Document:

Exhibit 10.2

    Exhibit
      10.2

    

    SECURITY
      AGREEMENT

    

    

    SECURITY
      AGREEMENT (“Security
      Agreement”)
      dated
      as of February 16, 2007, among KRISPY KREME DOUGHNUT CORPORATION, a corporation
      duly organized and validly existing under the laws of North Carolina (the
“Borrower”),
      KRISPY
      KREME DOUGHNUTS, INC., a corporation duly organized and validly existing under
      the laws of North Carolina (the “Parent
      Guarantor”),
      the
      Subsidiary Guarantors listed on the signature pages hereto (the “Subsidiary
      Guarantors”;
      together with the Parent Guarantor, the “Guarantors”;
      the
      Guarantors, together with the Borrower, the “Obligors”),
      and
CREDIT
      SUISSE, CAYMAN ISLANDS BRANCH,
      as
      collateral agent for the parties defined as “Administrative Agent” and “Lenders”
under the Credit Agreement referred to below (in such capacity, together with
      its successors in such capacity, the “Collateral
      Agent”).

    

    The
      Obligors, such Lenders, the Collateral Agent, and the Administrative Agent
      are
      parties to a Credit Agreement dated as of February 16, 2007 (as modified and
      supplemented and in effect from time to time, the “Credit
      Agreement”),
      providing, subject to the terms and conditions thereof, for extensions of credit
      (by means of loans and letters of credit) to be made by such Lenders to the
      Borrower.

    

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

    

    Accordingly,
      the parties hereto agree as follows:

    

    Section 1.
      Definitions,
      Etc.

    

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

    

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

    

    1.03 Additional
      Definitions.
      In
      addition, as used herein:

    

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

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    

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

    

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

    

    “Collateral
      Trigger Event”
shall
      be
      deemed to have occurred and be continuing on any date that the aggregate amount
      of (i) all items of Investment Property of any Obligor with a value of less
      than $500,000 not held by the Collateral Agent plus
      (ii) all Financial Assets with a value of less than $500,000 not held by
      the Collateral Agent plus
      (iii) all Electronic Chattel Paper of any Obligor with a principal amount
      of less than $500,000 not held by the Collateral Agent plus
      (iv) all Letter-of-Credit Rights of any Obligor with a face amount of less
      than $500,000 not held by the Collateral Agent plus
      (v) all Chattel Paper having a principal amount of less than $250,000 not
      held by the Collateral Agent is equal to or greater than
      $2,000,000.

    

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

    

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

    

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

    

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

    

    “Issuers”
means,
      collectively, (a) the respective Persons identified on Annex 3
      (Part A) under the caption “Issuer”
and
      (b) any other Person that shall at any time be a 

    
      
        
        

      

      
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    direct
      Subsidiary of any Obligor (other than any Inactive Company any such Subsidiary
      that is also a Subsidiary of a Foreign Subsidiary).

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    “Secured
      Obligations”
means
      the Secured Obligations (as defined in the Credit Agreement).

    

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

    
      
        
        

      

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

    

    “Trademark
      Collateral”
means
      all Trademarks of any Obligor, whether now owned or hereafter acquired by such
      Obligor, including each Trademark identified in Annex 6, together, in each
      case, with the product lines and goodwill of the business connected with the
      use
      of, and symbolized by, each such trade name, trademark and service mark.
      Notwithstanding the foregoing, the Trademark Collateral does not and shall
      not
      include any Trademark that would be rendered invalid, abandoned, void or
      unenforceable by reason of its being included as part of the Trademark
      Collateral.

    

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

    

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

    

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

    

    2.02 Names,
      Etc.
      The full
      and correct legal name, type of organization, jurisdiction of organization,
      organizational ID number (if applicable) and mailing address of each Obligor
      as
      of the date hereof are correctly set forth in Annex 1. Said Annex 1
      correctly specifies as of the date hereof the place of business of each
      Obligor or, if any Obligor has more than one place of business, the location
      of
      the chief executive office of such Obligor.

    

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

    

    2.04 Pledged
      Shares.
      The
      Initial Pledged Shares constitute (a) 100% of the issued and outstanding Shares
      of each Issuer (other than a Foreign Subsidiary) directly owned by each Obligor
      on the date hereof, whether or not registered in the name of such Obligor and
      (b) in the case of each Issuer that is a Foreign Subsidiary, (i) 65% (or
      such lesser percentage that constitutes all of the voting stock of such Issuer
      owned by such Obligor) of the issued and outstanding shares of voting stock
      of
      such Issuer and (ii) 100% of all other issued and 

    
      
        
        

      

      
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    outstanding
      shares of capital stock of whatever class of such Issuer directly owned by
      each
      Obligor on the date hereof, in each case whether or not registered in the name
      of such Obligor. Annex 3 (Part A) correctly identifies, as at the date
      hereof, the respective Issuers of the Initial Pledged Shares and (in the case
      of
      any corporate Issuer) the respective class and par value of such Shares and
      the
      respective number of such Shares (and registered owner thereof) represented
      by
      each such certificate.

    

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

     

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

    

    As
      of the
      execution date hereof, each Obligor shall have delivered to the Collateral
      Agent
      all certificates evidencing any of the Initial Pledged Shares, accompanied
      by
      undated stock or other powers duly executed in blank; provided
      that the
      Initial Pledged Shares identified as item 7 on Annex 3 (Part A) shall be
      delivered to the Collateral Agent no later than 30 Business Days following
      the
      date hereof (or such later date as the Collateral Agent may agree).

