Document:

Exhibit 10.2

 

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

 

CONVERTIBLE TERM NOTE

 

FOR VALUE
RECEIVED, ELECTRIC CITY CORP., a Delaware corporation (the “Borrower”), hereby promises to pay to
LAURUS MASTER FUND, LTD., c/o Ironshore Corporate Services Ltd., P.O. Box 1234
G.T., Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax:
345-949-9877 (the “Holder”) or its
registered assigns or successors in interest, on order, the sum of ONE MILLION
DOLLARS ($1,000,000), together with any accrued and unpaid interest hereon, on
September 11, 2005 (the “Maturity Date”)
if not sooner paid.

 

Capitalized
terms used herein without definition shall have the meanings ascribed to such
terms in that certain Securities Purchase Agreement dated as of the date hereof
between the Borrower and the Holder (the “Purchase
Agreement”).

 

The following terms shall apply
to this Note:

 

ARTICLE I

INTEREST & AMORTIZATION

 

1.1           Interest Rate and Payments.  Subject to Sections 4.9 and 5.6 hereof,
interest payable on this Note shall accrue at a rate per annum (the “Contract Rate”) equal to the “prime
rate” published in The Wall Street Journal from time to time, plus one
and three quarters percent (1.75%). 
Interest shall be payable monthly in arrears commencing on October1,
2003 and on the first day of each consecutive calendar month thereafter (each,
a “Repayment
Date”), and on the Maturity Date, accelerated or otherwise.  The prime rate shall be increased or
decreased as the case may be for each increase or decrease in the prime rate in
an amount equal to such increase or decrease in the prime rate; each change to
be effective as of the day of the change in such rate.  In no event shall the Contract Rate be less
than six percent (6.00%).

 

1.2           Monthly
Principal Payments.  Although
Borrower shall make payments of accrued

 

1

 

and unpaid interest under this
Note beginning on October 1, 2003, amortization of the aggregate principal
amount outstanding under this Note (the “Principal
Amount”) shall begin on February 1, 2004 (the “Amortization Date”).  Subject to Section 2.1 below with respect to
cash payments made on any Payment Date, beginning on the Amortization Date, the
Borrower shall make monthly payments to the Holder on each Repayment Date, each
in the amount of $50,000, together with any accrued and unpaid interest to date
on such portion of the Principal Amount plus any and all other amounts which
are then owing under this Note but have not been paid (collectively, the “Monthly Amount”).

 

ARTICLE II

BORROWER PAYMENT OPTIONS

 

2.1           Monthly Payments in Cash or Common
Stock.  Subject to the terms hereof,
the Borrower shall have the sole option to determine whether to satisfy payment
of the Monthly Amount on each Repayment Date either in cash or in shares of
Common Stock (as defined in the Purchase Agreement), or a combination of
both.  Each month by the tenth (10th)
day of such month, the Borrower shall deliver to the Holder a written
irrevocable notice in the form of Exhibit B attached hereto electing to pay the
Monthly Amount payable on the next Repayment Date in either cash or Common
Stock, or a combination of both (each, a “Repayment
Election Notice”).  Each
Repayment Election Notice shall be delivered to the Holder not later than the
tenth (10th) day of the month prior to the applicable Repayment Date
(the date by which such notice is required to be given being hereinafter
referred to as the “Notice Date”).  If, for the Monthly Amount payment due on
any Repayment Date, a Repayment Election Notice is not delivered to the Holder
by the applicable Notice Date for such Repayment Date, then the Monthly Amount
due on such Repayment Date shall be paid in cash.  If the Borrower elects or is required to repay all or a portion
of the Monthly Amount in cash on a Repayment Date, then on such Repayment Date
the Borrower shall pay to the Holder an amount equal to 105% of the Monthly
Amount then due in satisfaction of such obligation.  If the Borrower repays all or a portion of the Monthly Amount in
shares of Common Stock, the number of such shares to be issued for such
Repayment Date shall be the number determined by dividing (x) the portion of
the Monthly Amount to be paid in shares of Common Stock, by (y) the Fixed
Conversion Price.  For purposes hereof,
the “Fixed Conversion Price” means
$2.12.

