Document:

Exhibit 10.6

 

THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. 
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY
APPLICABLE STATES SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO ELECTRIC CITY CORP. THAT SUCH REGISTRATION IS NOT REQUIRED.

 

FORM
OF SECURED CONVERTIBLE REVOLVING NOTE

 

FOR VALUE RECEIVED,
ELECTRIC CITY CORP. a Delaware corporation (the “Borrower”) promises to pay to
LAURUS MASTER FUND, LTD., c/o Ironshore Corporate Services Ltd., P.O. Box 1234
G.T., Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax:
345-949-9877 (the “Holder”) or its registered assigns, on
order, the sum of [up to TWO MILLION DOLLARS ($2,000,000)], of, if different,
the aggregate principal amount of all “Loans” (as such term is defined in the
Security Agreement referred to below), together with any accrued and unpaid
interest hereon, on September 11, 2005 (the “Maturity Date”).

 

Capitalized terms used
herein without definition shall have the meanings ascribed to such terms in the
Security Agreement between Borrower and the Holder dated as of September 11,
2003 (as amended, modified and supplemented from time to time, the “Security
Agreement”).

 

The following terms shall
apply to this Note:

 

ARTICLE I
INTEREST

 

1.1.          Interest
Rate and Payments.  Subject to
Sections 5.3 and 6.7 hereof, interest payable on this Note shall accrue at a
rate per annum equal to the “prime rate” published in The Wall Street
Journal from time to time, plus one and three quarters percent
(1.75%).  Interest shall be payable
monthly in arrears commencing on October 1, 2003 and on the first day
of each consecutive calendar month thereafter 
The Prime Rate shall be increased or decreased as the case may be for
each increase or decrease in the Prime Rate in an amount equal to such increase
or decrease in the Prime Rate; each change to be effective as of the day of the
change in such rate in accordance with the terms of the Security Agreement.

 

 

ARTICLE II
ADVANCES, BORROWER CONVERSION RIGHTS,
PAYMENTS UNDER NOTE

 

2.1.          Mechanics
of Advances.  All Loans evidenced by
this Note shall be made in accordance with the terms and provisions of the
Security Agreement.

 

2.2.          Borrower’s
Conversion Rights.  Subject to the
terms hereof, the Borrower shall have the sole option to determine whether to
satisfy payment of any payment of principal or interest when due either in cash
or in shares of Common Stock (as defined in the Security Agreement), or a
combination of both.  Each month by the
tenth (10th) day of such month, the Borrower shall deliver to the
Holder a written irrevocable notice in the form of Exhibit A attached hereto
electing to pay the amount specified therein payable on the first day of the
next month in either cash or Common Stock, or a combination of both (each, a “Repayment Election Notice”).  Each Repayment Election Notice shall be
delivered to the Holder not later than the tenth (10th) day of the
month prior to the applicable payment date (the date by which such notice is
required to be given being hereinafter referred to as the “Notice Date”).  If, for any amount which is due on any repayment date, a
Repayment Election Notice is not delivered to the Holder by the applicable
Notice Date for such repayment date, then the amount due on such repayment date
shall be paid in cash.  If the Borrower
repays all or a portion of the amount due on any payment date in shares of
Common Stock, the number of such shares to be issued for such payment date shall
be the number determined by dividing (x) the amount to be paid in shares of
Common Stock, by (y) the Fixed Conversion Price.  For purposes hereof, the “Fixed
Conversion Price” means $2.12.

 

2.3.          No
Effective Registration. 
Notwithstanding anything to the contrary herein, the Borrower shall be
prohibited from exercising its right to repay any amount hereunder in shares of
Common Stock if at any time from the Notice Date for such payment through the
date upon which such payment is made by delivery of certificates for shares of
Common Stock there fails to exist an effective current Registration Statement
(as defined in the Registration Rights Agreement) covering the shares of Common
Stock to be issued, or if an Event of Default hereunder exists and is
continuing, unless such requirement is otherwise waived in writing by the
Holder in whole or in part at the Holder’s option.

 

2.4.          Common
Stock Payment Guidelines. 
Notwithstanding anything to the contrary herein, if the Borrower has
elected to make a payment hereunder in shares of Common Stock and the closing
price of the Common Stock as reported by Bloomberg, L.P. on the Principal
Market for any of the 11 trading days preceding the scheduled payment date was
less than 115% of the Fixed Conversion Price, then the Holder shall have the
option to refuse to accept any portion of such payment in shares of Common
Stock.

 

2.5.          Optional
Prepayments in Common Stock.  In the
event that the average closing price of the Common Stock on the Principal
Market is greater than 115% of the Fixed Conversion Price for a period of at
least five (5) consecutive trading days, then the Borrower may, at its sole
option, provide the Holder written notice (a “Call Notice”) requiring the
conversion at the Fixed Conversion Price of all or a portion of the outstanding
principal of this Note (subject to compliance with Section 3.2 if payment is
less than all of the principal and interest then due), together with accrued
interest on the amount being prepaid, as of the date set

 

2

 

forth in such Call Notice (the “Call Date”).  The Call Date shall be at least eleven (11) trading days
following the date of the Call Notice. 
Provided that;

 

(i)            on the Call Date there has been
filed with the Securities and Exchange Commission and declared effective a
current registration statement covering the shares of Common Stock which are to
be issued pursuant to the Call Notice,

 

then on the Call Date the
Borrower shall deliver to the Holder certificates evidencing the shares of
Common Stock issued in satisfaction of the principal and interest being
retired.  Notwithstanding the foregoing,
the Borrower’s right to issue shares of Common Stock in payment of obligations
under this Note shall be subject to the limitation that the number of shares of
Common Stock issued in connection with any Call Notice shall not exceed  25% of the aggregate dollar trading volume
of the Common Stock for the eleven (11) trading days immediately preceding the
Call Date (as such volume is reported by Bloomberg, L.P.  If the price of the Common Stock falls below
115% of the Fixed Conversion Price during the eleven (11) trading day period
immediately preceding the Call Date, then the Holder will then be required to
convert only such amount of the Note as shall equal twenty five percent (25%)
of the aggregate dollar trading volume (as such volume is reported by Bloomberg
L.P.) for each day that the Common Stock has exceeded 115% of the then
applicable Fixed Conversion Price.

 

 

The Borrower shall not be permitted to give the
Holder more than one Call Notice under this Note during any 22-day period.

 

2.6.          Optional
Prepayment in Cash.  The Borrower
will have the option of prepaying this Note in full or in part at any time
without penalty or premium .

 

ARTICLE III

HOLDER’S CONVERSION RIGHTS

 

3.1.          Optional
Conversion. Subject to the terms of this Article III, the Holder shall have
the right, but not the obligation, at any time until the Maturity Date, or
thereafter during an Event of Default (as defined in Article V), and, subject
to the limitations set forth in Section 3.2 hereof, to convert all or any
portion of the outstanding Principal Amount and/or accrued interest and fees
due and payable into fully paid and nonassessable shares of the Common Stock at the Fixed Conversion
Price. The shares of Common Stock to be issued upon such conversion are herein
referred to as the “Conversion Shares.”

 

3.2.          Conversion
Limitation. Notwithstanding anything contained herein to the contrary, the
Holder shall not be entitled to convert pursuant to the terms of this Note an
amount that would be convertible into that number of Conversion Shares which
would exceed the difference between the number of shares of Common Stock
beneficially owned by such Holder or issuable upon exercise of warrants held by
such Holder and 4.99% of the outstanding shares

 

3

 

of Common Stock of the Borrower. 
For the purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Exchange
Act and Regulation 13d-3 thereunder. 
The Holder may void the Conversion Share limitation described in this
Section 3.2 upon 75 days prior notice to the Borrower or without any notice
requirement upon an Event of Default.

 

3.3.          Mechanics
of Holder’s Conversion. In the event that the Holder elects to convert this
Note into Common Stock, the Holder shall give notice of such election by
delivering an executed and completed notice of conversion (“Notice of
Conversion”) to the Borrower and such Notice of Conversion shall
provide a breakdown in reasonable detail of the  Principal Amount, accrued interest and fees that are being
converted.  On each Conversion Date (as
hereinafter defined) and in accordance with its Notice of Conversion, the Holder
shall make the appropriate reduction to the Principal Amount, accrued interest
and fees as entered in its records and shall provide written notice thereof to
the Borrower within two (2) business days after the Conversion Date.  Each date on which a Notice of Conversion is
delivered or telecopied to the Borrower in accordance with the provisions
hereof shall be deemed a Conversion Date (the “Conversion Date”).  A form of Notice of Conversion to be
employed by the Holder is annexed hereto as Exhibit A.  The Borrower will cause the transfer agent
to transmit the certificates representing the Conversion Shares to the Holder
by crediting the account of the Holder’s designated broker with the Depository
Trust Corporation (“DTC”) through its Deposit Withdrawal Agent
Commission (“DWAC”) system within
three (3) business days after receipt by the Borrower of the Notice of
Conversion (the “Delivery Date”).

 

In the case of the exercise of the conversion rights
set forth herein the conversion privilege shall be deemed to have been
exercised and the Conversion Shares issuable upon such conversion shall be
deemed to have been issued upon the date of receipt by the Borrower of the
Notice of Conversion.  The Holder shall
be treated for all purposes as the record holder of such Common Stock, unless
the Holder provides the Borrower written instructions to the contrary.

 

3.4.          Late
Payments. The Borrower understands that a delay in the delivery of the
shares of Common Stock in the form required pursuant to this Article beyond the
Delivery Date could result in economic loss to the Holder.  As compensation to the Holder for such loss,
the Borrower agrees to pay late payments to the Holder for late issuance of
such shares in the form required pursuant to this Article III upon conversion
of the Note, in the amount equal to the greater of (i) $250 per business day
after the Delivery Date and (ii) the Holder’s actual damages from such delayed
delivery.  The Borrower shall pay any
payments incurred under this Section in immediately available funds upon demand
and, in the case of actual damages, accompanied by reasonable documentation of
the amount of such damages.

 

3.5.          Adjustment
Provisions. The Fixed Conversion Price and number and kind of shares or
other securities to be issued upon conversion determined pursuant to Section
3.1 shall be subject to adjustment from time to time upon the happening of
certain events while this conversion right remains outstanding, as follows:

 

A.            Reclassification,
etc.  If the Borrower at any time
shall, by reclassification or otherwise, change the Common Stock into the same
or a different number of securities of any class or classes, this Note, as to
the unpaid Principal Amount and accrued

 

4

 

interest thereon, shall thereafter be deemed to evidence the right to
purchase an adjusted number of such securities and kind of securities as would
have been issuable as the result of such change with respect to the Common
Stock immediately prior to such reclassification or other change.

 

B.            Stock
Splits, Combinations and Dividends. 
If the shares of Common Stock are subdivided or combined into a greater
or smaller number of shares of Common Stock, or if a dividend is paid on the
Common Stock in shares of Common Stock, the Fixed Conversion Price shall be
proportionately reduced in case of subdivision of shares or stock dividend or
proportionately increased in the case of combination of shares, in each such
case by the ratio which the total number of shares of Common Stock outstanding
immediately after such event bears to the total number of shares of Common
Stock outstanding immediately prior to such event.

 

C.            Share
Issuances.  Subject to the
provisions of this Section 3.6, if the Borrower shall at any time prior to the
conversion or repayment in full of the Principal Amount issue any shares of
Common Stock to a person other than the Holder (otherwise than (i) pursuant to
Subsections A or B above; (ii) pursuant to options, warrants, or other
obligations to issue shares outstanding on the date hereof as disclosed to
Holder in writing; or (iii) pursuant to options that may be issued under any
employee incentive stock option and/or any qualified stock option plan adopted
by the Borrower) for a consideration per share (the “Offer Price”) less than the Fixed Conversion Price in effect
at the time of such issuance, then the Fixed Conversion Price shall be
immediately reset to such lower Offer Price. For purposes hereof, the issuance
of any security of the Borrower convertible into or exercisable or exchangeable
for Common Stock shall result in an adjustment to the Fixed Conversion Price
only upon the conversion, exercise or exchange of such securities.

 

D.            Computation
of Consideration. For purposes of any computation respecting consideration
received pursuant to Subsection C above, the following shall apply:

 

(a)           in
the case of the issuance of shares of Common Stock for cash, the consideration
shall be the amount of such cash, provided that in no case shall any deduction
be made for any commissions, discounts or other expenses incurred by the
Borrower for any underwriting of the issue or otherwise in connection
therewith;

 

(b)           in
the case of the issuance of shares of Common Stock for a consideration in whole
or in part other than cash, the consideration other than cash shall be deemed
to be the fair market value thereof as determined in good faith by the Board of
Directors of the Borrower (irrespective of the accounting treatment thereof);
and

 

(c)           in
the case of the issuance of securities convertible into or exchangeable for
shares of Common Stock, no adjustment to the Offer Price shall be made until
actual exercise of any such rights of conversion or exchange.  Upon any such exercise, the aggregate
consideration received for such securities shall be deemed to be the
consideration received by the Borrower for the issuance of such securities plus
the additional minimum consideration, if any, to be received by the Borrower
upon the conversion or exchange thereof (the consideration in each case to be
determined in the same manner as provided in clauses (a) and (b) of this
Subsection (D)).

 

5

 

3.6.          Reservation
of Shares. During the period the conversion right exists, the Borrower will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of Common Stock upon the full conversion of
this Note.  The Borrower represents that
upon issuance, such shares will be duly and validly issued, fully paid and
non-assessable.  The Borrower agrees
that its issuance of this Note shall constitute full authority to its officers,
agents, and transfer agents who are charged with the duty of executing and
issuing stock certificates to execute and issue the necessary certificates for
shares of Common Stock upon the conversion of this Note.

 

3.7.          Registration
Rights.  The Holder has been granted
registration rights with respect to the shares of Common Stock issuable upon
conversion of this Note as more fully set forth in a Registration Rights
Agreement dated the date hereof.

 

ARTICLE IV
EVENTS OF DEFAULT

 

The occurrence of any of
the following events is an Event of Default (“Event of Default”):

 

4.1.          Failure
to Pay Principal, Interest or other Fees. 
The Borrower fails to pay when due any installment of principal,
interest or other fees hereon or on any other promissory note issued pursuant
to the Security Agreement, when due in accordance with the terms of such note.

 

4.2.          Breach
of Covenant.  The Borrower breaches
any covenant or other term or condition of this Note in any material respect
and such breach, if subject to cure, continues for a period of thirty (30) days
after the occurrence thereof.

 

4.3.          Breach
of Representations and Warranties. 
Any material representation or warranty of the Borrower made herein, or
the Security Agreement, or in any Ancillary Agreement shall be materially false
or misleading.

 

4.4.          Stop
Trade.  An SEC stop trade order or
Principal Market trading suspension of the Common Stock shall be in effect for
5 consecutive days or 5 days during a period of 10 consecutive days, excluding
in all cases a suspension of all trading on a Principal Market, provided that
the Borrower shall not have been able to cure such trading suspension within 30
days of the notice thereof or list the Common Stock on another Principal Market
within 60 days of such notice.  The
“Principal Market” for the Common Stock shall include the NASD OTC Bulletin
Board, NASDAQ SmallCap Market, NASDAQ National Market System, American Stock
Exchange, or New York Stock Exchange (whichever of the foregoing is at the time
the principal trading exchange or market for the Common Stock), or any
securities exchange or other securities market on which the Common Stock is
then being listed or traded.

