Exhibit 10.3
SECURITY AGREEMENT
This Security Agreement (this "Agreement") is executed as of January 11, 2005,
by and among Consolidated Energy, Inc., a Wyoming corporation (the "Company"),
and Eastern Consolidated Energy, Inc., a Kentucky corporation ("Eastern
Consolidated" and together with the Company, "Debtor"), Gryphon Master Fund,
L.P., a Bermuda limited partnership ("Gryphon"), and GSSF Master Fund, LP, a
Bermuda limited partnership ("GSSF" and together with Gryphon, the "Secured
Parties").
FOR VALUABLE CONSIDERATION, the receipt and adequacy of which are hereby
acknowledged, Debtor hereby covenants and agrees with Secured Parties as
follows:
1. Reference to Promissory Note. This Agreement is being executed and
delivered in connection with that certain Senior Secured Bridge Promissory
Note, in the original principal amount of $2,500,000, executed by Debtor in
favor of the Secured Parties, dated as of the same date of this Agreement (the
"Promissory Note").
2. Incorporation of Promissory Note. The terms, conditions, and provisions of
the Promissory Note are incorporated herein by reference, the same as if set
forth herein verbatim, which terms, conditions, and provisions shall continue
to be in full force and effect hereunder until the Promissory Note is paid and
performed in full.
3. Certain Definitions. As used herein, the following terms have the meanings
indicated:
Collateral means any and all assets and properties (real, personal or mixed)
of Debtor (or either of them), whether now owned or hereafter acquired,
including, without limitation, (i) all replacements, substitutions and
additions thereto, and the accounts, notes and any other proceeds therefrom,
and (ii) the Company's entire equity interest in (A) Eastern Consolidated, (B)
Eastern Consolidated Oil and Gas, Inc., a Kentucky corporation, and (C) CEI
Holdings, Inc., a Nevada corporation.
Default means the occurrence of any one or more of the following events, which
continues for a period of 5 days after Secured Parties give written notice
thereof: (i) the failure to pay the Promissory Note; (ii) except as otherwise
provided in this definition, the failure of Debtor to perform any material
covenant, agreement, or condition contained herein; (iii) the levy against the
Collateral, or any part thereof, or any execution, attachment, sequestration,
or other writ; (iv) the appointment of a receiver with respect to the
Collateral, or any part thereof; (v) the filing by Debtor, by way of petition
or answer, of any petition or other pleading seeking relief as a debtor, or an
adjustment of Debtor's debts, or any other relief under any bankruptcy,
reorganization, or insolvency laws now or hereafter existing; or (vi) the
receipt by Secured Parties of information establishing that any representation
or warranty made by Debtor herein is false, misleading, or erroneous in any
material respect.
Obligation means Debtor's payment and performance under the Promissory Note,
together with any and all renewals, extensions, and modifications of the same,
and all costs of collection thereunder.
Obligor means any person obligated with respect to any of the Collateral,
whether as an account debtor, obligor on an instrument, issuer of securities,
or otherwise.
Security Interest means the security interest granted and the pledge and
assignment made under Paragraph 4.
UCC means the Uniform Commercial Code as enacted in the States of Wyoming,
Texas, Kentucky and Florida, or other applicable jurisdiction, as amended at
the time in question.
4. Security Interest. In order to secure the full and complete payment and
performance of the Obligation when due, Debtor hereby grants to each Secured
Party a security interest in and to the Collateral and pledges and assigns the
Collateral to Secured Parties, all upon and subject to the terms and
conditions of this Agreement. Such security interest is granted and such
pledge and assignment are made as security only and shall not subject Secured
Parties to, or transfer or in any way affect or modify, any obligation of
Debtor with respect to any of the Collateral or any transaction involving or
giving rise thereto.
5. Representations, Warranties and Covenants of Debtor
(a) Representations and Warranties with Respect to the Collateral. Debtor
represents and warrants that (i) it has all requisite power and authority to
enter into this Agreement; (ii) except for any financing statement that may be
filed by Secured Parties with respect to the Collateral, no financing
statement covering the Collateral, or any part thereof, has been filed with
any filing officer or agency; (iii) no other security agreement covering the
Collateral, or any part thereof, has been made and no security interest, other
than the one created herein, has attached to or been perfected in the
Collateral or in any part thereof; and (iv) no dispute, right of setoff,
counterclaim, or defense exists with respect to any part of the Collateral.
