Borrower, other than the Senior Debt.  Subordinated Creditor agrees that it shallnot amend or modify the terms of the Subordinated Debt without the priorwritten consent of Sunrock in any manner that has the effect of acceleratingthe time of payments under the Subordinated Debt, increasing the amount of suchpayments or adding any additional covenants or defaults under the documentsevidencing the same.

 

                10.           Assignmentof Senior Debt.  Sunrock may, from timeto time, whether before or after any discontinuance of this SubordinationAgreement, in its sole discretion and without notice to Subordinated Creditor,assign or transfer any or all of the Senior Debt or any interest therein, and,notwithstanding any such assignment or transfer or subsequent assignment ortransfer thereof, the Senior Debt Documents and the Senior Debt shall remainsenior to the Subordinated Debt for the purposes of this SubordinationAgreement.

 

                11.           Renewaland Extension of Senior Debt.  Thisis a continuing agreement of subordination and Sunrock may continue, withoutnotice to Subordinated Creditor, to extend credit or other accommodation orbenefit and lend moneys to or for the account of Borrower on the faithhereof.  It is further understood andagreed that Sunrock may at any time, in its sole discretion, increase theamount of, or renew or extend the time of payment of all or any part of anyexisting or future indebtedness or obligations of Borrower to Sunrock or renew,waive or release the lien in the Property or the security interest in anycollateral which may be held therefor at any time and in reference thereto tomake and enter into any such agreement or agreements as Sunrock may deem properor desirable without notice to or further assent from Subordinated Creditor andwithout in any manner impairing or affecting this Subordination Agreement orany of Sunrock’s rights hereunder.

 

                12.           Waiverof Notice.  Subordinated Creditorhereby expressly waives notice of acceptance by Sunrock of the subordinationand other provisions of this Subordination Agreement and, except as expresslyprovided herein, all other notices whatsoever, including, without limitation,notice of the creation of any indebtedness or liability of Borrower to Sunrock,notice of the giving or extension of credit by Sunrock to Borrower, notice ofprotest and default, and all other notices to which Subordinated Creditor mightotherwise be entitled from Sunrock. Subordinated Creditor consents and agrees that Sunrock shall be under noobligation to marshal any assets in favor of Subordinated Creditor or againstor in payment of any or all of the Senior Debt.

 

                13.           Rightsof Sunrock as Senior Creditor. Subordinated Creditor expressly waives reliance by Sunrock upon the subordinationand other agreements as herein provided and presentment, demand andprotest.  Subordinated Creditor agreesthat Sunrock has made no warranties or representations with respect to the dueexecution, legality, validity, completeness or

 

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enforceability of theSenior Debt Documents, or the collectibility of the Senior Debt, that Sunrockshall be entitled to manage and supervise its loans to Borrower in accordancewith its usual practices, modified from time to time as Sunrock deemsappropriate under the circumstances, without regard to the existence of anyrights that Subordinated Creditor may now or hereafter have in or to any of theassets of Borrower, and that Sunrock shall have no liability to SubordinatedCreditor for, and waives any claim which Subordinated Creditor may now orhereafter have against Sunrock arising out of (i) any and all actions whichSunrock, takes or omits to take (including, without limitation, actions withrespect to the creation, perfection or continuation of liens or securityinterests in the Property or other collateral for the Senior Debt, actions withrespect to the occurrence of a “Default” or an “Event of Default” (as definedin any of the Senior Debt Documents), actions with respect to the foreclosureupon, sale, release of, depreciation of or failure to realize upon the Propertyor other collateral for the Senior Debt, and actions with respect to thecollection of any claim for all or any part of the Senior Debt from any accountdebtor, guarantor or any other party with respect to the Senior Debt Documentsor to the collection of the Senior Debt or the valuation, use, protection or release of the Property or othercollateral for the Senior Debt, (ii) Sunrock’s election, in any proceedinginstituted under the Bankruptcy Code, of the application of Section 1111(b)(2)of the Bankruptcy Code, and/or (iii) any borrowing or grant of a securityinterest under Section 364 of the Bankruptcy Code.  Sunrock may, at any time and from time to time, without theconsent of or notice to Subordinated Creditor, without incurring responsibilityto Subordinated Creditor, and without impairing or releasing any of Sunrock’srights, or any of the obligations of Subordinated Creditor hereunder, changethe amount, manner, place or terms of payment of, or change or extend the timeof payment of, or renew or alter Senior Debt in any and all respects; sell,exchange, release, or otherwise deal with all or any part of any Propertysecuring Senior Debt; exercise or refrain from exercising any rights againstthe Borrower and others (including Subordinated Creditor); add or release anyparty or other person primarily or secondarily liable for the Senior Debt; andapply any sums, by whomsoever paid or howsoever realized, to Senior Debt.

