EXHIBIT 10.65

EXECUTION COPY

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT (this “Agreement”), dated effective as of August 15,
2004, between REEVES PARK, INC., a Minnesota corporation whose mailing address
is 5050 Lincoln Drive, Suite 470, Edina, MN 55436, Attention: Klaus Jung
(hereinafter referred to as “Debtor”) and CHARLES & COLVARD, LTD, a North
Carolina corporation whose mailing address is 300 Perimeter Park Drive, Suite A,
Morrisville, NC 27560 (hereinafter referred to as “Secured Party”).

 

R E C I T A L S:

 

A. Debtor has entered into that certain Moissanite Consignment Agreement (as
defined below).

 

B. The execution and delivery of this Agreement is required by the Moissanite
Consignment Agreement as a condition to making extensions of credit thereunder.

 

NOW THEREFORE, in consideration of the premises and for other good and valuable
consideration, the adequacy, receipt, and sufficiency of which are hereby
acknowledged, and in order to induce Secured Party to enter the Transaction
pursuant to the Moissanite Consignment Agreement, the parties hereto hereby
agree as follows:

 

ARTICLE I

DEFINITIONS

 

Section 1.1. Definitions. As used in this Agreement, the following terms have
the following meanings:

 

“Account” means any “account,” as such term is defined in Article 9 of the UCC,
now owned or hereafter acquired by Debtor

 

“Collateral” has the meaning specified in Section 2.1 of this Agreement.

 

“Event of Default” means the occurrence of any of the following: (i) any failure
by Debtor to pay any amount due to Secured Party when and as due under the
Moissanite Consignment Agreement, any other Transaction Document or in
connection with the Transaction, (ii) Debtor shall default in the due observance
or performance of any other covenant, condition or agreement set forth in this
Agreement, the Moissanite Consignment Agreement, any other Transaction Document;
(iii) entry of any single judgment against Debtor in excess of $100,000, or
entry of judgments against Debtor that in the aggregate exceed $100,000 and that
are not bonded over or discharged within 30 days; (iv) Debtor shall become
insolvent or shall be adjudicated bankrupt; bankruptcy, insolvency,
reorganization, arrangement, debt

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adjustment, liquidation, or receivership proceedings in which Debtor is alleged
to be insolvent or unable to pay its debts as they mature, are instituted by or
against Debtor, and Debtor shall consent to the same or shall admit in writing
the material allegations of the petition filed in such proceedings, or the
proceedings are not dismissed within the time permitted for the posting of bond
and no bond shall have been posted in the matter (v) any material statement,
representation or warranty of Debtor herein is untrue in any material respect;
or (vi) Debtor shall default under its fine jewelry consignment agreement with
J.C. Penny Corporation dated July 20, 2004.

 

“General Intangibles” means any “general intangibles,” as such term is defined
in Article 9 of the UCC, now owned or hereafter acquired by Debtor.

 

“Lien” means any lien, mortgage, security interest, tax lien, financing
statement, pledge, charge, hypothecation or other encumbrance of any kind or
nature whatsoever (including, without limitation, any conditional sale or title
retention agreement), whether arising by contract, operation of law or
otherwise.

 

“Moissanite Consignment Agreement” means that certain agreement dated effective
as of August 15, 2004 by and between Secured Party as “Consignor” and Debtor as
“Consignee” pursuant to which Secured Party has and will consign and deliver
Charles & Colvard created Moisssanite jewels to Debtor, as such agreement may be
amended, restated, restated or otherwise modified from time to time.