(b) Affirmative Covenants of Debtor. Debtor covenants and agrees to each and
all of the following: (i) to execute and deliver promptly to Secured Parties
all such other assignments, certificates, and supplemental writings, and to do
all other acts or things, as Secured Parties may reasonably request in order
more fully to evidence and perfect the security interest created herein; (ii)
to furnish Secured Parties promptly with any information or writing that
Secured Parties may reasonably request concerning the Collateral; (iii) to
allow Secured Parties to inspect all books and records of Debtor relating to
the Collateral or the Promissory Note, and to make and take away copies of
such books and records at Secured Parties' expense; (iv) to notify Secured
Parties promptly of any change in any material fact or circumstance warranted
or represented by Debtor in this Agreement or in any other writings furnished
by Debtor to Secured Parties in connection with the Collateral; (v) to notify
Secured Parties promptly of any claim, action, or proceeding affecting title
to the Collateral, or any part thereof, or the security interest herein, and
at the request of Secured Parties, to appear in and defend, at Debtor's sole
cost and expense, any action or proceeding; and (vi) to pay to Secured Parties
promptly the amount of all court costs and reasonable attorney's fees incurred
by Secured Parties in the enforcement of their rights hereunder.
(c) Negative Covenants of Debtor. Debtor covenants and agrees that, without
the prior written consent of each Secured Party (which consent may be granted
or withheld in the sole and absolute discretion of Secured Parties), Debtor
will not (i) sell, assign, or transfer the Collateral or any of its rights
therein; or (ii) create any other security interest in, mortgage, or otherwise
encumber the Collateral or any part thereof, or permit the Collateral to be or
become subject to any lien, attachment, execution, sequestration, other legal
or equitable process, or any encumbrance of any kind or character, except the
security interest created herein.
6. Default; Remedies. Should a Default occur and be continuing, Secured
Parties may, at their election, exercise any and all rights available to
Secured Parties under the UCC, in addition to any and all other rights
afforded by this Agreement, at law, in equity, or otherwise, including,
without limitation, (a) requiring Debtor to assemble all or part of the
Collateral and make it available to Secured Parties at a place to be
designated by Secured Parties which is reasonably convenient to Debtor and
Secured Parties, (b) surrendering any policies of insurance on all or part of
the Collateral and receiving and applying the unearned premiums as a credit on
the Obligation, (c) applying by appropriate judicial proceedings for
appointment of a receiver for all or part of the Collateral (and Debtor hereby
consents to any such appointment), and (d) applying to the Obligation any cash
held by Secured Parties under this Agreement.
(a) Notice. Reasonable notification of the time and place of any public sale
of the Collateral, or reasonable notification of the time after which any
private sale or other intended disposition of the Collateral is to be made,
shall be sent to Debtor and to any other person entitled to notice under the
UCC; provided that if any of the Collateral threatens to decline speedily in
value or is of the type customarily sold on a recognized market, Secured
Parties may sell or otherwise dispose of the Collateral without notification,
advertisement, or other notice of any kind. It is agreed that notice sent or
given not less than three calendar days prior to the taking of the action to
which the notice relates is reasonable notification and notice for the
purposes of this subparagraph.
(b) Sales of Securities. In connection with the sale of any Collateral that is
securities, Secured Parties is authorized, but not obligated, to limit
prospective purchasers to the extent deemed necessary or desirable by Secured
Parties to render such sale exempt from the registration requirements of the
Securities Act of 1933, as amended, and any applicable state securities laws,
and no sale so made in good faith by Secured Parties shall be deemed not to be
"commercially reasonable" because so made.
(c) Application of Proceeds. Secured Parties shall apply the proceeds of any
sale or other disposition of the Collateral under this Paragraph 6 in the
following order: First, to the payment of all their expenses incurred in
retaking, holding, and preparing any of the Collateral for sale(s) or other
disposition, in arranging for such sale(s) or other disposition, and in
actually selling or disposing of the same (all of which are part of the
Obligation); second, toward repayment of amounts expended by Secured Parties
under Paragraph 7; and third, toward payment of the balance of the Obligation
in such order and manner as Secured Parties, in their discretion, may deem
advisable. Any surplus remaining shall be delivered to Debtor or as a court of
competent jurisdiction may direct.
7. Other Rights of Secured Parties.
(a) Performance. In the event Debtor shall fail to pay when due all taxes on
any of the Collateral, or to preserve the priority of the Security Interest in
any of the Collateral, or otherwise fail to perform any of its obligations
under this Agreement with respect to the Collateral, then Secured Parties may,
at their option, but without being required to do so, pay such taxes,
prosecute or defend any suits in relation to the Collateral, or take all such
other action which Debtor is required, but has failed or refused, to take
under this Agreement. Any sum which may be expended or paid by Secured Parties
under this subparagraph (including, without limitation, court costs and
attorneys' fees) shall bear interest from the dates of expenditure or payment
at the highest lawful rate until paid and, together with such interest, shall
be payable by Debtor to Secured Parties upon demand and shall be part of the
Obligation.
