Exhibit 10.3


                          FIRST LIEN SECURITY AGREEMENT


     FIRST LIEN SECURITY AGREEMENT ("Security Agreement") dated as of April 1,
2005, among KRISPY KREME DOUGHNUT CORPORATION, a corporation duly organized and
validly existing under the laws of North Carolina (the "Borrower"), KRISPY KREME
DOUGHNUTS, INC., a corporation duly organized and validly existing under the
laws of North Carolina (the "Parent Guarantor"), the Subsidiary Guarantors
listed on the signature pages hereto (the "Subsidiary Guarantors"; together with
the Parent Guarantor, the "Guarantors"; the Guarantors, together with the
Borrower, the "Obligors"), and WELLS FARGO FOOTHILL, INC., a California
corporation, as collateral agent for the parties defined as "Administrative
Agent" and "Lenders" under the Credit Agreement referred to below (in such
capacity, together with its successors in such capacity, the "Collateral
Agent").

     The Obligors, such Lenders, the Collateral Agent, and the Administrative
Agent are parties to a First Lien Credit Agreement dated as of April 1, 2005 (as
modified and supplemented and in effect from time to time, the "Credit
Agreement"), providing, subject to the terms and conditions thereof, for
extensions of credit (by means of loans and letters of credit) to be made by
such Lenders to the Borrower.

     To induce such Lenders to enter into the Credit Agreement and to extend
credit thereunder, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, each Obligor has agreed to
grant a security interest in the Collateral (as hereinafter defined) as security
for the Secured Obligations (as so defined).

     Accordingly, the parties hereto agree as follows:

     Section 1. Definitions, Etc.

     1.01 Terms Generally. Terms used herein and not otherwise defined herein
are used herein as defined in the Credit Agreement.

     1.02 Certain Uniform Commercial Code Terms. As used herein, the terms
"Accession", "Account", "Chattel Paper", "Commodity Account", "Commodity
Contract", "Deposit Account", "Document", "Electronic Chattel Paper",
"Equipment", "Fixture", "General Intangible", "Goods", "Instrument",
"Inventory", "Investment Property", "Letter-of-Credit Right", "Proceeds",
"Promissory Note" and "Supporting Obligations" have the respective meanings set
forth in Article 9 of the NYUCC, and the terms "Certificated Security",
"Entitlement Holder", "Financial Asset", "Securities Account", "Security",
"Security Entitlement" and "Uncertificated Security" have the respective
meanings set forth in Article 8 of the NYUCC.

     1.03 Additional Definitions. In addition, as used herein:


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     "Cash Dominion Notice" has the meaning assigned to such term in Section
5.04(d).

     "Collateral" has the meaning assigned to such term in Section 3.

     "Collateral Account" has the meaning assigned to such term in Section 4.01.

     "Copyright Collateral" means all Copyrights of any Obligor, whether now
owned or hereafter acquired by such Obligor, including each Copyright identified
in Annex 4.

     "Collateral Trigger Event" shall be deemed to have occurred and be
continuing on any date that the aggregate amount of (i) all items of Investment
Property of any Obligor with a value of less than $250,000 not held by the
Collateral Agent plus (ii) all Financial Assets with a value of less than
$250,000 not held by the Collateral Agent plus (iii) all Electronic Chattel
Paper of any Obligor with a principal amount of less than $250,000 not held by
the Collateral Agent plus (iv) all Letter-of-Credit Rights of any Obligor with a
face amount of less than $250,000 not held by the Collateral Agent plus (v) all
Chattel Paper having a principal amount of less than $250,000 not held by the
Collateral Agent is equal to or greater than $2,000,000.

     "Copyrights" means all copyrights, copyright registrations and applications
for copyright registrations, including all renewals and extensions thereof, all
rights to recover for past, present or future infringements thereof and all
other rights whatsoever accruing thereunder or pertaining thereto.

     "Excluded Account" shall mean (i) any Deposit Account of any Obligor that
is used solely to make payroll or employee benefits payments the balance of
which does not exceed $4,500,000.00 at any time, (ii) any Deposit Account or
Securities Account of any Obligor the balance of which is swept on each Business
Day into a Deposit Account that is subject to the Collateral Agent's control (as
such term is defined in Section 9-104 of the NYUCC), (iii) Deposit Accounts in
the name of Montana Mills or any of its subsidiaries with an aggregate balance
of no more than $100,000 and (iv) a Deposit Account in which cash posted as
margin is deposited to secure obligations of the Parent Guarantor or any of its
Included Subsidiaries under Hedging Agreements relating to commodities the
aggregate balance of which does not exceed $500,000 at any time.

     "Foreign Subsidiary" means any Subsidiary that is organized under the laws
of a jurisdiction outside the United States of America.

     "Initial Pledged Shares" means the Shares of each Issuer beneficially owned
by any Obligor on the date hereof and identified in Annex 3 (Part A).


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     "Intellectual Property" means, collectively, all Copyright Collateral, all
Patent Collateral and all Trademark Collateral, together with (a) all
inventions, processes, production methods, proprietary information, know-how and
trade secrets; (b) all licenses or user or other agreements granted to any
Obligor with respect to any of the foregoing, in each case whether now or
hereafter owned or used; (c) all information, customer lists, identification of
suppliers, data, plans, blueprints, specifications, designs, drawings, recorded
knowledge, surveys, engineering reports, test reports, manuals, materials
standards, processing standards, performance standards, catalogs, computer and
automatic machinery software and programs; (d) all field repair data, sales data
and other information relating to sales or service of products now or hereafter
manufactured; (e) all accounting information and all media in which or on which
any information or knowledge or data or records may be recorded or stored and
all computer programs used for the compilation or printout of such information,
knowledge, records or data; (f) all licenses, consents, permits, variances,
certifications and approvals of governmental agencies now or hereafter held by
any Obligor; and (g) all causes of action, claims and warranties now or
hereafter owned or acquired by any Obligor in respect of any of the items listed
above.

     "Intercreditor Agreement" means the Collateral Agency and Intercreditor
Agreement dated as of April 1, 2005, among the Borrower, the Guarantors, Wells
Fargo Foothill, Inc., as First Lien Collateral Agent, Credit Suisse First
Boston, as Second Lien Collateral Agent, First Lien Administrative Agent and
Second Lien Administrative Agent and certain other persons party or that may
become party thereto from time to time, as amended restated, supplemented or
otherwise modified from time to time.

     "Issuers" means, collectively, (a) the respective Persons identified on
Annex 3 (Part A) under the caption "Issuer" and (b) any other Person that shall
at any time be a direct Subsidiary of any Obligor (other than any such
Subsidiary that is also a Subsidiary of a Foreign Subsidiary).

     "Mobile Store" means any Motor Vehicle of any Obligor that is outfitted as
a retail store whether or not any sales are conducted therein.

     "Montana Mills" means Montana Mills Bread Co., Inc.

     "Motor Vehicles" means motor vehicles, tractors, trailers and other like
property, if the title thereto is governed by a certificate of title or
ownership.

     "NYUCC" means the Uniform Commercial Code as in effect from time to time in
the State of New York.