 

2.2           No Effective Registration.  Notwithstanding anything to the contrary
herein, the Borrower shall be prohibited from exercising its right to repay any
part of any Monthly Amount in shares of Common Stock (and must deliver cash in
respect thereof) on any applicable Repayment Date if at any time from the
Notice Date for such Repayment Date through the date upon which such payment is
made by delivery of certificates for shares of Common Stock (i) there fails to
exist an effective current Registration Statement (as defined in the
Registration Rights Agreement) covering the shares of Common Stock to be
issued, or (ii)  an Event of Default
hereunder exists and is continuing, unless such Event of Default is cured
within any applicable cure period or  is
otherwise

 

2

 

waived in writing by the Holder
in whole or in part at the Holder’s option.

 

2.3           Common Stock Payment Guidelines.  Notwithstanding anything to the contrary
herein, if the Borrower has elected to pay all or a portion of the Monthly
Amount due on such Repayment Date in shares of Common Stock and the closing
price of the Common Stock as reported by Bloomberg, L.P. on the Principal
Market (as defined in Section 4.7 hereof) for any of the 11 trading days
preceding a Repayment Date was less than 115% of the Fixed Conversion Price,
then the Holder shall have the option to refuse to accept any portion of such
payment in shares of Common Stock and require the Borrower to pay in cash
instead.  Any part of the Monthly Amount
due on such Repayment Date which the Borrower did not elect to pay in shares of
Common Stock shall be paid by the Borrower in cash on such Repayment Date.  Any part of the Monthly Amount due on such
Repayment Date which the Borrower elected to pay in shares of Common Stock but
which must be paid in cash  (because the
closing price of the Common Stock on one or more of the 11 trading days
preceding the applicable Repayment Date was less than 115% of the Fixed Conversion
Price and the Holder elected to require payment in cash instead of accepting
shares of Common Stock) shall be paid within three (3) business days of the
applicable Repayment Date.

 

2.4           Optional Prepayments in Common
Stock.  In the event that the average
closing price of the Common Stock on the Principal Market is greater than 115%
of the Fixed Conversion Price for a period of at least five (5) consecutive
trading days, then the Borrower may, at its sole option, provide the Holder
written notice (a “Call Notice”) requiring the conversion at
the Fixed Conversion Price of all or a portion of the outstanding principal of
this Note (subject to compliance with Section 2.3 and 3.2 if payment is less
than all of the principal and interest then due), together with accrued
interest on the amount being prepaid, as of the date set forth in such Call
Notice (the “Call Date”).  The Call
Date shall be at least eleven (11) trading days following the date of the Call
Notice.  Provided that:

 

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

 

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

 

3

 

twenty five percent (25%) of
the aggregate dollar trading volume (as such volume is reported by Bloomberg
L.P.) for each day that the Common Stock has exceeded 115% of the then
applicable Fixed Conversion Price.

 

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

 

Any principal amount of this Note which is
prepaid pursuant to this Section 2.4 shall be deemed to
constitute payments of outstanding principal applying to Monthly Amounts for
the remaining Repayment Dates in chronological order.

 

2.5           Optional Prepayment in Cash.  The Borrower will have the option of
prepaying this Note in full (“Optional
Redemption”) by paying to the Holder a sum of money equal to one
hundred twenty five percent (125%) of the principal amount of this Note
together with accrued but unpaid interest thereon and any and all other sums
due, accrued or payable to the Holder arising under this Note or the Purchase
Agreement or any Related Document (as defined in the Purchase Agreement) (the “Redemption Amount”) outstanding on the day
written notice of redemption (the “Notice of
Redemption”) is given to the Holder, which Notice of Redemption
shall specify the date for such Optional Redemption (the “Redemption Payment Date”).  A Notice of Redemption shall not be
effective with respect to any portion of this Note for which the Holder has a
pending election to convert pursuant to Section 3.1 and the Redemption Amount
shall be determined as if such election to convert had been completed
immediately prior to the date of the Notice of Redemption.  The Redemption Payment Date shall be not
earlier than the day after the date of the Notice of Redemption and not later
than seven (7) days after the date of the Notice of Redemption.  On the Redemption Payment Date, the
Redemption Amount must be paid in good funds to the Holder.  In the event the Borrower fails to pay the
Redemption Amount by the Redemption Payment Date, then such Redemption Notice
will be null and void.