(b) Collection. Upon notice from Secured Parties, each Obligor with respect to
any payments on any of the Collateral (including, without limitation,
dividends and other distributions with respect to securities and insurance
proceeds payable by reason of loss or damage to any of the Collateral) is
hereby authorized and directed by Debtor to make payment directly to Secured
Parties, regardless of whether Debtor was previously making collections
thereon. Subject to Paragraph 7(e) hereof, until such notice is given, Debtor
is authorized to retain and expend all payments made on the Collateral. Each
Secured Party shall have the right in his own name or in the name of Debtor to
compromise or extend time of payment with respect to all or any portion of the
Collateral for such amounts and upon such terms as Secured Parties may
determine; to demand, collect, receive, receipt for, ▇▇▇ for, compound, and
give acquaintances for any and all amounts due or to become due with respect
to the Collateral; to take control of cash and other proceeds of any
Collateral; to endorse the name of Debtor on any notes, acceptances, checks,
drafts, money orders, or other evidences of payment on the Collateral that may
come into the possession of Secured Parties; to sign the name of Debtor on any
invoice or ▇▇▇▇ of lading relating to any Collateral, on any drafts against
Obligors or other persons making payment with respect to the Collateral, on
assignments and verifications of accounts or other Collateral and on notices
to Obligors making payment with respect to the Collateral; to send requests
for verification of obligations to any Obligor; and to do all other acts and
things necessary to carry out the intent of this Agreement. If any Obligor
fails or refuses to make payment on any Collateral when due, each Secured
Party is authorized, in his sole discretion, either in his own name or in the
name of Debtor, to take such action as he shall deem appropriate for the
collection of any amounts owed with respect to the Collateral or upon which a
delinquency exists. Regardless of any other provision hereof, however, Secured
Parties shall never be liable for their failure to collect, or for their
failure to exercise diligence in the collection of, any amounts owed with
respect to the Collateral, nor shall they be under any duty whatever to anyone
except Debtor to account for funds that they shall actually receive hereunder.
Without limiting the generality of the foregoing, Secured Parties shall have
no responsibility for ascertaining any maturities, calls, conversions,
exchanges, offers, tenders, or similar matters relating to any Collateral, or
for informing Debtor with respect to any of such matters (irrespective of
whether Secured Parties actually have, or may be deemed to have, knowledge
thereof). The rights granted Secured Parties under this subparagraph may be
exercised at any time, whether or not a Default has occurred and is
continuing.
(c) Record Ownership of Securities. Whether or not a Default has occurred and
is continuing, Secured Parties at any time may have any Collateral that is
securities and that is in the possession of Secured Parties, or their nominee
or nominees, registered in their name, or in the name of their nominee or
nominees, as pledgee; and, as to any securities so registered, Secured Parties
shall execute and deliver (or cause to be executed and delivered) to Debtor
all such proxies, powers of attorney, dividend coupons or orders, and other
documents as Debtor may reasonably request for the purpose of enabling Debtor
to exercise the voting rights and powers which it is entitled to exercise
under this Agreement and to receive the dividends and other payments in
respect of securities which it is authorized to receive and retain under this
Agreement.
(d) Voting of Securities. As long as a Default has not occurred and is not
continuing, Debtor shall be entitled to exercise all voting rights pertaining
to any Collateral that is securities. After the occurrence and during the
continuance of a Default, the right to vote any Collateral that is securities
shall be vested exclusively in Secured Parties. To this end, Debtor hereby
irrevocably constitutes and appoints each Secured Party the proxy and
attorney-in-fact of Debtor, with full power of substitution, to vote, and to
act with respect to, any and all Collateral that is securities standing in the
name of Debtor or with respect to which Debtor is entitled to vote and act,
subject to the understanding that such proxy may not be exercised unless a
Default has occurred and is continuing. The proxy herein granted is coupled
with an interest, is irrevocable, and shall continue until the Obligation has
been paid and performed in full.
