Exhibit 10.3


 


ELECTRIC CITY CORP.


SECURITY AGREEMENT


 


	
  To:

  	
   

  	
  Laurus Master Fund, Ltd.

  
	
   

  	
   

  	
  c/o Onshore Corporate Services, Ltd.

  
	
   

  	
   

  	
  P.O. Box 1234 G.T

  
	
   

  	
   

  	
  Queensgate House

  
	
   

  	
   

  	
  South Church Street

  
	
   

  	
   

  	
  Grand Cayman, Cayman Islands

  



 


Gentlemen:


 


1.             To secure the payment
of all Obligations (as hereafter defined), we hereby grant to you a continuing
security interest in all of the following property now owned or at any time
hereafter acquired by us, or in which we now have or at any time in the future
may acquire any right, title or interest (the “Collateral”): all accounts,
inventory, equipment, goods, documents, instruments (including, without
limitation, promissory notes), contract rights, general intangibles (including,
without limitation, payment intangibles and an absolute right to license on
terms no less favorable than those current in effect among our affiliates, but
not own intellectual property), chattel paper, supporting obligations,
investment property, letter-of-credit rights, trademarks and tradestyles in which
we now have or hereafter may acquire any right, title or interest, all proceeds
and products thereof (including, without limitation, proceeds of insurance) and
all additions, accessions and substitutions thereto or therefor.   In the event we wish to finance the
acquisition of any hereafter acquired equipment and have obtained a commitment
from a financing source to finance such equipment from an unrelated  third party, you agree to release your
security interest on such hereafter acquired equipment so financed by such
third party financing source.


 


2.             The term
“Obligations” as used herein shall mean and include all debts, liabilities and
obligations owing by (a) us to you hereunder and under the Convertible Term
Note dated as of the date hereof made by us in favor of you in the original
principal amount of $1,000,000, as amended, modified and supplemented from time
to time or otherwise (as amended, modified and supplemented from time to time,
the “Note”).


 


3.             We hereby
represent, warrant and covenant to you that: (a) we are a company validly
existing, in good standing and formed under the laws of the State of
Delaware  and we will provide you thirty
(30) days’ prior written notice of any change in our state of formation; (b)
our legal name is Electric City Corp., as set forth in our Certificate of
Incorporation as amended through the date hereof; (c) we are the lawful owner
of the Collateral and have the sole right to grant a security interest therein
and will defend the Collateral against all claims and demands of all persons
and entities; (d) we will keep the Collateral free and clear of all
attachments, levies, taxes, liens, security interests and encumbrances of every
kind and nature (“Encumbrances”), other than Permitted Encumbrances (as
hereinafter defined), except to the extent said Encumbrance does not secure
indebtedness in excess of $100,000 and such Encumbrance is removed or otherwise
released within 10 days of the creation thereof; (e) we will at our own cost
and expense keep the Collateral in good state of repair (ordinary wear and tear
excepted) and will not waste or destroy the same or any part thereof other than
ordinary course discarding of items no longer used or useful in our business;
(f) we will not without your prior written consent, sell, exchange, lease or
otherwise dispose of the Collateral, whether by sale, lease or otherwise,
except for the sale of inventory in the ordinary course of business and for the
disposition or transfer in the ordinary course of business during any fiscal year
of obsolete and worn-out equipment having an aggregate fair market value of


 

















 


