Document:

Exhibit 10.1

 

FIRST AMENDMENT TO LOAN AND SECURITY
AGREEMENT

 

THIS FIRST AMENDMENT
TO LOAN AND SECURITY AGREEMENT (this “Amendment”)
is executed as of August 27, 2003 by and among FAO, INC., a Delaware corporation, FAO SCHWARZ, INC., a Delaware corporation, ZB COMPANY, INC., a Delaware corporation, THE RIGHT START, INC., a Delaware
corporation, and TARGOFF-RS, LLC,
a New York limited liability company (collectively, the “Borrowers”);
the lenders from time to time parties thereto (collectively, the “Lenders”
and each individually, a “Lender”); FLEET
RETAIL FINANCE INC., as Administrative Agent, Collateral Agent and
Syndication Agent for the Lenders (in each such capacity, with its successors
and assigns, the “Agent”); and CONGRESS
FINANCIAL CORPORATION (CENTRAL) and WELLS FARGO RETAIL FINANCE II, LLC, as Co-Documentation
Agents.

 

RECITALS

 

A.                                   The
Borrowers, the Lenders and the Agent are parties to that certain Loan and
Security Agreement dated as of April 23, 2003 (as amended, extended,
supplemented or otherwise modified from time to time, the “Loan
Agreement”).  Capitalized terms used
herein without definition have the meanings assigned to them in the Loan
Agreement.

 

B.                                     The
Borrowers have requested that they be permitted to provide another Availability
Letter of Credit in the aggregate maximum drawing amount of $6,000,000.

 

C.                                     The
Borrowers have also informed the Lenders and the Agent that the Kayne Existing
Indebtedness Holders are Richard Kayne and Fortune Twenty-Fifth, Inc. and that
there will be additions to the Kayne Credit Support Indebtedness Holders based
upon the requested additional Availability Letter of Credit.

 

D.                                    The
Lenders signing below are willing to consent to the Borrowers’ request on the
terms and conditions hereinafter set forth.

 

E.                                      The
Borrowers have informed the Agent that they failed as required by Section 10.1
of the Loan Agreement to maintain at least $5,000,000 in Excess Availability on
August 25 through the date hereof and have requested that the Lenders agree to
waive such default.  The Lenders are
willing to provide the requested waiver but only upon the terms and conditions
hereinafter set forth.

 

NOW,
THEREFORE, for good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:

 

I.                                         AMENDMENTS
TO LOAN AGREEMENT.

 

A.                                   Definitions.  The following definitions are amended to
read in their entirety as follows:

 

 

“$5,000,000
AVAILABILITY LETTER OF CREDIT.  A letter
or letters of credit in Agent’s possession in form and substance satisfactory
to the Agent in its sole discretion in the aggregate maximum drawing amount of
$5,000,000, naming the Agent as beneficiary and with an expiry date of November
30, 2003, with the Old Kayne Credit Support Indebtedness Holders as the obligors
thereunder, under which the Agent may draw the amount thereof in one (1) draw
(x) upon the occurrence of any Event of Default, (y) upon the occurrence of any
Default within fourteen (14) days prior to or on such expiry date, or (z) at
any time within fourteen (14) days prior to or on such expiry date, if an Event
of Default would exist if the $5,000,000 Availability Letter of Credit were to
expire on such day.  For purposes of
determining whether an Event of Default would exist under Section 10.1 of this
Agreement within fourteen (14) days prior to or on such expiry date, the
calculation of Excess Availability shall exclude the $6,000,000 Availability
Letter of Credit from the Borrowing Base and from the Tranche B Borrowing Base
(notwithstanding the definitions of “Borrowing Base” and “Tranche B Borrowing
Base”).

 

“$6,000,000
AVAILABILITY LETTER OF CREDIT.  A letter
or letters of credit in Agent’s possession in form and substance satisfactory
to the Agent in its sole discretion in the aggregate maximum drawing amount (in
increments of $1,000,000) of $6,000,000, naming the Agent as beneficiary and
with an expiry date of January 9, 2004 (or through an extended expiry date, at
the discretion of the New Kayne Credit Support Indebtedness Holders with the Agent’s
prior written consent, provided each such extension is in place more than ten
(10) days prior to the then existing expiry date and each such extension is for
no less than 90 days; as so extended, the “$6,000,000 L/C Expiry Date”), with
the New Kayne Credit Support Indebtedness Holders as the obligors hereunder,
under which the Agent may draw in one or more draws (in increments of
$1,000,000) on such letter of credit and apply such amounts to the Obligations
(x) at any time, the full amount thereof upon the occurrence of any Event of
Default (other than an Event of Default arising at any time within ten (10)
days prior to or on the $6,000,000 L/C Expiry Date solely by reason of the
Borrowers’ failure to comply with the minimum Excess Availability covenant set
forth in Section 10.1 of this Agreement during such ten-day period), (y) the
full amount thereof upon the occurrence of any Default within ten (10) days
prior to or on the $6,000,000 L/C Expiry Date, or (z) on any day within ten
(10) days prior to or on the $6,000,000 L/C Expiry Date in amounts rounded
upward to the nearest $1,000,000 sufficient to assure that the Borrower is in
compliance with Section 10.1 based upon the information available to the Agent
at the time of such draw request.  The
Agent’s rights to draw amounts under the $6,000,000 Availability Letter of
Credit shall not be limited by any increase in Excess Availability following
the submission of a draw request under the $6,000,000 Availability Letter of
Credit.

 

2

 

“AVAILABILITY
LETTERS OF CREDIT.  The $5,000,000
Availability Letter of Credit and the $6,000,000 Availability Letter of Credit,
individually and collectively.

 

“BORROWING
BASE.  The aggregate of the following:

 

(a)                                  The
face amount of Eligible Credit Card Receivables MULTIPLIED BY the Credit Card
Advance Rate,

 

PLUS

 

(b)                                 The
lesser of (i) the Cost of Eligible Inventory (net of Inventory Reserves)
MULTIPLIED BY the Inventory Advance Rate or (ii) the Appraised Inventory
Percentage MULTIPLIED BY the Appraised Inventory Liquidation Value,

 

PLUS

 

(c)                                  If
the $5,000,000 Availability Letter of Credit exists and is in full force and
effect, until fourteen (14) days prior to its expiry, one hundred percent
(100%) of the undrawn amount of the $5,000,000 Availability Letter of Credit,

 

PLUS

 

(d)                                 If
the $6,000,000 Availability Letter of Credit exists and is in full force and
effect, until ten (10) days prior to the $6,000,000 L/C Expiry Date, one
hundred percent (100%) of the undrawn amount of the $6,000,000 Availability
Letter of Credit.

 

“KAYNE CREDIT
SUPPORT ADDITIONAL LIEN.  A Lien on the
existing and future personal property assets of the Borrowers in favor of the
New Kayne Credit Support Indebtedness Holders to secure the New Kayne Credit
Support Indebtedness, pursuant to a security agreement in form and substance
satisfactory to the Agent, subordinate to the Lien (whether now existing or
hereafter acquired) of the Agent on all such assets.

 

“KAYNE CREDIT
SUPPORT INDEBTEDNESS.  Indebtedness to
the extent permitted hereunder hereafter incurred and owing by the Borrowers to
all or any combination of the Kayne Credit Support Indebtedness Holders in the
aggregate principal amount of up to and including the aggregate face amount of
the Availability Letters of Credit whether contingent as to a draw (or draws,
if more than one letter of credit) not yet made thereunder or evidenced by the
New Kayne Availability Notes with respect to a draw made under the Availability
Letters of Credit.

 

3

 

“KAYNE CREDIT
SUPPORT INDEBTEDNESS HOLDERS.  All or
any combination of the Old Kayne Credit Support Indebtedness Holders and the
New Kayne Credit Support Indebtedness Holders.

 

“KAYNE
EXISTING INDEBTEDNESS.  Existing
Indebtedness held by the Kayne Existing Indebtedness Holders under the Plan of
Reorganization evidenced by the “New Kayne Anderson Equipment Notes” of FAO,
Schwarz and ZB under and as defined in the Plan of Reorganization in the
original principal amount of $3,686,126.

 

“KAYNE
EXISTING INDEBTEDNESS HOLDERS.  Richard
Kayne and Fortune Twenty-Fifth, Inc., and their respective assigns; PROVIDED
such assigns have assumed pursuant to an agreement in form and substance
reasonably satisfactory to the Agent the intercreditor and subordination
agreement in favor of the Agent with respect to the Kayne Existing Indebtedness
and the Kayne Existing Lien.

 

“KAYNE
EXISTING LIEN.  A Lien on Equipment
owned by FAO, Schwarz or ZB and existing on the Closing Date in favor of the
Kayne Existing Indebtedness Holders to secure the Kayne Existing Indebtedness
and, if incurred after the Closing Date and to the extent permitted hereunder,
the Kayne Credit Support Indebtedness and the Equipment Financing Indebtedness,
superior to the Lien of the Agent.

 

“MINIMUM
EXCESS AVAILABILITY AMOUNT.  (a)
$5,000,000 until ten (10) days prior to the $6,000,000 L/C Expiry Date (as
defined in definition of $6,000,000 Availability Letter of Credit) and (b)
$10,000,000 ten (10) days prior to the L/C Expiry Date and at all times
thereafter; provided, however, the Minimum Excess Availability Amount shall be
reduced from $10,000,000 to $5,000,000 if either (i) the entire $6,000,000
Availability Letter of Credit is drawn and $6,000,000 is applied to reduce the
Revolving Loans (or to cash collateralize the Obligations), but such reduction
shall remain for only so long as no payments are made with respect to any of
the New Kayne Credit Support Indebtedness or (ii) the Borrowers have received
net proceeds of not less than $6,000,000 from new subordinated debt and or
equity financing on terms and conditions acceptable to the SuperMajority
Revolving Credit Lenders and the Tranche B Lender in their sole discretion.

 

“NEW KAYNE
AVAILABILITY NOTES.  Promissory notes
issued after the Closing Date by FAO, Schwarz and ZB in favor of the Old Kayne
Credit Support Indebtedness Holders in respect of the Old Kayne Credit Support
Indebtedness and by the Borrowers in favor of the New Kayne Credit Support
Indebtedness Holders in respect of the New Kayne Credit Support Indebtedness,
in each case evidencing draws made under the Availability Letters of Credit,
each of which Notes shall be in form and substance reasonably satisfactory to
the Agent.

 

4

 

“NEW KAYNE
CREDIT SUPPORT INDEBTEDNESS. 
Indebtedness to the extent permitted hereunder hereafter incurred and
owing by the Borrowers to all or any combination of the New Kayne Credit
Support Indebtedness Holders in the aggregate principal amount of up to and
including $6,000,0000 in respect of the $6,000,000 Availability Letter of
Credit, whether contingent as to a draw (or draws, if more than one letter of
credit) not yet made thereunder or evidenced by the New Kayne Availability Notes
with respect to a draw made under the $6,000,000 Availability Letter of Credit.