(e) Certain Proceeds. Notwithstanding any provision of this Agreement to the
contrary, any and all stock dividends or distributions in property made on or
in respect of any Collateral that is securities, and any proceeds of any
Collateral that is securities, whether such dividends, distributions, or
proceeds result from a subdivision, combination, or reclassification of the
outstanding capital stock of any issuer thereof or as a result of any merger,
consolidation, acquisition, or other exchange of assets to which any issuer
may be a party, or otherwise, shall be part of the Collateral hereunder,
shall, if received by Debtor, be held in trust for the benefit of Secured
Parties, and shall forthwith be delivered to Secured Parties (accompanied by
proper instruments of assignment and/or stock and/or bond powers executed by
Debtor in accordance with Secured Parties' instructions) to be held subject to
the terms of this Agreement. Any cash proceeds of Collateral which come into
the possession of Secured Parties (including, without limitation, insurance
proceeds) may, at Secured Parties' option, be applied in whole or in part to
the Obligation (to the extent then due), be released in whole or in part to or
on the written instructions of Debtor for any general or specific purpose, or
be retained in whole or in part by Secured Parties as additional Collateral.
Any cash Collateral in the possession of Secured Parties may be invested by
Secured Parties in certificates of deposit issued by any state or national
bank having combined capital and surplus greater than $10,000,000, or in
securities issued or guaranteed by the United States of America or any agency
thereof. Secured Parties shall never be obligated to make any such investment
and shall never have any liability to Debtor for any loss that may result
therefrom. All interest and other amounts earned from any investment of
Collateral may be dealt with by Secured Parties in the same manner as other
cash Collateral. The provisions of this subparagraph shall be applicable
whether or not a Default has occurred and is continuing.
(f) Subrogation. If any of the Obligation is given in renewal or extension or
applied toward the payment of indebtedness secured by any lien, Secured
Parties shall be, and are hereby, subrogated to all of the rights, titles,
interests, and liens securing the indebtedness so renewed, extended, or paid.
(g) Indemnification. Debtor hereby assumes all liability for the Collateral,
for the Security Interest, and for any use, possession, maintenance, and
management of, all or any of the Collateral, including, without limitation,
any taxes arising as a result of, or in connection with, the transactions
contemplated herein, and agrees to assume liability for, and to indemnify and
hold Secured Parties harmless from and against, any and all claims, causes of
action, or liability, for injuries to or deaths of persons and damage to
property, howsoever arising from or incident to such use, possession,
maintenance, and management, whether such persons be agents or employees of
Debtor or of third parties, or such damage be to property of Debtor or of
others. Debtor agrees to indemnify, save, and hold Secured Parties harmless
from and against, and covenants to defend Secured Parties against, any and all
losses, damages, claims, costs, penalties, liabilities, and expenses,
including, without limitation, court costs and attorneys' fees, howsoever
arising or incurred because of, incident to, or with respect to Collateral or
any use, possession, maintenance, or management thereof.
8. Miscellaneous.
(a) Term. Upon full and final payment and performance of the Obligation, this
Agreement shall thereafter terminate upon receipt by Secured Parties of
Debtor's written notice of such termination; provided that no Obligor, if any,
on any of the Collateral shall ever be obligated to make inquiry as to the
termination of this Agreement, but shall be fully protected in making payment
directly to Secured Parties.
(b) Actions Not Releases. The Security Interest and Debtor's obligations and
Secured Parties' rights hereunder shall not be released, diminished, impaired,
or adversely affected by the occurrence of any one or more of the following
events: (i) the taking or accepting of any other security or assurance for any
or all of the Obligation; (ii) any release, surrender, exchange,
subordination, or loss of any security or assurance at any time existing in
connection with any or all of the Obligation; (iii) the modification of,
amendment to, or waiver of compliance with any terms of this Agreement without
the notification or consent of Debtor, except as required herein (the right to
such notification or consent being herein specifically waived by Debtor); (iv)
the insolvency, bankruptcy, or lack of corporate, partnership or trust power
of any party at any time liable for the payment of any or all of the
Obligation, whether now existing or hereafter occurring; (v) any renewal,
extension, or rearrangement of the payment of any or all of the Obligation,
either with or without notice to or consent of Debtor, or any adjustment,
indulgence, forbearance, or compromise that may be granted or given by Secured
Parties to Debtor; (vi) any neglect, delay, omission, failure, or refusal of
Secured Parties to take or prosecute any action in connection with this
Agreement or any other agreement, document, guaranty, or instrument
evidencing, securing, or assuring the payment of all or any of the Obligation;
(vii) any failure of Secured Parties to notify Debtor of any renewal,
extension, or assignment of the Obligation or any part thereof, or the release
of any security, or of any other action taken or refrained from being taken by
Secured Parties against Debtor or any new agreement between Secured Parties
and Debtor, it being understood that Secured Parties shall not be required to
give Debtor any notice of any kind under any circumstances whatsoever with
respect to or in connection with the Obligation, including, without
limitation, notice of acceptance of this Agreement or any Collateral ever
delivered to or for the account of Secured Parties hereunder; (viii) the
illegality, invalidity, or unenforceability of all or any part of the
Obligation against any party obligated with respect thereto by reason of the
fact that the Obligation, or the interest paid or payable with respect
thereto, exceeds the amount permitted by law, the act of creating the
Obligation, or any part thereof, is ultra ▇▇▇▇▇, or the officers, partners, or
trustees creating same acted in excess of their authority, or for any other
reason; or (ix) if any payment by any party obligated with respect thereto is
held to constitute a preference under applicable laws or for any other reason
Secured Parties are required to refund such payment or pay the amount thereof
to someone else.
