Document:

ex10_1.htm

     

    Exhibit 10.1

     

    EMPLOYMENT AGREEMENT

     

    EMPLOYMENT
AGREEMENT (“Agreement”)
dated as of February 27, 2008 among Krispy Kreme Doughnut Corporation, a North
Carolina corporation (“KKDC”), Krispy Kreme
Doughnuts, Inc., a North Carolina corporation (the “Company” and, together with
KKDC, the “Companies”),
and James H. Morgan (the “Executive”).

     

    The
parties hereto agree as follows:

     

    ARTICLE
1

     

    DEFINITIONS

     

    SECTION
1.01. Definitions. For purposes of
this Agreement, the following terms have the meanings set forth
below:

     

    “Base Salary” has the meaning
set forth in Section 4.01.

     

    “Board” means the Board of
Directors of the Company.

     

    “Cause” shall mean (i) the
Executive’s failure or refusal to perform the Executive’s lawful and proper
duties hereunder (other than as a result of total or partial incapacity due to
physical or mental illness or a court or governmental order), (ii) the
Executive’s conviction of or plea of nolo contendere to any felony
(other than a traffic infraction), (iii) an act or acts on the Executive’s part
constituting fraud, theft or embezzlement or that otherwise constitutes a felony
under the laws of the United States or any state thereof which results or was
intended to result directly or indirectly in gain or personal enrichment by the
Executive at the expense of the Companies, or (iv) the Executive’s willful
violation of any material provision of the code of ethics of the Companies
applicable to the Executive. In the case of any item described in the previous
sentence, the Executive shall be given written notice of the alleged act or
omission constituting Cause, which notice shall set forth in reasonable detail
the reason or reasons that the Board believes the Executive is to be terminated
for Cause, including any act or omission that is the basis for the decision to
terminate the Executive. In the case of an act or omission described in clause
(i) or (iv) of the definition of Cause, (A) if reasonably capable of being
cured, the Executive shall be given 30 days from the date of such notice to
effect a cure of such alleged act or omission constituting “Cause” which, upon
such cure to the reasonable satisfaction of the Board, shall no longer
constitute a basis for Cause, and (B) the Executive shall be given an
opportunity to make a presentation to the Board (accompanied by counsel or other
representative, if the Executive so desires) at a meeting of the Board held
promptly following such 30-day cure period if the Board intends to determine
that no cure has occurred. At or following such meeting, the Board shall
determine whether or not to terminate the Executive for “Cause” and shall notify
the Executive in writing of its determination and the effective date of such
termination (which date may be no earlier than the date of the aforementioned
Board meeting).

     

    “Change in Control” means any
of the following events:

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

     

    (a) the
acquisition by any Person of “beneficial ownership” (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of the
combined voting power of the Company’s then outstanding voting securities;
provided, however, that a Change in Control shall not be deemed to occur solely
because fifty percent (50%) or more of the combined voting power of the
Company’s then outstanding securities is acquired by (i) a trustee or other
fiduciary holding securities under one or more employee benefit plans maintained
by the Company or any of its Subsidiaries, or (ii) any Person, which,
immediately prior to such acquisition, is owned directly or indirectly by the
shareholders of the Company in the same proportion as their ownership of stock
in the Company immediately prior to such acquisition;

     

    (b) consummation
of (i) a merger or consolidation involving the Company if the shareholders of
the Company, immediately before such merger or consolidation do not, as a result
of such merger or consolidation, own, directly or indirectly, more than fifty
percent (50%) of the combined voting power of the then outstanding voting
securities of the corporation resulting from such merger or consolidation in
substantially the same proportion as their ownership of the combined voting
power of the voting securities of the Company outstanding immediately before
such merger or consolidation, or (ii) a sale or other disposition of all or
substantially all of the assets of the Company other than to a Person which is
owned directly or indirectly by the shareholders of the Company in the same
proportion as their ownership of stock in the Company;

     

    (c) a change
in the composition of the Board such that the individuals who, as of the
Effective Date, constitute the Board (such Board shall be hereinafter referred
to as the “Incumbent Board”) cease for any reason to constitute at least a
majority of the Board; provided, however, for purposes of this definition, that
any individual who becomes a member of the Board subsequent to the Effective
Date whose election, or nomination for election by the Company’s shareholders,
was approved by a vote of at least a majority of those individuals who are
members of the Board and who were also members of the Incumbent Board (or deemed
to be such pursuant to this proviso) shall be considered as though such
individual were a member of the Incumbent Board; provided further, however, that
any such individual whose initial assumption of office occurs as a result of
either an actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act, including any
successor to such Rule), or other actual or threatened solicitation or proxies
or consents by or on behalf of a Person other than the Board, shall not be so
considered as a member of the Incumbent Board; or

     

    (d) approval
by shareholders of the Company of a complete liquidation or dissolution of the
Company;

     

    
      
         

      

      
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    provided, however,
that an event will be treated as a “Change in Control” for purposes of this
Agreement only if it is also a “change in control event” (as defined in Treas.
Reg. Section 1.409A-3(i)(5)) with respect to the Company.

     

    “Code” means the Internal
Revenue Code of 1986, as amended.

     

    “Confidential Information”
means information that is not generally known to the public and that was or is
used, developed or obtained by the Company or its Subsidiaries in connection
with the business of the Company and its Subsidiaries and which constitutes
trade secrets or information which they have attempted to protect, which may
include, but is not limited to, trade “know-how”, customer information, supplier
information, cost and pricing information, marketing and sales techniques,
strategies and programs, computer programs and software and financial
information. It shall not include information (a) required to be disclosed by
court or administrative order; (b) lawfully obtainable from other sources or
which is in the public domain through no fault of the Executive; or (c) the
disclosure of which is consented to in writing by the Company.

     

    “Date of Termination” has the
meaning set forth in Section 5.07.

     

    “Effective Date” has the
meaning set forth in Section 2.01.

     

    “Employment Period” has the
meaning set forth in Section 2.01.

     

    “Exchange Act” means the
Securities Exchange Act of 1934, as amended.

     

    “Good Reason” shall mean (i)
the failure of the Companies to pay any material amount of compensation to the
Executive when due hereunder, (ii) the Executive is no longer the most senior
executive officer of (A) the Company or (B) in the event of a merger,
consolidation or other business combination involving the Company, the successor
to the Company’s business or assets or (C) if all or substantially all of the
voting stock of the Company is held by another public company, such public
company (it being understood that it shall not be an event of Good Reason for
the applicable entity described in this clause (ii) to appoint an individual
other than the Executive as the non-executive chairman of its board of
directors), (iii) the assignment to the Executive of any duties or
responsibilities materially inconsistent with the Executive’s status under
clause (ii) of this sentence or his failure at any time to report directly to
the board of directors of the applicable company described in such clause (ii),
(iv) the failure of the Executive to be appointed or elected (or reelected) to
the Board, other than due to Executive’s decision not to stand for election or
reelection, or his removal from the Board not for Cause and not due to his
Permanent Disability or death, (v) any failure by the Companies to maintain the
Executive’s principal place of employment and the executive offices of the
Companies within 25 miles of the Winston-Salem, North Carolina area, (vi) any
material breach by the Companies of this Agreement, (vii) the term of the
Employment Period ending as a result of the Companies giving the Executive
notice of non-extension of the

     

    
      
         

      

      
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    term of
this Agreement in accordance with Section 5.01 solely at either the end of the
initial term or the end of the first, second or third one year extensions of the
term under Section 5.01 (but, for the avoidance of doubt, not at the end of any
further extension of the term) or (viii) a Change in Control; provided, however,
that for any of the foregoing to constitute Good Reason, the Executive must
provide written notification of his intention to resign within 60 days after the
Executive knows or has reason to know of the occurrence of any such event, and
the Companies shall have 30 days (10 days in the case of a material breach
related to payment of any amounts due hereunder) from the date of receipt of
such notice to effect a cure of the condition constituting Good Reason, and,
upon cure thereof by the Companies, such event shall no longer constitute Good
Reason.

     

    “Notice of Termination” has the
meaning set forth in Section 5.06.

     

    “Permanent Disability” means
the Executive becomes permanently disabled within the meaning of the long-term
disability plan of the Companies applicable to the Executive, and the Executive
commences to receive benefits under such plan.

     

    “Person” means an individual, a
partnership, a corporation, a limited liability company, an association, a joint
stock company, an estate, a trust, a joint venture, an unincorporated
organization or a governmental entity or any department, agency or political
subdivision thereof.

     

    “Reimbursable Expenses” has the
meaning set forth in Section 4.04.

     

    “Securities Act” means the
Securities Act of 1933, as amended.

     

    “Subsidiary” or “Subsidiaries” means, with
respect to any Person, any corporation, partnership, limited liability company,
association or other business entity of which (a) if a corporation, 50 percent
or more of the total voting power of shares of stock entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person or combination thereof; or (b) if a partnership, limited liability
company, association or other business entity, 50 percent or more of the
partnership or other similar ownership interests thereof are at the time owned
or controlled, directly or indirectly, by any Person or one or more Subsidiaries
of that Person or a combination thereof. For purposes of this definition, a
Person or Persons will be deemed to have a 50 percent or more ownership interest
in a partnership, limited liability company, association or other business
entity if such Person or Persons are allocated 50 percent or more of
partnership, limited liability company, association or other business entity
gains or losses or control the managing director or member or general partner of
such partnership, limited liability company, association or other business
entity.

     

    
      
         

      

      
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    ARTICLE
2

     

    EMPLOYMENT

     

    SECTION
2.01. Employment. The Companies
shall employ the Executive, and the Executive shall accept employment with the
Companies, upon the terms and conditions set forth in this Agreement for the
period beginning January 6, 2008 (the “Effective Date”) and ending as
provided in Section 5.01 (the “Employment
Period”).  It is acknowledged that the Executive began service
to the Companies prior to the date of this Agreement, with continued service
contingent upon the preparation of this Agreement in a form mutually acceptable
to both the Executive and the Companies.