 

“NEW KAYNE
CREDIT SUPPORT INDEBTEDNESS HOLDERS. 
Fred Kayne, Kayne Anderson Capital Advisors, L.P., Richard Kayne,
Hancock Park Capital II, L.P., Woodacres LLC, Les Biller, as Trustee of the Les
and Sheri Biller Revocable Trust, Charles Norris, Marc I. Stern, as trustee for
the Beatrice B. Trust and James J. Land (or Richard Atlas, as trustee of the
Atlas Family Trust, or such other Persons as reasonably acceptable to by the
Agent), and their respective assigns; PROVIDED Mr. Atlas in such capacity and
such other Persons and assigns have assumed pursuant to an agreement in form
and substance reasonably satisfactory to the Agent the intercreditor and
subordination agreement in favor of Agent with respect to the New Kayne Credit
Support Indebtedness.

 

“OLD KAYNE
CREDIT SUPPORT INDEBTEDNESS. 
Indebtedness to the extent permitted hereunder hereafter incurred and
owing by the Borrowers to all or any combination of the Old Kayne Credit
Support Indebtedness Holders in the aggregate principal amount of up to and
including $5,000,000 in respect of the $5,000,000 Availability Letter of Credit
whether contingent as to a draw (or draws, if more than one letter of credit)
not yet made thereunder or evidenced by the New Kayne Availability Notes with
respect to a draw made under the $5,000,000 Availability Letter of Credit.

 

“OLD KAYNE
CREDIT SUPPORT INDEBTEDNESS HOLDERS. 
Fred Kayne, Kayne Anderson Capital Advisors, L.P., Richard Kayne, Hancock
Park Capital II, L.P., Woodacres LLC, Les Biller and Charles Norris, and their
respective assigns; PROVIDED such assigns have assumed pursuant to an agreement
in form and substance reasonably satisfactory to the Agent the intercreditor
and subordination agreement in favor of Agent with respect to the Old Kayne
Credit Support Indebtedness and the Kayne Existing Lien.

 

“SECURITIES
PURCHASE AGREEMENT.  That certain
Securities Purchase Agreement dated as of April 3, 2003 among FAO and Saks,
Fred Kayne, Kayne Anderson Capital Advisors, L.P., Richard Kayne, Hancock Park
Capital II, L.P. and PCG Tagi, LLC (Series H), as amended by the First
Amendment to Securities Purchase Agreement dated as of April 21, 2003 among
FAO, Saks and the Old Kayne Credit Support Indebtedness Holders.

 

“TRANCHE B
BORROWING BASE.  The aggregate of the
following:

 

5

 

(a)                                  The
face amount of Eligible Credit Card Receivables MULTIPLIED BY the Credit Card
Advance Rate,

 

PLUS

 

(b)                                 The
lesser of (i) the Appraised Inventory Tranche B Percentage MULTIPLIED BY
the Appraised Inventory Liquidation Value, and (ii) the Tranche B
Inventory Advance Rate MULTIPLIED BY the Cost of Eligible Inventory (net of
Inventory Reserves),

 

PLUS

 

(c)                                  if
the $5,000,000 Availability Letter of Credit exists and is in full force and
effect, until fourteen (14) days prior to expiry of Availability Letter of
Credit, one hundred percent (100%) of the undrawn amount of the Availability
Letter of Credit,

 

PLUS

 

(d)                                 If
the $6,000,000 Availability Letter of Credit exists and is in full force and
effect, until ten (10) days prior to the $6,000,000 L/C Expiry Date, one
hundred percent (100%) of the undrawn amount of $6,000,000 Availability Letter
of Credit.”

 

B.                                     Permitted
Liens.  Section 9.2.1 is hereby
amended by (1) deleting the period at the end of subparagraph (xvii) thereof
and substituting “; and” therefor; and (2) adding the following new
subparagraph (xviii) immediately thereafter:

 

“(xviii)             A
Lien on the existing and hereafter acquired personal property assets of the
Borrowers (other than existing Equipment (as of the Closing Date) covered by
Section 9.2.1(viii)) in favor of the New Kayne Credit Support Indebtedness
Holders to secure the New Kayne Credit Support Indebtedness, subordinated to
the Lien (whether now existing or hereafter arising) of the Agent on behalf of
the Agent and the Lenders in such assets, pursuant to an intercreditor and
subordination agreement acceptable in form and substance to the Agent and the
Tranche B Lender.”

 

C.                                     Restricted
Payments.  Section 9.4(a) is hereby
amended by (1) deleting the period at the end of subparagraph (iii) thereof and
substituting “; and” therefor; and (2) adding the following new subparagraph
(iv) immediately thereafter:

 

“(iv)                        upon
five (5) Business Days’ prior written notice to the Agent of each such proposed
repayment of principal or interest under the New Kayne Availability Notes
issued in respect of the New Kayne Credit Support Indebtedness, repayment of
principal (in increments of no less than $1,000,000) and interest on such
prepaid principal; PROVIDED (i) the $6,000,000 Availability

 

6

 

Letter of
Credit has expired, (ii) no Default or Event of Default exists or could
reasonably be expected to result from such payment, and (iii) after giving
effect to such payment, the Borrowers shall have no less than $10,000,000 in
Excess Availability.”

 

D.                                    Minimum
Excess Availability.  Section 10.1
is hereby amended to read in its entirety as follows:

 

“10.1 MINIMUM
EXCESS AVAILABILITY.  The Borrower shall
maintain at all times Excess Availability of not less than the Minimum Excess
Availability Amount.”

 

E.                                      Application
of draws under Availability Letters of Credit.  The Agent agrees that so long as the $5,000,000 Availability
Letter of Credit and the $6,000,000 Availability Letter of Credit both remain
outstanding and undrawn, the Agent will draw on the $5,000,000 Availability
Letter of Credit first.  Proceeds of
draws under the Availability Letters of Credit shall be applied by the Agent to
pay down Revolving Loans under the Agreement; unless an Event of Default then
exists in which case such proceeds may be applied in accordance with Section
2.15 of the Credit Agreement.

 

II.                                     REPRESENTATIONS,
WARRANTIES AND COVENANTS.  The Borrowers hereby represent and warrant
to, and covenant and agree with, the Agent and the Lenders that:

 

A.                                   The
execution and delivery of this Amendment has been duly authorized by all
requisite corporate action on the part of the Borrowers.

 

B.                                     As
of the date hereof and after giving effect to this Amendment, the
representations and warranties of the Borrowers contained in the Loan
Agreement, as amended hereby, and the other Loan Documents are true and correct
in all material respects on and as of the date of this Amendment as though made
at and as of such date.  Since April 23,
2003, after giving effect to this Amendment, no event or circumstance has
occurred or existed which could reasonably be expected to have Material Adverse
Effect.  As of the date hereof and after
giving effect to this Amendment, no Default or Event of Default has occurred
and is continuing.

 

C.                                     The
Borrowers are not required to obtain any consent, approval or authorization
from, or to file any declaration or statement with, any governmental
instrumentality or other agency or any other Person in connection with, or as a
condition to, the execution, delivery or performance of this Amendment by such
party.

 

D.                                    This
Amendment constitutes the legal, valid and binding obligation of the Borrowers,
enforceable against it in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting the rights
and remedies of creditors generally or the application of principles of equity,
whether in any action at law or proceeding in equity.

 

7

 

E.                                      Each
of the Borrowers warrants and represents that, as of the date hereof, it has no
defenses, setoffs, claims, counterclaims or causes of action of any kind or
nature whatsoever with respect to the Loan Documents and this Amendment.

 

F.                                      All references to the Loan Agreement
(howsoever called) in any Loan Documents shall, from and after the date hereof,
refer to the Loan Agreement as amended by this Amendment.  All Loan Documents heretofore executed by
the Borrowers shall remain in full force and effect and, by the execution of
this Amendment by the Borrowers, such Loan Documents are hereby ratified and
affirmed.

 

III.                                 WAIVER
OF EXISTING EVENT OF DEFAULT/CONSENT.

 

A.                                   The
Borrowers have informed the Agent that they did not maintain at least
$5,000,000 in minimum Excess Availability as required by Section 10.1 of the
Loan Agreement for the period from August 25, 2003 through the date of this
Amendment (the “Existing Event of Default”).  The Agent and the Lenders hereby waive such Existing Event of
Default.  Such waiver relates solely to
the Existing Event of Default and shall in no way be deemed or construed as a
waiver by the Agent and the Lenders of any other Default or Event of Default
under the Loan Agreement or any other Loan Document, including without
limitation any additional breach of Section 10.1 occurring subsequent to the
date of this Amendment.  The Lenders
expressly reserve the full extent of their rights under the Loan Agreement, the
other Loan Documents and applicable law in respect of any other Default or
Event of Default.

 

B.                                     Notwithstanding
the fact that such payments constitute Restricted Payments under the Loan
Agreement, the Agent and the Lenders hereby consent to the Borrowers paying an
issuance fee of (i) $100,000 to the Old Kayne Credit Support Indebtedness
Holders with respect to the issuance of the $5,000,000 Availability Letter of
Credit and (ii) $200,000 to the New Kayne Credit Support Indebtedness Holders
with respect to the issuance of the $6,000,000 Availability Letter of Credit.

 

IV.                                CONDITIONS.   The willingness of the Agent and the
Lenders to amend the Loan Agreement is subject to the satisfaction of the
following conditions precedent:

 

A.                                   The
Borrowers shall have executed and delivered to the Agent (or shall have caused
to be executed and delivered to the Agent by the appropriate persons) the
following:

 

1.                                       On
or before the date hereof:

 

(a)                                  This
Amendment;

 

(b)                                 An
Intercreditor and Subordination Agreement dated as of the date hereof among the
Agent, the Borrowers and the New Kayne Credit Support Indebtedness Holders in
form and substance satisfactory to the Agent (the “New Kayne Intercreditor
Agreement”); and

 

8

 

(c)                                  An
Amendment No. 1 dated as of the date hereof in connection with the foregoing
items from the parties to the Intercreditor and Subordination Agreement dated
as of April 23, 2003 in form and substance satisfactory to the Agent; and

 

(d)                                 True
and complete copies of (i) any required stockholders’ and/or directors’
consents and (ii) any resolutions required for the due authorization of the
execution, delivery and performance by the Borrowers of this Amendment,
certified by a duly authorized officer of the Borrowers.

 

2.                                       Such
other supporting documents and certificates as the Agent, any Lender or their
counsel may reasonably request within the time period(s) reasonably designated
by the Agent, such Lender or their counsel.

 

B.                                     All
legal matters incident to the transactions hereby contemplated shall be
reasonably satisfactory to the Agent’s counsel and to the Lenders’ counsel.

 

V.                                    MISCELLANEOUS.

 

A.                                   As
provided in the Loan Agreement, the Borrowers agree to reimburse the Agent upon
demand for all fees and disbursements of counsel to the Agent incurred in
connection with the preparation of this Amendment.

