SUBORDINATION AND INTERCREDITOR AGREEMENT

 

                    SUBORDINATION AND INTERCREDITOR AGREEMENT

 

      This Subordination and Intercreditor Agreement (this "Agreement") dated as

of  February  28,  2005  among  LAURUS  MASTER  FUND,  LTD.,  a  Cayman  Islands

corporation  ("Laurus"),  ROYNAT MERCHANT  CAPITAL INC., a Delaware  corporation

("Roynat"), THOMAS EQUIPMENT, INC., a Delaware corporation ("Thomas Equipment"),

THOMAS  VENTURES,  INC.,  a Delaware  corporation  ("Thomas  Ventures"),  THOMAS

EQUIPMENT 2004 INC., a corporation  organized  under the laws of Canada ("Thomas

Canada"),  PNEUTECH  INC.,  a  corporation  organized  under  the laws of Canada

("Pneutech"),  ROUSSEAU CONTROLS INC., a corporation organized under the laws of

Canada ("Rousseau"),  and HYDRAMEN FLUID POWER LIMITED, a corporation  organized

under the laws of  Ontario  ("Hydramen")  (Thomas  Equipment,  Thomas  Ventures,

Thomas Canada,  Pneutech,  Rousseau and Hydramen and their respective successors

and assigns, each a "Company" and, collectively, the "Companies").

 

                                   BACKGROUND

 

      Laurus and Roynat wish to set forth their agreement as to their respective

rights and obligations  with respect to the  indebtedness of the Companies owing

to Laurus and Roynat and the security  interests,  hypothecs and liens of Laurus

and Roynat in the assets and properties of the Companies and their understanding

relative to their respective  positions in such indebtedness and such assets and

properties.

 

                                   AGREEMENTS

 

      NOW, THEREFORE,  for good and valuable consideration,  receipt of which is

hereby acknowledged, Laurus, Roynat and each Company hereby agree as follows:

 

      1. Definitions.

 

            1.1 General  Terms.  For purposes of this  Agreement,  the following

terms shall have the following meanings:

 

            "Affiliate"  means,  with respect to a Person,  any other Person (i)

which directly or indirectly through one or more intermediaries, controls, or is

controlled by, or is under common control with, such Person, (ii) which owns 10%

or more of the equity interests of such Person,  (iii) 10% or more of the voting

stock (or in the case of a Person that is not a corporation,  10% or more of the

equity interests of such Person) of which is owned by such Person or (iv) who is

an executive  officer or director of such Person.  The term "control"  means (a)

the power to vote more than 50% of the securities or other equity interests of a

Person  having  ordinary  voting power (on a fully  diluted  basis),  or (b) the

possession,  directly or  indirectly,  of any other power to direct or cause the

direction of the management and policies of a Person,  whether through ownership

of voting securities, by contract or otherwise.

 

            "Bankruptcy Law" shall mean the Code, or any similar federal, state,

provincial  or  foreign  law for  the  relief  of  debtors  or any  arrangement,

reorganization, insolvency, moratorium, assignment for the benefit of creditors,

any other marshalling of the assets and liabilities of any Company.

 

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            "Business Day" means any day other than a Saturday,  a Sunday or any

other  day on which  commercial  banks in New  York,  New York are  required  or

permitted by law to close.

 

            "Code" shall mean the United  States  Bankruptcy  Code, as in effect

from time to time.

 

            "Collateral"  shall  mean  all  of the  property  and  interests  in

property,  tangible or intangible,  real or personal,  immovable or movable, now

owned or hereafter  acquired by any Company in or upon which any Creditor at any

time has a Lien,  including,  without  limitation,  all proceeds and products of

such property and interests in property; provided, however, the Collateral shall

not include the Life Insurance Proceeds.

 

            "Common Stock" means the common stock of Thomas Equipment, par value

of $0.01 per share.