     

    ARTICLE
3

     

    POSITION
AND DUTIES

     

    SECTION
3.01. Position and Duties. During
the Employment Period, the Executive shall serve as Chief Executive Officer and
President of the Company reporting directly to the Board and shall be the
Company’s most senior executive officer.  The Executive shall also
serve as Chairman of the Board of the Company for as long as the Board
desires.  During the Employment Period, the Executive also shall serve
as Chief Executive Officer, President and Chairman of the Board of KKDC and
shall be KKDC’s most senior executive officer. The Executive shall have such
responsibilities, powers and duties as may from time to time be prescribed by
the Board or the most senior executive officer of the Companies; provided that such
responsibilities, powers and duties are substantially consistent with those
customarily assigned to individuals serving in such position at comparable
companies or as may be reasonably required for the proper conduct of the
business of the Companies. During the Employment Period, the Executive shall
devote substantially all of his working time and efforts to the business and
affairs of the Company and its Subsidiaries. The Executive shall not directly or
indirectly render any services of a business, commercial or professional nature
to any other person or organization not related to the business of the Company
or its Subsidiaries, whether for compensation or otherwise, without the prior
approval of the Board; provided, however, the Executive may serve on the board
of directors of one for-profit corporation with the prior approval of the Board,
which will not be unreasonably withheld, and the Executive may serve as a
director of not-for-profit organizations or engage in other charitable, civic or
educational activities, so long as the activities described in this proviso do
not interfere with the Executive’s performance of his duties hereunder or result
in any conflict of interest with the Companies.

     

    
      
         

      

      
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    ARTICLE
4

     

    BASE
SALARY AND BENEFITS

     

    SECTION
4.01. Base Salary. During the
Employment Period, the Executive will receive base salary from the Companies
equal to $650,000 per annum (the “Base Salary”). The Base Salary
will be payable in accordance with the normal payroll practices of the
Companies. Annually during the Employment Period the Company shall review with
the Executive his job performance and compensation, and if deemed appropriate by
the Board or its Compensation Committee, in their discretion, the Executive’s
Base Salary may be increased but not decreased. After any such increase, the
term “Base Salary” as used in this Agreement will thereafter refer to the
increased amount.  The Executive’s Base Salary and other compensation
is in lieu of any compensation he would otherwise receive as a Director of the
Company’s Board.

     

    SECTION
4.02. Bonuses. In addition to Base
Salary, the Executive shall be eligible to be considered for an annual bonus,
and the Executive’s annual target bonus shall be equal to 70% of Base
Salary.  The Compensation Committee of the Board and the Board shall
set targets with respect to and otherwise determine Executive’s bonus in
accordance with the Company’s then current incentive plans.  The
Executive will not receive a bonus attributable to his service during the
Companies’ 2008 fiscal years.  The Executive may elect to receive
bonus amounts that may become payable for the upcoming fiscal year (commencing
with the bonus that may become payable for fiscal year 2009) in equity instead
of cash by delivering a written irrevocable election to such effect prior to the
end of the preceding fiscal year.  Should such an election be made,
the equity will be granted under the Krispy Kreme Doughnuts, Inc. 2000 Stock
Incentive Plan (the “Stock
Incentive Plan”).

     

    SECTION
4.03. Benefits. During the
Employment Period, the Executive shall be entitled to participate in all
employee benefit, perquisite and fringe benefit plans and arrangements made
available by the Companies to their executives and key management employees upon
the terms and subject to the conditions set forth in the applicable plan or
arrangement. Such benefits shall include medical, life and disability insurance
provided in accordance with the policies of the Companies.  The
Executive also shall be provided an executive allowance of $2,000 per month, and
the Executive shall be entitled to four weeks of paid vacation annually during
the Employment Period.

     

    SECTION
4.04. Expenses. The Companies shall
reimburse the Executive for all reasonable expenses incurred by him in the
course of performing his duties under this Agreement which are consistent with
the Companies’ policies in effect from time to time with respect to travel,
entertainment and other business expenses (“Reimbursable Expenses”),
subject to the Companies’ requirements with respect to reporting and
documentation of expenses. 

     

    
      
         

      

      
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    SECTION
4.05. Stock Options.  The
Company shall grant to the Executive options to purchase 500,000 shares of the
Company’s common stock (the “Option Shares”) at an exercise
price per share equal to the fair market value per share on the date of grant,
which shall be the same as the date of this Agreement. Twenty five percent (25%)
of the options (specifically, 125,000 Option Shares) will vest and become
exercisable on July 6, 2008, 2008 and 1/18th of the
balance (specifically, 20,833 Option Shares in each of the first 17 months and
20,839 shares in the 18th month) will vest on the 6th day of
each month thereafter commencing on August 6, 2008 and ending on January 6,
2010, so long as, except as otherwise set forth in the applicable stock option
plan, the Executive’s employment continues through such vesting
dates.  The term of the Option Shares will be ten years from the date
of grant, subject to earlier termination in the event the Executive’s employment
terminates.  The Option Shares shall be subject to the terms of the
Stock Incentive Plan, and the option grant agreement for Executive’s Option
Shares shall have terms similar to those of other executive officers of the
Companies.  The Option Shares shall also be subject to, and Executive
agrees to comply with, the ownership guidelines adopted by the Company as may be
applicable to Option Shares of the Company’s Chief Executive Officer and
President.  During the Executive’s service to the Company as a
director or employee, unvested Option Shares will continue to vest.

     

    SECTION
4.06. Relocation.  The
Companies shall reimburse the Executive for all reasonable expenses incurred by
him in relocating his and his immediate family’s household items to
Winston-Salem, North Carolina, subject to the Companies requirements with
respect to reporting and documentation of such expenses, such relocation
reimbursements to include all normal expenses of moving, packing and unpacking,
home hunting, buying and selling brokerage fees, transfer taxes, origination
fees (not to exceed 1% of the loan amount) and mortgage points (not to exceed 1%
of the loan amount) incurred within one year from the Effective
Date.  Furthermore, the Executive’s temporary housing expenses will be
paid by the Companies through the first to occur of (i) July 6, 2008 or (ii) the
closing date of the Executive’s acquisition of a home in the Winston-Salem area.
The Executive will also receive a gross up for income and payroll taxes payable
by him related to reimbursement by the Companies pursuant to this Section 4.06
and for the related gross up itself, such that the relocation and commuting
expenses and the related gross up will be effectively tax free to the
Executive.

     

    ARTICLE
5

     

    TERM AND
TERMINATION

     

    SECTION
5.01. Term. The Employment Period
will terminate on January 6, 2011, unless sooner terminated as hereinafter
provided; provided, however, that the Employment Period will be automatically
extended for successive one-year periods following the original term ending
January 6, 2011 until either the Companies, on the one hand, or the Executive,
on the other hand, at least 180 days prior to the expiration

     

    
      
         

      

      
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    of the
original term or any extended term, shall give written notice to the other of
their intention not to so extend the Employment Period.

     

    SECTION
5.02. Termination Due to Death or
Permanent Disability. If the Employment Period shall be terminated due to
death or Permanent Disability of the Executive, the Executive (or his estate or
legal representative) shall be entitled solely to the following: (i) Base Salary
through the Date of Termination (paid on the Companies’ normal payroll payment
date); (ii) any vested stock options will remain exercisable for two years after
the Date of Termination (subject to the Companies discretion to cash out these
awards in connection with a Change in Control), and (iii) medical benefits as
provided in Section 5.05 below. The Executive’s entitlements under any other
benefit plan or program shall be as determined thereunder. In addition, promptly
following any such termination, the Executive (or his estate or legal
representative) shall be reimbursed for all Reimbursable Expenses incurred by
the Executive prior to such termination.

     

    SECTION
5.03. Termination for Good Reason or
Without Cause. Except as otherwise set forth in Section 5.09 below, if
the Employment Period shall be terminated (a) by the Executive for Good Reason,
or (b) by the Companies not for Cause, provided the Executive has executed, on
or before the date that is fifty (50) days following the date of his termination
of employment, an irrevocable (except to the extent required by law to be
revocable) general release of claims in the form attached hereto as Exhibit A,
and does not revoke such release prior to the end of the seven day statutory
revocation period, the Executive shall be entitled solely to the following: (i)
Base Salary through the Date of Termination, paid on the Companies’ normal
payroll payment date; (ii) an amount equal to two times the sum of Base Salary
and the Executive’s target annual bonus amount for the year of termination (or
the Base Salary or target annual bonus for the prior year if reduction of the
Executive’s Base Salary or target annual bonus, or both, was the event giving
rise to Good Reason), provided that, the Executive shall be entitled to any
unpaid amounts only if the Executive has not breached and does not breach the
provisions of Sections 6.01, 7.01, 8.01 or 9 below; (iii) a bonus for the year
of termination of employment equal to the Executive’s target annual bonus for
such year pro rated for the number of full months during the bonus year prior to
such termination of employment, to be paid, subject to Section 13.14 below, 60
days following such termination of employment; (iv) all of the restricted shares
and stock options held by the Executive shall vest and/or become exercisable on
the Date of Termination, and (v) medical benefits as provided in Section 5.05
below. The Executive’s entitlements under any other benefit plan or program
shall be as determined thereunder, except that duplicative severance benefits
shall not be payable under any other plan or program. Amounts described in
clause (ii) above will be paid, subject to Section 13.14 below, in twelve (12)
equal installments, the first two (2) of which shall be paid on the date that is
two (2) months following the Date of Termination and the next ten (10) of which
will be paid in ten (10) equal monthly installments commencing on the date that
is three (3) months following the Date of Termination and continuing on each of
the next nine (9) monthly anniversaries of the Date of Termination. In addition,
promptly following any

     

    
      
         

      

      
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    such
termination, the Executive shall be reimbursed for all Reimbursable Expenses
incurred by the Executive prior to such termination.  