 

B.                                     (i)  In consideration of the agreements of Agent
and Lenders contained herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, each of the Borrowers
on behalf of itself and its successors, assigns, and other legal
representatives hereby absolutely, unconditionally and irrevocably release,
remise and forever discharge Agent, each Lender and their respective successors
and assigns, and their affiliates, subsidiaries, predecessors, directors,
officers, attorneys, employees, agents and other representatives (Agent, each
Lender and all such other Persons being hereinafter referred to collectively as
the “Releasees”, and individually as a “Releasee”), of and from all demands,
actions, causes of action, suits, covenants, contracts, controversies,
agreements, promises, sums of money, accounts, bills, reckonings, damages and
any and all other claims, counterclaims, defenses, rights of set-off, demands
and liabilities whatsoever (individually, a “Claim”, and collectively,
“Claims”) of every name and nature, known or unknown, suspected or unsuspected,
both at law and in equity, which such Borrower, or any of its respective
administrators, successors, assigns, and other legal representatives, may now
or hereafter own, hold, have or claim to have against the Releasees or any of
them for, upon, or by reason of any circumstance, action, cause or thing
whatsoever which arises at any time on or prior to the day and date of this
Amendment for or on account of, or in relation to, or in any way in connection
with any of the Loan Agreement, the other Loan Documents or this Amendment or
transactions thereunder or hereunder related thereto or hereto.

 

(ii)                                  Each
of the Borrowers understands, acknowledges and agrees that the release set
forth above may be pleaded as a full and complete defense and may be used as a
basis for an

 

9

 

injunction against any action,
suit or other proceeding which may be instituted, prosecuted or attempted in
breach of the provisions of such release.

 

(iii)                               Each
of the Borrowers agrees that no fact, event, circumstance, evidence or
transaction which could now be asserted or which may hereafter be discovered
shall affect in any manner the final, absolute and unconditional nature of the
release set forth above.

 

C.                                     Each
of the Borrowers on behalf of itself and its successors, assigns, and other
legal representatives, hereby absolutely, unconditionally and irrevocably,
covenants and agrees with and in favor of each Releasee that it will not sue
(at law, in equity, in any regulatory proceeding or otherwise) any Releasee on
the basis of  any Claim released,
remised and discharged pursuant to the foregoing Paragraph B.

 

D.                                    This
Amendment shall be governed by, and construed in accordance with, the law of
the State of New York.

 

E.                                      This
Amendment may be executed by the parties hereto in several counterparts hereof
and by the different parties hereto on separate counterparts hereof, all of
which counterparts shall together constitute one and the same agreement.  Delivery of an executed signature page of
this Amendment by facsimile transmission shall be effective as an in-hand
delivery of an original executed counterpart hereof.

 

[The next pages are
the signature pages.]

 

10

 

IN WITNESS
WHEREOF, the parties hereto, intending to be legally bound hereby, have caused
this First Amendment to Loan and Security Agreement to be executed by their
respective officers thereunto duly authorized as of the date first written
above.

 

	
   

  	
  FAO, INC.

  
	
   

  
	
   

  
	
   

  	
  By:

  	
    /s/ Jerry R. Welch

  	
   

  
	
   

  	
    Name:

  	
  Jerry R.
  Welch

  	
   

  
	
   

  	
    Title:

  	
  Chief
  Executive Officer and President

  	
   

  
	
   

  
	
   

  	
  FAO SCHWARZ, INC.

  
	
   

  
	
   

  	
  By:

  	
    /s/ Jerry R. Welch

  	
   

  
	
   

  	
    Name:

  	
  Jerry R.
  Welch

  	
   

  
	
   

  	
    Title:

  	
  Chief
  Executive Officer and President

  	
   

  
	
   

  
	
   

  	
  ZB COMPANY, INC.

  
	
   

  
	
   

  	
  By:

  	
    /s/ Jerry R. Welch

  	
   

  
	
   

  	
    Name:

  	
  Jerry R.
  Welch

  	
   

  
	
   

  	
    Title:

  	
  Chief
  Executive Officer and President

  	
   

  
	
   

  
	
   

  	
  THE RIGHT START, INC.

  
	
   

  
	
   

  	
  By:

  	
    /s/ Jerry R. Welch

  	
   

  
	
   

  	
    Name:

  	
  Jerry R.
  Welch

  	
   

  
	
   

  	
    Title:

  	
  Chief
  Executive Officer and President

  	
   

  
	
   

  
	
   

  	
  TARGOFF-RS, LLC

  
	
   

  
	
   

  	
  By:

  	
    /s/ Jerry R. Welch

  	
   

  
	
   

  	
    Name:

  	
  Jerry R.
  Welch

  	
   

  
	
   

  	
    Title:

  	
  Chief
  Executive Officer and President

  	
   

  
							

 

11

 

IN WITNESS WHEREOF,
intending to be legally bound hereby, the undersigned Lender has caused this
First Amendment to Loan and Security Agreement by and among FAO, INC., FAO
SCHWARZ, INC., ZB COMPANY, INC., THE RIGHT START, INC., TARGOFF-RS, LLC, THE
LENDERS PARTY HERETO and FLEET RETAIL FINANCE INC., as Agent, to be executed by its duly
authorized officers as of the date first above written.

 

	
   

  	
  FLEET RETAIL FINANCE INC., as

  Administrative Agent, Collateral Agent and

  Syndication Agent and as a Lender

  
	
   

  
	
   

  
	
   

  	
  By:

  	
    /s/ Christine M. Scott

  	
   

  
	
   

  	
  Name:

  	
   Christine M. Scott

  	
   

  
	
   

  	
  Title:

  	
   Vice President

  	
   

  
							

 

12

 

IN WITNESS WHEREOF,
intending to be legally bound hereby, the undersigned Lender has caused this
First Amendment to Loan and Security Agreement by and among FAO, INC., FAO
SCHWARZ, INC., ZB COMPANY, INC., THE RIGHT START, INC., TARGOFF-RS, LLC, THE
LENDERS PARTY HERETO and FLEET RETAIL FINANCE INC., as Agent, to be executed by its duly
authorized officers as of the date first above written.

 

	
   

  	
  CONGRESS FINANCIAL CORPORATION

  (CENTRAL), as Co-Documentation Agent and

  as a Lender

  
	
   

  
	
   

  
	
   

  	
  By:

  	
  /s/ Steven Linderman

  	
   

  
	
   

  	
  Name:

  	
   Steven Linderman

  	
   

  
	
   

  	
  Title:

  	
   Senior Vice President

  	
   

  
						

 

13

 

IN WITNESS WHEREOF,
intending to be legally bound hereby, the undersigned Lender has caused this
First Amendment to Loan and Security Agreement by and among FAO, INC., FAO
SCHWARZ, INC., ZB COMPANY, INC., THE RIGHT START, INC., TARGOFF-RS, LLC, THE
LENDERS PARTY HERETO and FLEET RETAIL FINANCE INC., as Agent, to be executed by its duly
authorized officers as of the date first above written.

 

	
   

  	
  WELLS FARGO RETAIL FINANCE II,

  LLC, as Co-Documentation Agent and as a

  Lender

  
	
   

  
	
   

  
	
   

  	
  By:

  	
  /s/ David Molinario

  	
   

  
	
   

  	
  Name:

  	
    David Molinario

  	
   

  
	
   

  	
  Title:

  	
    Vice President

  	
   

  
							

 

14

 

IN WITNESS WHEREOF,
intending to be legally bound hereby, the undersigned Lender has caused this
First Amendment to Loan and Security Agreement by and among FAO, INC., FAO
SCHWARZ, INC., ZB COMPANY, INC., THE RIGHT START, INC., TARGOFF-RS, LLC, THE
LENDERS PARTY HERETO and FLEET RETAIL FINANCE INC., as Agent, to be executed by its duly
authorized officers as of the date first above written.

 

	
   

  	
  BACK BAY
  CAPITAL FUNDING LLC

  
	
   

  
	
   

  
	
   

  	
  By:

  	
  /s/ Kristan M. O’Connor

  	
   

  
	
   

  	
  Name:

  	
    Kristan M. O’Connor

  	
   

  
	
   

  	
  Title:

  	
    Director

  	
   

  
							

 

15Exhibit 10.1

 

 

ELECTRIC CITY CORP.

 

SECURITIES
PURCHASE AGREEMENT

 

 

September 11, 2003

 

 

 

 

TABLE OF CONTENTS

 

	
  1.

  	
  AGREEMENT TO SELL AND
  PURCHASE

  
	
   

  
	
  2.

  	
  FEES AND WARRANT

  
	
   

  
	
  3.

  	
  CLOSING, DELIVERY AND PAYMENT

  
	
   

  	
  3.1

  	
  Closing

  
	
   

  	
  3.2

  	
  Delivery

  
	
   

  
	
  4.

  	
  REPRESENTATIONS
  AND WARRANTIES OF THE COMPANY

  
	
   

  	
  4.1

  	
  Organization, Good Standing and
  Qualification

  
	
   

  	
  4.2

  	
  Subsidiaries

  
	
   

  	
  4.3

  	
  Capitalization; Voting Rights

  
	
   

  	
  4.4

  	
  Authorization; Binding Obligations

  
	
   

  	
  4.5

  	
  Liabilities

  
	
   

  	
  4.6

  	
  Agreements; Action

  
	
   

  	
  4.7

  	
  Obligations to Related
  Parties

  
	
   

  	
  4.8

  	
  Changes

  
	
   

  	
  4.9

  	
  Title to Properties and
  Assets; Liens, Etc.

  
	
   

  	
  4.10

  	
  Intellectual Property

  
	
   

  	
  4.11

  	
  Compliance with Other
  Instruments

  
	
   

  	
  4.12

  	
  Litigation

  
	
   

  	
  4.13

  	
  Tax Returns and Payments

  
	
   

  	
  4.14

  	
  Employees

  
	
   

  	
  4.15

  	
  Registration
  Rights and Voting Rights

  
	
   

  	
  4.16

  	
  Compliance with Laws;
  Permits

  
	
   

  	
  4.17

  	
  Environmental and Safety
  Laws

  
	
   

  	
  4.18

  	
  Valid Offering

  
	
   

  	
  4.19

  	
  Full Disclosure

  
	
   

  	
  4.20

  	
  Insurance

  
	
   

  	
  4.21

  	
  SEC Reports

  
	
   

  	
  4.22

  	
  Listing

  
	
   

  	
  4.23

  	
  No Integrated Offering

  
	
   

  	
  4.24

  	
  Stop Transfer

  

 

 

	
   

  	
  4.25

  	
  Dilution

  
	
   

  
	
  5.

  	
  REPRESENTATIONS
  AND WARRANTIES OF THE PURCHASERS

  
	
   

  	
  5.1

  	
  Requisite Power and
  Authority

  
	
   

  	
  5.2

  	
  Investment Representations

  
	
   

  	
  5.3

  	
  Purchaser Bears Economic
  Risk

  
	
   

  	
  5.4

  	
  Acquisition for Own Account

  
	
   

  	
  5.5

  	
  Purchaser Can
  Protect Its Interest

  
	
   

  	
  5.6

  	
  Accredited Investor

  
	
   

  	
  5.7

  	
  Legends

  
	
   

  	
  5.8

  	
  No Shorting

  
	
   

  
	
  6.