    

    2.05 Promissory
      Notes.
      Annex 3 (Part B) sets forth a complete and correct list of each
      Promissory Note held by each Obligor on the date hereof having an aggregate
      outstanding principal amount equal to or in excess of $500,000.

    

    As
      of the
      execution date hereof, each Obligor shall have delivered to the Collateral
      Agent
      all Promissory Notes listed on Annex 3 (Part B). 

    

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

    

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

    
      
        
        

      

      
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    listed
      in
      said Annexes 4, 5 and 6 (as so supplemented), and all
      registrations listed in said Annexes 4, 5 and 6 (as so
      supplemented) are, except as noted therein, in full force and
      effect.

    

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

    

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

    

    2.07 Commercial
      Tort Claims.
      Annex 7 sets forth a complete and correct list of all commercial tort
      claims of each Obligor in existence on the date hereof.

    

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

    

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

    

    (a) all
      Accounts:

    

    (b) all
      Chattel Paper;

    

    (c) the
      Collateral Account;

    

    (d) all
      Documents;

    

    (e) all
      Equipment;

    

    (f) all
      Fixtures;

    

    (g) all
      General Intangibles;

    
      
        
        

      

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

    

    (i) the
      Pledged Shares;

    

    (j) all
      Instruments, including all Promissory Notes;

    

    (k) all
      Intellectual Property;

    

    (l) all
      Inventory;

    

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

    

    (n) all
      Letter-of-Credit Rights;

    

    (o) all
      commercial tort claims, as defined in Section 9-102(a)(13) of the NYUCC,
      arising out of the events described in Annex 7;

    

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

    

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

    

    IT
      BEING
      UNDERSTOOD, HOWEVER, that (A) in the case of any of the foregoing that
      consists of general or limited partnership interests in a general or limited
      partnership or any Shares in a Joint Venture, the security interest hereunder
      shall be deemed to be created only to the maximum extent permitted under the
      applicable organizational instrument or joint venture agreement pursuant to
      which such entity is formed or governed, (B) in no event shall the security
      interest granted under this Section 3 attach to (1) any lease,
      license, contract, property rights or agreement to which such Obligor is a
      party
      (or to any of its rights or interests thereunder) if the grant of such security
      interest therein would constitute or result in either (i) the abandonment,
      invalidation or unenforceability of any right, title or interest of such Obligor
      therein or (ii) in a breach or termination pursuant to the terms of, or a
      default under, any such lease, license, contract, property rights or agreement
      (other than to the extent that any such term would be rendered ineffective
      by
      Section 9-406, 9-407, 9-408 or 9-409 of the Uniform Commercial Code as in
      effect in the relevant jurisdiction), (2) any assets owned by any Obligor
      on the date hereof or hereafter acquired that is subject to a Lien securing
      Indebtedness permitted to be incurred pursuant to Section 7.01(e) of the
      Credit Agreement if the contract or other agreement in which 

    
      
        
        

      

      
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    such
      Lien
      is granted (or the documentation providing for such Indebtedness) validly
      prohibits the creation of any other Lien on such assets and (3) any
      Fixtures located on premises leased by the Obligors to the extent the pledge
      thereof or grant of a security interest therein (x) is prohibited by the
      lease governing such premises or (y) would result in the forfeiture of any
      Obligor’s right, title or interest therein under applicable law, (C) the
      security interest created hereby in Shares constituting voting stock of any
      Issuer that is a Foreign Subsidiary shall be limited to that portion of such
      voting stock that does not exceed 65% of the aggregate issued and outstanding
      voting stock of such Issuer and (D) for the avoidance of doubt, the
      security interest created hereby is not a conditional or an absolute assignment
      of any of the Trademark Collateral or any other Collateral.

    

    Section 4.
      Cash
      Proceeds of Collateral.

    

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

    

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

    

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

    

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

    

    4.02 Withdrawals.
      The
      balance from time to time in the Collateral Account shall be subject to
      withdrawal only as provided in this Section 4.02. The Collateral Agent
      shall (except as otherwise provided in the last sentence of this
      Section 4.02) remit the collected balance outstanding to the credit of the
      Collateral Account to or upon the order of the Obligors as the Obligors shall
      from time to time instruct, provided
      that at
      any time following the occurrence and during the continuance of an Event of
      Default, the Collateral Agent may (and, if instructed by the Lenders as provided
      in the Credit Agreement, shall) in its (or their) discretion apply or cause
      to
      be applied (subject to collection) the balance from time to time outstanding
      to
      the credit of the Collateral Account (regardless of the origin thereof) to
      the
      prepayment of the principal of the Loans (and/or to provide cover for
      LC Exposure) in the manner specified in Section 2.17(b) of the Credit
      Agreement.