     

    SECTION
5.04. Termination for Cause or Other Than
Good Reason. If the Employment Period shall be terminated (a) by the
Companies for Cause, or (b) as a result of the Executive’s resignation or
leaving of his employment other than for Good Reason, the Executive shall be
entitled to receive solely Base Salary through the Date of Termination (paid on
the Companies’ normal payroll payment date) and reimbursement of all
Reimbursable Expenses incurred by the Executive prior to such
termination.  The Executive’s rights under the benefit plans and
programs shall be as determined thereunder. A voluntary resignation by the
Executive shall not be deemed to be a breach of this Agreement.

     

    SECTION
5.05. Benefits.  If the
Employment Period is terminated as a result of a termination of employment as
specified in Section 5.02, 5.03 or 5.09, the Executive and his covered
dependents shall continue to receive medical insurance coverage benefits from
the Companies, with the same contribution toward such coverage from the
Executive or his estate as was given during the Employment Period, for a period
equal to the lesser of (x) twelve months following the Date of Termination, or
(y) until the Executive is provided by another employer with benefits
substantially comparable to the benefits provided by the Companies’ medical
plan.  Furthermore, in the event of Executive’s Permanent Disability,
insurance benefits will continue under the Companies’ long term disability plan
in accordance with its terms.

     

    SECTION
5.06. Notice of Termination. Any
termination by the Companies for Permanent Disability or Cause or without Cause
or by the Executive with or without Good Reason shall be communicated by written
Notice of Termination to the other party hereto. For purposes of this Agreement,
a “Notice of
Termination” shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of employment under the provision indicated.

     

    SECTION
5.07. Date of Termination. “Date of Termination” shall
mean (a) if the Employment Period is terminated as a result of a Permanent
Disability, five days after a Notice of Termination is given, (b) if the
Employment Period is terminated as a result of his death, on the date of his
death, and (c) if the Employment Period terminates due to expiration of the term
of this Agreement, the date the term expires, and (d) if the Employment Period
is terminated for any other reason, the later of the date of the Notice of
Termination and the end of any applicable correction period.

     

    SECTION
5.08. No Duty to Mitigate. The
Executive shall have no duty to seek new employment or other duty to mitigate
following a termination of employment as described in this Article 5, and no
compensation or benefits described in this Article 5 shall be subject to
reduction or offset on account of any subsequent compensation, other than as
provided in Section 5.05.

     

    
      
         

      

      
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    SECTION
5.09. Change in
Control.  All stock options and restricted shares held by the
Executive will become vested in full upon a Change in Control; provided, however, that the
vesting of the restricted shares and stock options held by Executive shall not
be accelerated where the Executive continues as the chief executive officer of a
publicly traded parent corporation of the parent/subsidiary affiliated group
that included the Companies (the “Surviving Entity”) and either
the Company’s common stock remains outstanding or replacement equity awards are
granted by the Surviving Entity so long as the terms of this Agreement are
expressly assumed and continued by the Surviving Entity and the Executive has
not elected to properly terminate this Agreement for Good Reason.

     

    SECTION
5.10. Separation From
Service.  Notwithstanding any provision of this Agreement to
the contrary, for purposes of Section 5.03 and Section 5.09, the Executive will
be deemed to have terminated his employment on the date of his “separation from
service” (within the meaning of Treas. Reg. Section 1.409A-1(h)) with the
Companies, the Employment Period will be deemed to have ended on the date of his
“separation from service” with the Companies, and the Date of Termination will
be deemed to be the date of his “separation from service” with the
Companies.

     

    ARTICLE
6

     

    CONFIDENTIAL
INFORMATION

     

    SECTION
6.01. Nondisclosure and Nonuse of
Confidential Information. The Executive will not disclose or use at any
time during or after the Employment Period any Confidential Information of which
the Executive is or becomes aware, whether or not such information is developed
by him, except to the extent he reasonably believes that such disclosure or use
is directly related to and appropriate in connection with the Executive’s
performance of duties assigned to the Executive pursuant to this Agreement.
Under all circumstances and at all times, the Executive will take all
appropriate steps to safeguard Confidential Information in his possession and to
protect it against disclosure, misuse, espionage, loss and
theft.  Executive also agrees to execute and comply with such other
confidentiality agreements or provisions as required of executive officers of
the Company.

     

    ARTICLE
7

     

    INTELLECTUAL
PROPERTY

     

    SECTION
7.01. Ownership of Intellectual
Property. In the event that the Executive as part of his activities on
behalf of the Companies generates, authors or contributes to any invention,
design, new development, device, product, method of process (whether or not
patentable or reduced to practice or comprising Confidential Information), any
copyrightable work (whether or not comprising Confidential Information) or any
other form of Confidential Information relating directly or
indirectly

     

    
      
         

      

      
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    to the
business of the Company or its Subsidiaries as now or hereafter conducted
(collectively, “Intellectual
Property”), the Executive acknowledges that such Intellectual Property is
the sole and exclusive property of the Company and its Subsidiaries and hereby
assigns all right, title and interest in and to such Intellectual Property to
the Company or its designated Subsidiary. Any copyrightable work prepared in
whole or in part by the Executive during the Employment Period will be deemed “a
work made for hire” under Section 201(b) of the Copyright Act of 1976, as
amended, and the Company or its designated Subsidiary will own all of the rights
comprised in the copyright therein. The Executive will promptly and fully
disclose all Intellectual Property and will cooperate with the Companies to
protect their interests in and rights to such Intellectual Property (including
providing reasonable assistance in securing patent protection and copyright
registrations and executing all documents as reasonably requested by the
Companies, whether such requests occur prior to or after termination of
Executive’s employment hereunder).

     

    ARTICLE
8

     

    DELIVERY
OF MATERIALS UPON TERMINATION OF EMPLOYMENT

     

    SECTION
8.01. Delivery of Materials upon
Termination of Employment. As requested by the Companies from time to
time, and upon the termination of the Executive’s employment with the Companies
for any reason, the Executive will promptly deliver to the Companies all
property of the Company or its Subsidiaries, including, without limitation, all
copies and embodiments, in whatever form or medium, of all Confidential
Information in the Executive’s possession or within his control (including
written records, notes, photographs, manuals, notebooks, documentation, program
listings, flow charts, magnetic media, disks, diskettes, tapes and all other
materials containing any Confidential Information) irrespective of the location
or form of such material and, if requested by the Companies, will provide the
Companies with written confirmation that to the best of his knowledge all such
materials have been delivered to the Companies or destroyed.

     

    ARTICLE
9

     

    NON-COMPETITION
AND NONSOLICITATION

     

    SECTION
9.01. Noncompetition. The Executive
acknowledges that, during his employment with the Companies, he will become
familiar with trade secrets and other Confidential Information concerning the
Company and its Subsidiaries and his services will be of special, unique and
extraordinary value to the Companies. In addition, the Executive hereby agrees
that at any time during the Noncompetition Period (as defined below), he will
not directly or indirectly own, manage, control, participate in, consult with,
become employed by or otherwise render services to any business listed on
Exhibit B hereto in the Territory. During the Noncompetition Period, the Company
shall have the right to, in good faith, add other entities which are in
substantial competition

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

    with the
Companies to the list of businesses on Exhibit B, subject to the consent of the
Executive which shall not be unreasonably withheld. Notwithstanding the
foregoing, if the Executive’s termination of employment occurs at the end of the
Employment Period due to the Companies giving written notice after the second
anniversary of the Effective Date pursuant to Section 5.01 of its intention not
to extend the Employment Period, this Section 9.01 will only apply if the
Companies elect and agree in writing to pay the Executive his Base Salary and
his annual target bonus in effect for the year during which his employment is
terminated for an additional one-year period following the termination of
employment, such amount to be paid, subject to Section 13.14 below, in twelve
(12) equal installments, the first two (2) of which shall be paid on the date
that is two (2) months following the date of the Executive’s “separation from
service” with the Companies (as defined in Section 5.10 above) and the next ten
(10) of which will be paid in ten (10) equal monthly installments commencing on
the date that is three (3) months following such date and continuing on each of
the next nine (9) monthly anniversaries of such date; provided, however,
that if such termination of employment is within two years after a Change in
Control, such amount shall instead be paid, subject to Section 13.14 below, 60
days following the Executive’s “separation from service” with the
Companies.  It shall not be considered a violation of this Section
9.01 for the Executive to be a passive owner of not more than 2% of the
outstanding stock of any class of any corporation which is publicly traded, so
long as the Executive has no active participation in the business of such
corporation.

     

    SECTION
9.02. Nonsolicitation. The
Executive hereby agrees that (a) during the Nonsolicitation Period (as defined
below), the Executive will not, directly or indirectly through another Person,
induce or attempt to induce any employee of the Company or its Subsidiaries to
leave the employ of the Company or its Subsidiaries, or in any way interfere
with the relationship between the Company or its Subsidiaries and any person
employed by them at any time during such Nonsolicitation Period, and (b) during
the Nonsolicitation Period, the Executive will not induce or attempt to induce
any customer, supplier, client or other business relation of the Company or its
Subsidiaries to cease doing business with the Company or its
Subsidiaries.