not more than $25,000 and only to the extent
that (i) the proceeds of any such disposition are used to acquire replacement
Collateral which is subject to your first priority security interest or are
used to repay Obligations or to pay general corporate expenses, or (ii)
following the occurrence of an Event of Default which continues to exist the
proceeds of which are remitted to you to be held as cash collateral for the Obligations;  (g) we will insure the Collateral in your
name against loss or damage by fire, theft, burglary, pilferage, loss in
transit and such other hazards as you shall specify in amounts and under
policies by insurers acceptable to you and all premiums thereon shall be paid
by us and the policies delivered to you. 
If we fail to do so, you may procure such insurance and the cost thereof
shall constitute Obligations; (h) we will at all reasonable times allow you or
your representatives free access to and the right of inspection of the
Collateral; (i) we hereby indemnify and save you harmless from all loss, costs,
damage, liability and/or expense, including reasonable attorneys’ fees, that
you may sustain or incur to enforce payment, performance or fulfillment of any
of the Obligations and/or in the enforcement of this Agreement or in the
prosecution or defense of any action or proceeding either against you or us
concerning any matter growing out of or in connection with this Agreement,
and/or any of the Obligations and/or any of the Collateral except to the extent
caused by your own gross negligence or willful misconduct; (j) with respect to
all accounts arising out of contracts between us and the United States of
America, or any state, or any department, agency or instrumentality of any of
them (each, a “Government Contract”), we will so notify you in writing and
comply with any governmental notice or approval requirements, including,
without limitation, compliance with the Federal Assignment of Claims Act, (k)
each account shall conform to the following criteria: (i) shipment of the
merchandise or rendition of services has been completed, (ii) merchandise or
services shall not have been rejected or disputed by the account debtor and
there shall not have been asserted any offset, defense or counterclaim (other
than any such rejections, disputes, offsets, defenses or counterclaims which in
the aggregate do not at any time exceed $100,000 (iii) the proceeds of
such account shall be remitted by the applicable account debtor to and be on
deposit in the Pledged Account (as hereafter defined) within forty (40) days
from invoice date, and (iv) is a good and valid account representing an
undisputed bona fide indebtedness incurred by the account debtor liable
therefor, for a fixed sum as set forth in the invoice relating thereto with
respect to an unconditional sale and delivery upon the stated terms of goods
sold by us, or work, labor and/or services rendered by us, as applicable; (l)
we shall have no access to any funds on deposit in any Pledged Account (as
hereafter defined), except to the extent expressly set forth in the Control
Agreement (as hereafter defined) and the Control Agreement (as hereafter
defined) and we shall comply with the terms and provisions of the Control
Agreement (as hereafter defined.  For
purposes hereof, the following terms shall have the following meanings:  (1)“Control Agreement” shall mean the Multi
Party Blocked Account Agreement  dated
as of the date hereof among us, you and American Chartered Bank, as amended,
modified and supplemented from time to time, (2) “Pledged Accounts” shall have
the meaning set forth on Schedule A to the Control Agreement, and (3)
“Permitted Encumbrances” means “Permitted Liens” as such term is defined in
that certain other Security Agreement dated as of September 11, 2003 between
Electric City Corp. and Laurus Master Fund, Ltd.


 


4.             Following
the occurrence and during the continuance of an Event of Default, you shall
have the right to instruct all of our account debtors to remit payments
on all accounts in accordance with your express written instructions:  provided,
however, the account debtor liable under the Government Contract shall be
instructed on or prior to the date hereof to remit payments on all accounts
arising under the Government Contract to Collateral Account Number
                     
in our name at American Chartered Bank (the “Pledged Account”).  With respect to accounts arising from the
Government Contract, we shall execute all such documentation as you shall
require so as to comply with the Federal Assignment of Claims Act and to
instruct the governmental agency party to the Government Contract to remit all
accounts arising thereunder to the Pledged Account or such other address and/or
deposit account as you shall direct in writing.  If, despite such instructions, we shall receive any payments with
respect to accounts, we shall receive such payments in trust for your benefit,
shall segregate such payments from our other funds and shall deliver or cause
to be deposited in the Pledged Account or delivered to you, in the same form as
so received with all necessary endorsements, all such payments as soon as
practicable, but in no event later than two (2) business days after our receipt
thereof.


 


2

















 


You shall have full power and authority to
collect each account, through legal action or otherwise, and may settle,
compromise, or assign (in whole or in part) the claim for any account, or
otherwise exercise any other right now existing or hereafter arising with
respect to any account if such action will facilitate collection.


 


5.             We shall be in
default under this Agreement upon the happening of any of the following events
or conditions, each such event or condition an “Event of Default” (a) we shall
fail to pay when due or punctually perform any of the Obligations; (b) any
covenant, warranty, representation or statement made or furnished to you by us
or on our behalf was false in any material respect when made or furnished; (c)
the loss, theft, substantial damage, destruction, sale or encumbrance to or of
any of the Collateral or the making of any levy, seizure or attachment thereof
or thereon  except to the extent said
levy, seizure or attachment does not secure indebtedness in excess of $100,000
and such levy, seizure or attachment has not been removed or otherwise released
within  10 days  of the creation or the assertion thereof; (d)
we shall become insolvent, cease operations, dissolve, terminate our business existence,
make an assignment for the benefit of creditors, suffer the appointment of a
receiver, trustee, liquidator or custodian of all or any part of our property;
(e) any proceedings under any bankruptcy or insolvency law shall be commenced
by or against us and if commenced against us shall not be dismissed within 30
days; (f) we shall repudiate, purport to revoke or fail to perform any of our
obligations under the Note; or (g) an Event of Default shall have occurred
under and as defined in the Note.