(c) Waivers. Except to the extent expressly otherwise provided herein, Debtor
waives (i) any right to require Secured Parties to proceed against any other
person, to exhaust their rights in the Collateral, or to pursue any other
right which Secured Parties may have; (ii) with respect to the Obligation,
presentment and demand for payment, protest, notice of protest and nonpayment,
and notice of the intention to accelerate; and (iii) all rights of marshaling
in respect of any and all of the Collateral.
(d) Financing Statement. Secured Parties shall be entitled at any time to file
this Agreement or a carbon, photographic, or other reproduction of this
Agreement, as a financing statement, but the failure of Secured Parties to do
so shall not impair the validity or enforceability of this Agreement.
(e) Amendments. This instrument may be amended only by an instrument in
writing executed jointly by Debtor and Secured Parties, and supplemented only
by documents delivered or to be delivered in accordance with the express terms
hereof.
(f) Multiple Counterparts. This Agreement has been executed in a number of
identical counterparts, each of which shall be deemed an original for all
purposes and all of which constitute, collectively, one agreement; but, in
making proof of this Agreement, it shall not be necessary to produce or
account for more than one such counterpart.
(g) Parties Bound; Assignment. This Agreement shall be binding on Debtor and
Debtor's successors and assigns and shall inure to the benefit of Secured
Parties and Secured Parties' successors and assigns. Debtor may not, without
the prior written consent of both Secured Parties, assign any rights, duties,
or obligations hereunder. In the event of an assignment of all or part of the
Obligation, the Security Interest and other rights and benefits hereunder, to
the extent applicable to the part of the Obligation so assigned, shall be
transferred therewith.
(h) Governing Law; Exclusive Jurisdiction. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Texas,
without giving effect to the choice of law provisions. This Agreement shall
not be interpreted or construed with any presumption against the party causing
this Agreement to be drafted. Debtor and each Secured Party (i) hereby
irrevocably submit to the exclusive jurisdiction of the United States District
Court sitting in the Northern District of Texas and the courts of the State of
Texas located in Dallas, Texas, for the purposes of any suit, action or
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby, and (ii) hereby waive, and agree not to assert in any
such suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of such court, that the suit, action or proceeding is
brought in an inconvenient forum or that the venue of the suit, action or
proceeding is improper. Debtor and the Secured Parties hereby agree that the
prevailing party in any suit, action or proceeding arising out of or relating
to this Agreement shall be entitled to reimbursement for reasonable legal fees
from the non-prevailing party.
(i) Complete Agreement. This Agreement, the Promissory Note, and all other
agreements, instruments or documents executed and/or delivered in connection
therewith are intended by Debtor and Secured Parties as a final expression of
their agreement with respect to the subject matter hereof and thereof, and
supersede all prior agreements and understandings whether oral or written with
respect to the subject matter hereof and thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the date first above
written.
CONSOLIDATED ENERGY, INC.
By: /s/▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇▇, President
EASTERN CONSOLIDATED ENERGY, INC.
By: /s/▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇▇, President
GRYPHON MASTER FUND, L.P.
By: Gryphon Partners, L.P., its General Partner
By: Gryphon Management Partners, L.P., its General Partner
By: Gryphon Advisors, L.L.C., its General Partner
By: /s/▇▇▇▇▇▇ ▇. Garden
▇▇▇▇▇▇ ▇. Garden, Authorized Agent
GSSF MASTER FUND, LP
By: Gryphon Special Situations Fund, LP, its General Partner
By: GSSF Management Partners, LP, its General Partner
By: GSSF, LLC, its General Partner
By: /s/▇▇▇▇▇▇ ▇. Garden
▇▇▇▇▇▇ ▇. Garden, Authorized Agent