 

“Obligations” shall mean and include (a) the due and punctual payment by the
Debtor of: (i) all amounts payable to Secured Party pursuant to the Moissanite
Consignment Agreement or otherwise payable to Secured Party in connection with
the Transaction, when and as due, whether at maturity, by acceleration, upon one
or more dates set for prepayment or otherwise and any renewals, modifications or
extensions thereof, in whole or in part and (ii) all other monetary obligations,
including fees, costs, expenses and indemnities, whether primary, secondary,
direct, contingent, fixed or otherwise (including monetary obligations incurred
during the pendency of any bankruptcy, insolvency, receivership or other similar
proceeding, regardless of whether allowed or allowable in such proceeding) of
the Debtor to the Secured Party under the Transaction Documents, (b) the due and
punctual payment and performance of all other obligations of the Debtor under or
pursuant to the Moissanite Consignment Agreement and the other Transaction
Documents, and any renewals, modifications or extensions thereof, in whole or in
part; (c) the payment and performance by Debtor of all obligations, agreements,
covenants, representations and warranties in this Agreement, the Moissanite
Consignment Agreement, the Transaction Documents and any other document executed
and delivered in connection therewith (the liabilities, obligations and
indebtedness described in clauses (a) through (c), inclusive, of this paragraph
are herein collectively referred to as the “Obligations”).

 

“Payment Intangibles” means “payment intangibles” as such term is defined in
Article 9 of the UCC, now owned or hereafter acquired by Debtor.

 

“Proceeds” means any “proceeds,” as such term is defined in Article 9 of the
UCC.

 

“Security Agreement” means this Security Agreement dated as of August 15, 2004
by and between Secured Party and Debtor.

 

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“Transaction” means the consignment transactions between Secured Party and
Debtor pursuant to and as described in and contemplated by the Moissanite
Consignment Agreement.

 

“Transaction Documents” means and refers collectively to the Moissanite
Consignment Agreement, this Security Agreement and all other documents now or
hereafter evidencing or securing the Transaction, and any renewals,
modifications or extensions thereof, in whole or in part;

 

“UCC” means the Uniform Commercial Code as in effect in the State of North
Carolina and/or any other jurisdiction the laws of which may be applicable to or
in connection with the creation, perfection or priority of any Lien on any
Collateral.

 

Terms used herein, which are defined in the UCC, shall have the meanings
determined in accordance with the UCC.

 

ARTICLE II

SECURITY INTEREST

 

Section 2.1. Security Interest. As Collateral security for the prompt payment
and performance in full when due of the Obligations, Debtor hereby pledges and
assigns to Secured Party, and grants to Secured Party a continuing lien on and
security interest in, all of Debtor’s right, title, and interest in and to the
following, whether now owned or hereafter arising or acquired and wherever
located (collectively, the “Collateral”):

 

(a) all Accounts of Debtor from J.C Penney Corporation (“JC Penney”) at any time
owing to Debtor;

 

(b) all General Intangibles paid or payable by JC Penney to Debtor;

 

(c) all Payment Intangibles paid or payable by JC Penney to Debtor;

 

(d) all products and Proceeds, in cash or otherwise, of any of the property
described in the foregoing clauses (a) through (c);

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES

 

To induce Secured Party to enter into this Agreement and the Moissanite
Consignment Agreement, Debtor represents and warrants as follows:

 

Section 3.1. Office and Tax Identification Number. On the date hereof, the
principal place of business, mailing address and the chief executive office of
Debtor is identified in the first paragraph of this Agreement Debtor’s United
States Federal Income Tax Identification Number is set forth on the signature
page hereof.

 

Section 3.2. Ownership; No Encumbrances. Except for the security interest (and
pledges and assignments as applicable) granted hereby, and subject to the terms
of any Intercreditor Agreement entered into by Secured Party with SPECTRUM
Commercial Services

 

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Company, the Debtor is, and as to any property acquired after the date hereof
which is included within the Collateral, Debtor will be, the owner of all such
Collateral free and clear from all charges, Liens, security interests, adverse
claims and encumbrances of any and every nature whatsoever.

 

ARTICLE IV

COVENANTS

 

Debtor covenants and agrees that, as long as the Obligations or any part thereof
are outstanding or any amount payable under the Transaction remains unpaid under
the Moissanite Consignment Agreement, Debtor will perform and observe each of
the following covenants:

 

Section 4.1. Accounts. Debtor shall, in accordance with its customary business
practices, endeavor to collect or cause to be collected from JC Penney as
Account Debtor under its Accounts, as and when due, any and all amounts owing
under such Accounts. Without the prior written consent of Secured Party, Debtor
shall not, except in the ordinary course of business, and in no event when any
Event of Default exists, (a) grant any extension of time for any payment with
respect to any of the Accounts beyond sixty (60) days after such payment’s due
date, (b) compromise, compound, or settle any of the Accounts for less than the
full amount thereof, (c) release, in whole or in part, any Person liable for
payment of any of the Accounts, (d) allow any credit or discount for payment
with respect to any Account other than trade or other customary discounts
granted in the ordinary course of business, or (e) release any Lien or guaranty
securing any Account unless the Account has been paid.