 

4.5.          Default
Under Related Agreement.  The
occurrence of an Event of Default under and as defined in the Security
Agreement.

 

4.6           Failure
to Deliver Common Stock or Replacement Note.  The Borrower’s failure to timely deliver Common Stock to the
Holder pursuant to and in the form required by

 

6

 

this Note, and Section 9 of the Securities Purchase Agreement, or if
required, a replacement Note if such failure to timely deliver Common Stock
shall not be cured within two (2) days or such failure to deliver a replacement
Note is not cured within seven (7) Business Days.

 

4.7           Payment Grace Period.  The Borrower shall have a three (3) business
day grace period  to pay any monetary
amounts due under this Note or the Purchase Agreement or any Related Document,
after which grace period a default interest rate of five percent (5%) per annum
above the then applicable interest rate hereunder shall apply to the monetary
amounts due.

 

ARTICLE V
DEFAULT PAYMENTS

 

5.1.          Default
Payment.  If an Event of Default
occurs, the Holder, at its option, may elect, in addition to all rights and
remedies of Holder under the Security Agreement and all obligations of Borrower
under the Security Agreement, to require the Borrower to make a Default Payment
(“Default
Payment”).  The Default
Payment shall be the outstanding principal amount of the Note, plus accrued but
unpaid interest, all other fees then remaining unpaid, and all other amounts
payable hereunder.

 

5.2.          Default
Payment Date and Default Notice Period. 
The Default Payment shall be due and payable on the fifth business day
after the date written notice is sent from the Holder to the Borrower of an
Event of Default as defined in Article IV (“Default Payment Date”).  The period between the date of the written
notice from the Holder to the Borrower of an Event of Default and the Default
Payment Date shall be the “Default Notice Period.”  If during the Default Notice Period, the
Borrower cures the Event of Default, the Event of Default will no longer exist
and any rights the Holder had pertaining to the Event of Default will no longer
exist.  If the Event of Default is not
cured during the Default Notice Period, all amounts payable hereunder shall be
due and payable on the Default Payment Date, all without further demand,
presentment or notice, or grace period, all of which hereby are expressly
waived.

 

5.3.          
Default Interest Rate.  Following
the occurrence and during the continuance of an Event of Default, interest on
this Note shall automatically be increased to one and one half percent (1.5%)
per month, and all outstanding Obligations, including unpaid interest, shall
continue to accrue interest from the date of such Event of Default at such
interest rate applicable to such Obligations until such Event of Default is
cured or waived.

 

5.4.          Cumulative
Remedies.  The remedies under this
Note shall be cumulative.

 

ARTICLE VI
MISCELLANEOUS

 

6.1.          Failure
or Indulgence Not Waiver.  No
failure or delay on the part of the Holder hereof in the exercise of any power,
right or privilege hereunder shall operate as a waiver

 

7

 

thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.  All rights
and remedies existing hereunder are cumulative to, and not exclusive of, any
rights or remedies otherwise available.

 

6.2.          Notices.  Any notice herein required or permitted to
be given shall be in writing and provided in accordance with the terms of the
Security Agreement.

 

6.3.          
Amendment Provision.  The term
“Note” and all reference thereto, as used throughout this instrument, shall
mean this instrument as originally executed, or if later amended or
supplemented, then as so amended or supplemented, and any successor instrument
as it may be amended or supplemented.

 

6.4.          Assignability.  This Note shall be binding upon the Borrower
and its successors and assigns, and shall inure to the benefit of the Holder
and its successors and assigns, and may be assigned by the Holder in accordance
with the requirements of the Security Agreement.

 

6.5.          Cost
of Collection.  If default is made
in the payment of this Note, the Borrower shall pay the Holder hereof
reasonable costs of collection, including reasonable attorneys’ fees.

 

6.6.          Governing
Law.  This Note shall be governed by
and construed in accordance with the laws of the State of New York, without
regard to principles of conflicts of laws. 
Any action brought by either party against the other concerning the
transactions contemplated by this Agreement shall be brought only in the state
courts of New York or in the federal courts located in the state of New
York.  Both parties and the individual
signing this Note on behalf of the Borrower agree to submit to the jurisdiction
of such courts.  The prevailing party
shall be entitled to recover from the other party its reasonable attorney’s
fees and costs.  In the event that any
provision of this Note is invalid or unenforceable under any applicable statute
or rule of law, then such provision shall be deemed inoperative to the extent
that it may conflict therewith and shall be deemed modified to conform with
such statute or rule of law.  Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or unenforceability of any other provision of this
Note.  Nothing contained herein shall be
deemed or operate to preclude the Holder from bringing suit or taking other
legal action against the Borrower in any other jurisdiction to collect on the
Borrower’s obligations to Holder, to realize on any collateral or any other
security for such obligations, or to enforce a judgment or other court order in
favor of Holder.

 

6.7.          Maximum
Payments.  Nothing contained herein
shall be deemed to establish or require the payment of a rate of interest or
other charges in excess of the maximum permitted by applicable law.  In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum permitted by
such law, any payments in excess of such maximum shall be credited against
amounts owed by the Borrower to the Holder and thus refunded to the Borrower.

 

8

 

6.8.          Security
Interest.  The Holder of this Note
has been granted a security interest in certain assets of the Borrower more
fully described in a Security Agreement dated as of September 11, 2003.

 

6.9.          Construction.  Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that
the rule of construction that ambiguities are to be resolved against the
drafting party shall not be applied in the interpretation of this Note to favor
any party against the other.

 

[Balance of page
intentionally left blank; signature page follows.]

 

9

 

IN WITNESS WHEREOF,
the Borrower has caused this Secured Convertible Revolving Note to be signed in
its name effective as of this 11th day of September, 2003.

 

	
   

  	
  ELECTRIC CITY CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  John Mitola

  
	
   

  	
  Name:

  	
  John
  Mitola

  
	
   

  	
  Title:

  	
  Chief
  Executive Officer

  
	
   

  	
   

  
	
  WITNESS:

  	
   

  
	
   

  	
   

  
	
  /s/
  Jeffrey Mistarz

  	
   

  	
   

  
				

 

10

 

NOTICE
OF CONVERSION

 

(To be executed by the
Holder in order to convert the Note)

 

The undersigned hereby
elects to convert
$                   
of the principal and
$                  
of the interest due on the Secured Convertible Revolving Note issued by
Electric City Corp. on September 11, 2003 into Shares of Common Stock of
Electric City Corp. (the “Borrower”) according to the conditions set forth in
such Note, as of the date written below.

 

	
  Date of Conversion:

  	
   

  
	
   

  	
   

  
	
  Conversion Price:

  	
   

  
	
   

  	
   

  
	
  Shares To Be Delivered:

  	
   

  
	
   

  	
   

  
	
  Signature:

  	
   

  
	
   

  	
   

  
	
  Print Name:

  	
   

  
	
   

  	
   

  
	
  Address:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Holder  DWAC

  instructions

  	
   

  

 

11Exhibit
10.7

 

SECURITY
AGREEMENT

 

This Security Agreement is made as of September 11,
2003 by and between LAURUS MASTER FUND, LTD., a Cayman Islands corporation
(“Laurus”) and ELECTRIC CITY CORP., a Delaware corporation (the “Company”).

 

BACKGROUND

 

Company has requested that Laurus make advances
available to Company; and

 

Laurus has agreed to make such advances to Company on
the terms and conditions set forth in this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the mutual
covenants and undertakings and the terms and conditions contained herein, the
parties hereto agree as follows:

 

1.               (a)      General Definitions.  Capitalized terms used in this Agreement
shall have the meanings assigned to them in Annex A.

 

(b)         Accounting
Terms.  Any accounting terms used in
this Agreement which are not specifically defined shall have the meanings
customarily given them in accordance with GAAP and all financial computations
shall be computed, unless specifically provided herein, in accordance with GAAP
consistently applied.

 

(c)          Other
Terms.  All other terms used in
this Agreement and defined in the UCC, shall have the meaning given therein
unless otherwise defined herein.

 

(d)         Rules of
Construction.  All Schedules,
Addenda, Annexes and Exhibits hereto or expressly identified to this Agreement
are incorporated herein by reference and taken together with this Agreement
constitute but a single agreement.  The
words “herein”, hereof” and “hereunder” or other words of similar import refer
to this Agreement as a whole, including the Exhibits, Addenda, Annexes and
Schedules thereto, as the same may be from time to time amended, modified,
restated or supplemented, and not to any particular section, subsection or
clause contained in this Agreement. 
Wherever from the context it appears appropriate, each term stated in
either the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, the feminine and the neuter. 
The term “or” is not exclusive. 
The term “including” (or any form thereof) shall not be limiting or
exclusive.  All references to statutes
and related regulations shall include any amendments of same and any successor
statutes and regulations.  All
references in this Agreement or  in the
Schedules, Addenda, Annexes and Exhibits to this Agreement to sections,
schedules, disclosure schedules, exhibits, and attachments shall refer to the
corresponding sections, schedules, disclosure schedules, exhibits, and
attachments of or to this Agreement. 
All references to any instruments or agreements, including references to
any of this Agreement or 

 

 

the Ancillary Agreements shall include any and all modifications or
amendments thereto and any and all extensions or renewals thereof.

 

2.               Loans.

 

(a)          (i)  Subject to the terms and conditions set
forth herein and in the Ancillary Agreements, Laurus may make loans (the
“Loans”) to Company from time to time during the Term which, in the aggregate
at any time outstanding, will not exceed the lesser of (x) (I) the Capital
Availability Amount minus (II) such reserves as Laurus may reasonably in its
good faith judgment deem proper and necessary from time to time (the
“Reserves”) or (y) an amount equal to (I) the Accounts Availability minus (II)
the Reserves.  The amount derived at any
time from Section 2(a)(i)(y)(I) minus 2(a)(i)(y)(II) shall be referred to as
the “Formula Amount”.  Company shall
execute and deliver to Laurus on the Closing Date a Minimum Borrowing Note and
a Secured Convertible Revolving Note evidencing the Loans funded on the Closing
Date.  From time to time thereafter,
Company shall execute and deliver to Laurus immediately prior to the final
funding of each additional $250,000 tranche of Loans (calculated on a
cumulative basis for each such tranche) an additional Minimum Borrowing Note
evidencing such tranche, in the form of Note delivered by Company to Laurus on
the Closing Date.

 

(ii)                             Notwithstanding
the limitations set forth above, if requested by the Company, Laurus retains
the right to lend to Company from time to time such amounts in excess of such
limitations as Laurus may determine in its sole discretion.

 

(iii)                          Company
acknowledges that the exercise of Laurus’ discretionary rights hereunder may
result during the Term in one or more increases or decreases in the advance
percentages used in determining Accounts Availability and Company hereby
consents to any such increases or decreases which may limit or restrict
advances requested by Company.

 

(iv)                         If
Company does not pay any interest, fees, costs or charges to Laurus when due,
Company shall thereby be deemed to have requested, and Laurus is hereby
authorized at its discretion to make and charge to Company’s account, a Loan to
Company as of such date in an amount equal to such unpaid interest, fees, costs
or charges.

 

(v)                            If
Company at any time fails to perform or observe any of the covenants contained
in this Agreement or any Ancillary Agreement, Laurus may, but need not, perform
or observe such covenant on behalf and in the name, place and stead of Company
(or, at Laurus’ option, in Laurus’ name) and may, but need not, take any and
all other actions which Laurus may deem necessary to cure or correct such
failure (including the payment of taxes, the satisfaction of Liens, the
performance of obligations owed to Account Debtors, lessors or other obligors,
the procurement and maintenance of insurance, the execution of assignments,
security agreements and financing statements, and the endorsement of
instruments).  The amount of all monies
expended and all costs and expenses (including attorneys’ fees and legal
expenses) incurred by Laurus in connection with or as a result of the
performance or observance of such agreements or the taking of such action by
Laurus shall be charged to Company’s account as a Loan and added to the
Obligations.  To facilitate Laurus’
performance or observance of such covenants of Company, Company hereby
irrevocably appoints Laurus, or Laurus’ delegate, acting alone, as Company’s
attorney in fact (which appointment is coupled with an interest) with

 

2

 

the right (but not the duty) from time to time to create, prepare,
complete, execute, deliver, endorse or file in the name and on behalf of
Company any and all instruments, documents, assignments, security agreements,
financing statements, applications for insurance and other agreements and
writings required to be obtained, executed delivered or endorsed by Company.

 

(vi)                         Laurus
will account to Company monthly with a statement of all Loans and other
advances, charges and payments made pursuant to this Agreement, and such
account rendered by Laurus shall be deemed final, binding and conclusive unless
Laurus is notified by Company in writing to the contrary within thirty (30)
days of the date each account was rendered specifying the item or items to
which objection is made.

 

(vii)                      During the
Term, Company may borrow and prepay Loans in excess of the Minimum Borrowing
Amount, all in accordance with the terms and conditions hereof.

 

(viii)                   If any Eligible
Account is not paid by the Account Debtor within one hundred and twenty (120)
days after the date that such Eligible Account was invoiced or if any Account
Debtor asserts a deduction, dispute, contingency, set-off, or counterclaim with
respect to any Eligible Account, (a “Delinquent Account”), the Company shall
promptly, and in any event within three business days, (i) reimburse Laurus for
the amount of the Revolving Credit Advance made with respect to such Delinquent
Account, or (ii) replace such Delinquent Account with an otherwise Eligible
Account.  If the Company shall fail to
timely comply with the immediately preceding sentence, then an amount equal to
one hundred and one-half of one percent (100.50%) of the Loan made with respect
to such Delinquent Account shall be immediately due and payable to Laurus
(which such amount shall repay the Loan made with respect to such Delinquent
Account) .

 

(b)         Following the occurrence
of an Event of Default which continues to exist, Laurus may, at its option,
elect to convert the credit facility contemplated hereby to an accounts
receivable purchase facility.  Upon such
election by Laurus (subsequent notice of which Laurus shall provide to
Company), Company shall be deemed to hereby have sold, assigned, transferred,
conveyed and delivered to Laurus, and Laurus shall be deemed to have purchased
and received from Company, all right, title and interest of Company in and to
all Accounts which shall at any time constitute Eligible Accounts (the
“Receivables Purchase”).  All
outstanding Loans hereunder shall be deemed obligations under such accounts
receivable purchase facility.  The
conversion to an accounts receivable purchase facility in accordance with the
terms hereof shall not be deemed an exercise by Laurus of its secured creditor
rights under Article 9 of the UCC. 
Immediately following Laurus’ request, Company shall execute all such
further documentation as may be required by Laurus to more fully set forth the
accounts receivable purchase facility herein contemplated, including, without
limitation, Laurus’ standard form of accounts receivable purchase agreement and
account debtor notification letters, but Company’s failure to enter into any
such documentation shall not impair or affect the Receivables Purchase in any
manner whatsoever.

 

(c)          Minimum Borrowing
Amount.  After a registration
statement registering the Registrable Securities has been declared effective by
the SEC, conversions all or a portion of the Minimum Borrowing Amount into the
Common Stock of the Company may be initiated as set forth in the Note. From and
after the date upon which any outstanding principal of the

 

3

 

Minimum Borrowing Amount (as evidenced by the first Minimum Borrowing
Note) is converted into Common Stock (the “First Conversion Date”), (i)
corresponding amounts of all outstanding Loans (not attributable to the then
outstanding Minimum Borrowing Amount) existing on or made after the First Conversion
Date will be aggregated until they reach the sum of $250,000 and (ii) the
Company will issue a new (serialized) Minimum Borrowing Note to Laurus in
respect of such $250,000 aggregation, and (iii) the Company shall prepare and
file a subsequent registration statement with the SEC to register such
subsequent Minimum Borrowing Note as set forth in the Registration Rights
Agreement.

