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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   Form 10-K þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended:December 31, 2004 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number 000-2791   ELECTRIC CITY CORP.  Delaware
(State or other jurisdiction of incorporation or
organization)
    
    36-4197337
(I.R.S. Employer Identification No.)1280 Landmeier Road, Elk Grove Village, IL
(Address of principal executive offices)
    
    60007-2410
(Zip Code)
 Issuers telephone number (847) 437-1666 Securities registered under Section 12(b) of the Exchange Act: Title of each class
    
    Name of each exchange on which registeredCommon Stock $0.0001 par value
    
    American Stock Exchange
 Securities registered under Section 12(g) of the Exchange Act: None 
 (Title of class)
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  o Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes o No þ The aggregate market value of the registrants common stock held by non-affiliates was $51,917,332
based on the reported last sale price of common stock on June 30, 2004, which was the last business
day of the registrants most recently completed second fiscal quarter. For purposes of this
computation, all executive officers, directors and 10% stockholders were deemed affiliates. Such a
determination should not be construed as an admission that such executive officers, directors or
10% stockholders are affiliates. As of March 25, 2005, there were 41,828,310 shares of common stock, $0.0001 par value, of the
Company issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCEDOCUMENT DESCRIPTION
    
    10-K PARTPortions of the Registrants notice of annual meeting of
shareowners and proxy statement to be filed pursuant to
Regulation 14A within 120 days after Registrants fiscal year
end of December 31, 2004 are incorporated by reference into
Part II, Item 5 and Part III of this Report.
    
    II, ITEM 5
III




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TABLE OF CONTENTS PART I
    
    
    
    
    1Item 1.
    
    Description of Business
    
    
    1Item 2.
    
    Description of Property
    
    
    15Item 3.
    
    Legal Proceedings
    
    
    15Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    15PART II
    
    
    
    
    16Item 5.
    
    Market for Common Equity and Related Stockholder Matters
    
    
    16Item 6.
    
    Selected Financial Data
    
    
    18Item 7.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    19Item 7A.
    
    Quantitative and Qualitative Disclosures
    
    
    35Item 8.
    
    Financial Statements and Supplemental Data
    
    
    36Item 9
    
    Change in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    36Item 9A.
    
    Controls and Procedures
    
    
    36Item 9B.
    
    Other Information
    
    
    36PART III
    
    
    
    
    37Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    37Item 11.
    
    Executive Compensation
    
    
    37Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    37Item 13.
    
    Certain Relationships and Related Transactions
    
    
    37Item 14.
    
    Principal Accountant Fees and Services
    
    
    37PART IV
    
    
    
    
    38Item 15.
    
    Exhibits, Financial Report Schedules, and Reports on Form 8-K
    
    
    38SIGNATURES
    
    
    