 

Section 4.2. Corporate Changes. Debtor shall not change its name, identity,
corporate structure, or its United States Tax Identification Number in any
manner that might make any financing statement filed in connection with this
Agreement seriously misleading unless Debtor shall have given Secured Party not
less than thirty (30) days prior written notice thereof and shall have taken all
action reasonably deemed necessary or desirable by Secured Party to protect its
liens with the perfection and priority thereof required by the Transaction
Documents.

 

ARTICLE V

RIGHTS OF SECURED PARTY

 

Section 5.1. Power of Attorney. To the extent permitted by applicable law,
Debtor hereby irrevocably constitutes and appoints Secured Party, with full
power of substitution, as its true and lawful attorney-in-fact with full
irrevocable power and authority in the name of Debtor or in its own name, to
take, after the occurrence and during the continuance of an Event of Default,
any and all actions and to execute any and all documents and instruments which
Secured Party at any time and from time to time deems necessary to accomplish
the purposes of this agreement and, without limiting the generality of the
foregoing, such Debtor hereby gives Secured Party the power and right on behalf
of Debtor and in its own name to do any of the following after the occurrence
and during the continuance of an Event of Default, without notice to, or the
consent of, Debtor:

 

(a) to demand, sue for, collect, or receive, in the name of Debtor or in Secured
Party’s own name, any money or property at any time payable or receivable on
account of

 

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or in exchange for any of the Collateral and, in connection therewith, endorse
checks, notes, drafts, acceptances, money orders, documents of title, or any
other instruments for the payment of money under the Collateral or any policy of
insurance;

 

(b) (i) to direct Account Debtors and any other parties liable for any payment
under any of the Collateral to make payment of any and all monies due and to
become due thereunder directly to Secured Party or as Secured Party shall direct
(Debtor agrees that if any Proceeds of any Collateral (including payments made
in respect of Accounts) shall be received by Debtor while an Event of Default
exists, Debtor shall promptly deliver such Proceeds to Secured Party with any
necessary endorsements, and until such Proceeds are delivered to Secured Party,
such Proceeds shall be held in trust by Debtor for the benefit of Secured Party
and shall not be commingled with any other funds or property of Debtor); (ii) to
receive payment of and receipt for any and all monies, claims and other amounts
due and to become due at any time in respect of or arising out of any
Collateral; (iii) to commence and prosecute any suit, action, or proceeding at
law or in equity in any court of competent jurisdiction to collect the
Collateral or any part thereof and to enforce any other right in respect of any
Collateral; (iv) to defend any suit, action, or proceeding brought against
Debtor with respect to any Collateral; (v) to settle, compromise, or adjust any
suit, action, or proceeding described above and, in connection therewith, to
give such discharges or releases as Secured Party may deem appropriate;
insurance); and (vi) to sell, transfer, pledge, convey, make any agreement with
respect to, or otherwise deal with any of the Collateral as fully and completely
as though Secured Party were the absolute owner thereof for all purposes, and to
do, at Secured Party’s option and Debtor’s expense, at any time, or from time to
time, all acts and things which Secured Party deems necessary to protect,
preserve, maintain, or realize upon the Collateral and Secured Party’s security
interest therein.

 

THIS POWER OF ATTORNEY IS A POWER COUPLED WITH AN INTEREST AND SHALL BE
IRREVOCABLE UNTIL TERMINATION OF THIS AGREEMENT IN ACCORDANCE HEREOF.