    

    4.03 Investment
      of Balance in Collateral Account.
      The cash
      balance standing to the credit of the Collateral Account shall be invested
      from
      time to time in such Permitted 

    
      
        
        

      

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

    

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

    

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

    

    5.01 Delivery
      and Other Perfection.
      Subject
      to the limitations specifically set forth below, each Obligor shall promptly
      from time to time give, execute, deliver, file, record, authorize or obtain
      all
      such financing statements, continuation statements, notices, instruments,
      documents, agreements or consents or other papers as may be necessary or
      desirable in the reasonable judgment of the Collateral Agent to create,
      preserve, perfect, maintain the perfection of or validate the security interest
      granted pursuant hereto or to enable the Collateral Agent to exercise and
      enforce its rights hereunder with respect to such security interest, and without
      limiting the foregoing, shall:

    

    (a) subject
      to
      Section 5.01(h) hereto, if any of the Pledged Shares, or any Investment
      Property or Financial Assets with an individual value equal to or in excess
      of
      $500,000, constituting part of the Collateral are received by such Obligor,
      forthwith (x) deliver to the Collateral Agent the certificates or
      instruments, if any, representing or evidencing the same, duly endorsed in
      blank
      or accompanied by such instruments of assignment and transfer in such form
      and
      substance as the Collateral Agent may reasonably request, all of which
      thereafter shall be held by the Collateral Agent, pursuant to the terms of
      this
      Agreement, as part of the Collateral and (y) take such other action as the
      Collateral Agent may deem necessary or appropriate in its reasonable judgment
      to
      duly record or otherwise perfect the security interest created hereunder in
      such
      Collateral;

    

    (b) promptly
      from time to time deliver to the Collateral Agent any and all Instruments with
      an individual value equal to or in excess of $500,000 constituting part of
      the
      Collateral, endorsed and/or accompanied by such instruments of assignment and
      transfer in such form and substance as the Collateral Agent may reasonably
      request; provided
      that
      (other than in the case of the Promissory Notes delivered to the Collateral
      Agent pursuant to Section 2.05 hereto) so long as no Event of Default shall
      have occurred 

    
      
        
        

      

      
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    and
      be
      continuing, such Obligor may retain for collection in the ordinary course any
      Instruments received by such Obligor in the ordinary course of business and
      the
      Collateral Agent shall, promptly upon request of such Obligor, make appropriate
      arrangements for making any Instrument delivered by such Obligor available
      to
      such Obligor for purposes of presentation, collection or renewal (any such
      arrangement to be effected, to the extent requested by the Collateral Agent,
      against trust receipt or like document);

    

    (c) subject
      to
      Section 5.01(h) hereto, promptly from time to time enter into such control
      agreements, each in form and substance reasonably acceptable to the Collateral
      Agent, as Collateral Agent may require to perfect the security interest created
      hereby in Electronic Chattel Paper having an individual principal amount equal
      to or in excess of $500,000 and Letter-of-Credit Rights having an individual
      face amount equal to or in excess of $500,000, and will promptly furnish to
      the
      Collateral Agent true copies thereof; provided
      that with
      respect to any Letter-of-Credit Right, the Obligors shall be required only
      to
      use their commercially reasonable efforts to obtain control of such
      Letter-of-Credit Rights;

    

    (d) promptly
      from time to time upon the request of the Collateral Agent, execute and deliver
      such short-form security agreements as the Collateral Agent may deem necessary
      or desirable in its reasonable judgment to protect the interests of the
      Collateral Agent in respect of that portion of the Collateral consisting of
      Intellectual Property (each, a “Short
      Form Security Agreement”);

    

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

    

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

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

    

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

    

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

    

    Notwithstanding
      anything herein to the contrary, no Grantor shall be required to obtain control
      agreements with respect to any Deposit Accounts, Securities Accounts or
      Commodity Accounts.

    

    5.02 Other
      Financing Statements or Control.
      Except
      as otherwise permitted under Section 7.02 of the Credit Agreement, no
      Obligor shall (a) file or knowingly suffer to be on file for a period of
      more than 30 days from the date that such Obligor obtained knowledge
      thereof, or authorize or affirmatively permit to be filed or to be on file,
      in
      any jurisdiction, any financing statement or like instrument with respect to
      any
      of the Collateral in which the Collateral Agent is not named as the sole
      Collateral Agent for the benefit of the Secured Creditors, or (b) cause or
      permit any Person other than the Collateral Agent to have “control” (as defined
      in Section 9-104, 9-105, 9-106 or 9-107 of the NYUCC) of any Electronic
      Chattel Paper, Investment Property or Letter-of-Credit Right constituting part
      of the Collateral.

    

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

    

    5.04 Special
      Provisions Relating to Certain Collateral.

    

    (a) Pledged
      Shares.

    

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

    

    (ii) Subject
      to
      the last sentence of this Section 5.04(a)(ii), each Obligor shall have the
      right to exercise all voting, consensual and other powers of ownership
      pertaining 

    
      
        
        

      

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

    

    (iii) Subject
      to
      the last sentence of this Section 5.04(a)(iii), each Obligor shall be
      entitled to receive and retain any dividends, distributions or proceeds on
      the
      Pledged Shares paid in cash out of earned surplus. Notwithstanding anything
      to
      the contrary herein, the rights of the Obligors under this
      Section 5.04(a)(iii) shall terminate immediately upon (x) the
      occurrence and continuation of an Event of Default and (y) the delivery of
      a written notice from the Collateral Agent of its intent to exercise its rights
      under this Section 5.04(a) (unless the Collateral Agent is prohibited by
      law to give such notice in which case such written notice shall not be required
      for termination of the Obligors’ rights hereunder).

    

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

    

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

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

    (ii) if
      any of such Pledged Shares are securities governed by Article 8 of the
      NYUCC, then such Pledged Shares shall be certificated.

    

    (b) Intellectual
      Property.