    
    45




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PART I 
 Item 1. Description of Business Included in this report, exhibits and associated documents are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, as well as historical information. Although we believe
that the expectations reflected in such forward-looking statements are reasonable, we can give no
assurances that such expectations reflected in such forward-looking statements will prove to be
correct. Our actual results could differ materially from those anticipated in forward-looking
statements as a result of certain factors, including matters described in the section titled
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking statements include those that use forward-looking terminology, such as the words
anticipate, believe, estimate, expect, intend, may, project, plan, will, shall,
should, and similar expressions, including when used in the negative. Although we believe that
the expectations reflected in these forward-looking statements are reasonable and achievable, such
statements involve risks and uncertainties and no assurance can be given that the actual results
will be consistent with these forward-looking statements. Unless the context otherwise requires, Electric City, the Company, we, our, us and
similar expressions refers to Electric City Corp. and its subsidiaries. Overview/History We are a developer, manufacturer and integrator of energy saving technologies and building
automation controls as well as an independent developer of scalable, negative power systems. Our
premier energy saving product is the EnergySaver system, which reduces energy consumed by lighting,
typically by 20% to 30%, with minimal lighting level reduction. This technology has applications in
commercial buildings, factories and office structures, as well as street lighting and parking lot
lighting. Our GlobalCommander integrates with the EnergySaver allowing us to link multiple
EnergySaver units together and to provide remote communications, measurement and verification of
energy savings. The combined technology of the EnergySaver and GlobalCommander led to the
development of our Virtual Negawatt Power Plan (VNPP), which is essentially a negative power
system which we market primarily to utilities as a demand response system. In addition to our
EnergySaver system, we also provide, through our subsidiary, Great Lakes Controlled Energy
Corporation (Great Lakes), integrated building and environmental control solutions for commercial
and industrial facilities. Until June 1, 2003, we also manufactured custom electrical switchgear
through Switchboard Apparatus Inc. (Switchboard), a wholly owned subsidiary located in Broadview
Illinois. In an effort to refocus our resources and shed the continuing losses from the switchgear
business, we sold the operating assets of Switchboard to a group of investors that included the
President of Switchboard, effective as of May 31, 2003. On December 5, 1997, we were initially formed as Electric City LLC, a Delaware limited
liability company. On June 5, 1998, we changed from a limited liability company into a corporation
by merging Electric City LLC into Electric City Corp., a Delaware corporation. On June 10, 1998, Electric City issued 1,200,272 shares of our common stock with a fair market
value of $1,200,272, representing approximately six (6%) percent of Electric Citys then issued and
outstanding common stock, to the approximately 330 shareholders of Pice Products Corporation
(Pice), an inactive, unaffiliated company with minimal assets, pursuant to a merger agreement
under which Pice was merged with and into Electric City. The purpose of the merger was to
substantially increase the number of our shareholders to facilitate the establishment of a public
trading market for our common stock. Trading in our common stock commenced on August 14, 1998
through the OTC Bulletin Board under the trading symbol ECCC. 1




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In May 1999, we purchased most of the assets of Marino Electric, Inc., an entity engaged in
the business of designing and manufacturing custom electrical switchgear and distribution panels. On August 31, 2000, pursuant to an Agreement and Plan of Merger among us, Switchboard
Apparatus, Inc. and Switchboard Apparatuss stockholders, we acquired Switchboard Apparatus. In
connection with the acquisition, Switchboard Apparatus was merged into our wholly owned subsidiary,
with our subsidiary continuing as the surviving corporation under the name Switchboard Apparatus,
Inc. On June 7, 2001, pursuant to an Agreement and Plan of Merger by and among us, Electric City
Great Lakes Acquisition Corporation, Great Lakes Controlled Energy Corporation (Great Lakes) and
Great Lakes stockholders, we acquired Great Lakes. Great Lakes is an independent systems integrator
and facilities support specialist and focuses on building automation controls for lighting and HVAC
systems for commercial applications. Great Lakes is also a national representative and distributor
of select energy metering and control systems. In connection with the acquisition, Great Lakes was
merged into our wholly-owned subsidiary Electric City Great Lakes Acquisition Corporation, with our
subsidiary continuing as the surviving corporation under the name Great Lakes Controlled Energy
Corporation. On June 3, 2003, the Company entered into an asset purchase agreement with Hoppensteadt
Acquisition Corp., whereby Hoppensteadt acquired all of the assets, except for certain receivables
and cash, and assumed all of the liabilities, except for bank debt, of Switchboard Apparatus, the
Company Power Management segment, as of May 31, 2003. Products And Services The Company currently manufactures products or provides services under two distinct business
segments. The energy technology segment includes the EnergySaver and GlobalCommander product lines
manufactured and sold by Electric City Corp. In addition, this segment markets the Virtual
Negawatt Power Plan (VNPP), which is essentially a negative power system which is designed for
utilities as a demand response system. The building control and automation business segment is
served by our subsidiary, Great Lakes Controlled Energy Corporation, which specializes in the
installation and maintenance of building control and automation systems. See note 19 to the
consolidated financial statements for additional information regarding the segments of our
business. EnergySaver The EnergySaver system is a state-of-the-art lighting control system that reduces energy
consumption in indoor and outdoor commercial, institutional and industrial ballasted lighting
systems, while maintaining appropriate lighting levels. The EnergySaver is a freestanding enclosure
that contains control panels with electrical parts and is connected between the incoming power line
and the buildings electrical lighting circuits. The EnergySaver also contains a microprocessor
with software that allows the customer to control the amount of energy savings desired which,
depending on the application, can be as high as 50%, and provides self-diagnosis and
self-correction. The customer can access the EnergySavers microprocessor directly or remotely via
modem, network or two-way radio. The EnergySaver is manufactured to varying sizes and capacities to address differing lighting
situations. We can interface our EnergySaver products with new and existing lighting panels,
ballasts and lamps without modification. In addition, the EnergySaver system reduces the power
consumed by lamps, resulting in a reduction of heat generated within the lighting system, which
enhances ballast and lamp life and reduces the amount of air conditioning necessary to cool the
building. 2