 

            "Company" and  "Companies"  shall have the meanings set forth in the

introductory paragraph of this Agreement.

 

            "Creditor   Agreements"   shall  mean,   collectively,   the  Laurus

Agreements and the Roynat Agreements.

 

            "Creditors" shall mean, collectively, Laurus and Roynat.

 

            "Distribution" shall mean any payment,  whether in cash, in kind, by

offset,  securities  or any other  property,  or security  for any such  payment

(other than (i) securities,  including Common Stock,  issued by Thomas Equipment

to Roynat in connection with the Roynat Warrant or (ii) other property issued by

Thomas  Equipment to Roynat under Section  6(a)(ii) of the Roynat  Warrant as in

effect on the date hereof) for any such payment.

 

            "Enumerated  Collateral"  shall  mean the  Collateral  of  Pneutech,

Rousseau and Hydramen.

 

            "Enumerated Companies" shall mean, collectively,  Pneutech, Rousseau

and Hydramen.

 

            "Insolvency or Liquidation Proceeding" shall mean, collectively, (a)

any voluntary or involuntary case, proceeding or filing under any Bankruptcy Law

with respect to any Company, (b) any other voluntary or involuntary  insolvency,

reorganization  or bankruptcy case,  proceeding or filing,  or any receivership,

liquidation,  reorganization  or other similar  case,  proceeding or filing with

respect  to  any  Company  or  with  respect  to  any of  its  assets,  (c)  any

liquidation,  dissolution  or winding up of any  Company,  whether  voluntary or

involuntary  and whether or not  involving  insolvency  or  bankruptcy,  (d) any

assignment  for the benefit of creditors or any other  marshaling  of assets and

liabilities  of any  Company,  and  (e)  the  cessation  of the  operation  of a

substantial part of any Company's business.

 

            "Laurus  Agreements" shall mean,  collectively,  the Laurus Security

Agreement,  the Laurus  Guaranty and Security  Agreements,  the other  Ancillary

Agreements  (as  defined  in  the  Laurus  Security  Agreement)  and  all  other

promissory  notes,  agreements,  documents  and  instruments  now or at any time

hereafter  executed and/or delivered by any Company or any other Person to, with

or in favor of Laurus in connection  therewith or related thereto, as all of the

foregoing  now  exist  or may  hereafter  be  amended,  modified,  supplemented,

extended,  renewed,  restated or replaced,  in each case to the extent permitted

herein.

 

 

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            "Laurus  Amendment"  shall mean the Amendment  Agreement dated as of

the date hereof among Thomas Equipment, Thomas Ventures and Laurus.

 

            "Laurus Default" shall mean and include a Laurus Realization Default

and/or a Laurus Non-Realization Default.

 

            "Laurus Default Notice" shall mean and include a Laurus  Realization

Default Notice and/or a Laurus Non-Realization Default Notice.

 

            "Laurus Guaranty and Security Agreements" shall mean,  collectively,

(a) each  General  Security  Agreement,  deed of  hypothecs  and  shares  pledge

agreements  made by Thomas Canada,  Pneutech,  Rousseau and Hydramen in favor of

Laurus,  (b) each  Guarantee  made by  Thomas  Canada,  Pneutech,  Rousseau  and

Hydramen  in favor of  Laurus  and (c) each  Security  Agreement  made by Thomas

Canada, Pneutech,  Rousseau and Hydramen in favor of Laurus, as each of the same

may be amended, modified and supplemented from time to time.

 

            "Laurus  Indebtedness"  shall mean all monetary  obligations  of any

kind owed by any Company or the  Companies  to Laurus from time to time under or

pursuant to any of the Laurus  Agreements  including,  without  limitation,  all

principal,  interest accruing thereon,  charges,  expenses,  fees and other sums

(including all interest,  charges,  expenses, fees and other sums accruing after

commencement  of any  Insolvency or  Liquidation  Proceeding)  chargeable to any

Company  or the  Companies  by Laurus,  and  reimbursement,  indemnity  or other

obligations due and payable to Laurus.