  	
  COVENANTS OF THE COMPANY

  
	
   

  	
  6.1

  	
  Stop-Orders

  
	
   

  	
  6.2

  	
  Listing

  
	
   

  	
  6.3

  	
  Market Regulations

  
	
   

  	
  6.4

  	
  Reporting Requirements

  
	
   

  	
  6.5

  	
  Use of Funds

  
	
   

  	
  6.6

  	
  Access to Facilities

  
	
   

  	
  6.7

  	
  Taxes

  
	
   

  	
  6.8

  	
  Insurance

  
	
   

  	
  6.9

  	
  Intellectual
  Property

  
	
   

  	
  6.10

  	
  Properties

  
	
   

  	
  6.11

  	
  Confidentiality

  
	
   

  	
  6.12

  	
  Required Approvals

  
	
   

  	
  6.13

  	
  Reissuance of Securities

  
	
   

  	
  6.14

  	
  Opinion

  
	
   

  
	
  7.

  	
  COVENANTS OF THE PURCHASER

  
	
   

  	
  7.1

  	
  Confidentiality

  
	
   

  	
  7.2

  	
  Non-Public Information

  
	
   

  
	
  8.

  	
  COVENANTS
  OF THE COMPANY AND PURCHASERS REGARDING INDEMNIFICATION

  
	
   

  	
  8.1

  	
  Company Indemnification

  
	
   

  	
  8.2

  	
  Purchaser’s Indemnification

  
	
   

  	
  8.3

  	
  Procedures

  

 

ii

 

	
  9.

  	
  CONVERSION OF
  CONVERTIBLE NOTE

  
	
   

  	
  9.1

  	
  Mechanics of Conversion

  
	
   

  	
  9.2

  	
  Maximum Conversion

  
	
   

  
	
  10.

  	
  REGISTRATION RIGHTS

  
	
   

  	
  10.1

  	
  Registration Rights Granted

  
	
   

  	
  10.2

  	
  Indemnification

  
	
   

  	
  10.3

  	
  Offering Restrictions

  
	
   

  
	
  11.

  	
  MISCELLANEOUS

  
	
   

  	
  11.1

  	
  Governing Law

  
	
   

  	
  11.2

  	
  Survival

  
	
   

  	
  11.3

  	
  Successors and Assigns

  
	
   

  	
  11.4

  	
  Entire Agreement

  
	
   

  	
  11.5

  	
  Severability

  
	
   

  	
  11.6

  	
  Amendment and Waiver

  
	
   

  	
  11.7

  	
  Delays or Omissions

  
	
   

  	
  11.8

  	
  Notices

  
	
   

  	
  11.9

  	
  Attorneys’ Fees

  
	
   

  	
  11.10

  	
  Titles and Subtitles

  
	
   

  	
  11.11

  	
  Facsimile Signatures;
  Counterparts

  
	
   

  	
  11.12

  	
  Broker’s Fees

  
	
   

  	
  11.13

  	
  Construction

  

 

iii

 

SECURITIES
PURCHASE AGREEMENT

 

THIS
SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and
entered into as of September 11, 2003, by and between Electric City Corp., a
Delaware corporation (the “Company”), and Laurus Master Fund, Ltd., a
Cayman Islands company (the “Purchaser”).

 

RECITALS

 

WHEREAS,
the Company has authorized the sale to the Purchaser of a Convertible Term Note
in the aggregate principal amount of $1,000,000 (the “Note”), which Note is
convertible into shares of the Company’s common stock, $0.0001 par value per
share (the “Common Stock”) at a fixed conversion price of $2.12 per share
of Common Stock  (“Fixed Conversion Price”);

 

WHEREAS,  the
Company wishes to issue a warrant to the Purchaser to purchase up to 140,000
shares of the Company’s Common Stock in connection with Purchaser’s purchase of
the Note;

 

WHEREAS,
Purchaser desires to purchase the Note and Warrant on the terms and conditions
set forth herein; and

 

WHEREAS,
the Company desires to issue and sell the Note and Warrant to Purchaser on the
terms and conditions set forth herein.

 

AGREEMENT

 

NOW,
THEREFORE, in consideration of the foregoing recitals and the
mutual promises, representations, warranties and covenants hereinafter set
forth and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

 

1.                                      AGREEMENT TO SELL AND PURCHASE.  Pursuant to the terms and conditions set
forth in this Agreement, on the Closing Date (as defined in Section 3), the
Company agrees to sell to the Purchaser, and the Purchaser hereby agrees to
purchase from the Company a Note in the amount of $1,000,000 convertible in
accordance with the terms thereof into shares of the Company’s Common Stock in
accordance with the terms of the Note and this Agreement.  The Note purchased on the Closing Date shall
be known as the “Offering.”  A form of the Note is annexed hereto as
Exhibit A.  The Note will have a
Maturity Date (as defined in the Note) twenty four (24) months from the date of
issuance.  Collectively, the Note and
Warrant (as defined in Section 2) and Common Stock issuable in payment of the
Note, upon conversion of the Note and upon exercise of the Warrant are referred
to as the “Securities”.

 

2.                                      FEES AND WARRANT.   On the Closing Date:

 

(a)                                  The
Company will issue and deliver to the Purchaser a Warrant to purchase 140,000
shares of Common Stock in connection with the Offering (the “Warrant”) pursuant to Section 1
hereof.  The Warrant must be delivered
on the Closing Date.  A form of

 

1

 

Warrant is annexed hereto
as Exhibit B.  All the representations,
covenants, warranties, undertakings, and indemnification, and other rights made
or granted to or for the benefit of the Purchaser by the Company are hereby
also made and granted in respect of the Warrant and shares of the Company’s
Common Stock issuable upon exercise of the Warrant (the “Warrant Shares”).

 

(b)                                 Upon
execution and delivery of this Agreement by the Company and Purchaser , the
Company shall pay to Laurus Capital Management, LLC, manager of  Purchaser (i) a closing payment in an amount
equal to five percent  (5%) of the
aggregate principal amount of the Note. The foregoing fee is referred to herein
as the “Closing Payment”.

 

(c)                                  The
Company shall reimburse the Purchaser for its reasonable legal fees for
services rendered to the Purchaser in preparation of this Agreement and the
Related Agreements (as hereinafter defined), and expenses in connection with
the Purchaser’s due diligence review of the Company and relevant matters.  Amounts required to be paid hereunder will
be paid at the Closing and shall not exceed $22,000 for legal expenses and
$17,500 for performing due diligence inquiries on the Company.

 

(d)                                 The
Closing Payment, legal fees and due diligence fees (net of deposits previously
paid by the Company shall be paid at closing out of funds held pursuant to a
Funds Escrow Agreement of even date herewith among the company, Purchaser, and
an Escrow Agent (the “Funds Escrow Agreement”)
and a disbursement letter (the “Disbursement
Letter”).

 

3.                                      CLOSING, DELIVERY AND PAYMENT.

 

3.1                               Closing.  Subject to
the terms and conditions herein, the closing of the transactions contemplated
hereby (the “Closing”), shall take
place on the date hereof, at such time or place as the Company and Purchaser
may mutually agree (such date is hereinafter referred to as the “Closing Date”).

 

3.2                               Delivery.  Pursuant
to the Funds Escrow Agreement in the form attached hereto as Exhibit C, at the
Closing on the Closing Date, the Company will deliver to the Purchaser, among
other things, a Note in the form attached as Exhibit A representing the
principal amount of $1,000,000 and a Warrant in the form attached as Exhibit B
in the Purchaser’s name representing 140,000 Warrant Shares and the Purchaser
will deliver to the Company, among other things, the amounts set forth in the
Disbursement Letter by certified funds or wire transfer.

 

4.                                      REPRESENTATIONS AND WARRANTIES OF THE
COMPANY.

 

The Company hereby
represents and warrants to the Purchaser as of the date of this Agreement as
set forth below which disclosures are supplemented by, and subject to the
Company’s filings under the Securities Exchange Act of 1934 (collectively, the
“Exchange Act Filings”), copies of
which have been provided to the Purchaser.

 

4.1                               Organization, Good Standing and Qualification.  The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of

 

2

 

Delaware.  The Company has the corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement, and the Note and the Warrant to be issued in connection with
this Agreement, the Security Agreement relating to the Note dated as of
September 11, 2003 between the Company and the Purchaser, the Registration
Rights Agreement relating to the Securities dated as of September 11, 2003
between the Company and the Purchaser and all other agreements referred to herein
(collectively, the “Related Agreements”), to issue and sell the
Note and the shares of Common Stock issuable upon conversion of the Note (the “Note Shares”),
to issue and sell the Warrant and the Warrant Shares, and to carry out the
provisions of this Agreement and the Related Agreements and to carry on its
business as presently conducted.  The
Company is duly qualified and is authorized to do business and is in good
standing as a foreign corporation in all jurisdictions in which the nature of
its activities and of its properties (both owned and leased) makes such
qualification necessary, except for those jurisdictions in which failure to do
so would not have a material adverse effect on the Company or its business.

 

4.2                               Subsidiaries.  The Company owns all of the issued and
outstanding capital stock of Great Lakes Controlled Energy Corp., a Delaware
corporation.  The Company does not own or control
any equity security or other interest of any other corporation, limited
partnership or other business entity.

 

4.3                               Capitalization; Voting Rights.

 

(a)                                  The
authorized capital stock of the Company, as of the date hereof consists of
125,000,000 shares, of which 120,000,000 are shares of Common Stock, par value
$0.0001 per share, 34,152,021 shares of which are issued and outstanding, and
5,000,000 are shares of preferred stock, par value $0.01 per share of which
2,653,631 shares are issued outstanding.

 

(b)                                 Except
as disclosed on Schedule 4.3, other than (i) the shares reserved
for issuance under the Company’s stock option plans; and (ii) shares which may
be granted pursuant to this Agreement and the Related Agreements, there are no
outstanding options, warrants, rights (including conversion or preemptive
rights and rights of first refusal), proxy or stockholder agreements, or
arrangements or agreements of any kind for the purchase or acquisition from the
Company of any of its securities. 
Except as disclosed on Schedule 4.3, neither the offer, issuance
or sale of any of the Note or Warrant, or the issuance of any of the Note
Shares or Warrant Shares, nor the consummation of any transaction contemplated
hereby will result in a change in the price or number of any securities of the
Company outstanding, under anti-dilution or other similar provisions contained
in or affecting any such securities.

 

(c)                                  All
issued and outstanding shares of the Company’s Common Stock (i) have been
duly authorized and validly issued and are fully paid and nonassessable and
(ii) were issued in compliance with all applicable state and federal laws
concerning the issuance of securities.