 

ARTICLE VI

DEFAULT

 

Section 6.1. Rights and Remedies. If an Event of Default shall have occurred and
be continuing, Secured Party shall have the following rights and remedies:

 

(a) In addition to all other rights and remedies granted to Secured Party in
this Agreement or in any other Transaction Document or by applicable law,
Secured Party shall have all of the rights and remedies of a Secured Party under
the UCC (whether or not the UCC applies to the affected Collateral). Debtor
shall be liable for all reasonable expenses of retaking, holding, preparing for
sale, or the like, and all reasonable attorneys’ fees, legal expenses, and other
costs and expenses incurred by Secured Party in connection with the collection
of the Obligations and the enforcement of Secured Party’s rights under this
Agreement. Debtor shall remain liable for any deficiency if the Proceeds of any
sale or other disposition of the Collateral applied to the Obligations are
insufficient to pay the Obligations in full. Debtor waives all rights of
marshaling, valuation, and appraisal in respect of the Collateral.

 

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(b) Secured Party may cause any or all of the Collateral held by it to be
transferred into the name of Secured Party or the name or names of Secured
Party’s nominee or nominees.

 

(c) Secured Party may exercise any and all rights and remedies of Debtor under
or in respect of the Collateral, including, without limitation, any and all
rights of Debtor to demand or otherwise require payment of any amount under, or
performance of any provision of, any of the Collateral.

 

ARTICLE VII

MISCELLANEOUS

 

Section 7.1. No Waiver; Cumulative Remedies. No failure on the part of Secured
Party to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power, or privilege under this Agreement shall operate as
a waiver thereof, nor shall any single or partial exercise of any right, power,
or privilege under this Agreement preclude any other or further exercise thereof
or the exercise of any other right, power, or privilege. The rights and remedies
provided for in this Agreement are cumulative and not exclusive of any rights
and remedies provided by law.

 

Section 7.2. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of Debtor and Secured Party and their respective successors
and assigns, except that Debtor may not assign any of its rights or obligations
under this Agreement without the prior written consent of Secured Party.

 

Section 7.3. Amendment. The provisions of this agreement may be amended or
waived only by an instrument in writing signed by the parties hereto.

 

Section 7.4. Notices. All notices and other communications provided for in this
Agreement shall be given or made by telefax, overnight courier service, personal
delivery or U.S. Mail at the addresses shown for each party in the first
paragraph of this Agreement .

 

Section 7.5. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of North Carolina

 

Section 7.6. Survival of Representations and Warranties. All representations and
warranties made in this Agreement or in any certificate delivered pursuant
hereto shall survive the execution and delivery of this Agreement

 

Section 7.7. Severability. Any provision of this Agreement which is determined
by a court of competent jurisdiction to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions of this Agreement, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.

 

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Section 7.8. Termination. If all of the Obligations shall have been paid and
performed in full, Secured Party shall, upon the written request of Debtor,
execute and deliver to the Debtor a proper instrument or instruments
acknowledging the release and termination of the security interests created by
this Agreement Notwithstanding anything to the contrary contained in this
Agreement, if the payment of any amount of the Obligations is rescinded, voided
or must otherwise be refunded by Secured Party upon the insolvency, bankruptcy
or reorganization of the Debtor or otherwise for any reason whatsoever, then the
security interests created by this Agreement will be automatically reinstated
and become automatically effective and in full force and effect, all to the
extent that and as though such payment so rescinded, voided or otherwise
refunded had never been made and such release and termination of such security
interest had never been given.

 

Section 7.9. Counterparts. This Agreement may be executed in counterparts (and
by different parties hereto in different counterparts), each of which shall
constitute an original, but all of which when taken together shall constitute a
single contract. Delivery of an executed counterpart of a signature page of this
Agreement by telecopy shall be effective as delivery of a manually executed
counterpart of this Agreement.

 

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

 

DEBTOR:

REEVES PARK, INC.

By:

 

/s/ Klaus Jung

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Name:

  Klaus Jung

Title:

  President

 

Debtor’s Federal Income Tax Identification Number:

 

_______________________________________

SECURED PARTY:

CHARLES & COLVARD, LTD

By:

 

/s/ James R. Braun

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Name:

  James R. Braun

Title:

  Vice President Finance & CFO

 

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