 


6.             Upon the occurrence
of any Event of Default and at any time thereafter, you may declare all
Obligations immediately due and payable and you shall have the remedies of a
secured party provided in the Uniform Commercial Code as in effect in the State
of New York, this Agreement and other applicable law.  Upon the occurrence of any Event of Default and at any time
thereafter, you will have the right to take possession of the Collateral and to
maintain such possession on our premises or to remove the Collateral or any
part thereof to such other premises as you may desire.  Upon your request, we shall assemble the
Collateral and make it available to you at a place designated by you.  If any notification of intended disposition
of any Collateral is required by law, such notification, if mailed, shall be
deemed properly and reasonably given if mailed at least ten (10) days before
such disposition, postage prepaid, addressed to us either at our address shown
herein or at any address appearing on your records for us.  Any proceeds of any disposition of any of
the Collateral shall be applied by you to the payment of all expenses in
connection with the sale of the Collateral, including reasonable attorneys’
fees and other legal expenses and disbursements and the reasonable expense of
retaking, holding, preparing for sale, selling, and the like, and any balance
of such proceeds may be applied by you toward the payment of the Obligations in
such order of application as you may elect, and we shall be liable for any
deficiency.


 


7.             If we default in
the performance or fulfillment of any of the terms, conditions, promises,
covenants, provisions or warranties on our part to be performed or fulfilled
under or pursuant to this Agreement, you may, at your option without waiving your
right to enforce this Agreement according to its terms, immediately or at any
time thereafter and without notice to us, perform or fulfill the same or cause
the performance or fulfillment of the same for our account and at our sole cost
and expense, and the cost and expense thereof (including reasonable attorneys’
fees) shall be added to the Obligations and shall be payable on demand with
interest thereon at the highest rate permitted by law or, at your option,
debited by you from the Pledged Account.


 


8.             We appoint you, any
of your officers, employees or any other person or entity whom you may
designate as our attorney, with power to execute such documents in our behalf
and to supply any omitted information and correct patent errors in any
documents executed by us or on our behalf; to file financing statements against
us covering the Collateral; to sign our name on public records; and to do all
other things you deem necessary to carry out this Agreement.  We hereby ratify and approve all acts of the
attorney and neither you nor the attorney will be liable for any acts of
commission or omission, nor for any error of judgment or


 


3

















 


mistake of fact or law other than gross
negligence or willful misconduct.  This
power being coupled with an interest, is irrevocable so long as any Obligations
remains unpaid.


 


9.             No delay or failure
on your part in exercising any right, privilege or option hereunder shall
operate as a waiver of such or of any other right, privilege, remedy or option,
and no waiver whatever shall be valid unless in writing, signed by you and then
only to the extent therein set forth, and no waiver by you of any default shall
operate as a waiver of any other default or of the same default on a future occasion.  Your books and records containing entries
with respect to the Obligations shall be admissible in evidence in any action
or proceeding, shall be binding upon us for the purpose of establishing the
items therein set forth and shall constitute prima facie proof thereof.  You shall have the right to enforce any one
or more of the remedies available to you, successively, alternately or
concurrently.  We agree to join with you
in executing financing statements or other instruments to the extent required
by the Uniform Commercial Code in form satisfactory to you and in executing
such other documents or instruments as may be required or deemed necessary by
you for purposes of affecting or continuing your security interest in the
Collateral.


 


10.           This Agreement shall
be governed by and construed in accordance with the laws of the State of New
York and cannot be terminated orally. 
All of the rights, remedies, options, privileges and elections given to
you hereunder shall enure to the benefit of your successors and assigns.  The term “you” as herein used shall include
your company, any parent of your company, any of your subsidiaries and any
co-subsidiaries of your parent, whether now existing or hereafter created or acquired,
and all of the terms, conditions, promises, covenants, provisions and
warranties of this Agreement shall enure to the benefit of and shall bind the
representatives, successors and assigns of each of us and them.  You and we hereby (a) waive any and all
right to trial by jury in litigation relating to this Agreement and the
transactions contemplated hereby and we agree not to assert any counterclaim in
such litigation, (b) submit to the nonexclusive jurisdiction of any New York
State court sitting in the borough of Manhattan, the city of New York and (c)
waive any objection you or we may have as to the bringing or maintaining of
such action with any such court.


 


4

















 


11.           All notices from you to us shall be
sufficiently given if mailed or delivered to us at our address set forth below.


 


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  ELECTRIC CITY CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ John Mitola

  	
   

  
	
   

  	
  Name:

  	
   

  	
  John Mitola

  	
   

  
	
   

  	
  Title:

  	
   

  	
  Chief Executive Officer

  	
   

  
	
   

  	
   

  
	
   

  	
  Address: 

  	
  1280 Landmeier Road

  
	
   

  	
   

  	
  Elk Grove Village, Illinois 60007

  
	
   

  	
   

  
	
   

  	
  Dated as of:  September 11,
  2003

  
	
   

  	
   

  
	
  ACKNOWLEDGED:

  	
   

  
	
   

  
	
  LAURUS MASTER FUND, LTD.

  	
   

  
	
   

  
	
  By:

  	
   

  	
  /s/ David Grin

  	
   

  
	
  Name:

  	
   

  	
  David Grin

  	
   

  
	
  Title:

  	
   

  	
  Partner

  	
   

  
									



 


5