     "Patent Collateral" means all Patents of any Obligor, whether now owned or
hereafter acquired by such Obligor, including each Patent identified in Annex 5.


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     "Patents" means all patents and patent applications, including the
inventions and improvements described and claimed therein together with the
reissues, divisions, continuations, renewals, extensions and
continuations-in-part thereof, all income, royalties, damages and payments now
or hereafter due and/or payable with respect thereto, all damages and payments
for past or future infringements thereof and rights to sue therefor, and all
rights corresponding thereto throughout the world.

     "Pledged Shares" means, collectively, (i) the Initial Pledged Shares and
(ii) subject to the limitations set forth herein, all other Shares of any Issuer
now or hereafter owned by any Obligor, together in each case with (a) all
certificates representing the same, (b) all shares, securities, moneys or other
property representing a dividend on or a distribution or return of capital on or
in respect of the Pledged Shares, or resulting from a split-up, revision,
reclassification or other like change of the Pledged Shares or otherwise
received in exchange therefor, and any warrants, rights or options issued to the
holders of, or otherwise in respect of, the Pledged Shares, and (c) without
prejudice to any provision of any of the Loan Documents prohibiting any merger
or consolidation by an Issuer, all Shares of any successor entity of any such
merger or consolidation.

     "Secured Creditors" means, collectively, the Lenders, the Administrative
Agent, the Collateral Agent and the Issuing Lender, any other holder from time
to time of any of the Secured Obligations and, in each case, their respective
successors and assigns.

     "Secured Obligations" means the First Lien Secured Obligations (as defined
in the Credit Agreement).

     "Shared Collateral" has the meaning assigned to such term in the
Intercreditor Agreement.

     "Shared Lien Collateral Agent" has the meaning assigned to such term in the
Intercreditor Agreement.

     "Shares" means shares of capital stock of a corporation, limited liability
company interests, partnership interests and other ownership or equity interests
of any class in any Person.

     "Short Form Security Agreement" has the meaning assigned to such term in
Section 5.01(d).

     "Trademark Collateral" means all Trademarks of any Obligor, whether now
owned or hereafter acquired by such Obligor, including each Trademark identified
in Annex 6, together, in each case, with the product lines and goodwill of the
business connected with the use of, and symbolized by, each such trade name,
trademark and service mark. Notwithstanding the foregoing, the Trademark
Collateral does not and


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shall not include any Trademark that would be rendered invalid, abandoned, void
or unenforceable by reason of its being included as part of the Trademark
Collateral.

     "Trademarks" means all trade names, trademarks and service marks, logos,
trademark and service mark registrations, and applications for trademark and
service mark registrations, including all renewals of trademark and service mark
registrations, all rights to recover for all past, present and future
infringements thereof and all rights to sue therefor, and all rights
corresponding thereto throughout the world.

     Section 2. Representations and Warranties. Each Obligor represents and
warrants to the Secured Creditors that:

     2.01 Title. The Obligors are the sole beneficial owners of the Collateral
and no Liens exist upon the Collateral (and no right or option to acquire the
same exists in favor of any other Person) other than (a) the security interest
created or provided for herein, which security interest constitutes a valid
first and prior perfected Lien on the Collateral, and (b) the Liens expressly
permitted by Section 7.02 of the Credit Agreement.

     2.02 Names, Etc. The full and correct legal name, type of organization,
jurisdiction of organization, organizational ID number (if applicable) and
mailing address of each Obligor as of the date hereof are correctly set forth in
Annex 1. Said Annex 1 correctly specifies as of the date hereof (i) the place of
business of each Obligor or, if any Obligor has more than one place of business,
the location of the chief executive office of such Obligor, (ii) each location
where Goods of each Obligor are located (other than Motor Vehicles constituting
Equipment and Goods in transit), and (iii) each location where to Obligors'
knowledge any financing statement naming each Obligor as debtor is currently on
file.

     2.03 Changes in Circumstances. No Obligor has (i) within the period of four
months prior to the date hereof, changed its location (as defined in Section
9-307 of the NYUCC), (ii) except as specified in Annex 1, within the period of
five years prior to the date hereof, changed its name, or (iii) except as
specified in Annex 2, within the period of five years prior to the date hereof,
become a "new debtor" (as defined in Section 9-102(a)(56) of the NYUCC) with
respect to a currently effective security agreement previously entered into by
any other Person.

     2.04 Pledged Shares. The Initial Pledged Shares constitute (a) 100% of the
issued and outstanding Shares of each Issuer (other than a Foreign Subsidiary)
directly owned by each Obligor on the date hereof (other than any Shares held in
a Securities Account referred to in Annex 7), whether or not registered in the
name of such Obligor and (b) in the case of each Issuer that is a Foreign
Subsidiary, (i) 65% (or such lesser percentage that constitutes all of the
voting stock of such Issuer owned by such Obligor) of the issued and outstanding
shares of voting stock of such Issuer and (ii) 100% of all other issued and
outstanding shares of capital stock of whatever class of such Issuer directly
owned by each Obligor on the date hereof, in each case whether or not registered
in the name of such Obligor. Annex 3 (Part A) correctly


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identifies, as at the date hereof, the respective Issuers of the Initial Pledged
Shares and (in the case of any corporate Issuer) the respective class and par
value of such Shares and the respective number of such Shares (and registered
owner thereof) represented by each such certificate.

     The Initial Pledged Shares are, and all other Pledged Shares in which each
Obligor shall hereafter grant a security interest pursuant to Section 3 will be,
(i) duly authorized, validly existing, fully paid and non-assessable (in the
case of any Shares issued by a corporation) and (ii) duly issued and outstanding
(in the case of any equity interest in any other entity), and none of such
Pledged Shares are or will be subject to any contractual restriction, or any
restriction under the charter, by-laws, partnership agreement or other
organizational instrument of the respective Issuer thereof, upon the transfer of
such Pledged Shares (except for any such restriction contained herein or in the
Loan Documents, or under such organizational instruments).

     None of the Initial Pledged Shares constitute Uncertificated Securities. No
partnership agreement, limited liability agreement nor any other agreement of
any Issuer that is not a corporation provides that any of the Initial Pledged
Shares of such Issuer are securities governed by Article 8 of the NYUCC.

     As of the execution date hereof, each Obligor shall have delivered to the
Collateral Agent all certificates evidencing any of the Initial Pledged Shares,
accompanied by undated stock or other powers duly executed in blank.

     2.05 Promissory Notes. Annex 3 (Part B) sets forth a complete and correct
list of each Promissory Note (other than any held in a Securities Account
referred to in Annex 7) held by each Obligor on the date hereof having an
aggregate outstanding principal amount equal to or in excess of $250,000.

     As of the execution date hereof, each Obligor shall have delivered to the
Collateral Agent all Promissory Notes listed on Annex 3 (Part B); provided that
(i) the Promissory Notes identified as (x) item 11 on Annex 3 (Part B) shall be
delivered to the Collateral Agent no later than 15 Business Days following the
date hereof and (y) items 7, 8, 9, 10 and 15 on Annex 3 (Part B) shall not,
solely by reason of this sentence, be required to be delivered to the Collateral
Agent and (ii) the transfer powers duly executed in blank for the Promissory
Notes identified as items 13 and 14 on Annex 3 (Part B) shall be delivered to
the Collateral Agent promptly after the date of this Security Agreement .