     

    SECTION
9.03. Definitions. It is agreed
that the “Territory,”
for purposes of this Article 9, shall mean:

     

    (i) The
entire United States and any other country where the Company or any of its
Subsidiaries, joint venturers, franchisees or affiliates has operated a retail
facility at which the Companies’ products have been sold at any time in the
one-year period ending on the last day of the Executive’s employment with the
Companies;

     

    (ii) In the
event that the preceding clause shall be determined by judicial action to define
too broad a territory to be enforceable, then “Territory” shall mean the entire
United States;

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

    

     

    (iii) In the
event that the preceding clauses shall be determined by judicial action to
define too broad a territory to be enforceable, then “Territory” shall mean the
states in the United States where the Company or any of its Subsidiaries, joint
venturers, franchisees or affiliates has operated a retail facility at which the
Companies’ products have been sold at any time in the one-year period ending on
the last day of Executive’s employment with the Companies;

     

    (iv) In the
event that the preceding clauses shall be determined by judicial action to
define too broad a territory to be enforceable, then “Territory” shall mean the
area that includes all of the areas that are within a 50-mile radius of any
retail store location in the United States at which the Companies’ products have
been sold at any time in the one-year period ending on the last day of the
Executive’s employment with the Companies; and

     

    (v) In the
event that the preceding clauses shall be determined by judicial action to
define too broad a territory to be enforceable, then “Territory” shall mean the
entire state of North Carolina.

     

    It is
also agreed that “Noncompetition Period,” for
purposes hereof, shall mean:

     

    (i) the
Employment Period and a period ending one year after the Date of Termination;
and

     

    (ii) In the
event that the preceding clause shall be determined by judicial action to define
too long a period to be enforceable, “Noncompetition Period” shall mean the
Employment Period and a period ending six months after the Date of
Termination.

     

    It is
also agreed that “Nonsolicitation Period,” for
purposes hereof, shall mean:

     

    (i) the
Employment Period and a period ending two years after the Date of
Termination;

     

    (ii) In the
event that the preceding clause shall be determined by judicial action to define
too long a period to be enforceable, “Nonsolicitation Period” shall mean the
Employment Period and a period ending eighteen months after the Date of
Termination;

     

    (iii) In the
event that the preceding clauses shall be determined by judicial action to
define too long a period to be enforceable, “Nonsolicitation Period” shall mean
the Employment Period and a period ending one year after the Date of
Termination; and

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

    

     

    (iv) In the
event that the preceding clauses shall be determined by judicial action to
define too long a period to be enforceable, “Nonsolicitation Period” shall mean
the Employment Period and a period ending six months after the Date of
Termination.

     

    ARTICLE
10

     

    EQUITABLE
RELIEF

     

    SECTION
10.01. Equitable Relief. The
Executive acknowledges that (a) the covenants contained herein are reasonable,
(b) the Executive’s services are unique, and (c) a breach or threatened breach
by him of any of his covenants and agreements with the Companies contained in
Sections 6.01, 7.01, 8.01 or Article 9 could cause irreparable harm to the
Companies for which they would have no adequate remedy at law. Accordingly, and
in addition to any remedies which the Companies may have at law, in the event of
an actual or threatened breach by the Executive of his covenants and agreements
contained in Sections 6.01, 7.01, 8.01 or Article 9, the Companies shall have
the absolute right to apply to any court of competent jurisdiction for such
injunctive or other equitable relief, without the necessity to post bond, as
such court may deem necessary or appropriate in the circumstances.

     

    ARTICLE
11

     

    EXECUTIVE
REPRESENTATION AND INDEMNIFICATION

     

    SECTION
11.01. Executive Representation. The
Executive hereby represents and warrants to the Companies that (a) the
execution, delivery and performance of this Agreement by the Executive does not
and will not conflict with, breach, violate or cause a default under any
contract, agreement, instrument, order, judgment or decree to which the
Executive is a party or by which he is bound, (b) the Executive is not a party
to or bound by any employment agreement, noncompetition agreement or
confidentiality agreement with any other Person, and (c) upon the execution and
delivery of this Agreement by the Companies, this Agreement will be the valid
and binding obligation of the Executive, enforceable in accordance with its
terms. Notwithstanding Section 11.02 below, in the event that any action is
brought against Executive involving any breach of any employment agreement,
noncompetition agreement or confidentiality agreement with any other Person, the
Executive shall bear his own costs incurred in defending such action, including
but not limited to court fees, arbitration costs, mediation costs, attorneys’
fees and disbursements.

     

    SECTION
11.02. General Indemnification. The
Companies, jointly and severally, agree that if the Executive is made a party,
or is threatened to be made a party, to any action, suit or proceeding, whether
civil, criminal, administrative or investigative (each, a “Proceeding”), by reason of the
fact that he is or was a director, officer or employee of the Company or any of
its Subsidiaries or is or was serving at the

     

    
      
         

      

      
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    request
of the Company or any of its Subsidiaries as a director, officer, member,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether or not the basis of such Proceeding is the Executive’s alleged action in
an official capacity while serving as a director, officer, member, employee or
agent, the Executive shall be indemnified and held harmless by the Companies to
the fullest extent permitted or authorized by applicable law and their bylaws,
against all cost, expense, liability and loss (including, without limitation,
advancement of attorneys’ and other fees and expenses) reasonably incurred or
suffered by the Executive in connection therewith. The Company agrees to use its
best efforts to maintain a directors’ and officers’ liability insurance policy
covering the Executive during the Employment Period and for at least four years
thereafter to the extent available on commercially reasonable
terms.

     

    ARTICLE
12

     

    CERTAIN
ADDITIONAL PAYMENTS

     

    SECTION
12.01. Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including, without
limitation, the acceleration of any payment, award, distribution or benefit) by
the Company or its Subsidiaries to or for the benefit of the Executive (whether
pursuant to the terms of this Agreement or otherwise, but determined without
regard to any additional payments required under this Article 12) (a “Payment”) would be subject to
the excise tax imposed by Section 4999 of the Code or any corresponding
provisions of state or local tax law, or any interest or penalties are incurred
by the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
“Excise Tax”), then the
Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an
amount such that after payment by the Executive of all taxes (including any
Excise Tax, income tax or employment tax) imposed upon the Gross-Up Payment and
any interest or penalties imposed with respect to such taxes, the Executive
retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon
the Payments. The payment of a Gross-Up Payment under this Section 12.01 shall
not be conditioned upon the Executive’s termination of employment.
Notwithstanding the foregoing provisions of this Section 12.01, if it shall be
determined that the Executive is entitled to a Gross-Up Payment, but that the
portion of the Payments that would be treated as “parachute payments” under
Section 280G of the Code does not exceed the lesser of
110%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              of
the Safe Harbor Amount (as defined in the following sentence) or $200,000, then
no Gross-Up Payment shall be made to the Executive and the amounts payable under
this Agreement shall be reduced so that the Payments, in the aggregate, are
reduced to the Safe Harbor Amount.  The “Safe Harbor Amount” is the
greatest amount of payments in the nature of compensation that are contingent on
a Change in Control for purposes of Section 280G of the Code that could be paid
to the Executive without giving rise to any Excise Tax. The reduction of the
amounts payable hereunder, if applicable, shall be made

     

    
      
         

      

      
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     by
first reducing the cash payments under Article 5 hereof. For purposes of
reducing the payments to the Safe Harbor Amount, only amounts payable under this
Agreement (and no other Payments) shall be reduced. If the reduction of the
amounts payable under this Agreement would not result in a reduction of the
Payments to the Safe Harbor Amount, no amounts payable under this Agreement
shall be reduced pursuant to this Section 12.01.

     

    SECTION
12.02. Subject
to the provisions of Section 12.03, all determinations required to be made under
this Article 12, including the determination of whether a Gross-Up Payment is
required and of the amount of any such Gross-up Payment, shall be made by the
Company’s independent auditors or such other accounting firm agreed by the
parties hereto (the “Accounting
Firm”), which shall provide detailed supporting calculations to the
Companies within 15 business days after the receipt of notice from the Companies
that the Executive has received a Payment, or such earlier time as is requested
by the Companies, provided that any determination that an Excise Tax is payable
by the Executive shall be made on the basis of substantial authority. The
Companies will promptly provide copies of such supporting calculations to the
Executive on which the Executive may rely. The initial Gross-Up Payment, if any,
as determined pursuant to this Section 12.02, shall be paid to the Executive (or
for the benefit of the Executive to the extent of the Companies’ withholding
obligation with respect to applicable taxes) no later than one day prior to the
due date for the payment of any Excise Tax. If the Accounting Firm determines
that no Excise Tax is payable by the Executive, it shall furnish the Companies
with a written opinion that substantial authority exists for the Executive not
to report any Excise Tax on his Federal income tax return and, as a result, the
Companies are not required to withhold Excise Tax from payments to the
Executive. The Companies will promptly provide a copy of any such opinion to the
Executive on which the Executive may rely. Any determination by the Accounting
Firm meeting the requirements of this Section 12.02 shall be binding upon the
Companies and the Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Companies should have been made (“Underpayment”), consistent
with the calculations required to be made hereunder. In the event that the
Companies exhaust their remedies pursuant to Section 12.03 and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred, and any such
Underpayment shall be promptly paid by the Companies to or for the benefit of
the Executive. The fees and disbursements of the Accounting Firm shall be paid
by the Companies.