 

                14.           RemediesUpon Default.  Subordinated Creditorhereby covenants and agrees that upon the occurrence and continuance of anEvent of Default, Sunrock may, at its sole option, without notice toSubordinated Creditor:  (i) with orwithout releasing and extinguishing any liens or security interests created bythe Senior Debt Documents, cause title in and to all or any portion of theProperty (or any interest of any kind in the Property, including, withoutlimitation, a beneficial interest in a land trust) to be transferred, assignedor conveyed to a nominee for Sunrock, subject to the liens of the SubordinatedDebt, if any; and/or (ii) take possession of the Property and take all actionsnecessary to operate and maintain the Property (and to increase the amountsowed by Borrower pursuant to the Senior Debt by an amount equal to such costs)and the right to lease or sell all or any portion of the Property or anyinterest in the Property.  SubordinatedCreditor hereby expressly waives the right to assert any and all claims anddefenses against Sunrock relating to or arising from any action taken bySunrock pursuant to this Section 14.

 

                15.           FinancialCondition of Borrower.  SubordinatedCreditor hereby assumes responsibility for keeping itself informed of thefinancial condition of Borrower and of all other circumstances bearing upon therisk of nonpayment of the Subordinated Debt that diligent

 

16

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inquiry would reveal, andSubordinated Creditor hereby agrees that Sunrock shall have no duty to adviseSubordinated Creditor of information known to Sunrock regarding such conditionor any such circumstances.

 

                16.           EntireDebt.  Subordinated Creditorrepresents and warrants to Sunrock that Exhibit A attached heretoidentifies all of Borrower’s existing indebtedness and obligations toSubordinated Creditor.  SubordinatedCreditor agrees that no person or entity owned or controlled by theSubordinated Creditor, or under common control with, any of the foregoing(other than the Borrower) shall make loans to, or otherwise extend any creditto, the Borrower, without entering into a subordination agreement in favor ofSunrock in substantially the same form as this Subordination Agreement.

 

                17.           OtherInstruments.  Subordinated Creditorfurther agrees to execute and deliver to Sunrock such assignments,endorsements, or other instruments as may be reasonably required by Sunrock inorder to enable Sunrock to enforce any and all claims provided or permittedhereunder and to collect any and all dividends or other payments ordisbursements which may be made at any time on account of all or any of theSubordinated Debt, other than Permitted Payments to the extent allowedhereunder.

 

                18.           BindingEffect.  This SubordinationAgreement is binding on Subordinated Creditor, its legal representatives,successors and assigns, and shall inure to the benefit of Sunrock, itssuccessors and assigns.  Wheneverreference is made in this Subordination Agreement to Borrower, such term shallinclude any heir, legal representative, successor or assign of Borrower,including, without limitation, a receiver, trustee or debtor–in–possession.

 

                19.           Notice.Any notice or notification required, permitted or contemplated hereunder shallbe in writing, shall be addressed to the party to be notified at the addressset forth below or at such other address as each party may designate for itselffrom time to time by notice hereunder, and shall be deemed to have been validlyserved, given or received (i) three days following deposit in the United Statesmail, with proper first class postage prepaid, certified, return receiptrequested, (ii) the next business day after such notice was delivered to aregularly scheduled overnight delivery carrier with delivery fees eitherprepaid or an arrangement, satisfactory with such carrier, made for the paymentof such fees, or (iii) upon receipt of notice given by telecopy, mailgram,telegram, telex, or personal delivery:

 
|   | To Sunrock: |   | Sunrock Capital  Corp.            |
|--------|-------------|--------|-----------------------------------|
|   |        |   | 11 Penn Center                    |
|   |        |   | 1835 Market  Street               |
|   |        |   | Philadelphia,  Pennsylvania 19103 |
|   |        |   | Attention:  John Erwin       |
|   |        |   | Facsimile:  215-979-7679     |
|   |        |   | Telephone:  215-979-7654     |

 

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|   |                       |   |                                  |
|--------|----------------------------|--------|---------------------------------------|
|   | with copies to:            |   | Hughes &  Luce, L.L.P.            |
|   |                       |   | 1717 Main  Street, Suite 2800         |
|   |                       |   | Dallas, Texas  75201                  |
|   |                       |   | Attn:  John O. Sutton, Jr., Esq. |
|   |                       |   | Facsimile: 214.939.6100               |
|   |                       |   |                                  |
|   | To Subordinated  Creditor: |   | MVII, LLC                             |
|   |                       |   | 654 Osos Street                       |
|   |                       |   | San Luis Obispo,  California 93406    |
|   |                       |   | Attention: E.  Thomas Martin          |
|   |                       |   | Facsimile:  805.545.7590              |
|   |                       |   |                                  |
|   | with copies to:            |   | Andre, Morris &  Buttery          |
|   |                       |   | 1102 Laurel Lane                      |
|   |                       |   | San Luis Obispo,  California 93406    |
|   |                       |   | Attention: J. Todd  Mirolla           |
|   |                       |   | Facsimile: 805.543.0752               |
|   |                       |   |                                  |