 

ARTICLE III

CONVERSION RIGHTS

 

3.1.          Holder’s Conversion Rights.  If the closing price of the Common Stock on
the Conversion Date (as defined below) is greater than the Fixed Conversion
Price, and a Registration Statement covering the shares of Common Stock which
are issuable pursuant to conversion hereof has been declared effective by the
Securities and Exchange Commission and is effective and current on the Conversion
Date, the Holder shall have the right, but not the obligation, to convert all
or any portion of the then aggregate outstanding principal amount  of this Note, together with interest and
fees due hereon, into shares of Common Stock subject to the terms and
conditions set forth in this

 

4

 

Article III.  The Holder may exercise such right by
delivery to the Borrower of a written notice of conversion not less than one
(1) day prior to the date upon which such conversion shall occur.  The date upon which such conversion shall
occur is the “Conversion Date”).

 

3.2           Conversion Limitation. Notwithstanding anything
contained herein to the contrary, the Holder shall not be entitled to convert
pursuant to the terms of this Note an amount that would be convertible into
that number of Conversion Shares which would exceed the difference between the
number of shares of Common Stock beneficially owned by such Holder or issuable
upon exercise of warrants held by such Holder and 4.99% of the outstanding
shares of Common Stock of the Borrower. 
For the purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Exchange
Act and Regulation 13d-3 thereunder. 
The Holder may void the Conversion Share limitation described in this
Section 3.2 upon 75 days prior notice to the Borrower or without any notice
requirement upon an Event of Default.

 

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

 

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

 

 

3.4           Conversion Mechanics.

 

(a)           The number of shares of Common Stock
to be issued upon each conversion of this

 

5

 

Note shall be determined by
dividing that portion of the principal and interest and fees to be converted,
if any, by the Fixed Conversion Price. 
In the event of any conversions of outstanding principal amount under
this Note in part pursuant to this Article III, such conversions shall be
deemed to constitute conversions of outstanding principal amount applying to
Monthly Amounts for the remaining Repayment Dates in chronological order.  By way of example, if the original principal
amount of this Note is $1,000,000 and the Holder converted $125,000 of such
original principal amount prior to the first Repayment Date, then (1) the
principal amount of the Monthly Amount due on the first Repayment Date would
equal $0, (2) the principal amount of the Monthly Amount due on the second
Repayment Date would equal $0 and (3) the principal amount of the Monthly
Amount due on the third Repayment Dates would be $25,000.

 

(b)           The Fixed Conversion Price and number
and kind of shares or other securities to be issued upon conversion is subject
to adjustment from time to time upon the occurrence of certain events, as
follows:

 

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

 

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

 

3.5           Issuance of New Note.  Upon any partial conversion of this Note, a
new Note containing the same date and provisions of this Note shall, at the request
of the Holder, be issued by the Borrower to the Holder for the principal
balance of this Note and interest which shall not have been converted or paid.
The Borrower will pay no costs, fees or any other consideration to the Holder
for the production and issuance of a new Note.

 

 

6

 

ARTICLE IV

EVENTS OF DEFAULT

 

If an Event of
Default (as defined below) occurs and is continuing, the Borrower’s rights
under Sections 2.1, 2.2, 2.3 and 2.4 shall immediately cease and be of no
further effect until such time as the Event of Default has been cured, or has
been waived by the Holder.  Upon the
occurrence and continuance of an Event of Default beyond any applicable grace period,
the Holder may make all sums of principal, interest and other fees then
remaining unpaid hereon and all other amounts payable hereunder due and payable
within five (5) days after written notice from Holder to Borrower (each
occurrence being a “Default Notice Period”).  In the event of such an acceleration, the
amount due and owing to the Holder shall be 110% of the outstanding principal
amount of the Note (plus accrued and unpaid interest and fees, if any).  If, with respect to any Event of Default other
than a payment default described in Section 4.1 below, within the Default
Notice Period the Borrower cures the Event of Default, the Event of Default
will be deemed to no longer exist and any rights and remedies of  Holder pertaining to such Event of Default
will be of no further force or effect.