 

3.               Repayment
of the Loans. Company (a) may prepay the Obligations in excess of the
Minimum Borrowing Amount from time to time in accordance with the terms and
provisions of the Notes (and Section 16 hereof if such prepayment is due to a
termination of this Agreement); and (b) shall repay on the expiration of the
Term (i) the then aggregate outstanding principal balance of the Loans made by
Laurus to Company hereunder together with accrued and unpaid interest, fees and
charges and (ii) all other amounts owed Laurus under this Agreement and the
Ancillary Agreements.  Any payments of
principal, interest, fees or any other amounts payable hereunder or under any
Ancillary Agreement shall be made prior to 12:00 noon (New York time) on the
due date thereof in immediately available funds.

 

4.               Procedure for Loans.  Company may by written notice request a
borrowing of Loans prior to 3:00 p.m. 
(New York time) on the Business Day of its request to incur, on that
day, a Loan.  Together with each request
for a Loan (or at such other intervals as Laurus may request), Company shall
deliver to Laurus a Borrowing Base Certificate in the form of Exhibit A, which
shall be certified as true and correct by the Chief Executive Officer or Chief
Financial Officer of Company together with all supporting documentation
relating thereto.  All Loans shall be
disbursed from whichever office or other place Laurus may designate from time
to time and shall be charged to Company’s account on Laurus’ books.  The proceeds of each Loan made by Laurus
shall be made available to Company on the Business Day following the Business
Day so requested in accordance with the terms of this Section 4 by way of
credit to Company’s operating account maintained with such bank as Company
designated to Laurus.  Any and all
Obligations due and owing hereunder may be charged to Company’s account and
shall constitute Loans.

 

5.               Interest and Payments.

 

(a)          Interest.

 

(i)                                Except
as modified by Section 5(a)(iii) below, Company shall pay interest at the
Contract Rate on the unpaid principal balance of each Loan until such time as
such Loan is collected in full in good funds in dollars of the United States of
America.

 

(ii)                             Interest
and payments shall be computed on the basis of actual days elapsed in a year of
360 days.  At Laurus’ option, Laurus may
charge Company account for said interest.

 

(iii)                          Effective
upon the occurrence of any Event of Default and for so long as any Event of
Default shall be continuing, the Contract Rate shall automatically be 

 

4

 

increased to one and one-half percent (1.5%) per month (such increased
rate, the “Default Rate”), and all outstanding Obligations, including unpaid
interest, shall continue to accrue interest from the date of such Event of
Default at the Default Rate applicable to such Obligations.

 

(iv)                         In no
event shall the aggregate interest payable hereunder exceed the maximum rate
permitted under any applicable law or regulation, as in effect from time to
time (the “Maximum Legal Rate”) and if any provision of this Agreement or any
Ancillary Agreement is in contravention of any such law or regulation, interest
payable under this Agreement and each Ancillary Agreement shall be computed on
the basis of the Maximum Legal Rate (so that such interest will not exceed the
Maximum Legal Rate).

 

(v)                            Company
shall pay principal, interest and all other amounts payable hereunder, or under
any Ancillary Agreement, without any deduction whatsoever, including any
deduction for any set-off or counterclaim.

 

(b)         Payments.

 

(i)                                Closing/Annual
Payments.  Upon execution of this
Agreement by Company and Laurus, Company shall pay to Laurus Capital
Management, LLC a closing payment in an amount equal to five percent (5%) of
the Capital Availability Amount.  During
the Term, on each anniversary of the Closing Date, Company shall pay to Laurus
Capital Management, LLC an annual payment equal to one percent (1.0%) of the
Capital Availability Amount.  Such
payments shall be deemed fully earned on the Closing Date and shall not be
subject to rebate or proration for any reason.

 

(ii)                             Collateral
Management Payment.  For
underwriting, processing and supervising Company’s Accounts, Company shall pay
Laurus a monthly collateral management payment in an amount equal to 0.35% of
the average outstanding Loans during the immediately preceding month.  Such payment shall be payable on the first
day of each month in arrears by a charge by Laurus to Company’s account.  Notwithstanding the foregoing, any unpaid
fee shall be immediately due and payable upon termination of this Agreement.

 

(iii)                          Unused
Line Payment.  If, for any month,
the average outstanding Loans (the “Average Loan Amount”) do not equal the
Capital Availability Amount, Company shall pay to Laurus at the end of such
month a payment (calculated on a per annum basis) in an amount equal to one
half percent (0.5%) of the amount by which the Capital Availability Amount
exceeds the Average Loan Amount. 
Notwithstanding the foregoing, any unpaid fee shall be immediately due
and payable upon termination of this Agreement.

 

(iv)                         Overadvance
Payment.  Without affecting Laurus’
rights hereunder in the event the Loans exceed the amounts permitted by Section
2 (“Overadvances”), in the event an Overadvance occurs or is made by Laurus,
all such Overadvances shall bear interest at a monthly rate equal to 1.5% of
the amount of such Overadvances for each month or portion thereof as such
amounts shall be outstanding.

 

(v)                            Financial
Information Default.  Without
affecting Laurus’ other rights and remedies, in the event Company fails to
deliver the financial information required by 

 

5

 

Section 11 on or before the date required by this Agreement, Company
shall pay Laurus a fee in the amount of $500.00 per week (or portion thereof)
for each such failure until such failure is cured to Laurus’ satisfaction or
waived in writing by Laurus.  Such fee
shall be charged to Company’s account upon the occurrence of each such failure.

 

6.               Security Interest.

 

(a)          To secure the prompt
payment to Laurus of the Obligations, Company hereby assigns, pledges and
grants to Laurus a continuing security interest in and Lien upon all of the
Collateral.  All of Company’s Books and
Records relating to the Collateral shall, until delivered to or removed by
Laurus, be kept by Company in trust for Laurus until all Obligations have been
paid in full.  Each confirmatory
assignment schedule or other form of assignment hereafter executed by Company
shall be deemed to include the foregoing grant, whether or not the same appears
therein.

 

(b)         Company hereby (i)
authorizes Laurus to file any financing statements, continuation statements or
amendments thereto that (x) indicate the Collateral (1) as all assets of
Company other than the Premises (or any portion of Company’s assets other than
the Premises) or words of similar effect, regardless of whether any particular
asset comprised in the Collateral falls within the scope of Article 9 of the
UCC of such jurisdiction, or (2) as being of an equal or lesser scope or with
greater detail, and (y) contain any other information required by Part 5 of
Article 9 of the UCC for the sufficiency or filing office acceptance of any
financing statement, continuation statement or amendment and (ii) ratifies its
authorization for Laurus to have filed any initial financial statements, or
amendments thereto if filed prior to the date hereof.  Company acknowledges that it is not authorized to file any
financing statement or amendment or termination statement with respect to any
financing statement without the prior written consent of Laurus and agrees that
it will not do so without the prior written consent of Laurus, subject to
Company’s rights under Section 9-509(d)(2) of the UCC.

 

(c)          Company hereby grants to
Laurus an irrevocable, non-exclusive license (exercisable upon the termination
of this Agreement due to an occurrence and during the continuance of an Event
of Default without payment of royalty or other compensation to Company) to use,
transfer, license or sublicense any Intellectual Property now owned, licensed
to, or hereafter acquired by Company, and wherever the same may be located, and
including in such license access to all media in which any of the licensed
items may be recorded or stored and to all computer and automatic machinery
software and programs used for the compilation or printout thereof, and
represents, promises and agrees that any such license or sublicense is not and
will not be in conflict with the contractual or commercial rights of any third
Person; provided, that such license will terminate on the termination of this
Agreement and the payment in full of all Obligations.

 

7.               Representations, Warranties and Covenants
Concerning the Collateral.  Company
represents, warrants (each of which such representations and warranties shall
be deemed repeated upon the making of each request for a Loan and made as of the
time of each and every Loan hereunder) and covenants as follows:

 

6

 

(a)          Except with respect to
the Company’s rights in the Reverberi Patent, all of the Collateral (i) is
owned by Company free and clear of all Liens (including any claims of
infringement) except those in Laurus’ favor and Permitted Liens and (ii) is not
subject to any agreement prohibiting the granting of a Lien or requiring notice
of or consent to the granting of a Lien.

 

(b)         Company shall not
encumber, mortgage, pledge, assign or grant any Lien in any Collateral of
Company or any of Company’s other assets to anyone other than Laurus and except
for Permitted Liens.

 

(c)          The Liens granted
pursuant to this Agreement, upon completion of the filings and other actions
listed on Exhibit 7(c) (which, in the case of all filings and other
documents referred to in said Exhibit, have been delivered to Laurus in duly
executed form) constitute valid perfected security interests in all of the
Collateral in favor of Laurus as security for the prompt and complete payment
and performance of the Obligations, enforceable in accordance with the terms
hereof against any and all creditors of and any purchasers from Company and
such security interest is prior to all other Liens in existence on the date
hereof.

 

(d)         No effective security
agreement, mortgage, deed of trust, financing statement, equivalent security or
Lien instrument or continuation statement covering all or any part of the
Collateral is or will be on file or of record in any public office, except
those relating to Permitted Liens.

 

(e)          Company shall not
dispose of any 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 Equipment which is subject to
Laurus’ first priority security interest or are used to repay Loans 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 Laurus
to be held as cash collateral for the Obligations.

 

(f)            Company shall defend
the right, title and interest of Laurus in and to the Collateral against the
claims and demands of all Persons whomsoever, and take such actions, including
(i) all actions necessary to grant Laurus “control” of any Investment Property,
Deposit Accounts, Letter-of-Credit Rights or electronic Chattel Paper owned by
Company, with any agreements establishing control to be in form and substance
satisfactory to Laurus, (ii) the prompt (but in no event later than five (5)
Business Days following Laurus’ request therefor) delivery to Laurus of all
original Instruments, Chattel Paper, negotiable Documents and certificated
Stock owned by the Company (in each case, accompanied by stock powers, allonges
or other instruments of transfer executed in blank), (iii) notification of
Laurus’ interest in Collateral at Laurus’ request, and (iv) the institution of
litigation against third parties as shall be prudent in order to protect and
preserve Company’s and Laurus’ respective and several interests in the
Collateral.

 

7

 

(g)         Company shall promptly,
and in any event within ten (10) 
Business Days after the same is acquired by it, notify Laurus of any
commercial tort claim (as defined in the UCC) acquired by it and unless
otherwise consented by Laurus, Company shall enter into a supplement to this
Agreement granting to Laurus a Lien in such commercial tort claim.

 

(h)         Company shall place
notations upon its Books and Records and any financial statement of Company to
disclose Laurus’ Lien in the Collateral.

 

(i)             If Company retains
possession of any Chattel Paper or Instrument with Laurus’ consent, upon
Laurus’ request such Chattel Paper and Instruments shall be marked with the
following legend:  “This writing and
obligations evidenced or secured hereby are subject to the security interest of
Laurus Master Fund, Ltd.”

 

(j)             Company shall perform
in a reasonable time all other steps requested by Laurus to create and maintain
in Laurus’ favor a valid perfected first Lien in all Collateral subject only to
Permitted Liens.

 

(k)          Company shall notify
Laurus promptly and in any event within three (3) Business Days after obtaining
knowledge thereof (i) of any event or circumstance that to Company’s knowledge
would cause Laurus to consider any then existing Account as no longer
constituting an Eligible Account; (ii) of any material delay in Company’s
performance of any of its obligations to any Account Debtor; (iii) of any
assertion by any Account Debtor of any material claims, offsets or
counterclaims; (iv) of any allowances, credits and/or monies granted by Company
to any Account Debtor; (v) of all material adverse information relating to the
financial condition of an Account Debtor; (vi) of any material return of goods;
and (vii) of any loss, damage or destruction of any of the Collateral.

 

(l)             All Eligible Accounts
(i) except in the case of Accounts of Great Lakes, which are billed on a construction
completion basis, represent complete bona fide transactions which require no
further act under any circumstances on Company’s part to make such Accounts
payable by the Account Debtors, (ii) are not subject to any present, future
contingent offsets or counterclaims, and (iii) do not represent bill and hold
sales, consignment sales, guaranteed sales, sale or return or other similar
understandings or obligations of any Affiliate or Subsidiary of Company.  Company has not made, and will not make any
agreement with any Account Debtor for any extension of time for the payment of
any Account, any compromise or settlement for less than the full amount
thereof, any release of any Account Debtor from liability therefor, or any
deduction therefrom except a discount or allowance for prompt or early payment
allowed by Company in the ordinary course of its business consistent with
historical practice and as previously disclosed to Laurus in writing.

 

(m)        Company shall keep and
maintain its Equipment in good operating condition, except for ordinary wear
and tear, and shall make all necessary repairs and replacements thereof so that
the value and operating efficiency shall at all times be maintained and
preserved.  Company shall not permit any
such items to become a Fixture to real estate (excluding existing Fixtures at
the Premises) or accessions to other personal property.

 

8

 

(n)         Company shall maintain
and keep all of its Books and Records concerning the Collateral at Company’s
executive offices listed in Exhibit 12(d).

 

(o)         Company shall maintain
and keep the tangible Collateral at the addresses listed in Exhibit 12(d),
provided, that Company may change such locations or open a new location,
provided that Company provides Laurus at least thirty (30) days prior written
notice of such changes or new location and (ii) prior to such change or opening
of a new location where Collateral having a value of more than $50,000 will be
located, Company executes and delivers to Laurus such agreements as Laurus may
request, including landlord agreements, mortgagee agreements and warehouse
agreements, each in form and substance satisfactory to Laurus.

 

(p)         Exhibit 7(p) lists
all banks and other financial institutions at which Company maintains deposits
and/or other accounts, and such Exhibit correctly identifies the name, address
and telephone number of each such depository, the name in which the account is
held, a description of the purpose of the account, and the complete account number.  The 
Company shall not establish any depository or other bank account of any
with any financial institution (other than the accounts set forth on Exhibit
7(p)) without Laurus’ prior written consent.

 

8.               Payment of Accounts.

 

(a)          Company will irrevocably
direct all of its present and future Account Debtors and other Persons
obligated to make payments constituting Collateral to make such payments
directly to the lockbox maintained by Company (the “Lockbox”) with American
Chartered Bank (the “Lockbox Bank”) pursuant to the terms of the Multi Party
Blocked Account Agreement  dated
September 12, 2003 or such other financial institution accepted by Laurus in
writing as may be selected by Company. 
On or prior to the Closing Date, Company shall and shall cause the
Lockbox Bank to enter into all such documentation acceptable to Laurus pursuant
to which, among other things, the Lockbox Bank agrees to:  (a) sweep the Lockbox on a daily basis and
deposit all checks received therein to an account designated by the Company and
(b) comply only with the instructions or other directions of Laurus concerning
the Lockbox upon the occurrence of an Event of Default.  All of Company’s invoices, account
statements and other written or oral communications directing, instructing,
demanding or requesting payment of any Account of Company or any other amount
constituting Collateral shall conspicuously direct that all payments be made to
the Lockbox or, while any Event of Default exists and is continuing such other
address as Laurus may direct in writing. 
If, notwithstanding the instructions to Account Debtors, Company
receives any payments, Company shall immediately remit such payments to the
Lockbox Bank  in their original form
with all necessary endorsements.  Until
so remitted, Company shall hold all such payments in trust for and as the
property of Laurus and shall not commingle such payments with any of its other
funds or property.