    

    (i) For
      the
      purpose of enabling the Collateral Agent to exercise rights and remedies under
      Section 5.05 at such time as the Collateral Agent shall be lawfully
      entitled to exercise such rights and remedies, and for no other purpose, each
      Obligor hereby grants to the Collateral Agent, to the extent assignable, an
      irrevocable, non-exclusive license (exercisable without payment of royalty
      or
      other compensation to such Obligor) to use or sublicense any of the Intellectual
      Property now owned or hereafter acquired by such Obligor, wherever the same
      may
      be located, including in such license reasonable access to all media in which
      any of the licensed items may be recorded or stored and to all computer programs
      used for the compilation or printout thereof, subject to any licenses granted
      by
      any Obligor in compliance with the provisions of this Agreement prior to the
      occurrence of an Event of Default; provided,
      however
      that the
      Collateral Agent agrees that it shall provide prior written notice of its intent
      to exercise its rights pursuant to this Section 5.04(b) (unless the
      Collateral Agent is prohibited by law to give such notice in which case such
      written notice shall not be required for the Collateral Agent to exercise its
      rights hereunder).

    

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

    
      
        
        

      

      
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    (c) Chattel
      Paper.
      Subject
      to Section 5.01(h), each Obligor will (1) deliver to the Collateral
      Agent each original of each item of Chattel Paper having an individual principal
      amount equal to or in excess of $500,000 at any time constituting part of the
      Collateral, and (2) cause each such original and each copy thereof to bear
      a conspicuous legend, in form and substance reasonably satisfactory to the
      Collateral Agent, indicating that such Chattel Paper is subject to the security
      interest granted hereby and that purchase of such Chattel Paper by a Person
      other than the Collateral Agent without the consent of the Collateral Agent
      would violate the rights of the Collateral Agent.

    

    

    5.05 Remedies.

    

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

    

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

    

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

    

    (iii) the
      Collateral Agent may require each Obligor to notify (and each Obligor hereby
      authorizes the Collateral Agent, upon prior written notice to such Obligor,
      provided that if Collateral Agent is prevented from giving such notice by law
      no
      such notice shall be necessary, so to notify) each account debtor in respect
      of
      any Account, Chattel Paper or General Intangible, and each obligor on any
      Instrument, constituting part of the Collateral that such Collateral has been
      assigned to the Collateral Agent hereunder, and to instruct that any payments
      due or to become due in respect of such Collateral shall be made directly to
      the
      Collateral Agent or as it may direct (and if any such payments, or any other
      Proceeds of Collateral, are received by any Obligor they shall be held in trust
      by such Obligor for the Collateral Agent and as promptly as possible remitted
      or
      delivered to the Collateral Agent for application as provided
      herein);

    
      
        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    

    

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

    

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

    

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

    

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

    

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

    

    (b) Certain
      Securities Act Limitations.
      Each
      Obligor recognizes that, by reason of certain prohibitions contained in the
      Securities Act of 1933, as amended, and applicable state securities laws, the
      Collateral Agent may be compelled, with respect to any sale of all or any part
      of the Collateral, to limit purchasers to those who will agree, among other
      things, to acquire the Collateral for their own account, for investment and
      not
      with a view to the distribution or resale thereof. Each Obligor acknowledges
      that any such private sales may be at prices and on terms less favorable to
      the
      Collateral Agent than those obtainable through a public sale without such
      restrictions, and, notwithstanding such circumstances, agrees that any such
      private sale shall be deemed to have been made in a commercially reasonable
      manner and that 

    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    

    the
      Collateral Agent shall have no obligation to engage in public sales and no
      obligation to delay the sale of any Collateral for the period of time necessary
      to permit the issuer thereof to register it for public sale.

    

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

    

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

    

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

    

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

    

    5.09 Application
      of Proceeds.
      Except
      as otherwise herein expressly provided and except as provided below in this
      Section 5.09, the Proceeds of any collection, sale or other realization of
      all or any part of the Collateral pursuant hereto, and any other cash at the
      time held by the Collateral Agent under Section 4 or this Section 5,
      shall be applied by the Collateral Agent:

    

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

    

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

    
      
        
        

      

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

    

    Notwithstanding
      the foregoing, the proceeds of any cash or other amounts held in the
“LC Exposure Sub-Account” of the Collateral Account pursuant to
      Section 4.04 shall be applied first
      to the
      LC Exposure outstanding from time to time and second
      to the
      other Secured Obligations in the manner provided above in this
      Section 5.09.

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    
      
        
        

      

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

    

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

    

    

    Section 6.
      Miscellaneous.

    

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

    

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

    

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

    
      
        
        

      

      
        -18-

        
          

        

      

      
        
        

      

    

    

    

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

    

    6.05 Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the respective
      successors and assigns of the Obligors and the Secured Creditors (provided
      that,
      except in connection with a transaction permitted by Section 10.04(a) of
      the Credit Agreement, no Obligor shall assign or transfer its rights or
      obligations hereunder without the prior written consent of the Collateral
      Agent).

    

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

    

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

    

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

    

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

    

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

    
      
        
        

      

      
        -19-

        
          

        

      

      
        
        

      

    

    

    

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

    

    [Signature
      pages follow.]