 

            "Laurus Non-Realization  Default" shall mean an Event of Default (or

similar term) under and as such term is defined in any Laurus  Agreement,  other

than a Laurus Realization Default.

 

            "Laurus  Non-Realization  Default  Notice" shall mean written notice

from Laurus to Thomas Equipment and, to the extent applicable, any other Company

of the occurrence  and  continuance  of a Laurus  Non-Realization  Default which

written  notice shall describe such Laurus  Non-Realization  Default and declare

Thomas  Equipment and, to the extent  applicable,  such other Company in default

under any of the Laurus Agreements.

 

 

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            "Laurus  Realization  Default"  shall mean an Event of  Default  (or

similar term) under and as such term is defined in any Laurus Agreement  arising

from (a) the failure by any Company to make any payment,  whether for principal,

interest or fees, in respect of the Laurus Indebtedness  (whether at maturity or

at a date fixed for  prepayment or by  declaration,  acceleration  or otherwise)

and/or (b) the failure by Thomas  Equipment  to deliver or cause to be delivered

Common Stock to Laurus pursuant to and in accordance with the  requirements  set

forth in any of the Laurus Agreements.

 

            "Laurus  Realization  Default Notice" shall mean written notice from

Laurus to Thomas Equipment and, to the extent  applicable,  any other Company of

the occurrence and  continuance  of a Laurus  Realization  Default which written

notice  shall  describe  such Laurus  Realization  Default  and  declare  Thomas

Equipment and, to the extent applicable, such other Company in default under any

of the Laurus Agreements.

 

            "Laurus  Security  Agreement"  shall mean the  Security and Purchase

Agreement dated as of November 9, 2004 among Thomas  Equipment,  Thomas Ventures

and  Laurus,  amended  by the  Laurus  Amendment  and as the same may be further

amended, supplemented, modified and/or restated from time to time, to the extent

permitted herein.

 

            "Lien"   shall   mean  any   mortgage,   deed  of   trust,   pledge,

hypothecation,  hypothecs,  assignment, deposit arrangement,  security interest,

encumbrance  (including,  but not limited to,  easements,  rights of way and the

like),  lien (statutory or other),  security  agreement or transfer  intended as

security  including,  without  limitation,  any conditional  sale or other title

retention  agreement,  the  interest  of a lessor  under a capital  lease or any

financing  lease having  substantially  the same  economic  effect as any of the

foregoing.

 

            "Life  Insurance  Proceeds"  shall  mean  the  proceeds  of any life

insurance policy on the life of Clifford Rhee specifically assigned to Roynat.

 

            "Maximum Laurus Principal  Amount" shall mean an amount equal to (a)

$30,800,000,  plus (b)  interest,  fees and other costs and  expenses  which may

become  part of or added to the  principal  amount of the  Laurus  Indebtedness,

minus (c) any amounts  received by Laurus from the  Companies and applied to the

outstanding  principal  amount  of the Term  Loans  (as  defined  in the  Laurus

Security  Agreement),  minus  (d) any  permanent  commitment  reductions  in any

revolving credit facility under the Laurus Security Agreement.

 

            "Maximum Roynat Principal  Amount" shall mean an amount equal to (a)

$6,500,000,  plus (b)  interest,  fees and other  costs and  expenses  which may

become  part of or added to the  principal  amount of the  Roynat  Indebtedness,

minus (c) any amounts  received by Roynat from the  Companies and applied to the

outstanding principal amount of the Roynat Indebtedness.