 

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

 

4.1           Failure to Pay Principal, Interest
or other Fees.  The Borrower fails
to pay when due any installment of principal, interest or other fees hereon in
accordance herewith, or the Borrower fails to pay when due any amount due under
any other promissory note issued by Borrower to the Holder in accordance with
the terms of such other promissory note, and such failure continues for a
period of three (3) days after the due date.

 

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

 

4.3           Breach of Representations and
Warranties.  Any material
representation or warranty of the Borrower made herein, in the Purchase
Agreement, or in any Related Document (as defined in the Purchase Agreement)
shall be materially false or misleading and shall not be cured for a period of
ten (10) days after written notice thereof is received by the Borrower from the
Holder.

 

4.4           Receiver or Trustee.  The Borrower shall make an assignment for
the benefit of creditors, or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business; or such a receiver or trustee shall otherwise be appointed.

 

4.5           Judgments.  Any money judgment, writ or similar final
process shall be entered or filed against the Borrower or any of its property
or other assets for more than $250,000, and shall remain unvacated, unbonded or
unstayed for a period of ninety (90) days.

 

4.6           Bankruptcy.  Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings or relief under any bankruptcy law
or any law for the relief of debtors shall be

 

7

 

instituted by or against the
Borrower.

 

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

 

4.8           Failure to Deliver Common Stock or
Replacement Note.  The Borrower’s
failure to timely deliver Common Stock to the Holder pursuant to and in the
form required by this Note, and Section 9 of the Securities Purchase Agreement,
or if required, a replacement Note if such failure to timely deliver Common
Stock shall not be cured within two (2) days or such failure to deliver a
replacement Note is not cured within seven (7) Business Days.

 

DEFAULT RELATED PROVISIONS

 

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

 

4.10         Conversion Privileges.  The conversion privileges set forth in
Article III shall remain in full force and effect immediately from the date
hereof and until this Note is paid in full.

 

ARTICLE V

MISCELLANEOUS

 

5.1           Failure or Indulgence Not Waiver.  No failure or delay on the part of the
Holder hereof in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege. 
All rights and remedies existing hereunder are cumulative to, and not
exclusive of, any rights or remedies otherwise available.

 

5.2           Notices.  Any notice herein required or permitted to
be given shall be in writing and shall be deemed effectively given:  (a) upon personal delivery to the party
notified, (b) when sent by

 

8

 

confirmed telex or facsimile if
sent during normal business hours of the recipient, if not, then on the next
business day, (c) five 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 Borrower at the address provided
in the Purchase Agreement executed in connection herewith, and to the Holder at
the address provided in the Purchase Agreement for such Holder, with a copy to
John E. Tucker, Esq., 152 West 57th Street, 4th Floor,
New York, New York 10019, facsimile number (212) 541-4434, or at such other
address as the Borrower or the Holder may designate by ten days advance written
notice to the other parties hereto.  A
Notice of Conversion shall be deemed given when made to the Borrower pursuant
to the Purchase Agreement.

 

5.3           Amendment Provision.  The term “Note” and all reference thereto,
as used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented, and any successor instrument issued pursuant to Section 3.3
hereof, as it may be amended or supplemented.

 

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

 

5.5           Governing Law.  This Note shall be governed by and construed
in accordance with the laws of the State of New York, without regard to
principles of conflicts of laws.  Any
action brought by either party against the other concerning the transactions
contemplated by this Agreement shall be brought only in the state courts of New
York or in the federal courts located in the state of New York.  Both parties and the individual signing this
Note on behalf of the Borrower agree to submit to the jurisdiction of such
courts.  The prevailing party shall be
entitled to recover from the other party its reasonable attorney’s fees and
costs.  In the event that any provision
of this Note is invalid or unenforceable under any applicable statute or rule
of law, then such provision shall be deemed inoperative to the extent that it
may conflict therewith and shall be deemed modified to conform with such
statute or rule of law.  Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or unenforceability of any other provision of this Note.