    
      
        
        

      

      
         

        
          

        

      

      
        
        

      

    

    

    BORROWER:
      

    

    KRISPY
      KREME DOUGHNUT CORPORATION

    

    

    By:
      /s/
      Daryl G. Brewster

    Name:
      Daryl G. Brewster 

    Title:
      President & CEO

    

    

    PARENT
      GUARANTOR:

    

    KRISPY
      KREME DOUGHNUTS, INC. 

    

    

    By:
      /s/
      Michael C. Phalen

    Name:
      Michael C. Phalen 

    Title:
      CFO

    

    

    SUBSIDIARY
      GUARANTORS:

    

    KRISPY
      KREME MOBILE STORE COMPANY

    

    KRISPY
      KREME CANADA, INC.

    

    HD
      CAPITAL
      CORPORATION

    

    HDN
      DEVELOPMENT CORPORATION

    

    GOLDEN
      GATE DOUGHNUTS, LLC

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME DOUGHNUT
CORPORATION, 

            

    

                       
      as authorized Manager

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    PANHANDLE
      DOUGHNUTS, LLC

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME MANAGEMENT I, LLC, 

            

    

                       
      an authorized Manager

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME MANAGEMENT II, LLC, 

            

    

                      
      an authorized Manager

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME DOUGHNUT CORPORATION,

            

    

    
      	 	 	 	
              as
                authorized Member of Krispy Kreme 
Management I, LLC and Krispy Kreme
                
Management II, LLC

            

    

    

    NORTH
      TEXAS DOUGHNUTS, L.P.

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME DOUGHNUT 
CORPORATION, 

            

    

                       
      its General Partner

    

    KK
      CANADA
      HOLDINGS, INC.

    

    KRISPY
      KREME BRAND FUND CORPORATION

    

    KRISPY
      KREME MANAGEMENT I, LLC

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME DOUGHNUT 
CORPORATION,

            

    

    
      	 	 	 	
              as
                authorized Member

            

    

    

    KRISPY
      KREME MANAGEMENT II, LLC

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME DOUGHNUT 
CORPORATION,

            

    

    
      	 	 	 	
              as
                authorized Member

            

    

    

    KRISPY
      KREME MANAGEMENT III, LLC

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME DOUGHNUT 
CORPORATION,

            

    

    
      	 	 	 	
              as
                authorized Member

            

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    SOUTHERN
      DOUGHNUTS, LLC

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME MANAGEMENT I, LLC, 

            

    

    as
      authorized Manager

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME DOUGHNUT
CORPORATION,

            

    

    
      	 	 	 	
              as
                authorized Member

            

    

    

    SOUTHWEST
      DOUGHNUTS, LLC

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME MANAGEMENT I, LLC, 

            

    

                       
      as authorized Manager

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME DOUGHNUT 
CORPORATION,

            

    

    
      	 	 	 	
              as
                authorized Member

            

    

    

    NORTHEAST
      DOUGHNUTS, LLC

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME MANAGEMENT I, LLC, 

            

    

                       
      as authorized Manager

    

    
      	 	 	
              By:

            	
              KRISPY
                KREME DOUGHNUT 
CORPORATION,

            

    

    
      	 	 	 	
              as
                authorized Member

            

    

    

    

    By: /s/
      Michael C. Phalen

    Name:
      Michael C. Phalen

    Title:
      Authorized Officer

    

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    

    CREDIT
      SUISSE,

    CAYMAN
      ISLANDS BRANCH,

    as
      Collateral Agent

    

    

    By
      /s/
      David Dodd

    Name:
      David Dodd 

    Title:
      Vice President

    

    

    By
      /s/
      Denise L. Alvarez

    Name:
      Denise L. Alvarez 

    Title:
      AssociateExhibit 10.1

PRO-DEX, INC.

2004 AMENDED AND RESTATED  

STOCK OPTION PLAN

RESTRICTED STOCK GRANT AGREEMENT

This Restricted Stock Grant Agreement (the "Agreement") is made
pursuant to that certain 2004 Amended and Restated Stock Option Plan (the
"Plan") of Pro-Dex, Inc., a Colorado corporation (the "Company") and that
certain Employment Letter Agreement dated August 14, 2006 between the Company
and Mark Murphy ("Grantee"), a copy of which is attached hereto as Exhibit
A and incorporated by this reference (the "Employment Agreement"). 
Unless otherwise defined herein, the terms defined in the Plan shall have the
same defined meanings in this Agreement.   

I.                  
NOTICE OF RESTRICTED STOCK GRANT

Grantee's Name and Address: 
 

Mark Murphy

21295 Clear Haven Drive

Yorba Linda, Ca 92886

The undersigned Grantee has been granted restricted shares of
Common Stock (the "Shares") of the Company, subject to the terms and conditions
of the Plan and this Agreement, as follows:

	

Grant Number:        

			2007-001
	

Date of Grant:  

			 February 21, 2007
	

Vesting Commencement Date: 

			February 21, 2007
	

Total Number of Shares Granted:  

			340,000
	

Term/Expiration Date:    

			February 21, 2012

II.             AGREEMENT

1.                 
Consideration; Grant of Shares; Governing Provisions.  In
consideration of his continuing employment with the Company and as a means to
advance the interests of the Company and its shareholders by affording the
undersigned an opportunity for investment in the Company and the incentive
advantages inherent in stock ownership in the Company, the Company hereby
grants the Shares to the Grantee.  In the
event of a conflict between the terms of this Agreement and the Plan the terms
of the Plan shall govern.  In the event of a conflict between the terms of this
Agreement and the Employment Agreement the terms of the Employment Agreement shall
govern.  In the event of a conflict between the terms of the Plan and the
Employment Agreement the terms of the Plan shall govern.  Notwithstanding the
foregoing provisions of this Section 1, the Plan administrator shall not use
its discretion under Section 3(c) of the Plan to modify to Grantee's detriment,
any provision of this Agreement.