 

            "Permitted Payments" shall mean payments of:

 

            (a) interest,  fees and expenses due and payable by the Companies to

Roynat  pursuant  to the  Roynat  Agreements  as in  effect  on the date  hereof

including,  without limitation, any fees under the Registration Rights Agreement

dated as of the date hereof between Thomas Equipment and Roynat;

 

            (b) on or after  December  30,  2005,  any  principal  and any other

amounts which comprise all or part of the Roynat Indebtedness; and

 

            (c) any or all of the Roynat  Indebtedness  provided such payment is

made or derived  from the proceeds  received by Thomas  Equipment as a result of

any public offering of Common Stock.

 

 

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            "Person"  shall mean an  individual,  a  partnership,  a corporation

(including a business  trust),  a company,  a joint stock company,  a trust,  an

unincorporated  association,  a joint venture, a limited liability  company,  an

unlimited liability company, a limited liability partnership or other entity, or

a government or any agency, instrumentality or political subdivision thereof.

 

            "Post-Petition  Financing" shall mean all extensions of credit under

any financing extended or provided to any Company under any Bankruptcy Law.

 

            "Roynat Agreements" shall mean, collectively,  the Roynat Debenture,

the Roynat Warrant and all promissory notes, warrants, agreements, documents and

instruments  now or at any  time  hereafter  executed  and/or  delivered  by any

Company  or any  other  Person  to,  with or in favor of  Roynat  in  connection

therewith or related thereto, as all of the foregoing now exist or may hereafter

be amended, modified, supplemented,  extended, renewed, restated or replaced, in

each case to the extent permitted herein.

 

            "Roynat  Debenture"  shall mean the  Debenture  dated as of the date

hereof by and  between  Roynat  and Thomas  Equipment,  as amended to the extent

permitted herein.

 

            "Roynat  Default" shall mean an "event of default" (or similar term)

under and as such term in any Roynat Agreement as in effect on the date hereof.

 

            "Roynat Default Notice" shall mean written notice from Roynat to any

Company  of the  occurrence  of a Roynat  Default  which  written  notice  shall

describe such Roynat Default and refer to this Agreement.

 

            "Roynat  Indebtedness"  shall mean all monetary  obligations  of any

kind owed by any Company or the  Companies  to Roynat from time to time under or

pursuant to any of the Roynat  Agreements  including,  without  limitation,  all

principal,  interest accruing thereon,  charges,  expenses,  fees and other sums

(including all interest,  charges,  expenses, fees and other sums accruing after

commencement  of any  Insolvency or  Liquidation  Proceeding)  chargeable to any

Company  or the  Companies  by Roynat,  and  reimbursement,  indemnity  or other

obligations due and payable to Roynat.

 

            "Roynat Warrant" shall mean the Stock Purchase Warrant issued on the

date hereof by Thomas  Equipment in favor of Roynat and any reissue or amendment

thereof to the extent permitted herein.

 

            "Secured  Lender  Remedies"  shall  mean the  taking  possession  of

(either  directly  or through  an agent or  mandatary),  the sale,  foreclosure,

realization  upon,  and/or a  liquidation  of any of the  Collateral  including,

without limitation,  the exercise of any of the rights or remedies of a "secured

party" under  Article 9 of the New York Uniform  Commercial  Code,  or under the

Personal Property Security Act of the applicable province or territory of Canada

or the Civil Code of Quebec,  such as, without  limitation,  the notification of

account debtors.

 

            1.2 Certain Matters of  Construction.  The terms "herein",  "hereof"

and  "hereunder"  and other words of similar import refer to this Agreement as a

whole and not to any particular section,  paragraph or subdivision.  Any pronoun

used shall be deemed to cover all genders.  Wherever appropriate in the context,

terms used herein in the singular  also  include the plural and vice versa.  All

references to statutes and related  regulations  shall include any amendments of

same and any successor  statutes and regulations.  Except as expressly set forth

herein,  all references to any  instruments or  agreements,  including,  without

limitation,  references to any of the Creditor  Agreements shall include any and

all  modifications or amendments  thereto and any and all extensions or renewals

thereof,  in each case,  to the  extent  permitted  herein.  All  references  to

security interests or mortgages shall mean and include hypothecs.