     2.06 Intellectual Property. Annexes 4, 5 and 6, respectively, set forth a
complete and correct list of all copyright registrations, patents, patent
applications, trademark registrations and trademark applications owned by each
Obligor on the date hereof (or, in the case of any supplement to said Annexes 4,
5 and 6, effecting a pledge thereof, as of the date of such supplement).


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     As of the date hereof, except pursuant to licenses and other user
agreements entered into by the Obligors in the ordinary course of business that
are listed in said Annexes 4, 5 and 6 (including as supplemented by any
supplement effecting a pledge thereof), no Obligor has done anything to
authorize or enable any other Person to use any Copyright, Patent or Trademark
listed in said Annexes 4, 5 and 6 (as so supplemented), and all registrations
listed in said Annexes 4, 5 and 6 (as so supplemented) are, except as noted
therein, in full force and effect.

     As of the date hereof, to each Obligor's knowledge, (i) except as set forth
in said Annexes 4, 5 and 6 (as supplemented by any supplement effecting a pledge
thereof), there is no violation by others of any right of such Obligor with
respect to any Copyright, Patent or Trademark listed in said Annexes 4, 5 and 6
(as so supplemented), respectively, and (ii) such Obligor is not infringing in
any respect upon any Copyright, Patent or Trademark of any other Person; and no
proceedings alleging such infringement have been instituted or are pending
against such Obligor and no written claim against such Obligor has been received
by such Obligor, alleging any such violation, except as may be set forth in said
Annexes 4, 5 and 6 (as so supplemented).

     No Obligor on the date hereof owns any Trademarks registered in the United
States of America to which the last sentence of the definition of Trademark
Collateral applies.

     2.07 Deposit Accounts and Securities Accounts. Annex 7 sets forth a
complete and correct list of all Deposit Accounts, Securities Accounts and
Commodity Accounts of each Obligor on the date hereof.

     2.08 Commercial Tort Claims. Annex 8 sets forth a complete and correct list
of all commercial tort claims of each Obligor in existence on the date hereof.

     2.09 Fair Labor Standards Act. Any goods now or hereafter produced by any
Obligor or any of their Subsidiaries included in the Collateral have been and
will be produced in compliance with the requirements of the Fair Labor Standards
Act, as amended.

     Section 3. Collateral. As collateral security for the payment in full when
due (whether at stated maturity, by acceleration or otherwise) of the Secured
Obligations owing by such Obligor, each Obligor hereby pledges and grants to the
Collateral Agent for the benefit of the Secured Creditors and, with respect to
Shared Collateral, to the Shared Lien Collateral Agent for the benefit of the
Secured Creditors as hereinafter provided a security interest in all of such
Obligor's right, title and interest in, to and under the following property, in
each case whether tangible or intangible, wherever located, and whether now
owned by such Obligor or hereafter acquired and whether now existing or
hereafter coming into existence (all of the property described in this Section 3
being collectively referred to herein as "Collateral"):

          (a) all Accounts:

          (b) all Chattel Paper;


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          (c) all Deposit Accounts;

          (d) all Documents;

          (e) all Equipment;

          (f) all Fixtures;

          (g) all General Intangibles;

          (h) all Goods not covered by the other clauses of this Section 3;

          (i) the Pledged Shares;

          (j) all Instruments, including all Promissory Notes;

          (k) all Intellectual Property;

          (l) all Inventory;

          (m) all Investment Property not covered by other clauses of this
     Section 3, including all Securities, all Securities Accounts and all
     Security Entitlements with respect thereto and Financial Assets carried
     therein, and all Commodity Accounts and Commodity Contracts;

          (n) all Letter-of-Credit Rights;

          (o) all commercial tort claims, as defined in Section 9-102(a)(13) of
     the NYUCC, arising out of the events described in Annex 8;

          (p) all other tangible and intangible personal property whatsoever of
     such Obligor; and

          (q) all Proceeds of any of the Collateral, all Accessions to and
     substitutions and replacements for, any of the Collateral, all Supporting
     Obligations with respect to any of the Collateral and all offspring, rents,
     profits and products of any of the Collateral, and, to the extent related
     to any Collateral, all books, correspondence, credit files, records,
     invoices and other papers (including all tapes, cards, computer runs and
     other papers and documents in the possession or under the control of such
     Obligor or any computer bureau or service company from time to time acting
     for such Obligor),

IT BEING UNDERSTOOD, HOWEVER, that (A) in the case of any of the foregoing that
consists of general or limited partnership interests in a general or limited
partnership or any


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Shares in a Joint Venture, the security interest hereunder shall be deemed to be
created only to the maximum extent permitted under the applicable organizational
instrument or joint venture agreement pursuant to which such entity is formed or
governed, (B) in no event shall the security interest granted under this Section
3 attach to (1) any lease, license, contract, property rights or agreement to
which such Obligor is a party (or to any of its rights or interests thereunder)
if the grant of such security interest therein would constitute or result in
either (i) the abandonment, invalidation or unenforceability of any right, title
or interest of such Obligor therein or (ii) in a breach or termination pursuant
to the terms of, or a default under, any such lease, license, contract, property
rights or agreement (other than to the extent that any such term would be
rendered ineffective by Section 9-406, 9-407, 9-408 or 9-409 of the Uniform
Commercial Code as in effect in the relevant jurisdiction), (2) any Equipment
owned by any Obligor on the date hereof or hereafter acquired that is subject to
a Lien securing Indebtedness permitted to be incurred pursuant to Section
7.01(f) of the Credit Agreement if the contract or other agreement in which such
Lien is granted (or the documentation providing for such Indebtedness) validly
prohibits the creation of any other Lien on such Equipment and (3) any Fixtures
located on premises leased by the Obligors to the extent the pledge thereof or
grant of a security interest therein (x) is prohibited by the lease governing
such premises or (y) would result in the forfeiture of any Obligor's right,
title or interest therein under applicable law, (C) the security interest
created hereby in Shares constituting voting stock of any Issuer that is a
Foreign Subsidiary shall be limited to that portion of such voting stock that
does not exceed 65% of the aggregate issued and outstanding voting stock of such
Issuer and (D) for the avoidance of doubt, the security interest created hereby
is not a conditional or an absolute assignment of any of the Trademark
Collateral or any other Collateral.

     Section 4. Cash Proceeds of Collateral.

     4.01 Collateral Account. The Collateral Agent will cause to be established
at a banking institution to be selected by the Collateral Agent a cash
collateral account (the "Collateral Account"), that

          (i) to the extent of all Investment Property or Financial Assets
     (other than cash) credited thereto shall be a Securities Account in respect
     of which the Collateral Agent shall be the Entitlement Holder, and

          (ii) to the extent of any cash credited thereto shall be a Deposit
     Account in respect of which the Collateral Agent shall be the depository
     bank's customer, and

into which each Obligor agrees to deposit from time to time the cash proceeds of
any of the Collateral (including proceeds of insurance thereon) required to be
delivered to the Collateral Agent pursuant to any of the Loan Documents, or
pursuant hereto, and into which any Obligor may from time to time deposit any
additional amounts that it wishes to provide as additional collateral security
hereunder. The Collateral Account, and any money or other property from time to
time therein, shall constitute part of the Collateral hereunder and shall not
constitute payment of the Secured Obligations until applied as hereinafter
provided.