 

2.                 
Vesting Schedule.  Subject to the further provisions of
this Agreement, the Shares shall vest as follows:  (i) 85,000 Shares shall vest
immediately upon execution of this Agreement by the Company and Grantee and
(ii) one-third (1/3) of the remaining balance shall vest on each of February 21,
2008, February 21, 2009 and February 21, 2010 such that all Shares shall have
fully vested on February 21, 2010.    

3.                 
Termination of Service. In the event Grantee ceases to be
employed by either the Company or a Related Company, the Shares that have not
vested as of the date of the Grantee's termination of employment shall be
repurchased by the Company on such termination date (or within seven (7) days
thereafter) for One Dollar ($1.00).

4.                 
Transferability.  The unvested portion of the Shares shall
not be transferred, hypothecated, pledged or otherwise alienated.  The vested
Shares shall be freely transferable, subject to the requirements of applicable
law, including, but not limited to applicable federal and state securities
laws.

5.                 
Acceleration.  In the event of a transaction in which the
Company's shareholders receive cash or marketable securities for their Company
shares (a "Liquidity Event"), the vesting of the unvested Shares will
accelerate immediately prior to the Liquidity Event as follows: 100% of the
total grant of Shares if the consideration received by Pro-Dex shareholders is
$5 per share or greater; 80% if between $4 and $5; and 60% if between $3 and
$4.   All such price per share amounts in this letter will be
proportionately adjusted in the event of a Company recapitalization such a
stock split, stock dividend, reverse split, or the like.

6.                 
Grantee's Representations. The Shares have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and, accordingly, Grantee makes the investment representations set forth on Exhibit
B and by this reference made a part hereof.

7.                 
Legal, Tax and Financial Matters.  Grantee understands and
acknowledges that he is solely responsible for obtaining his own independent
legal, tax and financial planning advice concerning the grant of the Shares
pursuant to this Agreement.

8.                 
Entire Agreement; Governing Law. The Plan and this Agreement
(including the exhibits incorporated herein by reference) constitute the entire
agreement of the parties with respect to the subject matter hereof and
supersede in their entirety all prior undertakings and agreements of the
Company and Grantee with respect to the subject matter hereof, and may not be
modified adversely to the Grantee's interest except by means of a writing
signed by the Company and Grantee. This Agreement shall be governed by, and
construed in accordance with the laws of the State of California without resort
to that State's conflict of law rules.

 

-2-

9.                 
No Guarantee of Continued Service.  THE GRANTEE
ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING
SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED OR BEING GRANTED THE SHARES.
THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN
DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH GRANTEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE THE GRANTEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE EXCEPT AS MAY OTHERWISE BE SET FORTH IN ANY WRITTEN EMPLOYMENT
AGREEMENT BETWEEN THE COMPANY AND GRANTEE.

The Grantee hereby agrees to accept as binding, conclusive and
final all decisions or interpretations of the Plan Administrator upon any
questions arising under the Plan or this Agreement. The Grantee further agrees
to notify the Company upon any change in the residence address indicated below.

 

	GRANTEE: 	PRO-DEX,
INC.
	/s/ Mark Murphy 	

/s/
Jeffrey J. Ritchey

		
	MARK MURPHY (Signature)	

By

	 	

Chief
Financial Officer

Title

21295 Clear Haven Drive

Yorba Linda, Ca 92886

Residence Address of Mark Murphy

 

 

-3-

EXHIBIT A

EMPLOYMENT LETTER AGREEMENT

Dated August 14, 2006

(attached)

 

Mark P. Murphy

21295 Clear Haven Dr. 

Yorba Linda, CA 92886

Dear Mark:

On behalf of the Board
of Directors I am pleased to confirm an offer of employment as Chief Executive
Officer of Pro-Dex Inc. ("the Company") as an "at-will" employee, serving at the
pleasure of the Board of Directors and in accordance with the Company's Bylaws
(and applicable law). As Chief Executive Officer, you will perform the duties
assigned to you from time to time by the Board of Directors. You may also be
required to serve as the CEO and/or director of subsidiaries or other related
entities of the Company with no additional compensation. This position will
initially be based out of our Santa Ana, California office.

Salary

Your official start date will be August 31, 2006 ("the Starting Date"). Your
bi-weekly salary will be $10,769.23 which equals $280,000 on an annualized basis
, increasing annually by the All Urban Consumers CPI (applicable local
metropolitan area) for the preceding twelve calendar months effective the first
full pay period following each anniversary of the Starting Date.

Benefits

For PTO purposes only (and only with respect to this
Agreement), you will be treated as having been employed on a full time basis for
five (5) years as of the Starting Date, and you will be eligible to participate
in benefits including health, dental and life insurance and optional employee
benefits available to all Company employees except Companywide employee bonuses
or profit sharing plans.

You will receive
reimbursement for ordinary and necessary business expenses incurred in the
ordinary course of business consistent with the Company's policies applicable to
all employees and subject to review by the Company's audit committee.