 

(b)         At Laurus’ election,
following the occurrence of an Event of Default which is continuing, Laurus may
notify Company’s Account Debtors of Laurus’ security interest in the Accounts,
collect them directly and charge the collection costs and expenses thereof to
Company’s account.

 

9

 

9.               Collection
and Maintenance of Collateral.

 

(a)          Laurus may verify
Company’s Accounts from time to time, but not more often than once every three
(3) months unless an Event of Default has occurred and is continuing, utilizing
an audit control company or any other agent of Laurus.

 

(b)         Proceeds of Accounts
received by Laurus will be deemed received on the Business Day after Laurus’
receipt of such proceeds in good funds in dollars of the United States of
America in Laurus’ account.  Any amount
received by Laurus after 12:00 noon (New York time) on any Business Day shall
be deemed received on the next Business Day.

 

(c)          Following the occurrence
and during the continuance of an Event of Default, as Laurus receives the
proceeds of Accounts, Laurus, at its option, may (a) apply such proceeds to the
Obligations in such order as Laurus shall elect, (b) hold such proceeds as cash
collateral for the Obligations and Company hereby grants to Laurus a security
interest in such cash collateral amounts as security for the Obligations and/or
(c) do any combination of the foregoing.

 

10.         Inspections
and Appraisals.  At all times during
normal business hours, Laurus, and/or any agent of Laurus shall have the right
to (a) have access to, visit, inspect, review, evaluate and make physical verification
and appraisals of Company’s properties and the Collateral, (b) inspect, audit
and copy (or take originals if necessary) and make extracts from Company’s
Books and Records, including management letters prepared by independent
accountants, and (c) discuss with Company’s principal officers, and independent
accountants, Company’s business, assets, liabilities, financial condition,
results of operations and business prospects. 
Company will deliver to Laurus any instrument necessary for Laurus to
obtain records from any service bureau maintaining records for Company.  If any internally prepared financial
information, including that required under this Section is unsatisfactory in
any manner to Laurus, Laurus may request that the Accountants review the same.

 

11.         Financial Reporting.  Company will deliver, or cause to be
delivered, to Laurus each of the following, which shall be in form and detail
acceptable to Laurus:

 

(a)          As soon as available,
and in any event within ninety (90) days after the end of each fiscal year of
Company, Company’s audited financial statements with a report of independent
certified public accountants of recognized standing selected by Company and
acceptable to Laurus (the “Accountants”), which annual financial statements
shall include Company’s balance sheet as at the end of such fiscal year and the
related statements of Company’s income, retained earnings and cash flows for
the fiscal year then ended, prepared, if Laurus so requests, on a consolidating
and consolidated basis to include all Subsidiaries and Affiliates, all in
reasonable detail and prepared in accordance with GAAP, together with (i) if
and when available, copies of any management letters prepared by such
accountants; and (ii) a certificate of Company’s President, Chief Executive
Officer or Chief Financial Officer stating that such financial statements have
been prepared in accordance with GAAP and whether or not such officer has
knowledge of the occurrence of any Default or Event of Default hereunder and,
if so, stating in reasonable detail the facts with respect thereto;

 

10

 

(b)         As soon as available and
in any event within forty five (45) days after the end of each quarter, an
unaudited/internal balance sheet and statements of income, retained earnings
and cash flows of Company as at the end of and for such quarter and for the
year to date period then ended, prepared, if Laurus so requests, on a
consolidating and consolidated basis to include all Subsidiaries and Affiliates,
in reasonable detail and stating in comparative form the figures for the
corresponding date and periods in the previous year, all prepared in accordance
with GAAP, subject to year-end adjustments and accompanied by a certificate of
Company’s President, Chief Executive Officer or Chief Financial Officer,
stating (i) that such financial statements have been prepared in accordance
with GAAP, subject to year-end audit adjustments, and (ii) whether or not such
officer has knowledge of the occurrence of any Default or Event of Default
hereunder not theretofore reported and remedied and, if so, stating in
reasonable detail the facts with respect thereto;

 

(c)          Within thirty (30) days
after the end of each month (or more frequently if Laurus so requests), agings of
Company’s Accounts, unaudited trial balances and their accounts payable and a
calculation of Company’s Accounts and Eligible Accounts and within thirty (30)
days after the end of each fiscal quarter an Inventory listing as at the end of
such quarter or shorter time period, provided, however, that if Laurus shall
request the foregoing information more often than as set forth in the
immediately preceding clause, the Company shall have thirty (30) days from each
such request to comply with Laurus’ demand; and

 

(d)         Promptly after (i) the
filing thereof, copies of Company’s most recent registration statements and
annual, quarterly, monthly or other regular reports which Company files with
the Securities and Exchange Commission (the “SEC”), and (ii) the issuance
thereof, copies of such financial statements, reports and proxy statements as
Company shall send to its stockholders.

 

12.         Additional Representations and
Warranties.  Company represents
and warrants (each of which such representations and warranties shall be deemed
repeated upon the making of a request for a Loan and made as of the time of
each Loan made hereunder), as follows:

 

(a)          Company is a corporation
duly incorporated and validly existing under the laws of the jurisdiction of
its incorporation and duly qualified and in good standing in every other state
or jurisdiction in which the nature of Company’s business requires such
qualification.

 

(b)         The execution, delivery
and performance of this Agreement and the Ancillary Agreements (i) have been
duly authorized, (ii) are not in contravention of Company’s certificate of
incorporation, by-laws or of any indenture, agreement or undertaking to which
Company is a party or by which Company is bound and (iii) are within Company’s
corporate powers.

 

(c)          This Agreement and the
Ancillary Agreements executed and delivered by Company are Company’s legal,
valid and binding obligations, enforceable in accordance with their terms.

 

(d)         Exhibit 12(d) sets
forth Company’s name as it appears in official filing in the state of its
incorporation, the type of entity of Company, the organizational identification
number 

 

11

 

issued by Company’s state of incorporation or a statement that no such
number has been issued, Company’s state of incorporation, and the location of
Company’s chief executive office, corporate offices, warehouses, other
locations of Collateral and locations where records with respect to Collateral
are kept (including in each case the county of such locations) and, except as
set forth in such Exhibit 12(d), such locations have not changed during
the preceding twelve months.  As of the
Closing Date, during the prior five years, except as set forth in Exhibit
12(d), Company has not been known as or conducted business in any other
name (including trade names).  Company
has only one state of incorporation.

 

(e)          Based upon the Employee
Retirement Income Security Act of 1974 (“ERISA”), and the regulations and
published interpretations thereunder: (i) Company has not engaged in any
Prohibited Transactions as defined in Section 406 of ERISA and Section 4975 of
the Internal Revenue Code, as amended; (ii) Company has met all applicable
minimum funding requirements under Section 302 of ERISA in respect of its
plans; (iii) Company has no knowledge of any event or occurrence which would
cause the Pension Benefit Guaranty Corporation to institute proceedings under
Title IV of ERISA to terminate any employee benefit plan(s); (iv) Company has
no fiduciary responsibility for investments with respect to any plan existing
for the benefit of persons other than Company’s employees; and (v) except as
disclosed in Exhibit 12(e) attached hereto, Company has not withdrawn,
completely or partially, from any multi-employer pension plan so as to incur
liability under the Multiemployer Pension Plan Amendments Act of 1980.

 

(f)            There is no pending or
threatened litigation, court order, judgment, writ, suit, action or proceeding
which could reasonably be expected to have a Material Adverse Effect.

 

(g)         All balance sheets and
income statements which have been delivered to Laurus fairly, accurately and
properly state Company’s financial condition on a basis consistent with that of
previous financial statements and except as reflected in such financial
statements there has been no material adverse change in Company’s financial
condition as reflected in such statements since the balance sheet date of the
statements last delivered to Laurus and such statements do not fail to disclose
any fact or facts which might have a Material Adverse Effect on Company’s
financial condition.

 

(h)         Company possesses or has
licenses to use all of the Intellectual Property necessary to conduct its
business.  There has been no assertion
or claim of violation or infringement with respect to any Intellectual
Property. Exhibit 12(h) describes all Intellectual Property of Company.

 

(i)             Neither this
Agreement, the exhibits and schedules hereto, the Ancillary Agreements nor any
other document delivered by Company to Laurus or its attorneys or agents in
connection herewith or therewith or with the transactions contemplated hereby
or thereby, contain any untrue statement of a material fact nor omit to state a
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances in which they are made, not
misleading.  The issuance of the Notes
and the Warrants and the shares of common stock issued upon conversion of the
Notes and exercise of the Warrants will be exempt from the registration
requirements of the Securities Act of 1933, as amended (the “Securities Act”),
and will have been registered or qualified (or are exempt from registration and
qualification) under

 

12

 

the registration, permit or qualification requirements of all
applicable state securities laws. 
Neither Company nor any of its Affiliates, nor any person acting on its
or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Securities Act) in
connection with the offer or sale of the Securities.

 

(j)             The common stock of
the Company is registered pursuant to Section 12(b) or 12(g) of the Exchange
Act and, except with respect to certain matters set forth on Exhibit 12(j)
attached hereto, the Company has timely filed all proxy statements, reports,
schedules, forms, statements and other documents required to be filed by it
under the Exchange Act.  The Company has
filed (i) its Annual Report on Form 10-K for the fiscal year ended December 31,
2002 and (ii) its Quarterly Report on Form 10-Q for the fiscal quarters ended
March 31, 2003 and June 30, 2003 (collectively, the “SEC Reports”).  Each SEC Report was, at the time of its
filing, in substantial compliance with the requirements of its respective form
and none of the SEC Reports, nor the financial statements (and the notes
thereto) included in the SEC Reports, as of their respective filing dates,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.  The financial statements of
the Company included in the SEC Reports comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the Commission or other applicable rules and regulations with
respect thereto.  Such financial statements
have been prepared in accordance with generally accepted accounting principles
(“GAAP”) applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed) and fairly present in all material
respects the financial condition, the results of operations and the cash flows
of the Company and its subsidiaries, on a consolidated basis, as of, and for, the
periods presented in each such SEC Report.

 

(k)          The common stock of the
Company is listed for trading on the American Stock Exchange and satisfies all
requirements for the continuation of such listing.  The Company has not received any notice that its common stock
will be delisted from the American Stock Exchange or that the common stock does
not meet all requirements for the continuation of such listing.

 

(l)             Neither the Company,
nor any of its Affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales of any security or solicited
any offers to buy any security (other than a concurrent offering to Laurus
under a Note Purchase Agreement between the Company and Laurus dated as of
September 11, 2003) under circumstances that would cause the offering of the
Securities pursuant to this Agreement and the Ancillary Agreements to be
integrated with prior offerings by the Company for purposes of the Securities
Act which would prevent the Company from selling the Securities pursuant to
Rule 506 under the Securities Act, or any applicable exchange-related
stockholder approval provisions, nor will the Company or any of its Affiliates
or Subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings (other than such concurrent
offering to Laurus).

 

13

 

(m)       The Securities are all
restricted securities under the Securities Act as of the date of this
Agreement.  The Company will not issue
any stop transfer order or other order impeding the sale and delivery of any of
the Securities at such time as such Securities are registered for public sale
or an exemption from registration is available, except as required by federal
or state securities laws.

 

(n)         The Company understands
the nature of the Securities issuable under the Ancillary Agreements and
recognizes that the issuance of such Securities may have a potential dilutive
effect.  The Company specifically acknowledges
that its obligation to issue the Securities is binding upon the Company and
enforceable regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company.

 

(o)         Except for agreements
made in the ordinary course of business, there is no agreement that has not
been filed with the Commission as an exhibit to a registration statement or to
a form required to be filed by the Company under the Exchange Act, the breach
of which could reasonably be expected to have a Material Adverse Effect or
would prohibit or otherwise interfere with the ability of the Company to enter
into and perform any of its obligations under this Agreement the Registration
Rights Agreement executed by Company in favor of Laurus in any material
respect.

 

13.         Covenants.  Company covenants as follows:

 

(a)          Company will not,
without the prior written consent of Laurus, change (i) its name as it appears
in the official filings in the state of its incorporation or formation, (ii)
the type of legal entity it is, (iii) its organization identification number,
if any, issued by its state of incorporation, (iv) its state of incorporation
or (v) amend its certificate of incorporation, by-laws or other organizational
document.

 

(b)         The operation of Company’s
business is and will continue to be in compliance in all material respects with
all applicable federal, state and local laws, rules and ordinances, including
to all laws, rules, regulations and orders relating to taxes, payment and
withholding of payroll taxes, employer and employee contributions and similar
items, securities, employee retirement and welfare benefits, employee health
safety and environmental matters.

 

(c)          Company will pay or
discharge when due all taxes, assessments and governmental charges or levies
imposed upon Company or any of the Collateral unless such amounts are being
diligently contested in good faith by appropriate proceedings provided that (i)
adequate reserves with respect thereto are maintained on the books of Company
in conformity with GAAP and (ii) the related Lien shall have no effect on the
priority of the Liens in favor of Laurus or the value of the assets in which
Laurus has a Lien.

 

(d)         Company will promptly
inform Laurus in writing of: (i) the commencement of all proceedings and
investigations by or before and/or the receipt of any notices from, any
governmental or nongovernmental body and all actions and proceedings in any
court or before any arbitrator against or in any way concerning any event which
could reasonably be expected to have singly or in the aggregate, a Material
Adverse Effect; (ii) any amendment of Company’s certificate of incorporation,
by-laws or other organizational document; (iii) any change which

 

14

 

has had or could reasonably be expected to have a Material Adverse
Effect; (iv) any Event of Default or Default; (v) any default or any event
which with the passage of time or giving of notice or both would constitute a
default under any agreement for the payment of money to which Company is a
party or by which Company or any of Company’s properties may be bound the
breach of which would have a Material Adverse Effect and (vi) any change in
Company’s name or any other name used in its business.