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     4.02 [Intentionally deleted.]

     4.03 Withdrawals. The balance from time to time in the Collateral Account
shall be subject to withdrawal only as provided in this Section 4.03. The
Collateral Agent shall (except as otherwise provided in the last sentence of
this Section 4.03) remit the collected balance outstanding to the credit of the
Collateral Account to or upon the order of the Obligors as the Obligors shall
from time to time instruct, provided that at any time following the occurrence
and during the continuance of an Event of Default, the Collateral Agent may
(and, if instructed by the Lenders as provided in the Credit Agreement, shall)
in its (or their) discretion apply or cause to be applied (subject to
collection) the balance from time to time outstanding to the credit of the
Collateral Account (regardless of the origin thereof) to the prepayment of the
principal of the Loans (and/or to provide cover for LC Exposure) in the manner
specified in Section 2.17(b) of the Credit Agreement.

     4.04 [Intentionally deleted.]

     4.05 Investment of Balance in Collateral Account. The cash balance standing
to the credit of the Collateral Account shall be invested from time to time in
such Permitted Investments as the Obligors (or, after the occurrence and during
the continuance of an Event of Default, the Collateral Agent) shall determine,
which Permitted Investments shall be held in the name and be under the control
of the Collateral Agent (and credited to the Collateral Account), provided that
at any time after the occurrence and during the continuance of an Event of
Default, the Collateral Agent may (and, if instructed by the Lenders as provided
in the Credit Agreement, shall) in its (or their) discretion at any time and
from time to time elect to liquidate any such Permitted Investments and to apply
or cause to be applied the proceeds thereof to the payment of the Secured
Obligations then due and payable in the manner specified in Section 5.09.

     4.06 Cover for LC Exposure. Amounts deposited into the Collateral Account
as cover for LC Exposure under the Credit Agreement as contemplated by Section
2.05(k) thereof shall be held by the Collateral Agent in a separate sub-account
(designated "LC Exposure Sub-Account") and all amounts held in such sub-account
shall constitute collateral security first for the LC Exposure outstanding from
time to time and second as collateral security for the other Secured Obligations
hereunder.

     Section 5. Further Assurances; Remedies. In furtherance of the grant of the
security interest pursuant to Section 3, each Obligor hereby agrees with the
Collateral Agent for the benefit of the Secured Creditors as follows:

     5.01 Delivery and Other Perfection. Subject to the limitations specifically
set forth below, each Obligor shall promptly from time to time give, execute,
deliver, file, record, authorize or obtain all such financing statements,
continuation statements, notices, instruments, documents, agreements or consents
or other papers as may be necessary or desirable in the reasonable judgment of
the Collateral Agent to create, preserve, perfect, maintain the perfection


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of or validate the security interest granted pursuant hereto or to enable the
Collateral Agent to exercise and enforce its rights hereunder with respect to
such security interest, and without limiting the foregoing, shall:

          (a) subject to Section 5.01(h) hereto, if any of the Pledged Shares,
     or any Investment Property or Financial Assets with an individual value
     equal to or in excess of $250,000, constituting part of the Collateral are
     received by such Obligor, forthwith (x) deliver to the Collateral Agent the
     certificates or instruments, if any, representing or evidencing the same,
     duly endorsed in blank or accompanied by such instruments of assignment and
     transfer in such form and substance as the Collateral Agent may reasonably
     request, all of which thereafter shall be held by the Collateral Agent,
     pursuant to the terms of this Agreement, as part of the Collateral and (y)
     take such other action as the Collateral Agent may deem necessary or
     appropriate in its reasonable judgment to duly record or otherwise perfect
     the security interest created hereunder in such Collateral;


          (b) promptly from time to time deliver to the Collateral Agent any and
     all Instruments constituting part of the Collateral, endorsed and/or
     accompanied by such instruments of assignment and transfer in such form and
     substance as the Collateral Agent may reasonably request; provided that
     (other than in the case of the Promissory Notes delivered to the Collateral
     Agent pursuant to Section 2.05 hereto) so long as no Event of Default shall
     have occurred and be continuing, such Obligor may retain for collection in
     the ordinary course any Instruments received by such Obligor in the
     ordinary course of business and the Collateral Agent shall, promptly upon
     request of such Obligor, make appropriate arrangements for making any
     Instrument delivered by such Obligor available to such Obligor for purposes
     of presentation, collection or renewal (any such arrangement to be
     effected, to the extent requested by the Collateral Agent, against trust
     receipt or like document);

          (c) subject to Section 5.01(h) hereto, promptly from time to time
     enter into such control agreements, each in form and substance reasonably
     acceptable to the Collateral Agent, as may be required to perfect the
     security interest created hereby in any and all Deposit Accounts (other
     than any Excluded Accounts), Investment Property with an individual value
     equal to or in excess of $250,000, Electronic Chattel Paper having an
     individual principal amount equal to or in excess of $250,000 and
     Letter-of-Credit Rights having an individual face amount equal to or in
     excess of $250,000, and will promptly furnish to the Collateral Agent true
     copies thereof; provided that with respect to any Letter-of-Credit Right,
     the Obligors shall be required only to use their commercially reasonable
     efforts to obtain control of such Letter-of-Credit Rights;

          (d) promptly from time to time upon the request of the Collateral
     Agent, execute and deliver such short-form security agreements as the
     Collateral Agent may deem necessary or desirable in its reasonable judgment
     to protect the interests of the


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     Collateral Agent in respect of that portion of the Collateral consisting of
     Intellectual Property (each, a "Short Form Security Agreement");

          (e) promptly upon request of the Collateral Agent and if the net book
     value of Motor Vehicles (other than Mobile Stores) exceeds $1,000,000 in
     the aggregate, cause the Collateral Agent to be listed as the lienholder on
     any certificate of title or ownership covering any Motor Vehicle (other
     than Motor Vehicles constituting Inventory) that is not included in the
     calculation of the $1,000,000 and within 120 days of such request deliver
     evidence of the same to the Collateral Agent; provided, however that
     promptly upon request of the Collateral Agent, each Obligor shall cause the
     Collateral Agent to be listed as the lienholder on any certificate of title
     or ownership covering any Mobile Store and within 120 days of such request
     deliver evidence of the same to the Collateral Agent; provided further that
     the Collateral Agent hereby notifies the Obligors that they shall list the
     Collateral Agent as the lienholder on any certificate of title or ownership
     which covers any Mobile Store owned by any Obligor as of the date hereof
     and that such Obligor shall deliver evidence of the same to the Collateral
     Agent within 120 days of the date of this Agreement;

          (f) keep full and accurate books and records relating to the
     Collateral, and, to the extent required to perfect the Collateral Agent's
     security interest in the Collateral pursuant to the NYUCC, stamp or
     otherwise mark such books and records in such manner as the Collateral
     Agent may require in order to reflect the security interests granted by
     this Agreement;

          (g) permit representatives of the Collateral Agent, upon reasonable
     notice, at any time during normal business hours to inspect and make
     abstracts from its books and records pertaining to the Collateral, and
     permit representatives of the Collateral Agent to be present at such
     Obligor's place of business to receive copies of communications and
     remittances relating to the Collateral, and upon request of the Collateral
     Agent, forward copies of any notices or communications received by such
     Obligor with respect to the Collateral, all in such manner as the
     Collateral Agent may reasonably require; and

          (h) Notwithstanding anything to the contrary in this Agreement, if a
     Collateral Trigger Event occurs and is continuing, deliver to the
     Collateral Agent Investment Property, Financial Assets, Electronic Chattel
     Paper, Letter-of-Credit Rights and/or Chattel Paper (or control thereof as
     contemplated in this Agreement) in sufficient aggregate value, principal
     amount or face amount such that a Collateral Trigger Event would no longer
     be continuing.