Bonuses/incentive
compensation

In addition to the foregoing salary and benefits, you
will be eligible for additional compensation as follows if you are still
employed by the Company on a full time basis ("Continuing Employment Status")
when the conditions to earn such bonus are fully satisfied.

1.  Annual Bonus.  An Annual
Bonus equal to (i) 0.75% of your annual salary, times (ii) each one percent (or
any portion thereof) increase in pre-tax earnings (including extraordinary gains
and losses) per share for fiscal years ending after July 1, 2006 over the prior
fiscal year. For example, if pre-tax earnings per share increased by 18.5% and
your salary was $280K at the time, the Annual Bonus

 

	

 

would equal
$38,850 (0.75% times $280,000 times 18.5). The Annual Bonus shall be payable
within ten days after you have signed and the Company has filed with the SEC the
required Chief Executive Officer certifications, without qualification, for Form
10-KSB (or Form 10-K, as the case may be ) for the most recent fiscal year. Such
Continuing Employment Status shall not be required for additional compensation
under this "Annual Bonus" section in the event that during the period (i)
following the conclusion of the Company's fiscal year and (ii) prior to the
Company's filing of Form 10-KSB (or Form 10-K, as the case may be), your
employment is terminated by the Company without "Cause" or you resign for "Good
Reason," each as defined below):; If your employment has been terminated by the
Company without Cause prior to the time that you have signed such
certifications, or by you for Good Reason prior to the time that you have signed
such certifications, the Annual Bonus as set forth in this Section 1 which you
have earned shall be payable within thirty (30) days following the termination
of your employment. If all such filings are not signed and filed, except as
specified above, the bonus shall not be payable.

The actual Annual Bonus for fiscal year
ending June 30, 2007 shall not exceed $25,000; and shall not exceed $50,000 for
fiscal year ending June 30, 2008.

2. 
Second Bonus.  A Second Bonus equal to the appreciation of an
aggregate of 450,000 shares of the Company's common stock over the closing price
of such number of shares on the day preceding the Starting Date. Entitlement to
this second bonus shall vest at the rate of 33.333% per year commencing with the
first anniversary of the Starting Date (subject to acceleration in certain
events as provided below), and all or any part of each incremental vested
portion shall be exercisable within five years from the date such increment
first vested and payable in cash in the installments described below commencing
on the earliest of (i) 90 days written notice from you to the Company, based on
the average closing price of the Company's common shares, over the ten trading
days immediately preceding receipt of such written 90 day notice outside of any
blackout periods applicable to all insiders, (ii) termination of your employment
(except for termination of your employment by the Company for "Cause" " or
resignation by you without Good Reason), based on the average closing price of
the Company's common shares over the ten trading days immediately preceding the
date of termination, outside of any blackout periods applicable to all insiders
) or (iii) in case of a Liquidity Event as defined below, based on the price per
share received by the Company's shareholders in the Liquidity Event as described
herein. Payments of this Second Bonus shall be in quarterly installments equal
to 10% of the Company's pretax net income (and with respect to the final
quarterly payment, so much as may remain to be paid), including extraordinary
gains and losses, as reported in the Company's financial statements contained
within Form 10-QSB or Form 10-KSB (as the case may be) for the preceding
quarter, payable each quarter within thirty (30) days following the
determination of such pretax net income; provided, however, that any payments of
this Second Bonus which are earned but remain outstanding as of the date of your
termination/severance of employment

  

	

shall be paid over a
period of twelve (12) months as set forth under "Termination/Severance," below.
The unpaid portion shall bear no interest and shall become immediately due and
payable upon a Liquidity Event.

This Second Bonus may be
replaced at the Company's sole option on or before February 28, 2007 with a
grant of 340,000 restricted shares of Common Stock of the Company in accordance
with an equity incentive compensation plan if such a plan is approved by the
Company's shareholders at the Company's 2006 Annual Shareholders' Meeting (or
other such special shareholders' meeting of the Company) vesting at the rate of
85,000 shares per year commencing January 2, 2007 or the grant date, whichever
is later. Vested shares shall have no restrictions imposed with respect to their
sale or transfer except those required by laws or regulations. If the restricted
stock grant is pursuant to the Company's general equity incentive plan for its
key employees as approved by the Company's board of directors and shareholders,
then the Company shall on a reasonably expedited basis and consistent with past
practice, file a Registration Statement on Form S-8 with the Securities and
Exchange Commission.

Acceleration

In the event of a transaction in which the Company's
shareholders receive cash or marketable securities for their Company shares (a
"Liquidity Event"), the vesting of the unvested restricted shares or portion of
the second bonus will accelerate immediately prior to the Liquidity Event as
follows: 100% of the total grant of restricted shares or second bonus if the
consideration received by Pro-Dex shareholders is $5 per share or greater; 80%
if between $4 and $5; and 60% if between $3 and $4. All such price per share
amounts in this letter will be proportionately adjusted in the event of a
Company recapitalization such a stock split, stock dividend, reverse split, or
the like.