 

(e)          Other than with respect
to the Mortgage Indebtedness, which is secured by the Premises and any
Permitted Refinancing thereof, Company will not (i) create, incur, assume or
suffer to exist any indebtedness (exclusive of trade debt) whether secured or
unsecured other than Company’s indebtedness to Laurus and as set forth on Exhibit
13(e)(i) attached hereto and made a part hereof; (ii) cancel any debt owing
to it in excess of $50,000 in the aggregate during any 12 month period; (iii)
assume, guarantee, endorse or otherwise become directly or contingently liable
in connection with any obligations of any other Person, except the endorsement
of negotiable instruments by a Company for deposit or collection or similar
transactions in the ordinary course of business; (iv) directly or indirectly
declare, pay or make any dividend or distribution on any class of its Stock
other than to pay dividends on shares of its outstanding Preferred Stock, (v)
apply any of its funds, property or assets to the purchase, redemption or other
retirement of any Stock of the Company except as required under the terms of
the Company’s outstanding Preferred Stock; (vi) other than in connection with a
Permitted Acquisition, purchase or hold beneficially any Stock or other
securities or evidences of indebtedness of, make or permit to exist any loans
or advances to, or make any investment or acquire any interest whatsoever in,
any other Person, including any partnership or joint venture, except (x) travel
advances, (y) loans to Company’s officers and employees not exceeding at any
one time an aggregate of $10,000, and (z) existing Subsidiaries of the Company;
(vii) create or permit to exist any Subsidiary, other than any Subsidiary in
existence on the date hereof and listed in Exhibit 13(e)(ii) unless such
new Subsidiary is designated by Laurus as either a co-borrower or guarantor
hereunder and such Subsidiary shall have entered into all such documentation
required by Laurus to grant to Laurus a first priority perfected security
interest in such Subsidiary’s assets to secure the Obligations; (viii) directly
or indirectly, prepay any indebtedness (other than to Laurus or  in the ordinary course of business), or
repurchase, redeem, retire or otherwise acquire any indebtedness (other than to
Laurus or  in the ordinary course of
business) except to make scheduled payments of principal and interest thereof;
(ix) enter into any merger, consolidation or other reorganization with or into
any other Person or acquire all or a portion of the assets or Stock of any Person
or permit any other Person to consolidate with or merge with it, unless (1)
Company is the surviving entity of such merger or consolidation, (2) no Event
of Default shall exist immediately prior to and after giving effect to such
merger or consolidation, (3) Company shall have provided Laurus copies of all
documentation relating to such merger or consolidation and (4) Company shall
have provided Laurus with at least thirty (30) days’ prior written notice of
such merger or consolidation; (x) materially change the nature of the business
in which it is presently engaged; (xi) change its fiscal year or make any
changes in accounting treatment and reporting practices without prior written
notice to Laurus except as required by GAAP or in the tax reporting treatment
or except as required by law; (xii) enter into any transaction with any
employee, director or Affiliate, except in the ordinary course on arms-length
terms; or (xiii) bill Accounts under any name except the present name of
Company or its existing Subsidiaries.

 

15

 

(f)            None of the proceeds
of the Loans hereunder will be used directly or indirectly to “purchase” or
“carry” “margin stock” or to repay indebtedness incurred to “purchase” or
“carry” “margin stock” within the respective meanings of each of the quoted
terms under Regulation U of the Board of Governors of the Federal Reserve
System as now and from time to time hereafter in effect.

 

(g)         Company will bear the
full risk of loss from any loss of any nature whatsoever with respect to the
Collateral.  At Company’s own cost and
expense in amounts and with carriers acceptable to Laurus, Company shall (i)
keep all its insurable properties and properties in which it has an interest
insured against the hazards of fire, 
sprinkler leakage, those hazards covered by extended coverage insurance
and such other hazards, and for such amounts, as is customary in the case of
companies engaged in businesses similar to Company’s including business
interruption insurance; (ii) maintain a bond in such amounts as is customary in
the case of companies engaged in businesses similar to Company’s insuring
against larceny, embezzlement or other criminal misappropriation of insured’s
officers and employees who may either singly or jointly with others at any time
have access to the assets or funds of Company either directly or through
Governmental Authority to draw upon such funds or to direct generally the
disposition of such assets; (iii) maintain public and product liability insurance
against claims for personal injury, death or property damage suffered by
others; (iv) maintain all such worker’s compensation or similar insurance as
may be required under the laws of any state or jurisdiction in which Company is
engaged in business; and (v) furnish Laurus with (x) certificates as to all
such insurance coverages and evidence of the maintenance of such policies
before any expiration date, (y) endorsements to such policies naming Laurus as
“co-insured” or “additional insured” and appropriate loss payable endorsements
(except with respect to the Premises) in form and substance satisfactory to
Laurus, naming Laurus as loss payee, and (z) evidence that as to Laurus the
insurance coverage shall not be impaired or invalidated by any act or neglect
of Company and the insurer will provide Laurus with at least thirty (30) days
notice prior to cancellation or expiration thereof.  Company shall instruct the insurance carriers that in the event
of any loss thereunder (other than with respect to the Premises), the carriers
shall make payment for such loss to Laurus and not to Company and Laurus
jointly.  If any insurance losses are
paid by check, draft or other instrument payable to Company and Laurus jointly,
Laurus may endorse Company’s name thereon and do such other things as Laurus
may deem advisable to reduce the same to cash. 
Laurus is hereby authorized to adjust and compromise claims (except with
respect to the Premises).  All loss
recoveries received by Laurus upon any such insurance may be applied to the
Obligations, in such order as Laurus in its sole discretion shall determine or
shall otherwise be delivered to the Company. 
Any surplus shall be paid by Laurus to Company or applied as may be
otherwise required by law.  Any
deficiency thereon shall be paid by Company to Laurus, on demand.

 

(h)          Company will at all
times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the conversion of the Notes and exercise of the Warrants.

 

14.         Further Assurances.  At any time and from time to time, upon the written request of
Laurus and at the sole expense of Company, Company shall promptly and duly
execute and deliver any and all such further instruments and documents and take
such further action as Laurus may request (a) to obtain the full benefits of
this Agreement and the Ancillary 

 

16

 

Agreements, (b) to protect, preserve and maintain Laurus’ rights in the
Collateral and under this Agreement or any Ancillary Agreement, or (c) to
enable Laurus to exercise all or any of the rights and powers herein granted or
any Ancillary Agreement.

 

15.         Power
of Attorney.  Company hereby
appoints Laurus, or any other Person whom Laurus may designate as Company’s
attorney, with power to:  (i) endorse
Company’s name on any checks, notes, acceptances, money orders, drafts or other
forms of payment or security that may come into Laurus’ possession; (ii) sign
Company’s name on any invoice or bill of lading relating to any Accounts, drafts
against Account Debtors, schedules and assignments of Accounts, notices of
assignment, financing statements and other public records, verifications of
Account and notices to or from Account Debtors; (iii) verify the validity,
amount or any other matter relating to any Account by mail, telephone,
telegraph or otherwise with Account Debtors; (iv) do all things necessary to
carry out this Agreement, any Ancillary Agreement and all related documents;
and (v) on or after the occurrence and continuation of an Event of Default,
notify the post office authorities to change the address for delivery of
Company’s mail to an address designated by Laurus, and to receive, open and
dispose of all mail addressed to Company. 
Company hereby ratifies and approves all acts of the attorney.  Neither Laurus, nor the attorney will be
liable for any acts or omissions or for any error of judgment or mistake of
fact or law, except for gross negligence or willful misconduct.  This power, being coupled with an interest,
is irrevocable so long as Laurus has a security interest and until the
Obligations have been fully satisfied.

 

16.         Term
of Agreement.  Laurus’ agreement
to make Loans and extend financial accommodations under and in accordance with
the terms of this Agreement or any Ancillary Agreement shall continue in full
force and effect until the expiration of the Initial Term.  At Laurus’ election following the occurrence
of an Event of Default, Laurus may terminate this Agreement.  The termination of the Agreement shall not
affect any of Laurus’ rights hereunder or any Ancillary Agreement and the
provisions hereof and thereof shall continue to be fully operative until all
transactions entered into, rights or interests created and the Obligations have
been disposed of, concluded or liquidated. 
Notwithstanding the foregoing, Laurus shall release its security
interests at any time after thirty (30) days notice upon payment to it of all
Obligations if Companies shall have (i) provided Laurus with an executed
release of any and all claims which Companies may have or thereafter have under
this Agreement and all Ancillary Agreements and (ii) paid to Laurus an early
payment fee in an amount equal to (1) three percent (3%) of the Capital
Availability Amount if such payment occurs prior to the first anniversary of
the Initial Term or any applicable renewal term, and (2) two percent (2%) of
the Capital Availability Amount if such payment occurs on or after the first
anniversary and prior to the second anniversary of the Initial Term or any applicable
renewal term; such fee being intended to compensate Laurus for its costs and
expenses incurred in initially approving this Agreement or extending same.  Such early payment fee shall also be due and
payable by Company to Laurus upon termination by acceleration of this Agreement
by Laurus due to the occurrence and continuance of an Event of Default which
Laurus in good faith reasonably determines to have been caused by the Company
for the purpose of causing the acceleration hereof to avoid paying any early
payment fee pursuant to the preceding sentence.

 

17.         Termination of Lien.  The Liens and rights granted to Laurus
hereunder and any Ancillary Agreements and the financing statements filed in
connection herewith or therewith 

 

17

 

shall continue in full force and effect, notwithstanding the
termination of this Agreement or the fact that Company’s account may from time
to time be temporarily in a zero or credit position, until (a) all of the
Obligations of Company have been paid or performed in full after the
termination of this Agreement.  Laurus
shall not be required to send 
termination statements to Company, or to file them with any filing
office, unless and until this Agreement and the Ancillary Agreements shall have
been terminated in accordance with their terms and all Obligations paid in full
in immediately available funds.

 

18.         Events
of Default.  The occurrence of
any of the following shall constitute an Event of Default:

 

(a)          failure to make payment
of any of the Obligations when required hereunder;

 

(b)         failure to pay any taxes
when due unless such taxes are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves have been provided on
Company’s books;

 

(c)          failure to perform under
and/or committing any breach of this Agreement or any Ancillary Agreement or
any other agreement between Company and Laurus which shall continue for a
period of  thirty (30) days after the occurrence
thereof;

 

(d)         the occurrence of a
default under any agreement to which Company is a party with third parties
which has a Material Adverse Effect;

 

(e)          any representation,
warranty or statement made by Company hereunder, in any Ancillary Agreement,
any certificate, statement or document delivered pursuant to the terms hereof,
or in connection with the transactions contemplated by this Agreement should at
any time be false or misleading in any material respect;

 

(f)            an attachment or levy
is made upon Company’s assets having an aggregate value in excess of $50,000 or
a judgment is rendered against Company or Company’s property involving a
liability of more than $50,000 which shall not have been vacated, discharged,
stayed or bonded pending appeal within thirty (30) days from the entry thereof;

 

(g)         any change in Company’s
condition or affairs (financial or otherwise) which in Laurus’ reasonable, good
faith opinion, could reasonably be expected to have  a Material Adverse Effect;

 

(h)         any Lien created
hereunder or under any Ancillary Agreement for any reason ceases to be or is
not a valid and perfected Lien having a first priority interest;

 

(i)             if Company shall (i)
apply for, consent to or suffer to exist the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or of all
or a substantial part of its property, (ii) make a general assignment for the
benefit of creditors, (iii) commence a voluntary case under the federal
bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt
or insolvent, (v) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (vi) acquiesce to, or fail to have
dismissed, within 

 

18

 

thirty (30) days, any petition filed against it in any involuntary case
under such bankruptcy laws, or (vii) take any action for the purpose of
effecting any of the foregoing;

 

(j)             Company shall admit
in writing its inability, or be generally unable to pay its debts as they
become due or cease operations of its present business;

 

(k)          any Controlling Person
or Subsidiary of the Company shall (i) apply for, consent to or suffer to exist
the appointment of, or the taking possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its property, (ii)
admit in writing its inability, or be generally unable, to pay its debts as
they become due or cease operations of its present business, (iii) make a
general assignment for the benefit of creditors, (iv) commence a voluntary case
under the federal bankruptcy laws (as now or hereafter in effect), (v) be
adjudicated a bankrupt or insolvent, (vi) file a petition seeking to take
advantage of any other law providing for the relief of debtors, (vii) acquiesce
to, or fail to have dismissed, within thirty (30) days, any petition filed
against it in any involuntary case under such bankruptcy laws or (viii) take
any action for the purpose of effecting any of the foregoing;

 

(l)             Company directly or
indirectly sells, assigns, transfers, conveys, or suffers or permits to occur
any sale, assignment, transfer or conveyance of any assets of Company or any
interest therein, except as permitted herein;

 

(m)          the occurrence of a
Change in Control ;

 

(n)         a default by Company in
the payment, when due, of any principal of or interest on any other
indebtedness for money borrowed in an amount greater than $25,000, which is not
cured within any applicable cure or grace period;

 

(o)         the indictment or
threatened indictment of Company or any executive officer of Company under any
criminal statute, or commencement or threatened commencement of criminal or
civil proceeding against Company or any executive officer of Company pursuant
to which statute or proceeding penalties or remedies sought or available
include forfeiture of any of the property of Company;

 

(p)         if an Event of Default
shall occur under and as defined in any Note; or

 

(q)         any Guarantor shall
breach any term or provision of any Ancillary Agreement which is not cured within
any applicable cure or grace period;

 

(r)            if any Guarantor
attempts to terminate, challenges the validity of, or its liability under any
Guaranty or any Guarantor Security Agreement; or

 

(s)          should any Guarantor
default in its obligations under any Guaranty or any Guarantor Security
Agreement or if any proceeding shall be brought to challenge the validity,
binding effect of any Guaranty or any Guarantor Security Agreement or should
any Guarantor breach any representation, warranty or covenant contained in any
Guaranty Agreement or any Guarantor Security Agreement or should any Guaranty
or Guarantor Security Agreement cease to be a valid, binding and enforceable
obligation.

 

19

 

19.         Remedies.
Following the occurrence of an Event of Default, Laurus shall have the right to
demand repayment in full of all Obligations, whether or not otherwise due.  Until all Obligations have been fully
satisfied, Laurus shall retain its Lien in all Collateral.  Laurus shall have, in addition to all other
rights provided herein and in each Ancillary Agreement, the rights and remedies
of a secured party under the UCC, and under other applicable law, all other
legal and equitable rights to which Laurus may be entitled, including the right
to take immediate possession of the Collateral, to require Company to assemble
the Collateral, at Company’s expense, and to make it available to Laurus at a
place designated by Laurus which is reasonably convenient to both parties and
to enter any of the premises of Company or wherever the Collateral shall be
located, with or without force or process of law, and to keep and store the
same on said premises until sold (and if said premises be the property of
Company, Company agrees not to charge Laurus for storage thereof), and the
right to apply for the appointment of a receiver for Company’s property.  Further, Laurus may, at any time or times
after the occurrence of an Event of Default, sell and deliver all Collateral
held by or for Laurus at public or private sale for cash, upon credit or
otherwise, at such prices and upon such terms as Laurus, in Laurus’ sole
discretion, deems advisable or Laurus may otherwise recover upon the Collateral
in any commercially reasonable manner as Laurus, in its sole discretion, deems
advisable.  The requirement of
reasonable notice shall be met if such notice is mailed postage prepaid to
Company at Company’s address as shown in Laurus’ records, at least ten (10)
days before the time of the event of which notice is being given.  Laurus may be the purchaser at any sale, if
it is public.  In connection with the
exercise of the foregoing remedies, Laurus is granted permission to use all of
Company’s trademarks, tradenames, tradestyles, patents, patent applications,
licenses, franchises and other proprietary rights.  The proceeds of sale shall be applied first to all costs and
expenses of sale, including attorneys’ fees, and second to the payment (in
whatever order Laurus elects) of all Obligations.  After the indefeasible payment and satisfaction in full in cash
of all of the Obligations, and after the payment by Laurus of any other amount
required by any provision of law, including Section 608(a)(1) of the Code (but
only after Laurus has received what Laurus considers reasonable proof of a
subordinate party’s security interest), the surplus, if any, shall be paid to
Company or its representatives or to whosoever may be lawfully entitled to
receive the same, or as a court of competent jurisdiction may direct.  Company shall remain liable to Laurus for
any deficiency.  In addition, Company
shall pay Laurus a liquidation fee (“Liquidation Fee”) in the amount of five
percent (5%) of the actual amount collected in respect of each Account outstanding
at any time during a “liquidation period”. 
For purposes hereof, “liquidation period” means a period:  (i) beginning on the earliest date of (x) an
event referred to in Section 18(i) or 18(j), or (y) the cessation of Company’s
business; and (ii) ending on the date on which Laurus has actually received all
Obligations due and owing it under this Agreement and the Ancillary
Agreements.  The Liquidation Fee shall
be paid on the date on which Laurus collects the applicable Account by
deduction from the proceeds thereof. 
Company and Laurus acknowledge that the actual damages that would be
incurred by Laurus after the occurrence of an Event of Default would be
difficult to quantity and that Company and Laurus have agreed that the fees and
obligations set forth in this Section and in this Agreement would constitute
fair and appropriate liquidated damages in the event of any such termination.