 

 

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<PAGE>

 

      2. Priorities.

 

            2.1 Subordination Provisions. Notwithstanding any other provision of

the Roynat  Agreements to the  contrary,  to the extent  provided  below in this

Agreement, any Distribution with respect to the Roynat Indebtedness is and shall

be expressly  junior and subordinated in right of payment to all amounts due and

owing  upon all the  Laurus  Indebtedness  outstanding  from time to time in the

manner and to the extent  provided  in this  Agreement.  Until the  indefeasible

payment in full of the Laurus  Indebtedness  and the irrevocable  termination of

the  Laurus  Agreements,  no Company  shall make and Roynat  shall not accept or

retain any Distribution in respect of the Roynat Indebtedness except, subject to

the  provisions  of this  Section 2, Roynat may accept and retain (a)  Permitted

Payments, (b) subject to the last sentence hereof, any Distribution arising from

the exercise of Secured  Lender  Remedies  and (c) subject to the last  sentence

hereof,  any proceeds of Collateral  pursuant to an  Insolvency  or  Liquidation

Proceeding.  Notwithstanding  anything contained herein to the contrary,  to the

extent any Creditor  receives  any  Distribution  arising  from such  Creditor's

exercise of its Secured Lender  Remedies or any proceeds of Collateral  pursuant

to an Insolvency or Liquidation Proceeding, in each case, as permitted by and in

accordance with the terms and conditions of this  Agreement,  the application of

such Distribution to the Laurus Indebtedness or the Roynat Indebtedness,  as the

case may be,  shall be  governed  by the  priorities  set forth in  Section  3.2

hereof.

 

            2.2 Payments.

 

            (a) From and after receipt by Roynat of a Laurus Realization Default

Notice from Laurus (which  expressly states that such Default Notice is a Laurus

Realization  Default  Notice),  no Company  shall make any  Distribution  on the

Roynat  Indebtedness  and Roynat  shall not be entitled to receive or retain any

such  Distribution in respect of the Roynat  Indebtedness  until the earliest to

occur of (i) the date on which all  Laurus  Defaults  described  in such  Laurus

Realization Default Notice shall have been cured or waived in writing by Laurus,

(ii) the date  the  Laurus  Indebtedness  is  indefeasibly  paid in full and the

Laurus Agreements are irrevocably terminated or (iii) the expiration of a period

of one-hundred  and fifty (150) days  commencing  from and including the date of

Roynat's receipt of such Laurus Realization Default Notice from Laurus.

 

            (b) From and after  receipt  by  Roynat of a Laurus  Non-Realization

Default Notice from Laurus (which expressly states that such Default Notice is a

Laurus  Non-Realization  Default Notice), no Company shall make any Distribution

on the Roynat Indebtedness and Roynat shall not be entitled to receive or retain

any such Distribution in respect of the Roynat  Indebtedness  until the earliest

to occur of (i) the date on which all Laurus Non-Realization  Defaults described

in such Laurus Non-Realization Default Notice shall have been cured or waived in

writing by Laurus, (ii) the date the Laurus Indebtedness is indefeasibly paid in

full  and  the  Laurus  Agreements  are  irrevocably  terminated  or  (iii)  the

expiration of a period of sixty (60) days commencing from and including the date

of Roynat's receipt of such Laurus Non-Realization Default Notice from Laurus.

 

 

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<PAGE>

 

            (c) No Laurus  Realization  Default Notice shall be effective  under

clause (a) above if Laurus  previously  delivered a Laurus  Realization  Default

Notice to Roynat.  No Laurus  Non-Realization  Default Notice shall be effective

under clause (b) above if Laurus previously  delivered a Laurus  Non-Realization

Default Notice to Roynat.