     5.02 Other Financing Statements or Control. Except as otherwise permitted
under Section 7.02 of the Credit Agreement, no Obligor shall (a) file or
knowingly suffer to be on file for a period of more than 30 days from the date
that such Obligor obtained knowledge thereof, or authorize or affirmatively
permit to be filed or to be on file, in any jurisdiction, any financing
statement or like instrument with respect to any of the Collateral in which the

<PAGE>

Collateral Agent is not named as the sole Collateral Agent for the benefit of
the Secured Creditors, or (b) cause or permit any Person other than the
Collateral Agent to have "control" (as defined in Section 9-104, 9-105, 9-106 or
9-107 of the NYUCC) of any Deposit Account, Electronic Chattel Paper, Investment
Property or Letter-of-Credit Right constituting part of the Collateral.

     5.03 Preservation of Rights. The Collateral Agent shall not be required to
take steps necessary to preserve any rights against prior parties to any of the
Collateral.

     5.04 Special Provisions Relating to Certain Collateral.

          (a) Pledged Shares.

               (i) Except as may be permitted otherwise by the Credit Agreement,
          each Obligor will cause the Pledged Shares to constitute at all times
          (1) 100% of the total number of Shares of each Issuer other than a
          Foreign Subsidiary then outstanding owned directly by such Obligor and
          (2) in the case of any Issuer that is a Foreign Subsidiary, 65% (or
          such lesser percentage that constitutes all of the voting stock of
          such Issuer owned by such Obligor) of the total number of shares of
          voting stock of such Issuer and 100% of the total number of shares of
          all other classes of capital stock of such Issuer then issued and
          outstanding owned by such Obligor.

               (ii) Subject to the last sentence of this Section 5.04(a)(ii),
          each Obligor shall have the right to exercise all voting, consensual
          and other powers of ownership pertaining to the Pledged Shares for all
          purposes not inconsistent with the terms of this Agreement, the Loan
          Documents or any other instrument or agreement referred to herein or
          therein, provided that such Obligor agrees that it will not vote the
          Pledged Shares in any manner that is inconsistent with the terms of
          this Agreement or the Credit Agreement; and the Collateral Agent shall
          execute and deliver to such Obligor or cause to be executed and
          delivered to such Obligor all such proxies, powers of attorney,
          dividend and other orders, and all such instruments, without recourse,
          as such Obligor may request for the purpose of enabling such Obligor
          to exercise the rights and powers that it is entitled to exercise
          pursuant to this Section 5.04(a)(ii). Notwithstanding anything to the
          contrary herein, the rights of the Obligors under this Section
          5.04(a)(ii) shall terminate immediately upon (x) the occurrence and
          continuation of an Event of Default and (y) the delivery of a written
          notice from the Collateral Agent of its intent to exercise its rights
          under this Section 5.04(a) (unless the Collateral Agent is prohibited
          by law to give such notice in which case such written notice shall not
          be required for termination of the Obligors' rights hereunder).

               (iii) Subject to the last sentence of this Section 5.04(a)(iii),
          each Obligor shall be entitled to receive and retain any dividends,
          distributions or proceeds on the Pledged Shares paid in cash out of
          earned surplus. Notwithstanding anything to the contrary herein, the
          rights of the Obligors under this Section 5.04(a)(iii) shall terminate

<PAGE>

          immediately upon (x) the occurrence and continuation of an Event of
          Default and (y) the delivery of a written notice from the Collateral
          Agent of its intent to exercise its rights under this Section 5.04(a)
          (unless the Collateral Agent is prohibited by law to give such notice
          in which case such written notice shall not be required for
          termination of the Obligors' rights hereunder).

               (iv) Upon (x) the occurrence and continuation of an Event of
          Default and (y) the delivery of a written notice from the Collateral
          Agent of its intent to exercise its rights under this Section 5.04(a)
          (unless the Collateral Agent is prohibited by law to give such notice
          in which case such written notice shall not be required), whether or
          not the Secured Creditors or any of them exercise any available right
          to declare any Secured Obligations due and payable or seek or pursue
          any other relief or remedy available to them under applicable law or
          under this Agreement, the Loan Documents or any other agreement
          relating to such Secured Obligation, all dividends and other
          distributions on the Pledged Shares shall be paid directly to the
          Collateral Agent and retained by it in the Collateral Account as part
          of the Collateral, subject to the terms of this Agreement, and, if the
          Collateral Agent shall so request in writing, each Obligor agrees to
          execute and deliver to the Collateral Agent appropriate additional
          dividend, distribution and other orders and documents to that end,
          provided that if such Event of Default is cured, any such dividend or
          distribution theretofore paid to the Collateral Agent shall, upon
          request of any Obligor (except to the extent theretofore applied to
          the Secured Obligations), be returned by the Collateral Agent to such
          Obligor.

               (v) Either: (i) no partnership agreement, limited liability
          agreement nor any other agreement of any Issuer that is not a
          corporation shall provide that any of the Pledged Shares of such
          Issuer are securities governed by Article 8 of the NYUCC or (ii) if
          any of such Pledged Shares are securities governed by Article 8 of the
          NYUCC, then such Pledged Shares shall be certificated.

          (b) Intellectual Property.

               (i) For the purpose of enabling the Collateral Agent to exercise
          rights and remedies under Section 5.05 at such time as the Collateral
          Agent shall be lawfully entitled to exercise such rights and remedies,
          and for no other purpose, each Obligor hereby grants to the Collateral
          Agent, to the extent assignable, an irrevocable, non-exclusive license
          (exercisable without payment of royalty or other compensation to such
          Obligor) to use or sublicense any of the Intellectual Property now
          owned or hereafter acquired by such Obligor, wherever the same may be
          located, including in such license reasonable access to all media in
          which any of the licensed items may be recorded or stored and to all
          computer programs used for the compilation or printout thereof,
          subject to any licenses granted by any Obligor in compliance with the
          provisions of this Agreement prior to the occurrence of an Event of
          Default; provided, however that the Collateral Agent agrees that it
          shall provide prior written notice of its intent to exercise its
          rights pursuant to this Section 5.04(b) (unless the Collateral Agent
          is prohibited by law to


<PAGE>

          give such notice in which case such written notice shall not be
          required for the Collateral Agent to exercise its rights hereunder).