 

(d)                                 The
rights, preferences, privileges and restrictions of the shares of the Common
Stock are as stated in the Company’s Certificate of Incorporation (the “Charter”).  The Note Shares and Warrant Shares have been
duly and validly reserved for issuance. 
When issued

 

3

 

in compliance with the
provisions of this Agreement and the Company’s Charter, the Securities will be
validly issued, fully paid and nonassessable, and will be free of any liens or
encumbrances; provided, however, that the Securities may be subject to
restrictions on transfer under state and/or federal securities laws as set
forth herein or as otherwise required by such laws at the time a transfer is
proposed.

 

4.4                               Authorization; Binding Obligations.  All corporate action on the part of the
Company, its officers and directors necessary for the authorization of this
Agreement and the Related Agreements, the performance of all obligations of the
Company hereunder at the Closing and, the authorization, sale, issuance and
delivery of the Note and Warrant has been taken or will be taken prior to the
Closing.  The Agreement and the Related
Agreements, when executed and delivered and to the extent it is a party
thereto, will be valid and binding obligations of the Company enforceable in
accordance with their terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors’ rights, and (b) general
principles of equity that restrict the availability of equitable or legal
remedies.  The sale of the Note and the
subsequent conversion of the Note into Note Shares are not and will not be
subject to any preemptive rights or rights of first refusal that have not been
properly waived or complied with. The issuance of the Warrant and the
subsequent exercise of the Warrant for Warrant Shares are not and will not be
subject to any preemptive rights or rights of first refusal that have not been
properly waived or complied with.

 

4.5                               Liabilities. 
The Company, to the best of its knowledge, has no material contingent
liabilities, except current liabilities incurred in the ordinary course of
business and liabilities disclosed in any Exchange Act Filings.

 

4.6                               Agreements; Action.  Except as set forth on Schedule
4.6 or as disclosed in any Exchange Act Filings:

 

(a)                                  There
are no agreements, understandings, instruments, contracts, proposed
transactions, judgments, orders, writs or decrees to which the Company is a
party or to its knowledge by which it is bound which may involve
(i) obligations (contingent or otherwise) of, or payments to, the Company
in excess of $50,000 (other than obligations of, or payments to, the Company arising
from purchase or sale agreements entered into in the ordinary course of
business), or (ii) the transfer or license of any patent, copyright, trade
secret or other proprietary right to or from the Company (other than licenses
arising from the purchase of “off the shelf” or other standard products), or
(iii) provisions restricting the development, manufacture or distribution
of the Company’s products or services, or (iv) indemnification by the
Company with respect to infringements of proprietary rights.

 

(b)                                 Since
December 31, 2002, the Company has not (i) declared or paid any dividends,
or authorized or made any distribution upon or with respect to any class or
series of its capital stock, (ii) incurred any indebtedness for money
borrowed or any other liabilities (other than ordinary course obligations)
individually in excess of $50,000 or, in the case of indebtedness and/or
liabilities individually less than $50,000, in excess of $100,000 in the
aggregate, (iii) made any loans or advances to any person not in excess,
individually or in the aggregate, of $100,000, other than ordinary advances for
travel expenses, or (iv) sold, exchanged

 

4

 

or otherwise disposed of
any of its assets or rights, other than the sale of its inventory in the
ordinary course of business.

 

(c)                                  For
the purposes of subsections (a) and (b) above, all indebtedness, liabilities,
agreements, understandings, instruments, contracts and proposed transactions
involving the same person or entity (including persons or entities the Company
has reason to believe are affiliated therewith) shall be aggregated for the
purpose of meeting the individual minimum dollar amounts of such subsections.

 

4.7                               Obligations to Related Parties.  Except as set forth on Schedule 4.7,
there are no obligations of the Company to officers, directors, stockholders or
employees of the Company other than (a) for payment of salary for services
rendered and for bonus payments, (b) reimbursement for reasonable expenses
incurred on behalf of the Company, (c) for other standard employee
benefits made generally available to all employees (including stock option
agreements outstanding under any stock option plan approved by the Board of
Directors of the Company) and (d) obligations listed in the Company’s financial
statements or disclosed in any of its Exchange Act Filings.  Except as described above or set forth on Schedule
4.7, none of the officers, directors or, to the best of the Company’s
knowledge, key employees or stockholders of the Company or any members of their
immediate families, are indebted to the Company, individually or in the
aggregate, in excess of $50,000 or have any direct or indirect ownership
interest in any firm or corporation with which the Company is affiliated or
with which the Company has a business relationship, or any firm or corporation
which competes with the Company, other than passive investments in publicly
traded companies (representing less than 1% of such company) which may compete
with the Company.  Except as described above, no officer,
director or stockholder, or any member of their immediate families, is,
directly or indirectly, interested in any material contract with the Company
and no agreements, understandings or proposed transactions are contemplated
between the Company and any such person. 
Except as set forth on Schedule 4.7, the Company is not a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation.

 

4.8                               Changes.  Since
December 31, 2002, except as disclosed in any Exchange Act Filing or in any
Schedule to this Agreement or to any of the Related Agreements, there has not
been:

 

(a)                                  Any
change in the assets, liabilities, financial condition,  prospects or operations of
the Company, other than changes in the ordinary course of business, none of
which individually or in the aggregate has had or is reasonably expected to
have a material adverse effect on such assets, liabilities, financial
condition, prospects or operations of the Company;

 

(b)                                 Any
resignation or termination of any officer, key employee or group of employees
of the Company;

 

(c)                                  Any
material change, except in the ordinary course of business, in the contingent
obligations of the Company by way of guaranty, endorsement, indemnity, warranty
or otherwise;

 

5

 

(d)                                 Any
damage, destruction or loss, whether or not covered by insurance, materially
and adversely affecting the properties, business or prospects or financial
condition of the Company;

 

(e)                                  Any
waiver by the Company of a valuable right or of a material debt owed to it;

 

(f)                                    Any
direct or indirect material loans made by the Company to any stockholder,
employee, officer or director of the Company, other than advances made in the
ordinary course of business;

 

(g)                                 Any
material change in any compensation arrangement or agreement with any employee,
officer, director or stockholder;

 

(h)                                 Any
declaration or payment of any dividend or other distribution of the assets of
the Company;

 

(i)                                     Any
labor organization activity related to the Company;

 

(j)                                     Any
debt, obligation or liability incurred, assumed or guaranteed by the Company,
except those for immaterial amounts and for current liabilities incurred in the
ordinary course of business;

 

(k)                                  Any
sale, assignment or transfer of any patents, trademarks, copyrights, trade
secrets or other intangible assets;

 

(l)                                     Any
change in any material agreement to which the Company is a party or by which it
is bound which may materially and adversely affect the business, assets, liabilities,
financial condition, operations or prospects of the Company;

 

(m)                               Any
other event or condition of any character that, either individually or
cumulatively, has or may materially and adversely affect the business, assets,
liabilities, financial condition, prospects  or operations of the Company; or

 

(n)                                 Any
arrangement or commitment by the Company to do any of the acts described in
subsection (a) through (m) above.

 

4.9                               Title to Properties and Assets; Liens, Etc.
Except as set forth on Schedule 4.9, the Company has good and marketable
title to its properties and assets, and good title to its leasehold estates, in
each case subject to no mortgage, pledge, lien, lease, encumbrance or charge,
other than (a) those resulting from taxes which have not yet become
delinquent, (b) minor liens and encumbrances which do not materially
detract from the value of the property subject thereto or materially impair the
operations of the Company, and (c) those that have otherwise arisen in the
ordinary course of business.  All
facilities, machinery, equipment, fixtures, vehicles and other properties
owned, leased or used by the Company are in good operating condition and repair
and are reasonably fit and usable for the purposes for which they are being
used.  Except as set forth on Schedule
4.9, the Company is in compliance with all material terms of each lease to
which it is a party or is otherwise bound.

 

6

 

4.10                        Intellectual Property.

 

(a)                                  The
Company owns or possesses sufficient legal rights to all patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information
and other proprietary rights and processes necessary for its business as now
conducted and to the Company’s knowledge as presently proposed to be conducted
(the “Intellectual
Property”), without any known infringement of the rights of
others.  Except that the Company
licenses certain patent rights from Georgio Reverberi (the terms  of which have been previously provided in
their entirety to the Purchaser), there are no outstanding options, licenses or
agreements of any kind relating to the foregoing proprietary rights, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information and other proprietary rights
and processes of any other person or entity other than such licenses or
agreements arising from the purchase of “off the shelf” or standard products.

 

(b)                                 The
Company has not received any communications alleging that the Company has
violated any of the patents, trademarks, service marks, trade names, copyrights
or trade secrets or other proprietary rights of any other person or entity, nor
is the Company aware of any basis therefor.

 

(c)                                  The
Company does not believe it is or will be necessary to utilize any inventions,
trade secrets or proprietary information of any of its employees made prior to
their employment by the Company, except for inventions, trade secrets or
proprietary information that have been rightfully assigned to the Company.

 

4.11                        Compliance with Other Instruments.  Except as set forth on Schedule 4.11,
the Company is not in violation or default of any term of its Charter or Bylaws,
or of any material provision of any mortgage, indenture, contract, agreement,
instrument or contract to which it is party or by which it is bound or of any
judgment, decree, order or writ.  The
execution, delivery and performance of and compliance with this Agreement and
the Related Agreements to which it is a party, and the issuance and sale of the
Note by the Company and the other Securities by the Company each pursuant
hereto, will not, with or without the passage of time or giving of notice, result
in any such material violation, or be in conflict with or constitute a default
under any such term or provision, or result in the creation of any mortgage,
pledge, lien, encumbrance or charge upon any of the properties or assets of the
Company or the suspension, revocation, impairment, forfeiture or nonrenewal of
any permit, license, authorization or approval applicable to the Company, its
business or operations or any of its assets or properties.

 

4.12                        Litigation. 
Except as set forth on Schedule 4.12 hereto, there is no action,
suit, proceeding or investigation pending or, to the Company’s knowledge,
currently threatened against the Company that prevents the Company to enter
into this Agreement or the Related Agreements, or to consummate the transactions
contemplated hereby or thereby, or which might  result, either individually
or in the aggregate, in any material adverse change in the assets, condition,
affairs or prospects of the Company, financially or otherwise, or any change in
the current equity ownership of the Company, nor is the Company aware that
there is any basis for any of the foregoing. The Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality.  There is

 

7

 

no action, suit,
proceeding or investigation by the Company currently pending or which the
Company intends to initiate.

 

4.13                        Tax Returns and Payments.  The Company has timely filed all tax returns
(federal, state and local) required to be filed by it.  All taxes shown to be due and payable on
such returns, any assessments imposed, and to the Company’s knowledge all other
taxes due and payable by the Company on or before the Closing, have been paid
or will be paid prior to the time they become delinquent. 
Except as set forth
on Schedule 4.13, the Company has not been advised (a) that
any of its returns, federal, state or other, have been or are being audited as
of the date hereof, or (b) of any deficiency in assessment or proposed
judgment to its federal, state or other taxes. 
The Company has no knowledge of any liability of any tax to be imposed
upon its properties or assets as of the date of this Agreement that is not
adequately provided for.