     

    SECTION
12.03. The
Executive shall notify the Companies in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by the Companies
of a Gross-Up Payment. Such notification shall be given as soon as practicable
but not later than ten business days after the Executive receives written notice
of such claim and shall apprise the Companies of the nature of such
claim

     

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

    and the
date on which such Claim is requested to be paid. The Executive shall not pay
such claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Companies (or such shorter period ending on
the date that any payment of taxes with respect to such claim is due). If the
Companies notify the Executive in writing prior to the expiration of such period
that they desire to contest such claim, the Executive shall:

     

    (i) give the
Companies any information reasonably requested by the Companies relating to such
claim,

     

    (ii) take such
action in connection with contesting such claim as the Companies shall
reasonably request in writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Companies,

     

    (iii) cooperate
with the Companies in good faith in order effectively to contest such claim,
and

     

    (iv) permit
the Companies to participate in any proceedings relating to such
claim;

     

    provided,
however, that the Companies shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless, on an after-tax
basis, for any Excise Tax, income tax or employment tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 12.03, the Companies shall control all proceedings taken in
connection with such contest and, at their sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at their sole option, either
direct the Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Companies shall
determine; provided, however, that if the Companies direct the Executive to pay
such claim and sue for a refund, the Companies shall advance the amount of such
payment to the Executive on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax, income tax
or employment tax, including interest or penalties with respect thereto, imposed
with respect to such advance (except that if such a loan would not be permitted
under applicable law, the Companies may not direct the Executive to pay the
claim and sue for a refund); and further provided that any extension of the
statute of limitations relating to the payment of taxes for the taxable year of
the Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the Companies’ control
of the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the

     

    
      
         

      

      
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    Executive
shall be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing
authority.

     

    SECTION
12.04. If, after
the receipt by the Executive of an amount advanced by the Companies pursuant to
Section 12.03, the Executive becomes entitled to receive any refund with respect
to such claim, the Executive shall (subject to the compliance by the Companies
with the requirements of Section 12.03) promptly pay to the Companies the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Companies pursuant to Section 12.03, a determination is made
that the Executive shall not be entitled to any refund with respect to such
claim and the Companies do not notify the Executive in writing of their intent
to contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of the Gross-Up Payment required to be paid.

     

    SECTION
12.05. Anything
in this Agreement to the contrary notwithstanding, in no event shall any payment
by the Company pursuant to this Article 12 be made later than the end of the
Executive’s taxable year next following the Executive’s taxable year in which he
remits the related taxes.

     

    ARTICLE
13

     

    MISCELLANEOUS

     

    SECTION
13.01. Binding Arbitration. The
parties agree that, except as provided in Articles 9 and 10 above, any disputes
under this Agreement shall be settled exclusively by arbitration conducted in
Winston-Salem, North Carolina. Except to the extent inconsistent with this
Agreement, such arbitration shall be conducted in accordance with the National
Rules for the Resolution of Employment Disputes of the American Arbitration
Association then in effect at the time of the arbitration and otherwise in
accordance with principles which would be applied by a court of law or equity.
The arbitrator shall be acceptable to both the Companies and the Executive. If
the parties cannot agree on an acceptable arbitrator, the dispute shall be
decided by a panel of three arbitrators, one appointed by each of the parties
and the third appointed by the other two arbitrators or if the two arbitrators
do not agree, appointed by the American Arbitration Association. The costs of
arbitration incurred by the Executive (or his beneficiaries) will be borne by
the Companies (including, without limitation, reasonable attorneys’ fees and
other reasonable charges of counsel) (i) if the arbitration occurs prior to a
Change in Control, if the Executive prevails on a majority of the material
issues in the dispute, and (ii) if the arbitration occurs after a Change in
Control, if the Executive prevails on at least one material issue in the
dispute. Judgment upon the final award rendered by such arbitrator(s) may be
entered in any court having jurisdiction thereof. Following the final
determination of the dispute in which, based on the outcome of the dispute, the
Executive is, in accordance with this Section 13.01, entitled to have his
costs

     

    
      
         

      

      
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    borne by
the Companies, the Companies shall pay all such reasonable costs within ten (10)
days following written demand therefor (supported by documentation of such
costs) by the Executive, and the Executive shall make such written demand within
sixty (60) days following the final determination of the dispute; provided, however,
that such payment shall be made no later than on or prior to the end of the
calendar year following the calendar year in which the costs are
incurred.  Notwithstanding the foregoing, in the event a final
determination of the dispute has not been made by December 20 of the year
following the calendar year in which the costs are incurred, the Companies
shall, within ten (10) days after such December 20, reimburse such
reasonable costs (supported by documentation of such costs) incurred in the
prior taxable year; provided, however,
that the Executive shall return such amounts to the Companies within ten (10)
business days following the final determination if (x) in the case of an
arbitration prior to a Change in Control, the Executive does not prevail on a
majority of the material issues in the dispute, or (y) in the case of an
arbitration after a Change in Control, the Executive does not prevail on at
least one material issue in the dispute.  The amount of any costs
eligible for payment under this Section 13.01 during a calendar year will
not affect the amount of any costs eligible for payment under this
Section 13.01 in any other taxable year.

     

    SECTION
13.02. Consent to Amendments; No
Waivers. The provisions of this Agreement may be amended or waived only
by a written agreement executed and delivered by the Companies and the
Executive. No other course of dealing between the parties to this Agreement or
any delay in exercising any rights hereunder will operate as a waiver of any
rights of any such parties.

     

    SECTION
13.03. Successors and Assigns. All
covenants and agreements contained in this Agreement by or on behalf of any of
the parties hereto will bind and inure to the benefit of the respective
successors, assigns, heirs, executors and estates of the parties hereto whether
so expressed or not, provided that the Executive may not assign his rights or
delegate his obligations under this Agreement without the written consent of the
Companies (other than to his estate or heirs) and the Company may assign this
Agreement only to a successor to all or substantially all of the assets of the
Company.

     

    SECTION
13.04. Severability. Whenever
possible, each provision of this Agreement will be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
Agreement is held to be prohibited by or invalid under applicable law, such
provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement.

     

    SECTION
13.05. Counterparts. This Agreement
may be executed simultaneously in two or more counterparts, any one of which
need not contain the signatures of more than one party, but all of which
counterparts taken together will constitute one and the same
agreement.

     

    
      
         

      

      
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    SECTION
13.06. Descriptive Headings. The
descriptive headings of this Agreement are inserted for convenience only and do
not constitute a part of this Agreement.

     

    SECTION
13.07. Notices. All notices, demands
or other communications to be given or delivered under or by reason of the
provisions of this Agreement will be in writing and will be deemed to have been
given when delivered personally to the recipient, two business days after the
date when sent to the recipient by reputable express courier service (charges
prepaid) or four business days after the date when mailed to the recipient by
certified or registered mail, return receipt requested and postage prepaid. Such
notices, demands and other communications will be sent to the Executive and to
the Companies at the addresses set forth below.

     

    

     

    
      	
              If
      to the Executive:

               

            	
              To
      the last address delivered to the Companies 

              by
      the Executive in the manner set forth herein.

               

            
	 
      	 
      
	
              If
      to the Companies:

               

            	
              Krispy
      Kreme Doughnuts, Inc.

              Krispy
      Kreme Doughnut Corporation

              Suite
      500

              370
      Knollwood Street

              Winston-Salem,
      NC 27103

               

              Attn:
      Senior Vice President-Human
Resources

            

    

    

     

    or to
such other address or to the attention of such other person as the recipient
party has specified by prior written notice to the sending party.

     

    SECTION
13.08. Withholding. The Companies
may withhold from any amounts payable under this Agreement such federal, state,
local or foreign taxes as shall be required to be withheld pursuant to any
applicable law or regulation.

     

    SECTION
13.09. No Third-Party Beneficiary.
This Agreement will not confer any rights or remedies upon any person other than
the Companies, the Executive and their respective heirs, executors, successors
and assigns.

     

    SECTION
13.10. Entire Agreement. This
Agreement (including any other documents referred to herein) constitutes the
entire agreement among the parties and supersedes any prior understandings,
agreements or representations by or among the parties, written or oral, that may
have related in any way to the subject matter hereof.

     

    
      
         

      

      
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    SECTION
13.11. Construction. The language
used in this Agreement will be deemed to be the language chosen by the parties
to express their mutual intent, and no rule of strict construction will be
applied against any party. Any reference to any federal, state, local or foreign
statute or law will be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise.

     

    SECTION
13.12. Survival. Sections 6.01,
7.01, 8.01 and Articles 5, 9, 11, 12 and 13 will survive and continue in full
force in accordance with their terms notwithstanding any termination of the
Employment Period, and the Agreement shall otherwise remain in full force to the
extent necessary to enforce any rights and obligations arising hereunder during
the Employment Period.

     

    SECTION
13.13. GOVERNING LAW. ALL QUESTIONS
CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL
BE GOVERNED BY THE INTERNAL LAW OF NORTH CAROLINA, WITHOUT REGARD TO PRINCIPLES
OF CONFLICT OF LAWS.

     

    SECTION
13.14. Section 409A. It is intended
that this Agreement will comply with Section 409A of the Code (and any
regulations and guidelines issued thereunder) to the extent the Agreement is
subject thereto, and the Agreement shall be interpreted on a basis consistent
with such intent. If an amendment of the Agreement is necessary in order for it
to comply with Section 409A, the parties hereto will negotiate in good faith to
amend the Agreement in a manner that preserves the original intent of the
parties to the extent reasonably possible. Notwithstanding any provision to the
contrary in this Agreement, if the Executive is deemed on the date of his
“separation from service” (within the meaning of Treas. Reg. Section
1.409A-1(h)) to be a “specified employee” (within the meaning of Treas. Reg.
Section 1.409A-1(i)), then with regard to any payment that is required to be
delayed pursuant to Section 409A(a)(2)(B) of the Code, the portion, if any, of
such payment so required to be delayed shall not be made prior to the earlier of
(i) the expiration of the six (6)-month period measured from the date of his
“separation from service”, or (ii) the date of his death (the “Delay
Period”).  Upon the expiration of the Delay Period, all payments
delayed pursuant to this Section shall be paid to the Executive in a lump
sum.  The Companies shall not have any obligation to indemnify or
otherwise protect the Executive from any obligation to pay any taxes pursuant to
Section 409A of the Code.