 

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

 

5.7           Security Interest.  The holder of this Note has been granted a
security interest in

 

9

 

certain assets of the Borrower
more fully described in a Security Agreement dated as of September 11, 2003.

 

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

 

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

 

10

 

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

 

	
   

  	
  ELECTRIC CITY CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ John Mitola

  	
   

  
	
   

  	
  Name:

  	
    John Mitola

  	
   

  
	
   

  	
  Title:

  	
    Chief Executive Officer

  	
   

  
	
   

  	
   

  
	
  WITNESS:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
    /s/ Jeffrey Mistarz

  	
   

  	
   

  
					

 

11

 

EXHIBIT A

 

NOTICE OF CONVERSION

 

 

(To be executed by the Holder
in order to convert all or part of the Note into Common Stock

 

[Name and Address of Holder]

 

The
Undersigned hereby elects to convert 
$                    
of the principal due on [specify applicable Repayment Date] under the
Convertible Term Note issued by ELCTRIC CITY CORP. dated September
     , 2003 by delivery of Shares of Common Stock of
ELECTRIC CITY CORP. on and subject to the conditions set forth in Article II of
such Note.

 

	
  1.

  	
  Date of
  Conversion

  	
                                                          

  
	
   

  
	
  2.

  	
  Shares To Be
  Delivered:

  	
                                                           

  
	
   

  
	
   

  
	
  Date:

  	
   

  	
   

  
	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
										

 

12

 

EXHIBIT B

 

REPAYMENT ELECTION NOTICE

 

 

(To be executed by the
Borrower  in order to pay all or part of
a Monthly Amount with Common Stock)

 

[Name and Address of Holder]

 

ELECTRIC CITY CORP. hereby
elects to pay
$                          
of the Monthly Amount due on [specify applicable Repayment Date] under the
Convertible Term Note issued by ELCTRIC CITY CORP. dated September 11, 2003 by
delivery of Shares of Common Stock of ELECTRIC CITY CORP. on and subject to the
conditions set forth in Article II of such Note.

 

	
  1.

  	
  Fixed
  Conversion Price:

  	
  $

  	
   

  	
   

  
	
   

  
	
  2.

  	
  Amount to be
  paid:

  	
  $

  	
   

  	
   

  
	
   

  
	
  3.

  	
  Shares To Be
  Delivered (2 divided by 1):

  	
   

  	
   

  
	
   

  
	
  Date:

  	
   

  	
   

  	
  ELECTRIC
  CITY CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
															

 

13Exhibit 10.3

 

ELECTRIC CITY CORP.

SECURITY AGREEMENT

 

	
  To:

  	
   

  	
  Laurus Master Fund, Ltd.

  
	
   

  	
   

  	
  c/o Onshore Corporate Services, Ltd.

  
	
   

  	
   

  	
  P.O. Box 1234 G.T

  
	
   

  	
   

  	
  Queensgate House

  
	
   

  	
   

  	
  South Church Street

  
	
   

  	
   

  	
  Grand Cayman, Cayman Islands

  

 

Gentlemen:

 

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

 

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

 

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

 

 

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

 

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

 

2

 

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

 

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

 

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

 

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

 

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

 

3

 

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

 

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

 

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

 

4

 

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

 

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  ELECTRIC CITY CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ John Mitola

  	
   

  
	
   

  	
  Name:

  	
   

  	
  John Mitola

  	
   

  
	
   

  	
  Title:

  	
   

  	
  Chief Executive Officer

  	
   

  
	
   

  	
   

  
	
   

  	
  Address: 

  	
  1280 Landmeier Road

  
	
   

  	
   

  	
  Elk Grove Village, Illinois 60007

  
	
   

  	
   

  
	
   

  	
  Dated as of:  September 11,
  2003

  
	
   

  	
   

  
	
  ACKNOWLEDGED:

  	
   

  
	
   

  
	
  LAURUS MASTER FUND, LTD.

  	
   

  
	
   

  
	
  By:

  	
   

  	
  /s/ David Grin

  	
   

  
	
  Name:

  	
   

  	
  David Grin

  	
   

  
	
  Title:

  	
   

  	
  Partner

  	
   

  
									

 

5

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