 

4.14                        Employees.  Except as set forth on Schedule  4.14, the Company
has no collective bargaining agreements with any of its employees.  There is no labor union organizing activity
pending or, to the Company’s knowledge, threatened with respect to the Company.  Except as disclosed in the Exchange Act Filings or on Schedule 4.14,
the Company is not a party to or bound by any currently effective
employment contract, deferred compensation arrangement, bonus plan, incentive
plan, profit sharing plan, retirement agreement or other employee compensation
plan or agreement.  To the Company’s
knowledge, no employee of the Company, nor any consultant with whom the Company
has contracted, is in violation of any term of any employment contract,
proprietary information agreement or any other agreement relating to the right
of any such individual to be employed by, or to contract with, the Company
because of the nature of the business to be conducted by the Company; and to
the Company’s knowledge the continued employment by the Company of its present
employees, and the performance of the Company’s contracts with its independent
contractors, will not result in any such violation.  The Company is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any nature)
or other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with their duties to the
Company.  The Company has not received
any notice alleging that any such violation has occurred.  Except for employees who have a current
effective employment agreement with the Company, no employee of the Company has
been granted the right to continued employment by the Company or to any
material compensation following termination of employment with the
Company.  Except as set forth on Schedule
4.14, the Company is not aware that any officer, key employee or group of
employees intends to terminate his, her or their employment with the Company,
nor does the Company have a present intention to terminate the employment of
any officer, key employee or group of employees.

 

4.15                        Registration Rights and Voting Rights.  Except
as set forth on Schedule 4.15 and except as disclosed in Exchange Act
Filings, the Company is presently not under any obligation, and has not
granted any rights, to register any of the Company’s presently outstanding
securities or any of its securities that may hereafter be issued.  Except as set forth on Schedule 4.15 and
except as disclosed in Exchange Act Filings, to the Company’s knowledge, no
stockholder of the Company has entered into any agreement with respect to the
voting of equity securities of the Company.

 

8

 

4.16                        Compliance with Laws; Permits.  Except as set forth on Schedule 4.16,
to its knowledge, the Company is not in violation in any material respect of
any applicable statute, rule, regulation, order or restriction of any domestic
or foreign government or any instrumentality or agency thereof in respect of
the conduct of its business or the ownership of its properties which violation
would materially and adversely affect the business, assets, liabilities,
financial condition, operations or prospects of the Company.  No governmental orders, permissions,
consents, approvals or authorizations are required to be obtained and no
registrations or declarations are required to be filed in connection with the
execution and delivery of this Agreement and the issuance of any of the
Securities, except such as has been duly and validly obtained or filed, or with
respect to any filings that must be made after the Closing, as will be filed in
a timely manner.  The Company has all
material franchises, permits, licenses and any similar authority necessary for
the conduct of its business as now being conducted by it, the lack of which
would materially and adversely affect the business, properties, prospects or
financial condition of the Company.

 

4.17                        Environmental and Safety Laws.  The Company is not in violation of any
applicable statute, law or regulation relating to the environment or
occupational health and safety, and to its knowledge, no material expenditures
are or will be required in order to comply with any such existing statute, law
or regulation.  Except as set forth on Schedule
4.17, no Hazardous Materials (as defined below) are used or have been used,
stored, or disposed of by the Company or, to the Company’s knowledge, by any
other person or entity on any property owned, leased or used by the
Company.  For the purposes of the
preceding sentence, “Hazardous Materials” shall mean
(a) materials which are listed or otherwise defined as “hazardous”
or “toxic”
under any applicable local, state, federal and/or foreign laws and regulations
that govern the existence and/or remedy of contamination on property, the
protection of the environment from contamination, the control of hazardous
wastes, or other activities involving hazardous substances, including building
materials, or (b) any petroleum products or nuclear materials.

 

4.18                        Valid Offering. 
Assuming the accuracy of the representations and warranties of the
Purchaser contained in this Agreement, the offer, sale and issuance of the
Securities 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 the registration, permit or qualification requirements of all applicable
state securities laws.

 

4.19                        Full Disclosure. 
The Company has provided the Purchaser with all information requested by
the Purchaser in connection with its decision to purchase the Note and Warrant,
including all information the Company believes is reasonably necessary to make
such investment decision.  Neither this
Agreement, the exhibits and schedules hereto, the Related Agreements nor any
other document delivered by the Company to Purchaser 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.  Any financial projections
and other estimates provided to the Purchaser by the Company were based on the
Company’s experience in the industry and on assumptions of fact and opinion as
to future events which the Company, at the date of the issuance of such
projections or estimates, believed to be reasonable.

 

9

 

4.20                        Insurance.  The
Company has general commercial, product liability, fire and casualty insurance
policies with coverages which the Company believes are customary for companies
similarly situated to the Company in the same or similar business.

 

4.21                        SEC Reports.  Except
as set forth on Schedule 4.21, the Company has filed all proxy
statements, reports and other documents required to be filed by it under the
Exchange Act.  The Company has furnished
the Purchaser with copies of (i) its Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2002 and (ii) its Quarterly Reports on Form
10-QSB for the fiscal quarters ended March 31, 2003 and June 30, 2003, and the
Form 8-K filings which is has made during 2003 to day(collectively, the “SEC Reports”).  Except as set forth on Schedule 4.21,
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.

 

4.22                        Listing.  The
Company’s Common Stock 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 its Common Stock does not meet all requirements for
listing.

 

4.23                        No Integrated Offering.  Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers (other than a concurrent offering to the Purchaser
under a Security Agreement between the Company and the Purchaser dated as of
September     , 2003) or sales of any security or solicited
any offers to buy any security under circumstances that would cause the
offering of the Securities pursuant to this Agreement 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 the
Purchaser).

 

4.24                        Stop Transfer. 
The Securities are restricted securities 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 the Securities are registered for public sale or
an exemption from registration is available, except as required by state and
federal securities laws.

 

4.25                        Dilution.  The
Company specifically acknowledges that its obligation to issue the shares of
Common Stock upon conversion of the Note and exercise of the Warrant 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.

 

10

 

5.                                      REPRESENTATIONS AND WARRANTIES OF THE
PURCHASER.

 

The Purchaser
hereby represents and warrants to the Company as follows (such representations
and warranties do not lessen or obviate the representations and warranties of
the Company set forth in this Agreement):

 

5.1                               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.

 

5.2                               Requisite Power and Authority.  Purchaser has all necessary power and
authority under all applicable provisions of law to execute and deliver this
Agreement and the Related Agreements and to carry out their provisions.  All corporate action on Purchaser’s part
required for the lawful execution and delivery of this Agreement and the
Related Agreements have been or will be effectively taken prior to the
Closing.  Upon their execution and
delivery, this Agreement and the Related Agreements will be valid and binding
obligations of Purchaser, enforceable in accordance with their terms, except
(a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors’ rights, and (b) as limited by general principles of equity that
restrict the availability of equitable and legal remedies.

 

5.3                               Investment Representations. Purchaser
understands that the Securities are being offered and sold pursuant to an
exemption from registration contained in the Securities Act based in part upon
Purchaser’s representations contained in the Agreement, including, without
limitation, that the Purchaser is an “accredited investor” within the meaning
of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”).  The Purchaser confirms that it has received or has had full
access to all the information it considers necessary or appropriate to make an
informed investment decision with respect to the Note and the Warrant to be
purchased by it under this Agreement and the Note Shares and the Warrant Shares
acquired by it upon the conversion of the Note and the exercise of the Warrant,
respectively. The Purchaser further confirms that it has had an opportunity to
ask questions and receive answers from the Company regarding the Company’s
business, management and financial affairs and the terms and conditions of the
Offering, the Note, the Warrant and the Securities and to obtain additional
information (to the extent the Company possessed such information or could
acquire it without unreasonable effort or expense) necessary to verify any
information furnished to the Purchaser or to which the Purchaser had access.

 

5.4                               Purchaser Bears Economic Risk.   Purchaser has substantial experience in
evaluating and investing in private placement transactions of securities in companies
similar to the Company so that it is capable of evaluating the merits and risks
of its investment in the Company and has the capacity to protect its own
interests.  Purchaser must bear the
economic risk of this investment until the Securities are sold pursuant to (i)
an effective registration statement under the Securities Act, or (ii) an
exemption from registration is available with respect to such sale.

 

11

 

5.5                               Acquisition for Own Account.  Purchaser is acquiring the Note and Warrant
and the Note Shares and the Warrant Shares for Purchaser’s own account for
investment only, and not as a nominee or agent and not with a view towards or
for resale in connection with their distribution.

 

5.6                               Purchaser Can Protect Its Interest.   Purchaser represents that by reason of its,
or of its management’s, business and financial experience, Purchaser has the
capacity to evaluate the merits and risks of its investment in the Note, the
Warrant and the Securities and to protect its own interests in connection with
the transactions contemplated in this Agreement, and the Related
Agreements.  Further, Purchaser is aware
of no publication of any advertisement in connection with the transactions
contemplated in the Agreement or the Related Agreements.

 

5.7                               Accredited Investor.   Purchaser represents that it is an accredited investor within
the meaning of Regulation D under the Securities Act.

 

5.8                               Legends.

 

(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 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)                                 The
Note Shares and the Warrant Shares, if not issued by DWAC system (as
hereinafter defined), 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

 

12

 

 CITY CORP. THAT
SUCH REGISTRATION IS NOT REQUIRED.”

 

(c)                                  The
Warrant 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.”

 

6.                                      COVENANTS OF THE COMPANY.    The Company covenants and agrees
with the Purchaser as follows:

 

6.1                               Stop-Orders. The Company will advise the Purchaser,
promptly after it receives notice of issuance by the Securities and Exchange
Commission (the “SEC”), any state securities commission or any other regulatory
authority of any stop order or of any order preventing or suspending any
offering of any securities of the Company, or of the suspension of the
qualification of the Common Stock of the Company for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purpose.

 

6.2                               Listing.   The Company
shall promptly secure the listing of the shares of Common Stock issuable upon
conversion of the Note and upon the exercise of the Warrant on the American
Stock Exchange (the “Principal Market”)
upon which shares of Common Stock are listed (subject to official notice of
issuance) and shall maintain such listing so long as any other shares of Common
Stock shall be so listed.  The Company
will maintain the listing of its Common Stock on the Principal Market, and will
comply in all material respects with the Company’s reporting, filing and other
obligations under the bylaws or rules of the National Association of Securities
Dealers (“NASD”)
and such exchanges, as applicable.

 

6.3                               Market Regulations.   The Company shall notify the SEC, NASD and applicable state
authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities to Purchaser and
promptly provide copies thereof to Purchaser.