**                20.          GOVERNING LAW.  THIS SUBORDINATION AGREEMENT SHALL BEINTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED INACCORDANCE WITH THE LOCAL LAW OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OFLAW RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER CONSTRUCTION OR INTERPRETATIONOF THIS SUBORDINATION AGREEMENT TO THE SUBSTANTIVE LAW OF ANOTHER JURISDICTION,AND ALL OTHER LAWS OF MANDATORY APPLICATION.**

 

                21.           EntireAgreement.  This SubordinationAgreement sets forth the complete undertaking and agreements of Sunrock andSubordinated Creditor with respect to the subject matter hereof, and there areno other agreements or understandings binding upon them, including, withoutlimitation, any conflicting provisions of any agreement or note referred to on ExhibitA attached hereto.

 

                22.           Execution in Counterparts and Facsimile Signatures.  This Subordination Agreement may be executedin a number of identical counterparts. If so executed, each of such counterparts shall be deemed to be anoriginal for all purposes, and all such counterparts shall collectivelyconstitute one Subordination Agreement. This Subordination Agreement may be signed by facsimile signature, and afacsimile signature shall, for all purposes, have the effect of an originalsignature.

 

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                IN WITNESS WHEREOF, thisSubordination Agreement has been duly executed by Subordinated Creditor andSunrock as of the day and date first written above.

 

 

 
|   |   |                             |
|--------|--------|----------------------------------|
|   |   | E. Thomas  Martin, an individual |
|   |   |                             |   |   |   |   |   |
|   |   |  MVII, LLC                  |
|   |   |                             |   |   |   |   |   |
|   |   | By:                              |   |
|   |   | Name:                            |   |
|   |   | Title:                           |   |
|   |   |                             |   |   |   |   |   |
|   |   | SUNROCK CAPITAL  CORP.           |
|   |   |                             |   |   |   |   |   |
|   |   | By:                              |   |
|   |   |                             |   |   |   |   |   |
|        |        |                                  |  |  |  |  |  |  |

 

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**ACKNOWLEDGMENT BY BORROWER**

 

                The Borrowerhereby acknowledges receipt of a copy of the foregoing Subordination Agreement,confirms the accuracy of the information set forth in Exhibit A attachedhereto and that Exhibit A identifies all of Borrower’s existingindebtedness and obligations to Subordinated Creditor, and agrees that it willnot pay any indebtedness subordinated by the foregoing Subordination Agreement(except as otherwise permitted thereby) until all indebtedness of Borrower toSunrock, its successors and assigns, now existing and hereafter arising shallhave been indefeasibly paid in full, in cash. Without limiting the foregoing, Borrower agrees that Borrower shall notmake any payment to Subordinated Creditor at any time at which the ExcessAvailability (as defined in the foregoing Subordination Agreement) is less than$750,000.00.  The failure of Borrower tocomply with the foregoing covenant shall constitute an Event of Default underSection 10 of the Loan Agreement (as defined below).  The foregoing Subordination Agreement shall constitute a“Financing Agreement” for purposes of the Loan and Security Agreement, datedFebruary 2, 1999, by and between Borrower and Sunrock Capital Corp. (asamended, the “Loan Agreement”).

 

 
|   |           |   |
|--------|----------------|--------|
|   | DSI TOYS, INC. |
|   |           |   |
|   | By:            |   |
|   | Name:          |
|   | Title:         |
|   |           |   |

 

 

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| STATE OF  |   |   |   | § |
|-----------|--------|--------|--------|--------|
|      |   |   |   | § |
| COUNTY OF |   |   |   | § |

 

                Beforeme                                                    ,the undersigned Notary Public, on this day personally appeared E. ThomasMartin, known to me (or proved to me on the oathof                                 or through                               (description of identity card or other document)) to be the person whose nameis subscribed to the foregoing instrument and acknowledged to me that heexecuted the same for the purposes and consideration therein expressed.

 

                Given under my hand and seal ofoffice this        day of June, A.D., 2002.

 

 
|         |                    |
|--------------|-------------------------|
|         | Notary Public, State of |
| [AFFIX SEAL] | Printed Name:           |   |
|         | Commission Expiration:  |   |

 

 

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| STATE OF  |   |   |   | § |
|-----------|--------|--------|--------|--------|
|      |   |   |   | § |
| COUNTY OF |   |   |   | § |

 

                Beforeme                                                    ,the undersigned Notary Public, on this day personally appeared                                                    ,known to me (or proved to me on the oath of                                 or through                               (description of identity card or other document)) to be the                               of MVII, LLC, a California limited liability company, and acknowledged to methat he executed the same for the purposes and consideration therein expressed.