 

            (d) Any  Company  may make and  Roynat  may  accept  and  retain any

Permitted  Payments  other than during any period  described  in Section  2.2(a)

and/or Section 2.2(b) and, after the expiration of any such period,  any Company

may resume making and Roynat may accept and retain Permitted  Payments including

those Permitted  Payments that were due as of the commencement of such period or

became due during such period.

 

            (e)  Notwithstanding  anything contained herein to the contrary,  if

Thomas Equipment receives any proceeds from any public offering of Common Stock,

the proceeds of such public  offering shall first be applied to repay the Roynat

Indebtedness  regardless  of whether or not there has occurred and is continuing

any Laurus Realization Default or Laurus  Non-Realization  Default.  For greater

certainty, it is hereby acknowledged that nothing in this Agreement shall bar or

in any way affect the ability of Roynat to receive such  payments  following the

consummation of any public offering by Thomas Equipment.

 

            (f) In the  event  that  Roynat  delivers  to any  Company  a Roynat

Default Notice  declaring that there exists a Roynat Default,  any  Distribution

received by Roynat during the ten (10)  Business Days  following the delivery of

such notice to Laurus  shall be paid over to Laurus if Laurus  delivers a Laurus

Realization Default Notice or a Laurus Non-Realization  Default Notice to Roynat

during such ten (10) Business Day period.

 

            (g)  Notwithstanding  anything  contained  herein  to the  contrary,

Roynat shall be permitted to receive (i)  securities,  including  Common  Stock,

issued by Thomas  Equipment in connection  with the Roynat  Warrant  and/or (ii)

other property issued by Thomas  Equipment under Section  6(a)(ii) of the Roynat

Warrant (as in effect on the date hereof).

 

            2.3  Knowledge;  Delivery of Default  Notice.  Subject to compliance

with  Section  2.2(f)  hereof,  Roynat  shall  not at any time be  charged  with

knowledge  of any of the  events  described  in  Section  2.2  hereof or on such

account be prohibited from receiving or retaining any Permitted Payments, unless

and until Roynat  shall have  received the Laurus  Default  Notice.  Each Laurus

Default  Notice shall be deemed to be properly given by Laurus to Roynat if such

Laurus Default Notice is delivered in accordance with Section 5.6 hereof.

 

            2.4 Payments Held in Trust.  Should any Distribution or the proceeds

thereof,  in respect of any Roynat  Indebtedness,  be  collected  or received by

Roynat or any  Affiliate  of Roynat at a time when  Roynat is not  permitted  to

receive any such  Distribution or proceeds  thereof,  then Roynat will forthwith

deliver, or cause to be delivered, the same to Laurus in precisely the form held

by Roynat or such Affiliate (except for any necessary  endorsement) and until so

delivered,  the same shall be held in trust by Roynat, or any such Affiliate, as

the property of Laurus and shall not be commingled with other property of Roynat

or any such Affiliate.

 

 

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            2.5 Subrogation. After the Laurus Indebtedness has been indefeasibly

paid in full and the Laurus Agreements have been irrevocably terminated,  to the

extent that Laurus has received any Distribution on Laurus  Indebtedness  which,

but for this Agreement,  would have been applied to Roynat Indebtedness,  Roynat

shall be  subrogated  to the then or  thereafter  rights  of  Laurus  including,

without  limitation,  the  right to  receive  any  Distribution  made on  Laurus

Indebtedness until the principal of, interest on and other amounts payable under

the  Roynat  Indebtedness  shall  be  indefeasibly  paid in full;  and,  for the

purposes of such subrogation, no Distribution to Laurus to which Roynat would be

entitled  except for the  provisions  of this  Agreement  shall,  as between any

Company,  its  creditors  (other  than  Laurus)  and  Roynat,  be deemed to be a

Distribution  by such  Company to or on account of the Laurus  Indebtedness,  it

being understood that the provisions  hereof are and are intended solely for the

purpose of defining the relative rights of Roynat on the one hand, and Laurus on

the other hand.