     

    SECTION
13.15. Representations of the
Companies. The Companies represent and warrant that (i) the execution,
delivery and performance of this Agreement by the Companies has been fully and
validly authorized by all necessary corporate action, (ii) the officer(s)
signing this Agreement on behalf of the Companies is duly authorized to do so,
(iii) the execution, delivery and performance of this Agreement does not violate
any applicable law, regulation, order, judgment or decree or any agreement, plan
or corporate governance document to which the Companies are a party or by which
they are bound, and (iv) upon execution and delivery of this Agreement by the
parties hereto, it

     

    
      
         

      

      
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    will be a
valid and binding obligation of the Companies enforceable against the Companies
and their successors and assigns in accordance with its terms, except to the
extent that enforceability may be limited by applicable bankruptcy, insolvency
or similar laws affecting the enforcement of creditors’ rights
generally.

     

    IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date
and year first above written.

     

    
      	
              KRISPY
      KREME DOUGHNUTS, INC.

            
	 
	
              By: 
      /s/ Kenneth J.
      Hudson

            
	       
      Kenneth J. Hudson
	
                     
      Senior Vice President Human Resources

                      and
      Organizational Development

            
	 
      
	
              KRISPY
      KREME DOUGHNUT CORPORATION

            
	 
	
              By: 
      /s/ Kenneth J.
      Hudson

            
	
                     
      Kenneth J. Hudson

                      Senior Vice
      President Human Resources

                      and
      Organizational Development

            
	 
      
	
              EXECUTIVE

              
                 

                /s/ James H.
      Morgan

              

              James H.
Morgan

            

    

    

     

     

     

     

    22THIS AGREEMENT IS SUBJECT TO ARBITRATION

STATE OF TEXAS       ss.
                     ss.
COUNTY OF DALLAS     ss.

                              EMPLOYMENT AGREEMENT

          THIS EMPLOYMENT  AGREEMENT (this "Agreement") is made and entered into
as of February 29, 2008,  but  effective as of February 1, 2008 (the  "Effective
Date"), by and between CUBIC ENERGY,  INC., a Texas corporation (the "Company"),
and CALVIN A. WALLEN, III (the "Employee").

          WHEREAS, the Company desires to enter into an employment  relationship
with the Employee on certain terms and conditions as set forth herein; and

          WHEREAS, the Employee is willing to accept such employment;

          NOW,  THEREFORE,  the parties hereto,  in  consideration of the mutual
covenants and promises hereinafter contained, do hereby agree as follows:

          1. Employment.  The Company hereby employs Employee in the capacity of
President and Chief Executive Officer, or in such other positions of the same or
greater stature as the Company may direct or desire, and Employee hereby accepts
the employment, on the terms and conditions hereinafter set forth.

          2. Duties. The Employee's principal duties and responsibilities  shall
be as set forth in the Bylaws of the  Company.  The  Employee  agrees to perform
such  services  and duties and hold such  offices as may be assigned to him from
time  to time  by the  Company  and to  devote  a  reasonable  amount  of  time,
consistent with past practices,  to the  performance  thereof.  It is understood
that  Employee  has and will have  other  oil and gas  business  endeavors,  but
Employee is hereby  agreeing to devote the majority of his time, if not more, to
his duties on behalf of Employer.

          3. Term. The term of employment  under this  Agreement  shall begin on
the Effective Date and continue until terminated as herein provided.

          4. Salary and Other Compensation.  As compensation for the services to
be rendered  by the  Employee to the  Company  pursuant to this  Agreement,  the
Employee shall be paid the following compensation and other benefits:

               (a) Salary:  $16,666.67 per month, payable in accordance with the
Company's ordinary payroll practices,  and subject to all applicable withholding
obligations,  or such higher  compensation  as may be established by the Company
from time to time.  Should the employee become  "Partially  Disabled," which for
purposes  of this  subsection  means the  inability  because of any  physical or

<PAGE>

emotional  illness to perform his  assigned  duties  under this  Agreement,  the
Employee's  Salary shall  nevertheless  be paid in full prior to the  Employee's
termination  pursuant  to  Section  10. If the  Employee,  during  any period of
Partial   Disability,   receives  any  periodic   payments   representing   lost
compensation   under  any  health  and  accident  policy  or  under  any  salary
continuation  insurance  policy,  the  premiums  for which have been paid by the
Company,  the amount of Salary  that the  Employee  would be entitled to receive
from the Company during the Partial Disability shall be decreased by the amounts
of such payments.

               (b)  Stock  Grant:  The  Company  shall  issue  to  the  Employee
restricted  shares of Common Stock,  on such dates and in such amounts as may be
determined by the  Compensation  Committee  and/or the Board of Directors of the
Company.

               (c) Employee  Benefit  Plans:  The Employee  shall be eligible to
participate,  to  the  extent  he  may  be  eligible,  in  any  profit  sharing,
retirement, insurance or other employee benefit plan maintained by the Company.

               The  Employee  acknowledges  and  agrees  that  he  shall  not be
entitled  to any  additional  compensation  with  respect to his  service on the
Company's Board of Directors or on any committee thereof.

          5. Life and Health  Insurance.  The Company,  in its  discretion,  may
apply for and procure in its own name and for its own benefit, life insurance on
the life of the  Employee in any amount or amounts  considered  advisable by the
Company,  and the Employee shall submit to any medical or other  examination and
execute and deliver any application or other  instrument in writing,  reasonably
necessary  to  effectuate  such  insurance.   The  Company  may  provide  health
insurance,  including major medical  coverage,  for the Employee.  All insurance
provided to Employee  shall be in such form and provide such  coverage as may be
determined by the Board of Directors or the Compensation  Committee of the Board
of Directors.

          6.  Vacations  and Leave.  The Employee  shall be entitled to the same
vacation and leave time as the other  executive  officers of the Company,  or as
otherwise approved by the Board of Directors.

          7.   Non-Disclosure   of   Confidential   Information.   The  Employee
acknowledges  that in and as a result of his employment by the Company,  he will
be making use of,  acquiring,  and/or adding to  confidential  information  of a
special and unique  nature and value  relating to such matters as the  Company's
patents,   copyrights,   proprietary   information,   trade  secrets,   systems,
procedures,  manuals,  confidential  reports,  and lists of customers (which are
deemed for all purposes confidential and proprietary), as well as the nature and
type of services  rendered by the Company,  the equipment and methods used,  and
the fees paid by the Company in obtaining services.  As a material inducement to
the Company to enter into this Agreement and to pay to Employee the compensation
stated in Section 4, the Employee covenants and agrees that he shall not, at any
time during or  following  the term of his  employment,  directly or  indirectly
divulge or disclose for any purpose whatsoever any confidential information that
has been obtained by, or disclosed to, him as a result of his  employment by the
Company, except to affiliates of the Company.

                                       2
<PAGE>

          8. Reasonableness of Restrictions

               (a) The Employee has carefully read and considered the provisions
of Section 7, and,  having done so,  agrees that the  restrictions  set forth in
that section,  including,  but not limited to, the time period of restriction is
fair  and  reasonable  and is  reasonably  required  for the  protection  of the
interests of the Company and its subsidiary and affiliated  entities,  officers,
directors, shareholders, and other employees.

               (b) In the event that,  notwithstanding the foregoing, any of the
provisions  of  Section  7 shall be held to be  invalid  or  unenforceable,  the
remaining  provisions  thereof  shall  nevertheless  continue  to be  valid  and
enforceable as though the invalid or  unenforceable  parts had not been included
therein.  In the event that any  provision  of Section 7 shall be  declared by a
court of competent jurisdiction to exceed the maximum restrictiveness such court
deems reasonable and enforceable, restrictions deemed reasonable and enforceable
by the court shall become and  thereafter  be the maximum  restrictions  in such
regard,  and the  restrictions  shall remain  enforceable  to the fullest extent
deemed reasonable by such court.

          9. Remedies for Breach of Employee's  Covenant of  Non-Disclosure.  In
the event of a breach or threatened breach of any of the covenants in Section 7,
the Company  shall have the right to seek  monetary  damages for any past breach
and equitable relief,  including specific  performance by means of an injunction
against   the   Employee   or  against  the   Employee's   affiliates,   agents,
representatives,  servants, employers,  employees, family members and/or any and
all persons acting directly or indirectly by or with him, to prevent or restrain
any such breach.

          10.  Termination.  Employment  of the  Employee  under this  Agreement
may/will be terminated:

               (a) Death. By the Employee's death.

               (b) If the Employee is Totally Disabled. For the purposes of this
Agreement,  the Employee  will be Totally  Disabled if he (i) has been  declared
legally  incompetent  by a final court  decree  (the date of such  decree  being
deemed  to be  the  date  on  which  the  disability  occurred),  (ii)  receives
disability  insurance  benefits  from any  disability  income  insurance  policy
maintained by the Company for a period of six (6) consecutive  months,  or (iii)
has  been  found  to be  disabled  pursuant  to a  Disability  Determination.  A
Disability  Determination  means a  finding  that  the  Employee,  because  of a
medically determinable disease,  injury, or other mental or physical disability,
is unable to perform  substantially all of his regular duties to the Company and
that such  disability  is  determined  or  reasonably  expected to last at least
twelve (12) months. The Disability  Determination  shall be based on the written
opinion of the  physician  regularly  attending  the  Employee.  If the  Company
disagrees  with the opinion of this physician  (the "First  Physician"),  it may
engage at its own expense another physician (the "Second  Physician") to examine
the  Employee.  If the First and Second  Physicians  agree in  writing  that the
Employee is or is not disabled, their written opinion shall, except as otherwise
set forth in this subsection,  be conclusive on the issue of disability.  If the
First and Second  Physicians  disagree on the  disability of the Employee,  they
shall choose a third  consulting  physician (whose expense shall be borne by the
Company), and the written opinion of a majority of these three physicians shall,

                                       3
<PAGE>

except  as  otherwise  provided  in this  subsection,  be  conclusive  as to the
Employee's disability.  The date of any written opinion conclusively finding the
Employee to be disabled  is the date on which the  disability  will be deemed to
have occurred. If there is a conclusive finding that the Employee is not Totally
Disabled,  the  Company  shall have the right to request  additional  Disability
Determinations  provided  it agrees to pay all the  expenses  of the  Disability
Determinations and does not request an additional Disability  Determination more
frequently  than once every three (3) months.  In conjunction  with a Disability
Determination, the Employee hereby consents to any required medical examination,
and  agrees to  furnish  any  medical  information  requested  by any  examining
physician and to waive any applicable physician-patient privilege that may arise
because of such  examination.  All physicians except the First Physician must be
board-certified  in the  specialty  most  closely  related  to the nature of the
disability alleged to exist.