 

6.4                               Reporting Requirements.   The Company will timely file with the SEC
all reports required to be filed pursuant to the Exchange Act and refrain from
terminating its status as

 

13

 

an issuer required by the
Exchange Act to file reports thereunder even if the Exchange Act or the rules
or regulations thereunder would permit such termination.

 

6.5                               Use of Funds.  
The Company agrees that it will use the proceeds of the sale of the Note
and Warrant for general corporate purposes only.

 

6.6                               Access to Facilities.   The Company will permit any representatives designated by the
Purchaser (or any successor of the Purchaser), upon reasonable notice and
during normal business hours, at such person’s expense and accompanied by a
representative of the Company, to (a) visit and inspect any of the properties
of the Company, (b) examine the corporate and financial records of the Company
(unless such examination is not permitted by federal, state or local law or by
contract) and make copies thereof or extracts therefrom and (c) discuss the
affairs, finances and accounts of the Company with the directors, officers and
independent accountants of the Company. 
Notwithstanding the foregoing, the Company will not provide any
material, non-public information to the Purchaser unless the Purchaser signs a
confidentiality agreement and otherwise complies with Regulation FD, under the
federal securities laws.

 

6.7                               Taxes.     The Company will promptly pay and discharge,
or cause to be paid and discharged, when due and payable, all lawful taxes,
assessments and governmental charges or levies imposed upon the income,
profits, property or business of the Company; provided, however, that any such
tax, assessment, charge or levy need not be paid if the validity thereof shall
currently be contested in good faith by appropriate proceedings and if the Company
shall have set aside on its books adequate reserves with respect thereto, and
provided, further, that the Company will pay all such taxes, assessments,
charges or levies forthwith upon the commencement of proceedings to foreclose
any lien which may have attached as security therefor.

 

6.8                               Insurance.    The
Company will keep its assets which are of an insurable character insured by
financially sound and reputable insurers against loss or damage by fire,
explosion and other risks customarily insured against by companies in similar
business similarly situated as the Company; and the Company will maintain, with
financially sound and reputable insurers, insurance against other hazards and
risks and liability to persons and property to the extent and in the manner
which the Company reasonably believes is customary for companies in similar
business similarly situated as the Company and to the extent available on
commercially reasonable terms.

 

6.9                               Intellectual Property.    The Company shall maintain in full force and effect
its corporate existence, rights and franchises and all licenses and other
rights to use Intellectual Property owned or possessed by it and reasonably
deemed to be necessary to the conduct of its business.

 

6.10                        Properties.   The
Company will keep its properties in good repair, working order and condition,
reasonable wear and tear excepted, and from time to time make all needful and
proper repairs, renewals, replacements, additions and improvements thereto; and
the Company will at all times comply with each provision of all leases to which
it is a party or under

 

14

 

which it occupies
property if the breach of such provision could reasonably be expected to have a
material adverse effect.

 

6.11                        Confidentiality. 
The Company agrees that it will not disclose, and will not include in
any public announcement, the name of the Purchaser, unless expressly agreed to
by the Purchaser or unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement.

 

6.12                        Required Approvals.  For so long as 25% of the
principal amount of the Note is outstanding, the Company, without the
prior written consent of the Purchaser, shall not:

 

(a)                                  directly
or indirectly declare or pay any dividends, other than dividends with respect
to its preferred stock;

 

(b)                                 liquidate,
dissolve or effect a material reorganization;

 

(c)                                  become
subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under
any circumstances) restrict the Company’s right to perform the provisions of
this Agreement or any of the agreements contemplated thereby; or

 

(d)                                 materially
alter or change the scope of the business of the Company.

 

6.13                        Reissuance of Securities.  The Company agrees to reissue certificates
representing the Securities without the legends set forth in Section 5.7 above
at such time as (a) the holder thereof is permitted to dispose of such
Securities pursuant to Rule 144(k) under the Securities Act, or (b) upon resale
subject to an effective registration statement after such Securities are
registered under the Securities Act. 
The Company agrees to cooperate with the Purchaser in connection with
all resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions
necessary to allow such resales provided the Company and its counsel receive
reasonably requested representations from the selling Purchaser and broker, if
any.

 

6.14                        Opinion. On the Closing Date, the Company will deliver to
the Purchaser an opinion acceptable to the Purchaser from the Company’s legal
counsel.  The Company will provide, at
the Company’s expense, such other legal opinions in the future as are
reasonably necessary for the conversion of the Note and exercise of the
Warrant.

 

7.                                      COVENANTS
OF THE PURCHASER.   The Purchaser covenants and
agrees with the Company as follows:

 

7.1                               Confidentiality. 
The Purchaser agrees that it will not disclose, and will not include in
any public announcement, the name of the Company, unless expressly agreed to by
the Company or unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement.

 

15

 

7.2                               Non-Public Information.  The Purchaser agrees
not to effect any sales in the shares of the Company’s Common Stock while in
possession of material, non-public information regarding the Company if such
sales would violate applicable securities law.

 

8.                                      COVENANTS OF THE COMPANY AND PURCHASER
REGARDING 

INDEMNIFICATION.

 

8.1                               Company Indemnification.   The Company agrees to indemnify, hold
harmless, reimburse and defend Purchaser, each of Purchaser’s officers,
directors, agents, affiliates, control persons, and principal shareholders,
against any claim, cost, expense, liability, obligation, loss or damage
(including reasonable legal fees) of any nature, incurred by or imposed upon
the Purchaser which results, arises out of or is based upon (i) any misrepresentation
by Company or breach of any warranty by Company in this Agreement or in any
exhibits or schedules attached hereto or any Related Agreement, or (ii) any
breach or default in performance by Company of any covenant or undertaking to
be performed by Company hereunder, or any other agreement entered into by the
Company and Purchaser relating hereto.

 

8.2                               Purchaser’s Indemnification.  Purchaser agrees to indemnify, hold
harmless, reimburse and defend the Company and each of the Company’s officers,
directors, agents, affiliates, control persons and principal shareholders, at
all times against any claim, cost, expense, liability, obligation, loss or
damage (including reasonable legal fees) of any nature, incurred by or imposed
upon the Company which results, arises out of or is based upon (i) any
misrepresentation by Purchaser or breach of any warranty by Purchaser in this
Agreement or in any exhibits or schedules attached hereto or any Related
Agreement; or (ii) any breach or default in performance by Purchaser of any
covenant or undertaking to be performed by Purchaser hereunder, or any other
agreement entered into by the Company and Purchaser relating hereto.

 

8.3                               Procedures.  The
procedures and limitations set forth in Section 10.2(c) and (d) shall apply to
the indemnifications set forth in Sections 8.1 and 8.2 above.

 

16

 

9.                                      CONVERSION OF CONVERTIBLE NOTE.

 

9.1                               Mechanics of Conversion.

 

(a)                                  Provided
the Purchaser has notified the Company of the Purchaser’s intention to sell the
Note Shares and the Note Shares are included in an effective registration
statement or are otherwise exempt from registration when sold:  (i) Upon the conversion of the Note or part
thereof, the Company shall, at its own cost and expense, take all necessary
action (including the issuance of an opinion of counsel) to assure that the
Company’s transfer agent shall issue shares of the Company’s Common Stock in
the name of the Purchaser (or its nominee) or such other persons as designated
by the Purchaser in accordance with Section 9.1(b) hereof and in such
denominations to be specified representing the number of Note Shares issuable
upon such conversion; and (ii)  The
Company warrants that no instructions other than these instructions have been
or will be given to the transfer agent of the Company’s Common Stock and that
after the Effective Date (as hereinafter defined) the Note Shares issued will
be freely transferable subject to the prospectus delivery requirements of the
Securities Act and the provisions of this Agreement, and will not contain a
legend restricting the resale or transferability of the Note Shares.

 

(b)                                 Purchaser
will give notice of its decision to exercise its right to convert the Note or
part thereof by telecopying or otherwise delivering an executed and completed
notice of the number of shares to be converted to the Company (the “Notice of
Conversion”). The Purchaser will not be required to surrender the
Note until the Purchaser receives a credit to the account of the Purchaser’s
prime broker through the DWAC system (as defined below), representing the Note
Shares or until the Note has been fully satisfied.  Each date on which a Notice of Conversion is telecopied or
delivered to the Company in accordance with the provisions hereof shall be
deemed a “Conversion
Date.”  The Company will
cause the transfer agent to transmit the shares of the Company’s Common Stock
issuable upon conversion of the Note (and a certificate representing the
balance of the Note not so converted, if requested by Purchaser) to the
Purchaser by crediting the account of the Purchaser’s prime broker with the
Depository Trust Company (“DTC”)
through its Deposit Withdrawal Agent Commission (“DWAC”) system within three (3) business days after receipt by
the Company of the Notice of Conversion (the “Delivery Date”).

 

(c)                                  The
Company understands that a delay in the delivery of the Note Shares in the form
required pursuant to Section 9 hereof beyond the Delivery Date could result in
economic loss to the Purchaser.  In the
event that the Company fails to direct its transfer agent to deliver the Note
Shares to the Purchaser via the DWAC system within the time frame set forth in
Section 9.1(b) above and the Note Shares are not delivered to the Purchaser by
the Delivery Date, as compensation to the Purchaser for such loss, the Company
agrees to pay late payments to the Purchaser for late issuance of the Note
Shares in the form required pursuant to Section 9 hereof upon conversion of the
Note in the amount equal to the greater of (i) $500 per business day after the
Delivery Date or (ii) the Purchaser’s actual damages from such delayed
delivery. Notwithstanding the foregoing, the Company will not owe the Purchaser
any late payments if the delay in the delivery of the Note Shares beyond the
Delivery Date is solely out of the control of the Company and the Company is
actively trying to cure the cause of the delay.  The Company shall pay any payments incurred under this Section in
immediately available funds upon demand

 

17

 

and, in the case of
actual damages, accompanied by reasonable documentation of the amount of such
damages.  Such documentation shall show
the number of shares of Common Stock the Purchaser is forced to purchase (in an
open market transaction) which the Purchaser anticipated receiving upon such
conversion, and shall be calculated as the amount by which (A) the Purchaser’s
total purchase price (including customary brokerage commissions, if any) for
the shares of Common Stock so purchased exceeds (B) the aggregate principal
and/or interest amount of the Note, for which such Conversion Notice was not
timely honored.

 

Nothing contained
herein or in any document referred to herein or delivered in connection herewith
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 or
dividends required to be paid or other charges hereunder exceed the maximum
amount permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to a Purchaser and thus refunded
to the Company.

 

9.2                               Maximum Conversion.  The
Purchaser shall not be entitled to convert on a Conversion Date, nor shall the
Company be permitted to require the Purchaser to accept, that amount of a Note
in connection with that number of shares of Common Stock which would be in
excess of the sum of (i) the number of shares of Common Stock beneficially
owned by the Purchaser on a Conversion Date, and (ii) the number of shares of
Common Stock issuable upon the conversion of the Note with respect to which the
determination of this proviso is being made on a Conversion Date, which would
result in beneficial ownership by the Purchaser of more than 4.99% of the
outstanding shares of Common Stock of the Company on such Conversion Date.  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.  Upon an Event of Default under the Note, the
conversion limitation in this Section 9.2 shall become null and void.