 

            2.6 Scope of  Subordination.  The  provisions of this  Agreement are

solely to define  the  relative  rights of Roynat  and  Laurus.  Nothing in this

Agreement shall impair, as between any Company and Roynat, the unconditional and

absolute  obligation of such Company to punctually pay the  principal,  interest

and any other  amounts  and  obligations  owing under the Roynat  Agreements  in

accordance  with the terms  thereof,  subject to the rights of Laurus under this

Agreement.

 

      3. Security and Remedies.

 

            3.1   Acknowledgment  of  Lien.  Each  Creditor  hereby  agrees  and

acknowledges  that  the  other  Creditor  has  been  granted  a  Lien  upon  the

Collateral.

 

            3.2  Priority.  Notwithstanding  the  order  or  time  of  grant  or

attachment, or the order, time or manner of perfection or rendering enforceable,

or the order or time of filing, registration,  publication or recordation of any

document or instrument, or other method of perfecting or rendering enforceable a

Lien in  favor  of each  Creditor  in any  Collateral  and  notwithstanding  any

conflicting  terms or  conditions  which may be contained in any of the Creditor

Agreements, the Liens of each Creditor shall have the following priorities:

 

            (a) With  respect to the  Collateral  (other  than in respect of the

Enumerated  Collateral),  the Liens of Laurus have and shall have  priority over

the Liens of Roynat upon the Collateral (other than in respect of the Enumerated

Collateral)  and the Liens of Roynat are and shall be, in all respects,  subject

and  subordinate to the Liens of Laurus therein to the full extent of the Laurus

Indebtedness outstanding from time to time; and

 

            (b) With respect to the Enumerated  Collateral,  the Liens of Laurus

and Roynat shall have the following priorities in the following order:

 

                  (i) First,  the Liens of Laurus  have and shall have  priority

over the  Liens of Roynat  to the  extent  of an amount  equal to the sum of (x)

$1,900,000,  (y) any accrued and unpaid  interest  on the  principal  amount set

forth in  subsection  (x)  immediately  above  and (z) all  costs  and  expenses

incurred  by Laurus in its  enforcement  of any  Secured  Lender  Remedies  with

respect to the Enumerated Collateral;

 

 

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                  (ii) Second,  the Liens of Roynat have and shall have priority

over  the  Liens  of  Laurus  to the  full  extent  of the  Roynat  Indebtedness

outstanding from time to time; and

 

                  (iii) Third,  the Liens of Laurus have and shall have priority

to the remaining amounts of the outstanding Laurus Indebtedness.

 

            3.3 No  Alteration  of  Priority.  The Lien  priorities  provided in

Section 3.2 hereof shall not be altered or otherwise  affected by any amendment,

modification,  supplement, extension, renewal, restatement or refinancing of any

Laurus Indebtedness or Roynat Indebtedness,  nor by any action or inaction which

either Creditor may take or fail to take in respect of the Collateral.

 

            3.4 Perfection.

 

            (a) Each Creditor  shall be solely  responsible  for  perfecting and

rendering  enforceable and maintaining the perfection and  enforceability of its

Lien in and to each item  constituting the Collateral in which such Creditor has

been granted a Lien.  The foregoing  provisions  of this  Agreement are intended

solely to govern the  respective  Lien  priorities  as between the Creditors and

shall  not  impose  on  Laurus  or Roynat  any  obligations  in  respect  of the

disposition  of  proceeds  of  foreclosure  or  enforcement  of  security on any

Collateral  which would  conflict with prior  perfected and  enforceable  claims

therein in favor of any other  Person.  Each  Creditor  agrees  that it will not

contest the validity, perfection, priority or enforceability of the Liens of the

other Creditor in the Collateral.

 

            (b)  Each  Creditor  hereby  appoints  the  other  Creditor  as such

Creditor's  bailee,  agent and  mandatary  for the  purpo