               (c) By the  Company  for  Just  Cause.  This  Agreement  and  the
Employee's  employment  with the Company may be terminated for Just Cause at any
time in accordance with Section 11. For purposes of this  Agreement,  Just Cause
shall mean only the  following:  (i) a conviction of or a plea of guilty or nolo
contendre  by  the  Employee  to  a  felony  or  misdemeanor   involving  fraud,
embezzlement,  theft or  dishonesty  or other  criminal  conduct,  (ii) habitual
neglect  of the  Employee's  duties or  failure  by the  Employee  to perform or
observe  any  substantial  lawful  obligation  of  such  employment  that is not
remedied  promptly  following written notice or (iii) any material breach by the
Employee of this  Agreement  that is not  remedied  promptly  following  written
notice.  Should the Employee  dispute  whether he was terminated for Just Cause,
then  the  Company  and  the  Employee  shall  enter  immediately  into  binding
arbitration  pursuant  to the  Commercial  Arbitration  Rules  of  the  American
Arbitration  Association,  the cost of which shall be borne by the substantially
non-prevailing party.

               (d)  By  Employee  for  Good  Reason.   This  Agreement  and  the
Employee's  employment  with the Company may be  terminated  at any time, at the
election of the Employee, for Good Reason in accordance with Section 11 and such
termination  for Good Reason shall be treated as an involuntary  separation from
service within the meaning of Section 409A of the Internal Revenue Code of 1986,
as amended (the "Code") and the Treasury regulations promulgated thereunder.  As
used in this  Agreement,  Good  Reason  shall  mean  (i) the  assignment  to the
Employee of duties  inconsistent with the title of President and Chief Executive
Officer of the Company or his then current office,  or a material  diminution in
the Employee's  then current  authority,  duties or  responsibilities;  (ii) the
material  diminution of the  Employee's  then current  Salary or other action or
inaction that  constitutes a material  breach of this  Agreement by the Company;
(iii) the relocation of the Company's  principal executive offices to a location
more than  fifty  (50)  miles from the  Company's  then  current  offices or the
transfer of the Employee to a place other than the Company's principal executive
offices  (excepting  required  travel on the Company's  business).  Prior to any
termination  at the election of the Employee for Good Reason,  the Employee must
provide notice to the Company within ninety (90) days of the initial  occurrence
of such event upon which Good Reason is based,  and provide the Company not less
than thirty (30) days to cure such event in which case the Company  shall not be
required to make the payments required by Section 12(b).

               (e)  Expiration  of  Time.  At the  end  of 36  months  from  the
Effective Date (the "Term"); provided,  however, that the Term shall be extended

                                       4
<PAGE>

automatically  at the end of each month by one  additional  month unless by such
date the  Compensation  Committee or the Board of Directors gives written notice
to the Employee that the Term shall not be so extended. Such notice may indicate
that it shall have the effect of preventing any further extension of the Term.

          11. Notice of Termination. Any purported termination of the Employee's
employment,  either by the  Company for Just Cause or by the  Employee  for Good
Reason,  shall be  communicated  by a written Notice of Termination to the other
party hereto.  Such notice shall  indicate a specific  termination  provision in
this Agreement which is relied upon, recite the facts and circumstances  claimed
to provide the basis for such  termination  and specify the Date of Termination.
As used in this Agreement,  Date of Termination shall mean the date specified in
the Notice of Termination,  if Notice of Termination is required pursuant to the
previous  sentence,  which date shall not be less than thirty (30) nor more than
sixty (60) days from the date the Notice of Termination  is given.  If Notice of
Termination is not so required,  then the Date of Termination  shall be the date
of the event giving rise to such  termination.  If within  thirty (30) days from
the date the Notice of  Termination  is given,  the party  receiving such notice
notifies the other party that a dispute exists concerning such termination,  the
Date of Termination  shall be the date on which the dispute is finally resolved.
The Date of  Termination  shall be extended by a notice of dispute  only if such
notice is given in good  faith and the party  giving  such  notice  pursues  the
resolution  of such dispute by entering  immediately  into  binding  arbitration
pursuant  to  the  Commercial  Arbitration  Rules  of the  American  Arbitration
Association,   the   cost  of  which   shall  be  borne  by  the   substantially
non-prevailing  party.  Notwithstanding  the pendency of any such  dispute,  the
Company  will  continue to pay the  Employee his full Salary in effect as of the
date of the Notice of Termination  and continue the Employee as a participant in
all  compensation,  benefit and insurance plans in which he was participating at
such date, until the dispute is finally resolved.  Notwithstanding the preceding
or any provision of this Agreement to the contrary,  the Employee's  termination
shall not be considered  for Good Reason unless any dispute with respect to such
Good Reason  termination is resolved and the  Employee's  Date of Termination is
not later than two (2) years from the initial occurrence of the event upon which
Good Reason is based.

          12.  Payments  Upon   Termination.   Payments  to  the  Employee  upon
termination shall be as follows:

               (a) If the Employee is terminated  upon death pursuant to Section
10(a),  Total  Disability  pursuant  to Section  10(b),  Just Cause  pursuant to
Section 10(c) or time pursuant to Section 10(e),  the Employee shall be entitled
to all  arrearages  of  Salary  as of the Date of  Termination  but shall not be
entitled to further compensation.

               (b) If the  Employee  terminates  for  Good  Reason  pursuant  to
Section  10(d),  or if the  Employee is  terminated  by the  Company  other than
pursuant to Section  10(a),  the  Employee  shall be  entitled to all  remaining
Salary under this Agreement to the end of the Term, payable in a lump sum amount
on the first  business  day of the  payroll  period next  following  the Date of
Termination,  subject to the provisions of Section 13 (the "Severance Payment");
and, in  addition,  be entitled  to receive all stock  compensation  pursuant to
Section 4(b) through the end of the Term.

                                       5
<PAGE>

          13. Limitation or Payments Upon Termination; Deferral of Payments.

               (a) Change in Control. As used in the Agreement, the term "Change
in Control" shall mean:

               (i)            a change in the  ownership  of the  Company  which
                              shall be  deemed to occur on the date that any one
                              person,  or more than one person acting as a group
                              (as determined under Section  13(b)(i)),  acquires
                              ownership of stock of the Company  that,  together
                              with stock held by such person or group,  has more
                              than 50% of the total fair  market  value or total
                              voting   power  of  the  stock  of  the   Company;
                              provided, however, if any one person, or more than
                              one person acting as a group, is considered to own
                              more than 50% of the total  fair  market  value or
                              total  voting  power of the stock of the  Company,
                              the  acquisition  of additional  stock by the same
                              person or  persons  is not  considered  to cause a
                              change in the ownership of the Company;

               (ii)           a change in the  effective  control of the Company
                              which  shall be presumed to occur on the date that
                              either (A) any one person, or more than one person
                              acting as a group  (as  determined  under  Section
                              13(b)(i)),  acquires (or has  acquired  during the
                              12-month  period  ending  on the  date of the most
                              recent  acquisition  by such  person  or  persons)
                              ownership of stock of the Company  possessing  20%
                              or more of the total  voting power of the stock of
                              the  Company,  or (B) a majority of members of the
                              Board of  Directors  of the  Company  is  replaced
                              during  any  12-month  period by  directors  whose
                              appointment  or  election  is  not  endorsed  by a
                              majority of the members of the Board of  Directors
                              of  the   Company   prior   to  the  date  of  the
                              appointment or election; or

               (iii)          a change in the ownership of a substantial portion
                              of the  Company's  assets which shall be deemed to
                              occur on the date  that  any one  person,  or more
                              than one person  acting as a group (as  determined
                              under   Section   13(b)(ii)),   acquires  (or  has
                              acquired  during the 12-month period ending on the
                              date of the most recent acquisition by such person
                              or persons)  assets  from the Company  that have a
                              total  gross fair  market  value  equal to or more
                              than  one-third  of the total  gross  fair  market
                              value  of  all  of  the  assets  of  the   Company
                              immediately   prior   to   such   acquisition   or
                              acquisitions;  provided  that  for  this  purpose,
                              gross  fair  market  value  means the value of the
                              assets of the Company,  or the value of the assets
                              being  disposed of,  determined  without regard to
                              any liabilities associated with such assets.

The determination of whether a Change in Control of the Company has occurred for
purposes of this  Section  13(a) shall be made in  accordance  with the Treasury

                                       6
<PAGE>

regulations  promulgated  under Section 280G of the Code. The presumption  under
Section 13(a)(ii) that a Change in Control of the Company has occurred by reason
of the occurrence of an event described in Section  13(a)(ii) may be rebutted by
establishing  that such acquisition or acquisitions of the stock of the Company,
or such  replacement of the majority of the members of the Board of Directors of
the Company, does not transfer the power to control (directly or indirectly) the
management  and  policies of the  Company  from any one person (or more than one
person acting as a group as determined under Section 13(b)(i)) to another person
(or group).