 

20.         Waivers.  To the full extent permitted by applicable
law, Company waives (a) presentment, demand and protest, and notice of
presentment, dishonor, intent to accelerate, acceleration, protest, default,
nonpayment, maturity, release, compromise, settlement, extension or renewal of
any or all of this Agreement and the Ancillary Agreements or any other notes, 

 

20

 

commercial paper, Accounts, contracts, Documents, Instruments, Chattel
Paper and guaranties at any time held by Laurus on which Company may in any way
be liable, and hereby ratifies and confirms whatever Laurus may do in this
regard; (b) all rights to notice and a hearing prior to Laurus’ taking
possession or control of, or to Laurus’ replevy, attachment or levy upon, any
Collateral or any bond or security that might be required by any court prior to
allowing Laurus to exercise any of its remedies; and (c) the benefit of all
valuation, appraisal and exemption laws. 
Company acknowledges that it has been advised by counsel of its choices
and decisions with respect to this Agreement, the Ancillary Agreements and the
transactions evidenced hereby and thereby.

 

21.         Expenses.  Company shall pay all of Laurus’ reasonable
out-of-pocket costs and expenses, including reasonable fees and disbursements
of in-house or outside counsel and appraisers, in connection with the
preparation, execution and delivery of this Agreement and the Ancillary
Agreements, and in connection with the prosecution or defense of any action,
contest, dispute, suit or proceeding concerning any matter in any way arising
out of, related to or connected with this Agreement or any Ancillary Agreement.  Company shall also pay all of Laurus’
reasonable fees, charges, out-of-pocket costs and expenses, including fees and
disbursements of counsel and appraisers, in connection with (a) the
preparation, execution and delivery of any waiver, any amendment thereto or
consent proposed or executed in connection with the transactions contemplated
by this Agreement or the Ancillary Agreements, (b) Laurus’ obtaining
performance of the Obligations under this Agreement and any Ancillary
Agreements, including, but not limited to, the enforcement or defense of
Laurus’ security interests, assignments of rights and Liens hereunder as valid
perfected security interests, (c) any attempt to inspect, verify, protect,
collect, sell, liquidate or otherwise dispose of any Collateral, (d) any
appraisals or re-appraisals of any property (real or personal) pledged to
Laurus by Company as Collateral for, or any other Person as security for,
Company’s Obligations hereunder and (e) any consultations in connection with
any of the foregoing.  Company shall
also pay Laurus’ customary bank charges for all bank services (including wire
transfers) performed or caused to be performed by Laurus for Company at
Company’s request or in connection with Company’s loan account with
Laurus.  All such costs and expenses
together with all filing, recording and search fees, taxes and interest payable
by Company to Laurus shall be payable on demand and shall be secured by the
Collateral.  If any tax by any Governmental
Authority is or may be imposed on or as a result of any transaction between
Company and Laurus which Laurus is or may be required to withhold or pay,
Company agrees to indemnify and hold Laurus harmless in respect of such taxes,
and Company will repay to Laurus the amount of any such taxes which shall be
charged to Company’s account; and until Company shall furnish Laurus with
indemnity therefor (or supply Laurus with evidence satisfactory to it that due
provision for the payment thereof has been made), Laurus may hold without
interest any balance standing to Company’s credit and Laurus shall retain its
Liens in any and all Collateral.

 

22.         Assignment By Laurus.  Laurus may assign any or all of the
Obligations together with any or all of the security therefor to any Person
which is not a competitor of the Company and any such transferee shall succeed
to all of Laurus’ rights with respect thereto. 
Upon such transfer, Laurus shall be released from all responsibility for
the Collateral to the extent same is assigned to any transferee.  Laurus may from time to time sell or
otherwise grant participations in any of the Obligations and the holder of any
such participation shall, subject to the terms of any agreement between Laurus
and such holder, be entitled to the same benefits as 

 

21

 

Laurus with respect to any security for the Obligations in which such
holder is a participant.  Company agrees
that each such holder may exercise any and all rights of banker’s lien, set-off
and counterclaim with respect to its participation in the Obligations as fully
as though Company were directly indebted to such holder in the amount of such
participation.

 

23.         No Waiver; Cumulative Remedies.  Failure by Laurus to exercise any right,
remedy or option under this Agreement, any Ancillary Agreement or any
supplement hereto or thereto or any other agreement between Company and Laurus
or delay by Laurus in exercising the same, will not operate as a waiver; no
waiver by Laurus will be effective unless it is in writing and then only to the
extent specifically stated.  Laurus’
rights and remedies under this Agreement and the Ancillary Agreements will be
cumulative and not exclusive of any other right or remedy which Laurus may
have.

 

24.         Application of Payments.  Company irrevocably waives the right to
direct the application of any and all payments at any time or times hereafter
received by Laurus from or on Company’s behalf and Company hereby irrevocably
agrees that Laurus shall have the continuing exclusive right to apply and
reapply any and all payments received at any time or times hereafter against
the Obligations hereunder in such manner as Laurus may deem advisable
notwithstanding any entry by Laurus upon any of Laurus’ books and records.

 

25.         Indemnity.  Company agrees to indemnify and hold Laurus,
and its respective affiliates, employees, attorneys and agents (each, an
“Indemnified Person”), harmless from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses of any kind or
nature whatsoever (including attorneys’ fees and disbursements and other costs
of investigation or defense, including those incurred upon any appeal) which
may be instituted or asserted against or incurred by any such Indemnified
Person as the result of credit having been extended, suspended or terminated
under this Agreement or any of the Ancillary Agreements or with respect to the
execution, delivery, enforcement, performance and administration of, or in any
other way arising out of or relating to, this Agreement, the Ancillary
Agreements or any other documents or transactions contemplated by or referred
to herein or therein and any actions or failures to act with respect to any of
the foregoing, except to the extent that any such indemnified liability is
finally determined by a court of competent jurisdiction to have resulted solely
from such Indemnified Person’s gross negligence or willful misconduct. NO
INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO COMPANY OR TO ANY OTHER
PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER
PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT,
PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT
OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR
ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED
HEREUNDER OR THEREUNDER.

 

26.         Revival.  Company further agrees that to the extent
Company makes a payment or payments to Laurus, which payment or payments or any
part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver or
any other party under any bankruptcy act, state or federal law, common law or
equitable cause, then, to the extent of such payment or repayment, the
obligation 

 

22

 

or part thereof intended to be satisfied shall be revived and continued
in full force and effect as if said payment had not been made.

 

27.         Notices.  Any notice or request hereunder may be given
to Company or Laurus at the respective addresses set forth below or as may
hereafter be specified in a notice designated as a change of address under this
Section.  Any notice or request hereunder
shall be given by registered or certified mail, return receipt requested, hand
delivery, overnight mail or telecopy (confirmed by mail).  Notices and requests shall be, in the case
of those by hand delivery, deemed to have been given when delivered to any
officer of the party to whom it is addressed, in the case of those by mail or
overnight mail, deemed to have been given three (3) business days after the
date when deposited in the mail or with the overnight mail carrier, and, in the
case of a telecopy, when confirmed.

 

Notices shall be provided
as follows:

 

	
  If to Laurus:

  	
   

  	
  Laurus Master Fund,
  Ltd.

  c/o Laurus Capital Management, LLC

  152 West 57th Street 4th Floor

  New York, New York 10019

  Attention:  David Grin

  Telephone:  (212) 541-5800

  Telecopier:  (212) 541-4434

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Loeb & Loeb LLP

  345 Park Avenue

  New York, New York  10154

  Attention:  Scott J. Giordano, Esq.

  Telephone:  (212) 407-4000

  Telecopier: (212) 407-4990

  
	
   

  	
   

  	
   

  
	
  If to Company:

  	
   

  	
  Electric City Corp.

  1280 Landmeier Road

  Elk Grove Village, Illinois  60007

  Attention: Chief Financial Officer

  Telephone: (847)-437-1666

  Telecopier: (847)-437-4969

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Andrew H. Connor

  Schwartz, Cooper, Greenberger & Krauss

  180 North LaSalle Street, 27th Floor

  Chicago, Illinois 60601

  Telephone: (312) 845-5118

  Telecopier: (312) 782-8416

  

 

or such other address as
may be designated in writing hereafter in accordance with this Section 27 by
such Person.

 

23

 

28.         Governing
Law, Jurisdiction and Waiver of Jury Trial.  (a) THIS AGREEMENT AND THE ANCILLARY
AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN
SUCH STATE.

 

(b)         COMPANY HEREBY CONSENTS
AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK,
STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY
CLAIMS OR DISPUTES BETWEEN COMPANY AND LAURUS PERTAINING TO THIS AGREEMENT OR
ANY OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO
THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS
AND COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD
BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND
FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE
TO PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER
JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY
OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF LAURUS.  COMPANY
EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR
SUIT COMMENCED IN ANY SUCH COURT, AND COMPANY HEREBY WAIVES ANY OBJECTION WHICH
IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS.  COMPANY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY
AT THE ADDRESS SET FORTH IN SECTION 27 AND THAT SERVICE SO MADE SHALL BE DEEMED
COMPLETED UPON THE EARLIER OF COMPANY’S ACTUAL RECEIPT THEREOF OR THREE (3)
DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

 

(c)          THE PARTIES DESIRE THAT
THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS.  THEREFORE, TO ACHIEVE THE BEST COMBINATION
OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN
LAURUS AND COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED THERETO.

 

29.         Limitation
of Liability.  Company
acknowledges and understands that in order to assure repayment of the
Obligations hereunder Laurus may be required to exercise any and all of Laurus’
rights and remedies hereunder and agrees that, except as limited by applicable
law,

 

24

 

neither Laurus nor any of Laurus’ agents shall be liable for acts taken
or omissions made in connection herewith or therewith except for actual bad
faith.

 

30.         Entire Understanding.  This Agreement and the Ancillary Agreements
contain the entire understanding between Company and Laurus as to the subject
matter hereof and thereof and any promises, representations, warranties or
guarantees not herein contained shall have no force and effect unless in
writing, signed by Company’s and Laurus’ respective officers.  Neither this Agreement, the Ancillary
Agreements, nor any portion or provisions thereof may be changed, modified,
amended, waived, supplemented, discharged, cancelled or terminated orally or by
any course of dealing, or in any manner other than by an agreement in writing,
signed by the party to be charged.

 

31.         Severability.  Wherever possible each provision of this
Agreement or the Ancillary Agreements shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this
Agreement or the Ancillary Agreements shall be prohibited by or invalid under
applicable law such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions thereof.

 

32.         Captions.  All captions are and shall be without
substantive meaning or content of any kind whatsoever.

 

33.         Counterparts;
Telecopier Signatures.  This
Agreement may be executed in one or more counterparts, each of which shall
constitute an original and all of which taken together shall constitute one and
the same agreement.  Any signature
delivered by a party via telecopier transmission shall be deemed to be any
original signature hereto.

 

34.         Construction.  The parties acknowledge that each party and
its counsel have reviewed this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any amendments, schedules or exhibits thereto.

 

35.         Publicity.  Company hereby authorizes Laurus to make
appropriate announcements of the financial arrangement entered into by and
between Company and Laurus, including, without limitation, announcements which
are commonly known as tombstones, in such publications and to such selected
parties as Laurus shall in its sole and absolute discretion deem appropriate,
or as required by applicable law. Laurus hereby authorizes the Company to make
appropriate announcements required by applicable law or consented to by Laurus
of the financial arrangement entered into by and between Company and Laurus,
which consent shall not be unreasonably withheld.

 

36.         Legends.  The Securities shall bear legends as
follows;

 

(a)                                  The
Note shall bear substantially the following legend:

 

“THIS NOTE AND THE COMMON
STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS 

 

25

 

AMENDED, OR ANY
APPLICABLE, STATE SECURITIES LAWS.  THIS
NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO ELECTRIC CITY CORP. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(b)                                 Any
shares of Common Stock issued pursuant to conversion of the Note or exercise of
the Warrants, shall bear a legend which shall be in substantially the following
form until such shares are covered by an effective registration statement filed
with the SEC:

 

“THE SHARES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THESE SHARES MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR
AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO ELECTRIC CITY CORP. THAT SUCH
REGISTRATION IS NOT REQUIRED.”

 

(c)                                  The
Warrants shall bear substantially the following legend:

 

“THIS WARRANT AND THE
COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE
UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO ELECTRIC
CITY CORP. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

26

 

37.         No Shorting.  The Purchaser or any of its affiliates and investment partners will not and will
not cause any person or entity, directly or indirectly, to engage in “short
sales” of the Company’s Common Stock or any other hedging strategies.

 

 

[Balance of page
intentionally left blank; signature page follows.]

 

27

 

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

 

 

	
   

  	
  ELECTRIC CITY CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  John Mitola

  	
   

  
	
   

  	
  Name:

  	
  John
  Mitola

  	
   

  
	
   

  	
  Title:

  	
  Chief
  Executive Officer

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  LAURUS MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  David Grin

  	
   

  
	
   

  	
  Name:

  	
  David
  Grin

  	
   

  
	
   

  	
  Title: 

  	
  Partner

  	
   

  

 

28

 

Annex A -
Definitions

 

“Account Debtor”
means any Person who is or may be obligated with respect to, or on account of,
an Account.

 

“Accountants” has
the meaning given to such term in Section 11(a).

 

“Accounts” means
all “accounts”, as such term is defined in the UCC, now owned or hereafter
acquired by any Person, including:  (a)
all accounts receivable, other receivables, book debts and other forms of
obligations (other than forms of obligations evidenced by Chattel Paper or
Instruments) (including any such obligations that may be characterized as an
account or contract right under the UCC); (b) all of such Person’s rights in,
to and under all purchase orders or receipts for goods or services; (c) all of
such Person’s rights to any goods represented by any of the foregoing
(including unpaid sellers’ rights of rescission, replevin, reclamation and
stoppage in transit and rights to returned, reclaimed or repossessed goods);
(d) all rights to payment due to such Person for Goods or other property sold,
leased, licensed, assigned or otherwise disposed of, for a policy of insurance
issued or to be issued, for a secondary obligation incurred or to be incurred,
for energy provided or to be provided, for the use or hire of a vessel under a
charter or other contract, arising out of the use of a credit card or charge
card, or for services rendered or to be rendered by such Person or in
connection with any other transaction (whether or not yet earned by performance
on the part of such Person); and (e) all collateral security of any kind given
by any Account Debtor or any other Person with respect to any of the foregoing.