 

                Given under my hand and seal ofoffice this        day of June, A.D., 2002.

 
|         |                    |
|--------------|-------------------------|
|         | Notary Public, State of |
| [AFFIX SEAL] | Printed Name:           |   |
|         | Commission Expiration:  |   |

 

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|   |   | § |
|--------|--------|--------|
|   |   |   |   | § |
|   |   | § |
|        |        |        |  |  |

 

                This instrumentwas acknowledged before me on the        dayof June, A.D., 2002,by                                         ,                                                              of Sunrock Capital Corp., a Delaware corporation, on behalf of saidcorporation.

 
|                   |                                |   |
|------------------------|-------------------------------------|--------|
|                   | Notary Public,                      |   |
|                   | Notary’s Printed/Stamped Name: |
|                   |                                |   |
| My Commission Expires: |                                |   |
|                   |                                |   |
|                   |                                |   |

 

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| THE STATE OF TEXAS |   |   |
|--------------------|--------|--------|
|               |   |   |   | § |
| COUNTY OF HARRIS   |   |   |
|                    |        |        |  |  |

 

                This instrumentwas acknowledged before me on the        dayof June, A.D., 2002,by                                         ,                                                              of DSI Toys, Inc., a Texas corporation, on behalf of said corporation.

 
|                   |                                |
|------------------------|-------------------------------------|
|                   | Notary Public, State of Texas       |
|                   | Notary’s Printed/Stamped Name: |
|                   |                                |
| My Commission Expires: |                                |
|                   |                                |
|                   |                                |

 

 

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**EXHIBIT A**

 

**TO**

 

**AMENDED AND RESTATED SUBORDINATION AGREEMENT**

 

**AMENDED AND RESTATED**

**DEBT OWED TO SUBORDINATED CREDITOR**

 

1.             $5,000,000.00,evidenced by, and payable in accordance with, the Promissory Note (the “SubordinatedNote”), dated January 4, 2000, executed by DSI Toys, Inc., payable to theorder of MVII, LLC, a California limited liability company, in installments,the final installment of which is due on July 1, 2004, a copy of which isattached to this Exhibit A, for which Permitted Payments shall includeonly the following payments, subject to the limitations of Section 7 of theforegoing Subordination Agreement:  (a)interest at the rate specified in the Subordinated Note (without giving effectto any event of default) on the first day of each calendar month or thenext-following day if such day shall not be a business day; (b) principalpayments in the amount of $50,000 on the first day of each calendar month orthe next-following business day if such day shall not be a business day, and(c) an annual principal payment in the amount of $300,000 on, or within ten (10) days after, theforty-fifth day following delivery by Borrower to Sunrock of Borrower’s auditedannual financial statements in compliance with the Senior Debt Documents;provided, that to the extent any of the foregoing payments is not permitted bythe terms of the foregoing Subordination Agreement to be made when scheduled,such payment shall be deferred until the maturity of the SubordinatedNote.  MVII, LLC shall be permitted tomake future loans to Borrower and increase the outstanding principal amount ofthe Subordinated Note from time to time by the amount of such future loans, notto exceed $700,000 in the aggregate for all such loans; provided, that,the stated interest rate of the Subordinated Note shall not be increased, thefrequency of payments shall not be increased and the principal amount of the SubordinatedNote, as increased from time to time, shall be payable no more frequently thanmonthly or in principal amounts greater than the amounts permitted by clauses(b) and (c) above.

 

2.             Reimbursementobligations under the Letter of Credit (as defined in the foregoingSubordination Agreement), not to exceed $868,000.00 in the aggregate, for whichno Permitted Payments shall be made.

 

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**EXHIBIT B**

 

**TO**

 

**AMENDED AND RESTATED**

**SUBORDINATION AGREEMENT**

 

**LEGEND TO NOTE**

 

THIS PPROMISSORY NOTE, AND PAYMENT AND ENFORCEMENT HEREOF, IS SUBJECTTO THE TERMS AND PROVISIONS OF THAT CERTAIN AMENDED AND RESTATED SUBORDINATIONAGREEMENT DATED                                           ,2002, AMONG SUNROCK CAPITAL CORP., E. THOMAS MARTIN AND MVII, LLC, A CALIFORNIALIMITED LIABILITY COMPANY, AND ACKNOWLEDGED BY DSI TOYS, INC., AS SUCHSUBORDINATION AGREEMENT MAY BE AMENDED FROM TIME TO TIME.

 

 

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