Termination/Severance

In the event you are terminated involuntarily by the
Company without "Cause" or resign with "Good Reason" as defined below, the
Company shall pay you your (i) salary up through the date of termination plus
(ii) accrued vacation plus (iii) severance equal to $280,000 and (iv) any Annual
Bonus or Second Bonus earned but not yet paid pursuant to this letter as of the
termination date (the date you are terminated without "Cause" or upon which you
resign with "Good Reason"), each of which shall be paid less applicable
withholding as required by law. With the exception of the earned amount of your
Annual Bonus (to be paid within thirty (30) days of your termination), the
severance payment referred to above shall be made in equal incremental payments,
consistent with the Company's usual payroll payment periods, over a period of
twelve (12) months immediately following your last day of employment with the
Company. You hereby acknowledge that such severance will be the total and sole
remedy for any claims by you, known or unknown, arising from your employment
with the Company and you will be required prior to the receipt of such severance
payments to execute a written separation agreement with the Company containing a
general release of claims against the Company in form and content acceptable to
both you and the Company and our respective counsel.

 
	

 

However, the release
agreement will not alter your rights under the indemnification agreement.

As used herein, the
term termination for "Cause" shall mean termination due to:

(i)   your failure or inability to perform your duties
with the Company or a related entity;

(ii)  your failure to
substantially follow and comply with the specific and lawful directives of the
Board or any officer of the Company or a related entity to whom you report
directly;

(iii)The Board's determination on advice of
counsel of your commission of an act of fraud or dishonesty; your engagement in
illegal conduct, gross misconduct or an act of moral turpitude; or your material
violation of any material written policy, guideline, code, handbook or similar
document governing the conduct of directors, officers or employees of the
Company or its related entities; or

(iv) a material breach by you of the terms of this letter.

As used herein,
the term resignation for "Good Reason" shall mean your resignation due to:

(i)  
a reduction in your salary as set forth herein or failure of the Company to pay
any amount owing to you hereunder when due; or a material reduction in benefits
provided to you under the terms of this Letter;

(ii) 
the Company's requiring you to be based full time in any office or location
outside of a sixty (60) mile radius from your current residence in Yorba Linda,
California;

(iii) your being requested by the Board to execute any documents or take any
action in violation of any laws or regulations applicable to the Company, commit
an act of fraud or dishonesty violation of any material written policy,
guideline, code, handbook or similar document governing the conduct of
directors, officers or employees of the Company or its related entities;

(iv) a
Liquidity Event, in which you are not being offered an executive position with
substantially comparable compensation, benefits and incentives with any
successor to the Company based in any office or location inside a sixty (60)
miles radius from your current residence in Yorba Linda, California provided
that such an offer has not been discouraged by you or your representative; or

(v) a material
breach by the Company of the terms of this Letter.

In case of a claim of
"Cause" for termination or "Good Reason" for resignation, the Board shall
promptly notify you or you shall promptly notify the Board (as the case may be)
in writing of the existence of such Cause or Good Reason, and if the basis of
such claim is reasonably susceptible of cure and in fact is fully cured within
thirty (30) days, it shall no longer be grounds for termination with "Cause" or
"Good Reason" for resignation.

  

	

 

Indemnification.
Company will continue its commitment to indemnify you
in accordance with the Company's standard Indemnification Agreement for its
officers and directors (which you have previously executed in your capacity as a
director of the Company).

By accepting this offer, you confirm your
understanding that your employment will be on an at-will basis meaning that
either you or the Company may terminate the employment relationship at any time
for any reason with or without notice or Cause, and that neither you nor the
Company has entered into any other agreement regarding the duration of your
employment. This Letter represents the full and exclusive understanding between
us of the matters set forth herein and there is no other agreement, written or
oral, which governs such matters. Please sign both copies of this letter to
indicate your acceptance of this offer and retain one copy for your records and
return the second copy to us.

	

 

EXHIBIT B

INVESTMENT REPRESENTATION STATEMENT

GRANTEE:      Mark Murphy

COMPANY:   Pro-Dex, Inc.

SECURITY:     Restricted Common
Stock

AMOUNT:      340,000 shares

DATE:             February 21,
2007

In connection with the acquisition of
the above-referenced securities (the "Securities"), the undersigned
Grantee makes the following representations to the Company:

(a)        Grantee is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to acquire the Securities.
Grantee is acquiring the Securities for investment for Grantee's own account
only and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act of 1933, as amended
(the "Securities Act").

(b)        Grantee acknowledges and understands that the
Securities constitute "restricted securities" under the Securities Act and have
not been registered under the Securities Act in reliance upon a specific
exemption therefrom, which exemption depends upon, among other things, the bona
fide nature of Grantee's investment intent as expressed herein. In this
connection, Grantee understands that, in the view of the Securities and
Exchange Commission, the statutory basis for such exemption may be unavailable
if Grantee's representation was predicated solely upon a present intention to
hold these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Grantee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available. Grantee
further acknowledges and understands that the Company is under no obligation to
register the Securities. Grantee understands that the certificate evidencing
the Securities will be imprinted with a legend which prohibits the transfer of
the Securities unless they are registered or such registration is not required
in the opinion of counsel satisfactory to the Company and any other legend
required under applicable state securities laws.

(c)        Grantee is familiar with the provisions of Rule 144
promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly from
the issuer thereof, in a nonpublic offering subject to the satisfaction of
certain conditions.  

 

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(d)        Grantee further understands that if all of the
applicable requirements of Rule 144 are not satisfied, registration under the
Securities Act, or some other registration exemption will be required; and that
no assurances can be given that any such other registration exemption will be
available in such event.

Signature
of Grantee:

/s/
Mark Murphy

Mark
Murphy

Date:
February 21, 2007

 

 

 

 

 

 

 

 

 

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