 

“Accounts Availability”
means the amount of Loans against Eligible Accounts Laurus may from time to
time make available to Company up to ninety percent (90%) of the net face
amount of Eligible Accounts based on Accounts of Company.

 

“Affiliate” of any
Person means (a) any Person (other than a Subsidiary) which, directly or
indirectly, is in control of, is controlled by, or is under common control with
such Person,  (b) any Person who is a
director or officer (i) of such Person, (ii) of any Subsidiary of such Person
or (iii) of any Person described in clause (a) above. For the purposes of this
definition, control of a Person shall mean the power (direct or indirect) to
direct or cause the direction of the management and policies of such Person
whether by contract or otherwise.

 

“Ancillary Agreements”
means, the Notes, Warrants, Registration Rights Agreements, each Guaranty, each
Guaranty Security Agreement and all other agreements, instruments, documents,
mortgages, pledges, powers of attorney, consents, assignments, contracts,
notices, security agreements, trust agreements and guarantees whether
heretofore, concurrently, or hereafter executed by or on behalf of Company or
any other Person or delivered to Laurus, relating to this Agreement or to the
transactions contemplated by this Agreement or otherwise relating to the
relationship between the  Company and
Laurus.

 

“Books and Records”
means all books, records, board minutes, contracts, licenses, insurance
policies, environmental audits, business plans, files, computer files, computer
discs and other data and software storage and media devices, accounting books
and records, financial statements (actual and pro forma), filings with
Governmental Authorities and any and

 

29

 

all records and instruments relating to the Collateral or otherwise
necessary or helpful in the collection thereof or the realization thereupon.

 

“Business Day”
means a day on which Laurus is open for business and that is not a Saturday, a
Sunday or other day on which banks are required or permitted to be closed in
the State of New York.

 

“Capital Availability
Amount” means $2,000,000.

 

“Change in Control”
means the occurrence of the following event: 
at any time individuals who, as of the Closing Date, were members of the
board of directors of the Company (together with any new directors elected by
holders of the Company’s preferred stock pursuant to their rights to elect
certain board members and any new directors whose nomination for election by
the Company’s common stock holders were approved by a vote of at least a
majority of the directors of the Company then in office who themselves were
either directors as of the Closing Date or whose election or nomination for
election was previously so approved) cease for any reason to constitute at
least a majority of the members of the board of directors of the Company then
in office.

 

“Chattel Paper”
means all “chattel paper,” as such term is defined in the UCC, including
electronic chattel paper, now owned or hereafter acquired by any Person.

 

“Cinergy” means
Cinergy Ventures II, LLC, a Delaware limited liability company, and its
Affiliates.

 

“CIT” means Newcourt
Capital USA Inc., a Delaware corporation, and its Affiliates.

 

“Closing Date”
means the date on which Company shall first receive proceeds of the initial
Loans.

 

“Collateral” means
all of Company’s property and assets other than the Premises, whether real or
personal, tangible or intangible, and whether now owned or hereafter acquired,
or in which it now has or at any time in the future may acquire any right,
title or interests including all of the following property in which it now has
or at any time in the future may acquire any right, title or interest:

 

(a)          all Inventory;

 

(b)         all Equipment;

 

(c)          all Fixtures;

 

(d)         all General Intangibles;

 

(e)          all Accounts;

 

30

 

(f)            all Deposit Accounts,
other bank accounts and all funds on deposit therein;

 

(g)         all Investment Property;

 

(h)         all Stock;

 

(i)             all Chattel Paper;

 

(j)             all Letter-of-Credit
Rights;

 

(k)          all Instruments;

 

(l)             all commercial tort
claims set forth on Exhibit 1(A);

 

(m)       all Books and Records;

 

(n)         all Supporting
Obligations including letters of credit and guarantees issued in support of
Accounts, Chattel Paper, General Intangibles and Investment Property;

 

(o)         (i) all money, cash and
cash equivalents and (ii) all cash held as cash collateral to the extent not
otherwise constituting Collateral, all other cash or property at any time on
deposit with or held by Laurus for the account of Company (whether for
safekeeping, custody, pledge, transmission or otherwise); and

 

(p)         all products and Proceeds
of all or any of the foregoing, tort claims and all claims and other rights to
payment including insurance claims against third parties for loss of, damage
to, or destruction of, and (ii) payments due or to become due under leases,
rentals and hires of any or all of the foregoing and Proceeds payable under, or
unearned premiums with respect to policies of insurance in whatever form.

 

“Contract Rate”
means an interest rate per annum equal to the Prime Rate plus 1.75%.

 

“Controlling Person”
means any Person which has the ability to elect, at the time of determination,
more than one-third (1/3) of the members of the board of directors of the
Company.

 

“Default” means
any act or event which, with the giving of notice or passage of time or both,
would constitute an Event of Default.

 

“Default Rate” has
the meaning given to such term in Section 5(a)(iii).

 

“Deposit Accounts”
means all “deposit accounts” as such term is defined in the UCC, now or
hereafter held in the name of any Person, including, without limitation, the
Lockbox Account.

 

“Documents” means
all “documents”, as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including all bills of lading, dock 

 

31

 

warrants, dock receipts, warehouse receipts, and other documents of
title, whether negotiable or non-negotiable.

 

“Excepted Affiliate
Sales” means arm’s length sales of services or goods to any of Cinergy,
Morgan Stanley, CIT, or any other Qualifying Affiliate.

 

““Excepted Stockholder
Sales” means arm’s length sales of services or goods to any Qualifying
Stockholder

 

“Eligible Accounts”
means and includes each Account which conforms to the following criteria:  (a) shipment of the merchandise or the
rendition of services has been completed; (b) no return, rejection or
repossession of the merchandise has occurred; (c) 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; (d) continues to be in
full conformity with the representations and warranties made by Company to
Laurus with respect thereto; (e) Laurus is, and continues to be, satisfied with
the credit standing of the Account Debtor in relation to the amount of credit
extended; (f) there are no facts existing or threatened which are likely to
result in any adverse change in an Account Debtor’s financial condition; (g) is
documented by an invoice in a form approved by Laurus and shall not be unpaid
more than ninety (120) days from invoice date; (h) not more than twenty-five
percent (25%) of the unpaid amount of invoices due from such Account Debtor
remains unpaid more than ninety (120) days from invoice date; (i) is not
evidenced by chattel paper or an instrument of any kind with respect to or in
payment of the Account unless such instrument is duly endorsed to and in
possession of Laurus or represents a check in payment of a Account; (j) the
Account Debtor is located in the United States; provided, however,
Laurus may, from time to time, in the exercise of its sole discretion and based
upon satisfaction of certain conditions to be determined at such time by
Laurus, deem certain Accounts as Eligible Accounts notwithstanding that such
Account is due from an Account Debtor located outside of the United States; (k)
Laurus has a first priority perfected Lien in such Account and such Account is
not subject to any Lien other than Permitted Liens; (l) does not arise out of
transactions with any employee, officer, director, stockholder or Affiliate of
Company (excluding Excepted Stockholder Sales and Excepted Affiliate Sales);
(m) is payable to Company; (n) does not arise out of a bill and hold sale prior
to shipment and does not arise out of a sale to any Person to which Company is
indebted; (o) is net of any returns, discounts, claims, credits and allowances;
(p) if the Account arises out of contracts between Company and the United
States, any state, or any department, agency or instrumentality of any of them,
Company has so notified Laurus, in writing, prior to the creation of such
Account, and there has been compliance with any governmental notice or approval
requirements, including compliance with the Federal Assignment of Claims Act;
(q) is a good and valid account representing an undisputed bona fide
indebtedness incurred by the Account Debtor therein named, 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 Company or work, labor
and/or services rendered by Company; (r) except for Accounts of Great Lakes,
does not arise out of progress billings prior to completion of the order; (s)
the total unpaid Accounts from such Account Debtor does not exceed twenty-five
percent (25%) of all Eligible Accounts; (t) Company’s right to payment is
absolute and not contingent upon the fulfillment of any condition whatsoever;
(u) Company is able to bring suit and enforce its remedies against the Account
Debtor through judicial process; (v) does not represent interest payments, late
or finance charges owing to 

 

32

 

Company and (w) is otherwise satisfactory to Laurus as determined by
Laurus in the exercise of its sole discretion. 
In the event Company requests that Laurus include within Eligible
Accounts certain Accounts of one or more of Company’s acquisition targets,
Laurus shall at the time of such request consider such inclusion, but any such
inclusion shall be at the sole option of Laurus and shall at all times be
subject to the execution and delivery to Laurus of all such documentation
(including, without limitation, guaranty and security documentation) as Laurus
may require in its sole discretion.

 

“Equipment” means
all “equipment” as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including any and all machinery,
apparatus, equipment, fittings, furniture, fixtures, motor vehicles and other
tangible personal property (other than Inventory) of every kind and description
that may be now or hereafter used in such Person’s operations or that are owned
by such Person or in which such Person may have an interest, and all parts,
accessories and accessions thereto and substitutions and replacements therefor.

 

“ERISA” shall have
the meaning given to such term in Section 12(g).

 

“Event of Default”
means the occurrence of any of the events set forth in Section 18.

 

“Fixtures” means
all “fixtures” as such term is defined in the UCC, now owned or hereafter
acquired by any Person.

 

“Formula Amount”
has the meaning set forth in Section 2(a)(i).

 

“GAAP” means
generally accepted accounting principles, practices and procedures in effect
from time to time in the United States of America.

 

“General Intangibles”
means all “general intangibles” as such term is defined in the UCC, now owned
or hereafter acquired by any Person including all right, title and interest
that such Person may now or hereafter have in or under any contract, all
Payment Intangibles, customer lists, Licenses, Intellectual Property, interests
in partnerships, joint ventures and other business associations, permits,
proprietary or confidential information, inventions (whether or not patented or
patentable), technical information, procedures, designs, knowledge, know-how,
Software, data bases, data, skill, expertise, experience, processes, models,
drawings, materials, Books and Records, Goodwill (including the Goodwill
associated with any Intellectual Property), all rights and claims in or under insurance
policies (including insurance for fire, damage, loss, and casualty, whether
covering personal property, real property, tangible rights or intangible
rights, all liability, life, key-person, and business interruption insurance,
and all unearned premiums), uncertificated securities, choses in action,
deposit accounts, rights to receive tax refunds and other payments, rights to
received dividends, distributions, cash, Instruments and other property in
respect of or in exchange for pledged Stock and Investment Property, and rights
of indemnification.

 

“Goods” means all
“goods”, as such term is defined in the UCC, now owned or hereafter acquired by
any Person, wherever located, including embedded software to the extent 

 

33

 

included in “goods” as defined in the UCC, manufactured homes, standing
timber that is cut and removed for sale and unborn young of animals.

 

“Goodwill” means
all goodwill, trade secrets, proprietary or confidential information, technical
information, procedures, formulae, quality control standards, designs,
operating and training manuals, customer lists, and distribution agreements now
owned or hereafter acquired by any Person.

 

“Great Lakes”
means Great Lakes Controlled Energy Corp., a Delaware corporation and a
wholly-owned Subsidiary of the Company.

 

“Guarantor” means
and any Person who may guarantee payment of performance of the whole or any
part of the Obligations.

 

“Guarantor Security
Agreements” means all security agreements, mortgages, cash collateral
deposit letters, pledges and other agreements which are executed by any
Guarantor in favor of Laurus.

 

“Guaranty” means
all agreements to perform all or any portion of the Obligations on behalf of
Company.

 

“Governmental
Authority” means any nation or government, any state or other political
subdivision thereof, and any agency, department or other entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.

 

“Indemnified Person”
shall have the meaning given to such term in Section 25.

 

“Initial Term”
means the Closing Date through the close of business on the day immediately
preceding the second anniversary of the Closing Date, subject to acceleration
at the option of Laurus upon the occurrence of an Event of Default hereunder or
other termination hereunder.

 

“Instruments”
means all “instruments”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including all certificated
securities and all promissory notes and other evidences of indebtedness, other
than instruments that constitute, or are a part of a group of writings that
constitute, Chattel Paper.

 

“Intellectual Property”
means any and all Licenses, patents, patent registrations, copyrights,
copyright registrations, trademarks, trademark registrations, trade secrets and
customer lists.

 

“Inventory” means
all “inventory”, as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including all inventory, merchandise,
goods and other personal property that are held by or on behalf of such Person
for sale or lease or are furnished or are to be furnished under a contract of
service or that constitute raw materials, work in process, finished goods,
returned goods, or materials or supplies of any kind, nature or description
used or consumed or to be used or consumed in such Person’s 

 

34

 

business or in the processing, production, packaging, promotion,
delivery or shipping of the same, including all supplies and embedded software.

 

“Investment Property”
means all “investment property”, as such term is defined in the UCC, now owned
or hereafter acquired by any Person, wherever located.

 

“Letter-of-Credit
Rights” means “letter-of-credit rights” as such term is defined in the UCC,
now owned or hereafter acquired by any Person, including rights to payment or
performance under a letter of credit, whether or not such Person, as
beneficiary, has demanded or is entitled to demand payment or performance.

 

“License” means
any rights under any written agreement now or hereafter acquired by any Person
to use any trademark, trademark registration, copyright, copyright registration
or invention for which a patent is in existence or other license of rights or
interests now held or hereafter acquired by any Person.

 

“Lien” means any
mortgage, security deed, deed of trust, pledge, hypothecation, assignment,
security interest, lien (whether statutory or otherwise), charge, claim or
encumbrance, or preference, priority or other security agreement or
preferential arrangement held or asserted in respect of any asset of any kind
or nature whatsoever including any conditional sale or other title retention
agreement, any lease having substantially the same economic effect as any of
the foregoing, and the filing of, or agreement to give, any financing statement
under the UCC or comparable law of any jurisdiction.

 

“Loans” shall have
the meaning set forth in Section 2(a)(i) and shall include all other extensions
of credit hereunder and under any Ancillary Agreement.

 

“Material Adverse
Effect” means a material adverse effect on (a) the condition, operations,
assets, business or prospects of Company, (b) Company’s ability to pay or
perform the Obligations in accordance with the terms hereof or any Ancillary
Agreement, (c) the value of the Collateral, the Liens on the Collateral or the
priority of any such Lien or (d) the practical realization of the benefits of
Laurus’ rights and remedies under this Agreement and the Ancillary Agreements.

 

“Maximum Legal Rate”
shall have the meaning given to such term in Section 5(a)(iv).

 

“Minimum Borrowing
Amount” means $250,000 which such aggregate amount shall be evidenced by
Minimum Borrowing Notes.

 

“Minimum Borrowing
Notes” shall mean each Secured Convertible Note, which shall be issued in a
series, made by the Company in favor of Laurus, each in a principal amount
equal to the Minimum Borrowing Amount.

 

“Morgan Stanley”
means Morgan Stanley Dean Witter Equity Funding, Inc., a Delaware corporation,
and its Affiliates.

 

35

 

“Mortgage Indebtedness”
means the Company’s indebtedness to American Chartered Bank which is secured by
a mortgage on the Premises.

 

“Notes” means each
Secured Convertible Note made by Company in favor of Laurus in connection with
the transactions contemplated hereby, as the same may be amended, modified and
supplemented from time to time.