               (ii) Notwithstanding Section 5.04(b)(i) and subject to the
          provisions of Section 7.03 of the Credit Agreement that limit the
          rights of any Obligor to dispose of its property, each Obligor will be
          permitted to exploit, use, enjoy, protect, license, sublicense,
          assign, sell, dispose of or take other actions with respect to the
          Intellectual Property in the ordinary course of the business of such
          Obligor; provided, however, that notwithstanding anything to the
          contrary herein, the rights of the Obligors under this Section
          5.04(b)(ii) shall terminate immediately upon (x) the occurrence and
          continuation of an Event of Default and (y) the delivery of a written
          notice from the Collateral Agent of its intent to exercise its rights
          under this Section 5.04(b) (unless the Collateral Agent is prohibited
          by law to give such notice in which case such written notice shall not
          be required for termination of the Obligors' rights hereunder). In
          furtherance of the foregoing, so long as no Event of Default shall
          have occurred and be continuing and the Obligors' rights under this
          Section 5.04(b)(ii) have not been terminated, the Collateral Agent
          shall from time to time, upon the request of any Obligor, execute and
          deliver any instruments, certificates or other documents, in the form
          so requested, that such Obligor shall have certified are appropriate
          in its judgment to allow it to take any action permitted above
          (including relinquishment of the license provided pursuant to clause
          (i) immediately above as to any specific Intellectual Property).
          Further, upon the payment in full of all of the Secured Obligations
          and cancellation or termination of the Commitments and LC Exposure or
          earlier expiration of this Agreement or release of the Collateral, the
          Collateral Agent shall grant back to the Obligors the license granted
          pursuant to clause (i) immediately above. The exercise of rights and
          remedies under Section 5.05 by the Collateral Agent shall not
          terminate the rights of the holders of any licenses or sublicenses
          theretofore granted by the Obligors in accordance with the first
          sentence of this clause (ii).

          (c) Chattel Paper. Subject to Section 5.01(h), each Obligor will (1)
     deliver to the Collateral Agent each original of each item of Chattel Paper
     having an individual principal amount equal to or in excess of $250,000 at
     any time constituting part of the Collateral, and (2) cause each such
     original and each copy thereof to bear a conspicuous legend, in form and
     substance reasonably satisfactory to the Collateral Agent, indicating that
     such Chattel Paper is subject to the security interest granted hereby and
     that purchase of such Chattel Paper by a Person other than the Collateral
     Agent without the consent of the Collateral Agent would violate the rights
     of the Collateral Agent.

          (d) Deposit Accounts and Securities Accounts. Pursuant to the terms of
     a control agreement governing any Deposit Account or Securities Account,
     each Obligor may authorize and direct a depository bank or securities
     intermediary that is a party to such control agreement to act upon the
     instructions of its officers, agents or other representatives concerning
     such Deposit Account or Securities Account or as to any other matters
     relating to such Deposit Account or Securities Account unless and until
     such


<PAGE>

     depository bank or securities intermediary receives notice from the
     Collateral Agent to the contrary; provided, however, that the Collateral
     Agent shall not deliver any instructions to such depository bank or
     securities intermediary with respect to such Deposit Account or Securities
     Account ("Cash Dominion Notice") except upon the occurrence and during the
     continuation of an Event of Default; provided, further, however that (i) if
     the Collateral Agent has delivered a Cash Dominion Notice upon the
     occurrence of an Event of Default caused by the Borrower's breach of
     Section 2.10(b)(iii) of the Credit Agreement and the Borrower has
     thereafter maintained Net Liquidity greater than $20,000,000 for at least
     30 consecutive days, the Collateral Agent shall rescind such Cash Dominion
     Notice upon the request of the Borrower or (ii) if the Collateral Agent has
     delivered a Cash Dominion Notice upon the occurrence of an Event of
     Default, other than a breach by the Borrower of Section 2.10(b)(iii) of the
     Credit Agreement, and if such Event of Default has been remedied and no
     other Event of Default has occurred or been continuing for at least 90
     consecutive days thereafter, the Collateral Agent shall rescind such Cash
     Dominion Notice upon the request of the Borrower.

     5.05 Remedies.

          (a) Rights and Remedies Generally upon Default. If an Event of Default
     shall have occurred and is continuing, the Collateral Agent shall have all
     of the rights and remedies with respect to the Collateral of a collateral
     agent under the NYUCC (whether or not the Uniform Commercial Code is in
     effect in the jurisdiction where the rights and remedies are asserted) and
     such additional rights and remedies to which the Collateral Agent is
     entitled under the laws in effect in any jurisdiction where any rights and
     remedies hereunder may be asserted, including the right, to the fullest
     extent permitted by law, to exercise all voting, consensual and other
     powers of ownership pertaining to the Collateral as if the Collateral Agent
     were the sole and absolute owner thereof (and each Obligor agrees to take
     all such action as may be appropriate to give effect to such right); and
     without limiting the foregoing:

               (i) the Collateral Agent in its discretion may, in its name or in
          the name of any Obligor or otherwise, demand, sue for, collect or
          receive any money or other property at any time payable or receivable
          on account of or in exchange for any of the Collateral, but shall be
          under no obligation to do so;

               (ii) the Collateral Agent may make any reasonable compromise or
          settlement deemed desirable with respect to any of the Collateral and
          may extend the time of payment, arrange for payment in installments,
          or otherwise modify the terms of, any of the Collateral;

               (iii) the Collateral Agent may require each Obligor to notify
          (and each Obligor hereby authorizes the Collateral Agent, upon prior
          written notice to such Obligor, provided that if Collateral Agent is
          prevented from giving such notice by law no such notice shall be
          necessary, so to notify) each account debtor in respect of any
          Account,


<PAGE>

          Chattel Paper or General Intangible, and each obligor on any
          Instrument, constituting part of the Collateral that such Collateral
          has been assigned to the Collateral Agent hereunder, and to instruct
          that any payments due or to become due in respect of such Collateral
          shall be made directly to the Collateral Agent or as it may direct
          (and if any such payments, or any other Proceeds of Collateral, are
          received by any Obligor they shall be held in trust by such Obligor
          for the Collateral Agent and as promptly as possible remitted or
          delivered to the Collateral Agent for application as provided herein);

               (iv) the Collateral Agent may require any Obligor to assemble the
          Collateral at such place or places, reasonably convenient to the
          Collateral Agent and such Obligor, as the Collateral Agent may direct;

               (v) the Collateral Agent may apply the Collateral Account and any
          money or other property therein to payment of the Secured Obligations;

               (vi) the Collateral Agent may require any Obligor to cause the
          Pledged Shares to be transferred of record into the name of the
          Collateral Agent or its nominee (and the Collateral Agent agrees that
          if any of such Pledged Shares is transferred into its name or the name
          of its nominee, the Collateral Agent will thereafter promptly give to
          such Obligor copies of any notices and communications received by it
          with respect to such Pledged Shares); and