 

10.                               REGISTRATION RIGHTS. 

 

10.1                        Registration
Rights Granted.  The
Company hereby grants registration rights to the Purchaser pursuant to a
Registration Rights Agreement dated as of even date herewith between the
Company and the Purchaser.

 

10.2                        Indemnification. 

 

(a)                                  In
the event of a registration of any Registrable Securities under the Securities
Act pursuant to the Registration Rights Agreement, the Company will indemnify
and hold harmless the Purchaser, and its officers, directors and each other
person, if any, who controls the Purchaser within the meaning of the Securities
Act, against any losses, claims, damages or liabilities, joint or several, to
which the Purchaser, or such persons may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement under which such Registrable Securities were registered under the
Securities Act pursuant to the Registration Rights Agreement, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereof, or arise out of or are based upon the omission or alleged

 

18

 

omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Purchaser, and each
such person for any reasonable legal or other expenses incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with
information furnished by or on behalf of the Purchaser or any such person in
writing specifically for use in any such document.

 

(b)                                 In
the event of a registration of the Registrable Securities under the Securities
Act pursuant to the Registration Rights Agreement, the Purchaser will indemnify
and hold harmless the Company, and its officers, directors and each other
person, if any, who controls the Company within the meaning of the Securities
Act, against all losses, claims, damages or liabilities, joint or several, to
which the Company or such persons may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the registration
statement under which such Registrable Securities were registered under the
Securities Act pursuant to the Registration Rights Agreement, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company and each such person for any reasonable legal or other expenses
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action, provided, however, that the Purchaser will
be liable in any such case if and only to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission so made in conformity
with information furnished in writing to the Company by or on behalf of the
Purchaser specifically for use in any such document.

 

(c)                                  Promptly
after receipt by an indemnified party hereunder of notice of the commencement
of any action, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party hereunder, notify the indemnifying
party in writing thereof, but the omission so to notify the indemnifying party
shall not relieve it from any liability which it may have to such indemnified
party other than under this Section 10.2(c) and shall only relieve it from any
liability which it may have to such indemnified party under this Section
10.2(c) if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in and, to the extent
it shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 10.2(c) for any legal expenses subsequently incurred
by such indemnified party in connection with the defense thereof; if the
indemnified party retains its own counsel, then the indemnified party shall pay
all fees, costs and expenses of such counsel, provided, however, that, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be reasonable defenses available to it which are different

 

19

 

from or additional to
those available to the indemnifying party or if the interests of the
indemnified party reasonably may be deemed to conflict with the interests of
the indemnifying party, the indemnified party shall have the right to select
one separate counsel and to assume such legal defenses and otherwise to
participate in the defense of such action, with the reasonable expenses and
fees of such separate counsel and other expenses related to such participation
to be reimbursed by the indemnifying party as incurred.

 

(d)                                 In
order to provide for just and equitable contribution in the event of joint
liability under the Securities Act in any case in which either (i) the
Purchaser, or any controlling person of the Purchaser, makes a claim for
indemnification pursuant to this Section 10.2 but it is judicially determined
(by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 10.2 provides for indemnification in
such case, or (ii) contribution under the Securities Act may be required on the
part of the Purchaser or controlling person of the Purchaser in circumstances
for which indemnification is provided under this Section 10.2; then, and in
each such case, the Company and the Purchaser will contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (after
contribution from others) in such proportion so that the Purchaser is
responsible only for the portion represented by the percentage that the public
offering price of its securities offered by the registration statement bears to
the public offering price of all securities offered by such registration
statement, provided, however, that, in any such case, (A) the Purchaser will not
be required to contribute any amount in excess of the public offering price of
all such securities offered by it pursuant to such registration statement; and
(B) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 10 of the Act) will be entitled to contribution from any
person or entity who was not guilty of such fraudulent misrepresentation.

 

10.3                        OFFERING
RESTRICTIONS.  Except as previously disclosed in the SEC
Reports or in the Exchange Act Filings, or stock or stock options granted to
employees or directors of the Company; or shares of preferred stock issued to
pay dividends in respect of the Company’s preferred stock; or equity or debt
issued in connection with an acquisition of a business or assets by the Company;
or the issuance by the Company of stock in connection with the establishment of
a joint venture partnership or licensing arrangement (these exceptions
hereinafter referred to as the “Excepted Issuances”), the Company will not
issue any securities with a continuously variable/floating conversion feature
which are or could be (by conversion or registration) free-trading securities
(i.e. common stock subject to a registration statement) prior to the full
repayment or conversion of the Note (the “Exclusion Period”).

 

11.                               MISCELLANEOUS.

 

11.1                        Governing Law. THIS AGREEMENT 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 INDIVIDUALS

 

20

 

EXECUTING THIS AGREEMENT
AND OTHER AGREEMENTS ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE
JURISDICTION OF SUCH COURTS AND WAIVE TRIAL BY JURY.  IN THE EVENT THAT ANY PROVISION OF THIS AGREEMENT OR ANY OTHER
AGREEMENT DELIVERED IN CONNECTION HEREWITH 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 ENFORCEABILITY OF ANY OTHER PROVISION
OF ANY AGREEMENT.

 

11.2                        Survival.  The
representations, warranties, covenants and agreements made herein shall survive
any investigation made by the Purchaser and the closing of the transactions
contemplated hereby to the extent provided therein. All statements as to
factual matters contained in any certificate or other instrument delivered by
or on behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.

 

11.3                        Successors. 
Except as otherwise expressly provided herein, the provisions hereof
shall inure to the benefit of, and be binding upon, the successors, heirs,
executors and administrators of the parties hereto and shall inure to the
benefit of and be enforceable by each person who shall be a holder of the
Securities from time to time, other than the holders of Common Stock which has
been sold by the Purchaser pursuant to Rule 144 or an effective registration
statement. Purchaser may not assign its rights hereunder to a competitor of the
Company.

 

11.4                        Entire Agreement. 
This Agreement, the exhibits and schedules hereto, the Related
Agreements and the other documents delivered pursuant hereto constitute the
full and entire understanding and agreement between the parties with regard to
the subjects hereof and no party shall be liable or bound to any other in any
manner by any representations, warranties, covenants and agreements except as
specifically set forth herein and therein.

 

11.5                        Severability. 
In case any provision of the Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.

 

11.6                        Amendment and Waiver.

 

(a)                                  This
Agreement may be amended or modified only upon the written consent of the
Company and the Purchaser.

 

(b)                                 The
obligations of the Company and the rights of the Purchaser under this Agreement
may be waived only with the written consent of the Purchaser.

 

(c)                                  The
obligations of the Purchaser and the rights of the Company under this Agreement
may be waived only with the written consent of the Company.

 

21

 

11.7                        Delays or Omissions.  It is agreed that no delay or omission to exercise any right,
power or remedy accruing to any party, upon any breach, default or
noncompliance  by another party under
this Agreement or the Related Agreements, shall impair any such right, power or
remedy, nor shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any similar breach,
default or noncompliance thereafter occurring. 
All remedies, either under this Agreement, the Note or the Related
Agreements, by law or otherwise afforded to any party, shall be cumulative and
not alternative.

 

11.8                        Notices.  All
notices required or permitted hereunder shall be in writing and shall be deemed
effectively given: (a) upon personal delivery to the party to be notified,
(b) when sent by confirmed facsimile if sent during normal business hours
of the recipient, if not, then on the next business day, (c) three (3)
business days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (d) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt.  All
communications shall be sent to the Company at the address as set forth on the
signature page hereof, to the Purchaser at the address set forth on the
signature page hereto for such Purchaser, with a copy in the case of the
Purchaser to John E. Tucker, Esq., 152 West 57th Street, 4th
Floor, New York, NY 10019, facsimile number (212) 541-4434, or at such other
address as the Company or the Purchaser may designate by written notice to the
other parties hereto given in accordance herewith.

 

11.9                        Attorneys’ Fees. 
In the event that any suit or action is instituted to enforce any
provision in this Agreement, the prevailing party in such dispute shall be
entitled to recover from the losing party all fees, costs and expenses of
enforcing any right of such prevailing party under or with respect to this
Agreement, including, without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.

 

11.10                 Titles and Subtitles.  The titles of the sections and subsections of the Agreement are
for convenience of reference only and are not to be considered in construing
this Agreement.

 

11.11                 Facsimile Signatures; Counterparts.  This Agreement may be executed by facsimile
signatures and in any number of counterparts, each of which shall be an
original, but all of which together shall constitute one instrument.

 

11.12                 Broker’s Fees. 
Except as set forth on Schedule 11.12 hereof, Each party hereto
represents and warrants that no agent, broker, investment banker, person or
firm acting on behalf of or under the authority of such party hereto is or will
be entitled to any broker’s or finder’s fee or any other commission directly or
indirectly in connection with the transactions contemplated herein.  Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 11.12 being
untrue.

 

11.13                 Construction. 
Each party acknowledges that its legal counsel participated in the
preparation of this Agreement and the Related Agreements and, therefore,
stipulates that

 

22

 

the rule of construction that ambiguities are to be
resolved against the drafting party shall not be applied in the interpretation
of this Agreement to favor any party against the other.

 

23

 

IN
WITNESS WHEREOF, the parties hereto have executed the SECURITIES
PURCHASE AGREEMENT as of the date set forth in the first paragraph
hereof.

 

 

	
  COMPANY:

  	
  PURCHASER:

  
	
   

  	
   

  
	
  ELECTRIC CITY CORP.

  	
  LAURUS MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
    /s/ John Mitola

  	
   

  	
  By:

  	
    /s/ David Grin

  	
   

  
	
  Name:

  	
    John Mitola

  	
   

  	
  Name:

  	
    /s/ David Grin 

  	
   

  
	
  Title:

  	
    Chief Executive Officer

  	
   

  	
  Title:

  	
    Partner

  	
   

  
	
  Address:

  	
    1280 Landmeier Road

  	
  Address:

  	
    c/o Ironshore Corporate Services Ltd.

  
	
   

  	
    Elk Grove Village, Illinois  60007

  	
   

  	
    P.O. Box 1234 G.T., Queensgate House,

  
	
   

  	
   

  	
    South Church Street

  
	
   

  	
   

  	
    Grand Cayman, Cayman Islands

  
											

 

24

 

LIST
OF EXHIBITS

 

 

	
  Form of
  Convertible Term Note

  	
   

  	
  Exhibit A

  
	
   

  	
   

  	
   

  
	
  Form of Warrant

  	
   

  	
  Exhibit B

  
	
   

  	
   

  	
   

  
	
  Form of Opinion

  	
   

  	
  Exhibit C

  
	
   

  	
   

  	
   

  
	
  Form of Escrow
  Agreement

  	
   

  	
  Exhibit D

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00056-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00056-of-00352.parquet"}]]