 

“Obligations”
means all Loans, all advances, debts, liabilities, obligations, covenants and
duties owing by Company to Laurus (or any corporation that directly or
indirectly controls or is controlled by or is under common control with Laurus)
of every kind and description (whether or not evidenced by any note or other
instrument and whether or not for the payment of money or the performance or
non-performance of any act), direct or indirect, absolute or contingent, due or
to become due, contractual or tortious, liquidated or unliquidated, whether
existing by operation of law or otherwise now existing or hereafter arising
including any debt, liability or obligation owing from Company to others which
Laurus may have obtained by assignment or otherwise and further including all
interest (including interest accruing at the then applicable rate provided in
this Agreement after the maturity of the Loans and interest accruing at the
then applicable rate provided in this Agreement after the filing of any
petition in bankruptcy, or the commencement of any insolvency, reorganization
or like proceeding, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding), charges or any other payments Company
is required to make by law or otherwise arising under or as a result of this
Agreement and the Ancillary Agreements, together with all reasonable expenses
and reasonable attorneys’ fees chargeable to Company’s account or incurred by
Laurus in connection with Company’s account whether provided for herein or in
any Ancillary Agreement.

 

“Payment Intangibles”
means all “payment intangibles” as such term is defined in the UCC, now owned
or hereafter acquired by any Person, including, a General Intangible under
which the Account Debtor’s principal obligation is a monetary obligation.

 

“Permitted Liens”
means (a) Liens of carriers, warehousemen, artisans, bailees, mechanics and
materialmen incurred in the ordinary course of business securing sums not
overdue; (b) Liens incurred in the ordinary course of business in connection
with workmen’s compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (i)
not overdue or (ii) being diligently contested in good faith provided that
adequate reserves with respect thereto are maintained on the books of the
applicable Company in conformity with GAAP; (c) Liens in favor of Laurus; (d)
Liens for taxes (i) not yet due or (ii) being diligently contested in good
faith by appropriate proceedings, provided that adequate reserves with respect
thereto are maintained on the books of the applicable Company in conformity
with GAAP provided, that, the Lien shall have no effect on the priority of
Liens in favor of Laurus or the value of the assets in which Laurus has a Lien;
(e) Purchase Money Liens securing Purchase Money Indebtedness to the extent
permitted in this Agreement and (f) Liens specified on Exhibit 2 hereto.

 

“Permitted Refinancing”
means any indebtedness incurred in whole or in part to refinance the Mortgage
Indebtedness provided that (i) the principal amount thereof does not exceed the
fair market value of the Premises at the time incurred, (ii) the Mortgage
Indebtedness 

 

36

 

is repaid in full concurrently with such Permitted Refinancing, and
(iii) such Permitted Refinancing is not secured with any assets of the Company
other than the Premises.

 

“Person” means any
individual, sole proprietorship, partnership, limited liability partnership,
joint venture, trust, unincorporated organization, association, corporation,
limited liability company, institution, public benefit corporation, entity or
government (whether federal, state, county, city, municipal or otherwise,
including any instrumentality, division, agency, body or department thereof),
and shall include such Person’s successors and assigns.

 

“Premises” means
the real property, building and improvements at 1280 Landmeier Road, Elk Grove
Village, Illinois 60007 which is owned by the Company.  As of the date hereof the Premises are
subject to the Mortgage Indebtedness.

 

“Prime Rate” means
the “prime rate” published in The Wall Street Journal from time to
time.  The Prime Rate shall be increased
or decreased as the case may be for each increase or decrease in the Prime Rate
in an amount equal to such increase or decrease in the Prime Rate; each change
to be effective as of the day of the change in such rate.

 

“Proceeds” means
“proceeds”, as such term is defined in the UCC and, in any event, shall
include:  (a) any and all proceeds of
any insurance, indemnity, warranty or guaranty payable to Company or any other
Person from time to time with respect to any Collateral; (b) any and all
payments (in any form whatsoever) made or due and payable to Company from time
to time in connection with any requisition, confiscation, condemnation, seizure
or forfeiture of any Collateral by any governmental body, governmental
authority, bureau or agency (or any person acting under color of governmental
authority); (c) any claim of Company against third parties (i) for past,
present or future infringement of any Intellectual Property or (ii) for past,
present or future infringement or dilution of any trademark or trademark
license or for injury to the goodwill associated with any trademark, trademark
registration or trademark licensed under any trademark License; (d) any
recoveries by Company against third parties with respect to any litigation or
dispute concerning any Collateral, including claims arising out of the loss or
nonconformity of, interference with the use of, defects in, or infringement of
rights in, or damage to, Collateral; (e) all amounts collected on, or
distributed on account of, other Collateral, including dividends, interest,
distributions and Instruments with respect to Investment Property and pledged
Stock; and (f) any and all other amounts , rights to payment or other property
acquired upon the sale, lease, license, exchange or other disposition of
Collateral and all rights arising out of Collateral.

 

“Purchase Money
Indebtedness” means (a) any indebtedness incurred for the payment of all or
any part of the purchase price of any fixed asset, including indebtedness under
capitalized leases, (b) any indebtedness incurred for the sole purpose of
financing or refinancing all or any part of the purchase price of any fixed
asset, and (c) any renewals, extensions or refinancings thereof (but not any
increases in the principal amounts thereof outstanding at that time).

 

“Purchase Money Lien”
means any Lien upon any fixed assets that secures the Purchase Money
Indebtedness related thereto but only if such Lien shall at all times be
confined solely to the asset the purchase price of which was financed or
refinanced through the incurrence 

 

37

 

of the Purchase Money Indebtedness secured by such Lien and only if
such Lien secures only such Purchase Money Indebtedness.

 

“Qualifying Affiliate”
means an Affiliate of the Company which is not a Controlling Person, and is not
an Affiliate of a Controlling Person .

 

“Qualifying
Stockholder” means a stockholder of the Company which (i) if an individual,
is not an officer or director of the Company or a Controlling Person, and (ii)
if a corporation, partnership, limited liability company or other organization,
is not a Controlling Person or an Affiliate of a Controlling Person and does
not have any employees, officers, directors, managers or general partners (or
other individuals holding similar such positions with respect to such
organization) who are also officers or directors of the Company.

 

“Registration Rights
Agreements” means those registration rights agreements from time to time
entered into between Company and Laurus, as amended, modified and supplemented
from time to time.

 

“Reverberi Patent”
means United States Patent No. 6,078,146 and any other U.S. and non-U.S.
patents that may issue or claim priority from U.S. Patent Application Serial
Number 08/966,983 filed November 10, 1997 or from Italian Patent No.
M197A-00185 filed May 21, 1997and any counterpart non-U.S. letters including,
but not limited to, patents of implementation, importation, improvement or
addition, utility model patents, and investors certificates, as well as all
continuation, continuation in part, divisions, reexamination, reissue renewal,
and extension patent applications and letters patent that may issue from all
such applications based upon the aforementioned U.S. and non-U.S. patent
applications which are the subject of a license agreement in favor of the
Company permitting the Company to use the technology covered by such patent.

 

“Secured Convertible
Revolving Note” shall mean that secured revolving note of made by the Company
in favor of Laurus in the aggregate principal amount of up to one million  seven hundred fifty thousand dollars
($1,750,000).

 

“Securities”  means the Notes and the Warrants being
issued by the Company to Laurus pursuant to this Agreement and the Ancillary
Agreements and the shares of the common stock of the Company which may be
issued pursuant to conversion of such Notes in whole or in part or exercise of
such Warrants.

 

“Software” means
all “software” as such term is defined in the UCC, now owned or hereafter
acquired by any Person, including all computer programs and all supporting
information provided in connection with a transaction related to any program.

 

“Stock” means all
certificated and uncertificated shares, options, warrants, membership
interests, general or limited partnership interests, participation or other
equivalents (regardless of how designated) of or in a corporation, partnership,
limited liability company or equivalent entity whether voting or nonvoting,
including common stock, preferred stock, or any 

 

38

 

other “equity security” (as such term is defined in Rule 3a11-1 of the
General Rules and Regulations promulgated by the SEC under the Securities
Exchange Act of 1934).

 

“Subsidiary” of
any Person means a corporation or other entity whose shares of stock or other
ownership interests having ordinary voting power (other than stock or other
ownership interests having such power only by reason of the happening of a
contingency) to elect a majority of the directors of such corporation, or other
Persons performing similar functions for such entity, are owned, directly or
indirectly, by such Person.

 

“Supporting
Obligations” means all “supporting obligations” as such term is defined in
the UCC.

 

“Term” means, as
applicable, the Initial Term and any Renewal Term.

 

“UCC” means the
Uniform Commercial Code as the same may, from time be in effect in the State of
New York; provided, that in the event that, by reason of mandatory provisions
of law, any or all of the attachment, perfection or priority of, or remedies
with respect to, Laurus’ Lien on any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of New
York, the term “UCC” shall mean the Uniform Commercial Code as in effect in
such other jurisdiction for purposes of the provisions of this Agreement
relating to such attachment, perfection, priority or remedies and for purposes
of definitions related to such provisions; provided further, that to the extent
that UCC is used to define any term herein or in any Ancillary Agreement and
such term is defined differently in different Articles or Divisions of the UCC,
the definition of such term contained in Article or Division 9 shall govern.

 

“Warrants” has the
meaning set forth in the Registration Rights Agreements.

 

EXHIBITS

 

Exhibit 1(A) – Commercial
Tort Claims

Exhibit 2 – Permitted
Liens

Exhibit 7(c) – Actions
for Perfection

Exhibit 7(p) – Bank
Accounts

Exhibit 12(d) – Corporate
Information and Locations of Collateral

Exhibit 12(e) – ERISA

Exhibit 12(i) – Licenses,
Patents, Trademarks and Copyrights

Exhibit 12(j) – Certain
SEC matters

Exhibit 13(e)(i) –
Permitted Indebtedness

Exhibit 13(e)(ii) –
Existing Subsidiaries

Exhibit A – Form of
Borrowing Base Certificate

 

39

 

Exhibit A

 

Borrowing Base
Certificate

 

	
  DATE

  	
  CERTIFICATE NUMBER:

  
	
  BORROWER NAME: Electric City Corp

  	
   

  

 

	
  1.

  	
  Period end Accounts as
  of:  

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Ineligible Accounts as
  of:  

  	
   

  	
   

  	
   

  
	
   

  	
  Accounts over 120 days
  from invoice date

  	
  $

  	
   

  	
   

  
	
   

  	
  Intercompany and
  Affiliate Accounts

  	
  $

  	
   

  	
   

  
	
   

  	
  Contra Accounts

  	
  $

  	
   

  	
   

  
	
   

  	
  COD Accounts

  	
  $

  	
   

  	
   

  
	
   

  	
  Foreign Accounts

  	
  $

  	
   

  	
   

  
	
   

  	
  Discounts, Credits and
  Allowances

  	
  $

  	
   

  	
   

  
	
   

  	
  25% cross aging
  exclusion

  	
  $

  	
   

  	
   

  
	
   

  	
  Bill and Hold invoices

  	
  $

  	
   

  	
   

  
	
   

  	
  Progress Accounts
  (other than Great Lakes)

  	
  $

  	
   

  	
   

  
	
   

  	
  Finance/Service/Late
  Charges

  	
  $

  	
   

  	
   

  
	
   

  	
  Other 

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  Total ineligibles

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  Eligible Accounts (Line
  1 minus Line 2)

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  Eligible Accounts
  advance rate  (90%)

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
  Accounts Availability
  (Line 3 multiplied by Line 4)

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
  Borrowing Availability
  (lesser of lines 5  or the Capital
  Availability Amount)

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
  Revolving Credit
  Advances balance

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
  Reserves (explain)

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
  Net Borrowing
  Availability (Line 6 minus the total of Lines 7 and 8)

  	
   

  	
   

  	
  $

  

 

The undersigned hereby
certifies that all of the foregoing information regarding the Eligible Accounts
is true and correct on the date hereof and all such Accounts listed as Eligible
Accounts are Eligible Accounts within the meaning given such term in the
Security Agreement dated September 11, 2003 between Borrower and Laurus Master
Fund, Ltd.

 

	
  ELECTRIC CITY CORP.

  
	
   

  
	
  By:  

  	
   

  	
   

  
	
   

  	
  Name: 

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
					

 

40

 

LAURUS MASTER
FUND, LTD.

 

and

 

ELECTRIC CITY
CORPORATION

 

Dated: September
11, 2003

 

 

TABLE
OF CONTENTS

 

	
  1.

  	
  (a) General Definitions

  
	
   

  	
  (b)

  	
  Accounting Terms

  
	
   

  	
  (c)

  	
  Other Terms

  
	
   

  	
  (d)

  	
  Rules of Construction

  
	
   

  	
   

  
	
  2.

  	
  Credit Advances.

  
	
   

  	
   

  
	
  3.

  	
  Repayment of the Loans

  
	
   

  	
   

  
	
  4.

  	
  Procedure
  for Loans

  
	
   

  	
   

  
	
  5.

  	
  Interest
  and Payments.

  
	
   

  	
  (a)

  	
  Interest.

  
	
   

  	
  (b)

  	
  Payments.

  
	
   

  	
   

  
	
  6.

  	
  Security
  Interest.

  
	
   

  	
   

  
	
  7.

  	
  Representations,
  Warranties and Covenants Concerning the Collateral

  
	
   

  	
   

  
	
  8.

  	
  Payment
  of Accounts.

  
	
   

  	
   

  
	
  9.

  	
  Collection and Maintenance of Collateral.

  
	
   

  	
   

  
	
  10.

  	
  Inspections and Appraisals

  
	
   

  	
   

  
	
  11.

  	
  Financial
  Reporting

  
	
   

  	
   

  
	
  12.

  	
  Additional
  Representations and Warranties

  
	
   

  	
   

  
	
  13.

  	
  Covenants. 
  Company covenants as follows:

  
	
   

  	
   

  
	
  14.

  	
  Further
  Assurances

  
	
   

  	
   

  
	
  15.

  	
  Power of
  Attorney

  
	
   

  	
   

  
	
  16.

  	
  Term of
  Agreement

  
	
   

  	
   

  
	
  17.

  	
  Termination
  of Lien

  
	
   

  	
   

  
	
  18.

  	
  Events of
  Default

  
	
   

  	
   

  
	
  19.

  	
  Remedies

  

 

i

 

	
  20.

  	
  Waivers

  
	
   

  	
   

  
	
  21.

  	
  Expenses

  
	
   

  	
   

  
	
  22.

  	
  Assignment
  By Laurus

  
	
   

  	
   

  
	
  23.

  	
  No Waiver; Cumulative
  Remedies

  
	
   

  	
   

  
	
  24.

  	
  Application
  of Payments

  
	
   

  	
   

  
	
  25.

  	
  Indemnity

  
	
   

  	
   

  
	
  26.

  	
  Revival

  
	
   

  	
   

  
	
  27.

  	
  Notices

  
	
   

  	
   

  
	
  28.

  	
  Governing Law, Jurisdiction and Waiver of
  Jury

  
	
   

  	
   

  
	
  29.

  	
  Limitation of Liability

  
	
   

  	
   

  
	
  30.

  	
  Entire
  Understanding

  
	
   

  	
   

  
	
  31.

  	
  Severability

  
	
   

  	
   

  
	
  32.

  	
  Captions

  
	
   

  	
   

  
	
  33.

  	
  Counterparts; Telecopier Signatures

  
	
   

  	
   

  
	
  34.

  	
  Construction

  
	
   

  	
   

  
	
  35.

  	
  Publicity

  

 

ii

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