               (vii) the Collateral Agent may sell, lease, assign or otherwise
          dispose of all or any part of such Collateral, at such place or places
          as the Collateral Agent deems best, and for cash or for credit or for
          future delivery (without thereby assuming any credit risk), at public
          or private sale, without demand of performance or notice of intention
          to effect any such disposition or of the time or place thereof (except
          such notice as is required above or by applicable statute and cannot
          be waived), and the Collateral Agent or any other Secured Creditor or
          anyone else may be the purchaser, lessee, assignee or recipient of any
          or all of the Collateral so disposed of at any public sale (or, to the
          extent permitted by law, at any private sale) and thereafter hold the
          same absolutely, free from any claim or right of whatsoever kind,
          including any right or equity of redemption (statutory or otherwise),
          of any Obligor, any such demand, notice and right or equity being
          hereby expressly waived and released. In the event of any sale,
          assignment, or other disposition of any of the Trademark Collateral,
          the goodwill connected with and symbolized by the Trademark Collateral
          subject to such disposition shall be included. The Collateral Agent
          may, without notice or publication, adjourn any public or private sale
          or cause the same to be adjourned from time to time by announcement at
          the time and place fixed for the sale, and such sale may be made at
          any time or place to which the sale may be so adjourned.

The Proceeds of each collection, sale or other disposition under this Section
5.05, including by virtue of the exercise of any license granted to the
Collateral Agent in Section 5.04(b), shall be applied in accordance with Section
5.09.


<PAGE>

     (b) Certain Securities Act Limitations. Each Obligor recognizes that, by
reason of certain prohibitions contained in the Securities Act of 1933, as
amended, and applicable state securities laws, the Collateral Agent may be
compelled, with respect to any sale of all or any part of the Collateral, to
limit purchasers to those who will agree, among other things, to acquire the
Collateral for their own account, for investment and not with a view to the
distribution or resale thereof. Each Obligor acknowledges that any such private
sales may be at prices and on terms less favorable to the Collateral Agent than
those obtainable through a public sale without such restrictions, and,
notwithstanding such circumstances, agrees that any such private sale shall be
deemed to have been made in a commercially reasonable manner and that the
Collateral Agent shall have no obligation to engage in public sales and no
obligation to delay the sale of any Collateral for the period of time necessary
to permit the issuer thereof to register it for public sale.

     (c) Notice. Each Obligor agrees that to the extent the Collateral Agent is
required by applicable law to give reasonable prior notice of any sale or other
disposition of any Collateral, ten Business Days' notice shall be deemed to
constitute reasonable prior notice.

     5.06 Deficiency. If the proceeds of sale, collection or other realization
of or upon the Collateral pursuant to Section 5.05 are insufficient to cover the
costs and expenses of such realization and the payment in full of the Secured
Obligations, the Obligors, jointly and severally, shall remain liable for any
deficiency.

     5.07 Locations; Names. Without at least 7 days' prior written notice to the
Collateral Agent, no Obligor shall (i) change its location (as defined in
Section 9-307 of the NYUCC), (ii) change its name from the name shown as its
current legal name on Annex 1 or (iii) agree to or authorize any modification of
the terms of any item of Collateral that would result in a change thereof from
one Uniform Commercial Code category to another such category (such as from a
General Intangible to Investment Property) if such resulting change would
invalidate the Collateral Agent's perfection of its security interest in such
item of Collateral.

     5.08 Private Sale. The Secured Creditors shall incur no liability as a
result of the sale of the Collateral, or any part thereof, at any private sale
pursuant to Section 5.05 conducted in a commercially reasonable manner. Each
Obligor hereby waives any claims against the Secured Creditors arising by reason
of the fact that the price at which the Collateral may have been sold at such a
private sale was less than the price that might have been obtained at a public
sale or was less than the aggregate amount of the Secured Obligations, even if
the Collateral Agent accepts the first offer received and does not offer the
Collateral to more than one offeree.

     5.09 Application of Proceeds. Subject to the terms of the Intercreditor
Agreement, except as otherwise herein expressly provided and except as provided
below in this Section 5.09, the Proceeds of any collection, sale or other
realization of all or any part of the


<PAGE>

Collateral pursuant hereto, and any other cash at the time held by the
Collateral Agent under Section 4 or this Section 5, shall be applied by the
Collateral Agent:

          First, to the payment of the costs and expenses of such collection,
     sale or other realization, including out-of-pocket costs and expenses of
     the Collateral Agent and the fees and expenses of its agents and counsel,
     and all expenses incurred and advances made by the Collateral Agent in
     connection therewith;

          Next, to the payment in full of the Secured Obligations, in each case
     equally and ratably in accordance with the respective amounts thereof then
     due and owing or as the Lenders or any other holders of the Other Pari
     Passu Obligations holding the same may otherwise agree; and

          Finally, to the payment to the Obligors, or their successors or
     assigns, or as a court of competent jurisdiction may direct, of any surplus
     then remaining.

Notwithstanding the foregoing, the proceeds of any cash or other amounts held in
the "LC Exposure Sub-Account" of the Collateral Account pursuant to Section 4.06
shall be applied first to the LC Exposure outstanding from time to time and
second to the other Secured Obligations in the manner provided above in this
Section 5.09.

     5.10 Attorney-in-Fact. Without limiting any rights or powers granted by
this Agreement to the Collateral Agent while no Event of Default has occurred
and is continuing, upon the occurrence and during the continuance of any Event
of Default the Collateral Agent is hereby appointed the attorney-in-fact of the
Obligors for the purpose of carrying out the provisions of this Section 5 and
taking any action and executing any instruments that the Collateral Agent may
deem necessary or advisable to accomplish the purposes hereof, which appointment
as attorney-in-fact is irrevocable and coupled with an interest. Without
limiting the generality of the foregoing, so long as the Collateral Agent shall
be entitled under this Section 5 to make collections in respect of the
Collateral, the Collateral Agent shall have the right and power to receive,
endorse and collect all checks made payable to the order of any Obligor
representing any dividend, payment or other distribution in respect of the
Collateral or any part thereof and to give full discharge for the same.

     5.11 Perfection and Recordation. Prior to or concurrently with the
execution and delivery of this Agreement, each Obligor shall:

          (a) file such financing statements and other documents in such offices
     as the Collateral Agent may request to perfect the security interests
     granted by Section 3 of this Agreement,

          (b) deliver to the Collateral Agent all certificates evidencing any of
     the Pledged Shares, accompanied by undated stock or other powers duly
     executed in blank,


<PAGE>

          (c) deliver the originals of any of the promissory notes referred to
     in Section 3,

          (d) cause each Issuer (other than an Issuer the ownership interests in
     which are evidenced by certificates) to agree that it will comply with
     instructions regarding perfection and recordation originated by the
     Collateral Agent,

          (e) execute, deliver and record such short form security agreements
     relating to Collateral consisting of the Intellectual Property as the
     Collateral Agent may reasonably request, and

          (f) enter into such account control agreements (and obtain the written
     agreement with respect thereto from the applicable financial institution
     where each Deposit Account, Securities Account or Commodity Account is
     located) as may be necessary to perfect the security interests granted by
     Section 3 of this Agreement with respect to all Deposit Accounts (other
     than Excluded Accounts) and Securities Accounts.