               (b)  Persons  Acting  as a Group.  For  purposes  of  determining
whether a Change in Control of the Company has occurred under Section 13(a):

               (i)            persons  shall not be considered to be acting as a
                              group for purposes of Section  13(a)(i) or Section
                              13(a)(ii)  merely  because they happen to purchase
                              or own stock of the  Company at the same time,  or
                              as a result of the same public offering; provided,
                              however,  persons shall be considered to be acting
                              as a group if they  are  owners  of a  corporation
                              that enters into a merger, consolidation, purchase
                              or  acquisition  of  stock,  or  similar  business
                              transaction with the Company; and

               (ii)           persons  shall not be considered to be acting as a
                              group for purposes of Section  13(a)(iii),  merely
                              because  they  happen  to  purchase  assets of the
                              Company  at the same  time,  or as a result of the
                              same public offering;  provided,  however, persons
                              shall be  considered  to be  acting  as a group if
                              they are owners of a corporation  that enters into
                              a merger,  consolidation,  purchase or acquisition
                              of assets,  or similar  business  transaction with
                              the Company.

               (c) Possible Reduction of Severance  Payment.  If the Employee is
terminated without Just Cause or the Employee terminates his employment for Good
Reason within the period beginning one year before and ending one year after the
Change  in  Control  of the  Company,  and the  presumption,  if any,  under the
Treasury  regulations  promulgated  under  Section  280G of the Code  that  such
employment  termination  was  contingent  on  that  Change  in  Control  is  not
successfully  rebutted,  then the Severance  Payment  specified in Section 12(b)
shall be adjusted as set forth below:

               (i)            The  Severance  Payment  shall  be  reduced  to an
                              amount  equal to 2.99  times  the  average  of the
                              annual  compensation  which  was  payable  to  the
                              Employee  by the  Company  and  includible  in the
                              Employee's  gross  income for  federal  income tax
                              purposes  for the five (5)  calendar  years ending
                              before  the  calendar  year in which a  Change  in
                              Control  occurred,  or for  the  portion  of  such
                              period  during  which the  Employee  was  actually
                              employed by the Company if the  Employee  has been
                              employed  by the  Company  for less  than five (5)
                              calendar years (the "Base Period"). The Employee's
                              average annual compensation shall be determined in
                              accordance    with   the   Treasury    regulations
                              promulgated  under Section 280G(d) of the Code. As

                                       7
<PAGE>

                              used in this  Agreement,  the term  "compensation"
                              shall  mean  and  include  every  type and form of
                              compensation  includible in the  Employee's  gross
                              income  in  respect  of  his   employment  by  the
                              Company,  including compensation income recognized
                              as a result of the  exercise  of stock  options or
                              sale  of the  stock  so  acquired,  except  to the
                              extent   otherwise   provided   in  the   Treasury
                              regulations  promulgated  under Section 280G(d) of
                              the Code.

               (ii)           The Severance  Payment shall be further reduced by
                              the  amount of any other  payment  or the value of
                              any  benefit  received  or to be  received  by the
                              Employee in connection with the termination of his
                              employment or contingent  upon a Change in Control
                              (whether  payable  pursuant  to the  terms of this
                              Agreement,    any   other   plan,   agreement   or
                              arrangement  with  the  Company)  unless  (A)  the
                              Employee shall have effectively  waived in writing
                              his  receipt  or  enjoyment  of  such  payment  or
                              benefit prior to the date of payment or receipt of
                              the Severance  Payment,  (B) in the opinion of tax
                              counsel  selected  by  the  Company,   such  other
                              payment  or   benefit   does  not   constitute   a
                              "parachute  payment" within the meaning of Section
                              280G(b)(2)  of the Code,  or (C) in the opinion of
                              such tax counsel,  the  Severance  Payment (in its
                              full amount or as partially  reduced,  as the case
                              may be) plus all other  payments or benefits which
                              constitute "parachute payments" within the meaning
                              of Section  280G(b)(2) of the Code are  deductible
                              by the Company.  The value of any non-cash benefit
                              or any deferred payment shall be determined by the
                              independent  auditors of the Company in accordance
                              with the principles of Section 280G(d) (3) and (4)
                              of the Code.

               (d) Deferral of Payment Date Under Section  12(b).  No payment of
the Severance  Payment,  as reduced in accordance  with Section 13(c),  shall be
paid during the six-month  period  following the Employee's  Date of Termination
unless the Company  determines  that the Employee is not a "specified  employee"
(as that term is defined in the Treasury regulations promulgated Section 409A of
the Code),  or if the  Company  determines  that the  Employee  is a  "specified
employee,"  that  paying such  amount  would not cause the  Employee to incur an
additional tax under Section 409A of the Code.  The six-month  delay required by
the  preceding  sentence  shall not apply to the  extent  (i) the amount of such
reduced  Severance  Payment,  or any portion  thereof,  constitutes a short-term
deferral  within  the  meaning of the  Treasury  regulations  promulgated  under
Section  409A of the Code,  and (ii) to the extent  the  amount of such  reduced
Severance Payment does not constitute a short-term deferral,  the amount of such
reduced Severance Payment, or any portion thereof, does not exceed two times the
lesser of (A) the Employee's  annualized  compensation based upon the Employee's
annual rate of pay for services  provided to the Company for the taxable year of
the Employee  preceding the taxable year in which the Date of Termination occurs
(adjusted  for any  increase  during  that year that was  expected  to  continue
indefinitely had no separation from service occurred), or (B) the maximum amount
that may be taken  into  account  under a  qualified  plan  pursuant  to Section

                                       8
<PAGE>

401(a)(17) of the Code for the year in which the Date of Termination  occurs. If
the  payment  of any  amount of the  reduced  Severance  Payment is delayed as a
result of the  application  of this  Section  13(d),  on the first  business day
following  the end of the  six-month  delay  period,  the Company  shall pay the
Employee a lump-sum  amount equal to the amount that would have  otherwise  been
previously  paid to the Employee under Section 12(b) during such six-month delay
period.  The  provisions  of this Section  13(d) shall apply only to the minimum
extent necessary,  after  application of the Treasury  regulations under Section
409A of the Code, to avoid the Employee's  incurrence of any additional taxes or
penalties  under  Section  409A of the  Code.  Notwithstanding  anything  to the
contrary contained herein, the Company shall not be responsible for, or have any
obligation to reimburse or pay (as damages or  otherwise)  any taxes or interest
charges imposed on the Employee pursuant to Section 409A of the Code.

          14. Resignation Upon Termination.  In the event of termination of this
Agreement  other than for death,  the Employee  hereby agrees to resign from all
positions held in the Company,  including without  limitations any position as a
director,  officer, agent, trustee or consultant of the Company or any affiliate
of the Company.  For the purposes of this provision,  the term "affiliate" means
any entity that  directly  or  indirectly,  through one or more  intermediaries,
controls, is controlled by, or is under common control with the Company.

          15. Waiver.  A party's  failure to insist on compliance or enforcement
of  any  provision  of  this  Agreement,   shall  not  affect  the  validity  or
enforceability or constitute a waiver of future enforcement of that provision or
of any other provision of this Agreement by that party or any other party.

          16. Governing Law. This Agreement shall in all respects be subject to,
and governed by, the laws of the State of Texas.

          17. Severability.  The invalidity or unenforceability of any provision
in the Agreement shall not in any way affect the validity or  enforceability  of
any other  provision and this Agreement shall be construed in all respects as if
such invalid or unenforceable provision had never been in the Agreement.

          18. Notice.  Any and all notices required or permitted herein shall be
deemed delivered if delivered personally or if mailed by registered or certified
mail to the Company at its  principal  place of business  and to the Employee at
the address hereinafter set forth following the Employee's signature, or at such
other address or addresses as either party may hereafter designate in writing to
the other.

          19. Assignment.  This Agreement,  together with any amendments hereto,
shall be binding  upon and shall inure to the benefit of the parties  hereto and
their respective successors, assigns, heirs and personal representatives, except
that the rights and  benefits of the  parties  under this  Agreement  may not be
assigned without the prior written consent of the other party.

          20.  Amendments.  This  Agreement may be amended at any time by mutual
consent of the parties  hereto,  with any such amendment to be invalid unless in
writing, signed by the Company and the Employee.

                                       9
<PAGE>

          21. Entire Agreement. This Agreement,  along with the Company handbook
to the  extent it does not  specifically  conflict  with any  provision  of this
Agreement,  contains the entire  agreement and  understanding by and between the
Employee and the Company with respect to the employment of the Employee,  and no
representations,  promises,  agreements,  or  understandings,  written  or oral,
relating to the  employment of the Employee by the Company not contained  herein
shall be of any force or effect.

          22.  References  to  Gender  and  Number  Terms.  In  construing  this
Agreement,  feminine or number pronouns shall be substituted for those masculine
in form and vice versa,  and plural terms shall be substituted  for singular and
singular for plural in any place which the context so requires.

          23. Headings.  The various headings in this Agreement are inserted for
convenience only and are not part of the Agreement.

                                       10
<PAGE>

         IN WITNESS WHEREOF, the Company and Employee have duly executed this
Agreement as of the date first above written.

                                                     COMPANY:
                                                     --------

                                                     CUBIC ENERGY, INC.

                                                     By: /s/ Jon S. Ross
                                                         -----------------------
                                                         Name: Jon Stuart Ross
                                                         Title: Secretary

                                                     EMPLOYEE:
                                                     ---------

                                                     /s/ Calvin A. Wallen, III
                                                     ---------------------------
                                                     Calvin A. Wallen, III

                                                     Address for Notice:
                                                     -------------------

                                                     9870 Plano Road
                                                     Dallas, TX  75238

                                       11
<PAGE>

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