Each Obligor authorizes the Collateral Agent to file Uniform Commercial Code
financing statements describing the Collateral as "all assets" or "all personal
property and fixtures" of such Obligor (provided that no such description shall
be deemed to modify the description of Collateral set forth in Section 3).

     5.12 Termination. When all Secured Obligations shall have been paid in full
and the Commitments of the Lenders under the Credit Agreement and all LC
Exposure shall have expired or been terminated or cash collateralized pursuant
to a written agreement reasonably acceptable to the Collateral Agent, this
Agreement and the Lien and security interest created hereunder shall
automatically terminate, and the Collateral Agent shall forthwith cause to be
assigned, transferred and delivered, against receipt but without any recourse,
warranty or representation whatsoever, any remaining Collateral and money
received in respect thereof, to or on the order of any Obligor and to be
released and canceled all licenses and rights referred to in Section 5.04(b).
The Lien and security interest created hereunder shall automatically terminate
and be released with respect to any Collateral or any Obligor that is sold as
part of or in connection with any disposition permitted under Section 7.03 of
the Credit Agreement. The Collateral Agent shall also, at the expense of the
Obligors, execute and deliver to the Obligors upon such termination such Uniform
Commercial Code termination statements, certificates for terminating the Liens
on the Motor Vehicles and such other documentation as shall be reasonably
requested by the Obligors to effect the termination and release of the Liens on
the Collateral as required by this Section 5.12.

     5.13 Further Assurances. Each Obligor agrees that, from time to time upon
the written request of the Collateral Agent, such Obligor will execute and
deliver such further documents and do such other acts and things as the
Collateral Agent may reasonably request in order fully to effect the purposes of
this Agreement. The Collateral Agent shall release any Lien covering any asset
that has been disposed of in a transaction not prohibited by the Credit

<PAGE>

Agreement or that has been disposed of with the consent of the Required Lenders
under the Credit Agreement.


     Section 6. Miscellaneous.

     6.01 Notices. All notices, requests, consents and demands hereunder shall
be in writing and telecopied or delivered to the intended recipient at its
"Address for Notices" specified pursuant to Section 10.01 of the Credit
Agreement and shall be deemed to have been given at the times specified in said
Section 10.01.

     6.02 No Waiver. No failure on the part of any Secured Creditor to exercise,
and no course of dealing with respect to, and no delay in exercising, any right,
power or remedy hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise by any Secured Creditor of any right, power or remedy
hereunder preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies herein are cumulative and are not
exclusive of any remedies provided by law.

     6.03 Amendments, Etc. The terms of this Agreement may be waived, altered or
amended only by an instrument in writing duly executed by the Obligors and the
Collateral Agent (with the consent of the Lenders or Required Lenders as
specified in Article X of the Credit Agreement). Any such amendment or waiver
shall be binding upon the Secured Creditors and the Obligors.

     6.04 Expenses. The Obligors, jointly and severally, agree to reimburse each
of the Secured Creditors for all out-of-pocket costs and expenses incurred by
them (including the reasonable fees and expenses of legal counsel) in connection
with (i) any Event of Default and any enforcement or collection proceeding
resulting therefrom, including all manner of participation in or other
involvement with (w) performance by the Collateral Agent of any obligations of
any Obligor in respect of the Collateral that such Obligor has failed or refused
to perform, (x) bankruptcy, insolvency, receivership, foreclosure, winding up or
liquidation proceedings, or any actual or attempted sale, or any exchange,
enforcement, collection, compromise or settlement in respect of any of the
Collateral, and for the care of the Collateral and defending or asserting rights
and claims of the Collateral Agent in respect thereof, by litigation or
otherwise, including expenses of insurance, (y) judicial or regulatory
proceedings and (z) workout, restructuring or other negotiations or proceedings
(whether or not the workout, restructuring or transaction contemplated thereby
is consummated) and (ii) the enforcement of this Section 6.04, and all such
costs and expenses shall be Secured Obligations entitled to the benefits of the
collateral security provided pursuant to Section 3.

     6.05 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the respective successors and assigns of the Obligors and the
Secured Creditors (provided that, except in connection with a transaction
permitted by Section 10.04(a) of the


<PAGE>

Credit Agreement, no Obligor shall assign or transfer its rights or obligations
hereunder without the prior written consent of the Collateral Agent).

     6.06 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.

     6.07 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the law of the State of New York.

     6.08 Captions. The captions and section headings appearing herein are
included solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.

     6.09 Agents and Attorneys-in-Fact. The Collateral Agent may employ agents
and attorneys-in-fact in connection herewith and shall not be responsible for
the negligence or misconduct of any such agents or attorneys-in-fact selected by
it in good faith.

     6.10 Severability. If any provision hereof is invalid and unenforceable in
any jurisdiction, then, to the fullest extent permitted by law, (a) the other
provisions hereof shall remain in full force and effect in such jurisdiction and
shall be liberally construed in favor of the Secured Creditors in order to carry
out the intentions of the parties hereto as nearly as may be possible and (b)
the invalidity or unenforceability of any provision hereof in any jurisdiction
shall not affect the validity or enforceability of such provision in any other
jurisdiction.


<PAGE>



     IN WITNESS WHEREOF, the parties hereto have caused this First Lien Security
Agreement to be duly executed and delivered as of the day and year first above
written.


                                            KRISPY KREME DOUGHNUT CORPORATION


                                            By: /s/ Steven G. Panagos
                                                -------------------------------
                                                  Name: Steven G. Panagos
                                                  Title: President and
                                                         Chief Operating Officer

                                            GUARANTORS:

                                            KRISPY KREME DOUGHNUTS, INC.

                                            KRISPY KREME DISTRIBUTING COMPANY,
                                            INCORPORATED

                                            KRISPY KREME MOBILE STORE COMPANY

                                            KRISPY KREME CANADA, INC.

                                            HD CAPITAL CORPORATION

                                            HDN DEVELOPMENT CORPORATION

                                            KRISPY KREME COFFEE COMPANY, LLC

                                               By:   KRISPY KREME DOUGHNUT
                                                     CORPORATION,
                                                     an authorized Member

                                            GOLDEN GATE DOUGHNUTS, LLC

                                               By:   KRISPY KREME DOUGHNUT
                                                     CORPORATION,
                                                     an authorized Member

                                            PANHANDLE DOUGHNUTS, LLC

                                               By:   KRISPY KREME DOUGHNUT
                                                     CORPORATION,
                                                     an authorized Member

                                            FREEDOM RINGS, LLC

                                               By:   KRISPY KREME DOUGHNUT
                                                     CORPORATION,
                                                     an authorized Member

                                            NORTH TEXAS DOUGHNUTS, L.P.

                                               By:   KRISPY KREME DOUGHNUT
                                                     CORPORATION,
                                                     an authorized Member


                                            By: /s/ Michael C. Phalen
                                                -------------------------------
                                                  Name: Michael C. Phalen
                                                  Title: Authorized Officer



<PAGE>

                                            WELLS FARGO FOOTHILL, INC.,
                                              as Collateral Agent


                                            By: /s/ Katy Brooks
                                            Name: Katy Brooks
                                            Title: Vice President