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GlobalCommander The GlobalCommander system is an advanced lighting controller capable of providing large-scale
demand side management and savings measurement and verification without turning off the users
lights. The GlobalCommander bundles the EnergySaver technology with an area-wide communication
package to allow for maximum energy reductions across entire systems in response to the guidelines
of a customers facility manager. In addition, the GlobalCommander has the ability to measure and
store information about the actual savings generated from the use of the EnergySaver. This
information, which can be viewed in a tabular or graphical format and can be downloaded to a users
computer, is often required for a customer to qualify for utility incentives for energy savings and
curtailment. The GlobalCommander also allows customers to control their facilities loads and
lighting requirements from a single control point. This single-point control is available for a
virtually unlimited number of remote facilities and can be accessed through the Internet, intranet
or over standard telephone lines through dial-up modems. Virtual Negawatt Power Plan The combined technology of the EnergySaver and GlobalCommander led to the development of our
Virtual Negawatt Power Plan (VNPP), which is essentially a negative power system which we
market primarily to utilities as a demand response system. The VNPP allows a utility to remotely
control commercial, industrial and government lighting systems over a managed and secure Internet
protocol (IP) network. Through the use of the EnergySaver/GlobalCommander system, the utility is
able to reduce electric demand requirements during periods of peak demand, providing instantaneous
control, measurement and verification of load reduction. The demand reduction can be specifically
placed across a utility grid targeting potential hot spots such as particular substations. The
Electric City VNPP is the first demand response system to provide this level of control to a
utility without requiring active customer participation and without impacting a customers
operations or ability to do business. For additional information on the VNPP program please see
Item 7  Managements Discussion and Analysis or Plan of Operations. Building Control and Automation Through our wholly owned subsidiary, Great Lakes Controlled Energy Corporation, we provide
integration of building and automation control systems for commercial and industrial customers.
Great Lakes has been providing building automation services for over 20 years and is an authorized
distributor for Teletrol Systems Inc., WattStopper Inc. and Power Measurement Ltd., and is a dealer
for Novar Controls Corporation and ABB Drives and Motors. Marketing, Sales and Distribution We have established relationships with distributors (also referred to as State
Representatives) to market and distribute our EnergySaver products to end-users. As of December
31, 2004, we had eight distributor/state representative agreements covering Arizona, California,
Illinois, Indiana, Nevada, New Jersey, Pennsylvania, and Texas. Each distributor is responsible for
developing and managing a sales network within its respective territory. Typically the distributor
does this by establishing direct relationships with end-users or through dealerships within the
territory and overseeing the sales, installation and maintenance of our products by those
dealerships. If a distributor sells any of our products outside its territory, such distributor
operates as a dealer, meaning it manages end-user sales only. The distributor earns a commission on
any sale of our products in its territory whether initiated by the distributor itself, a dealer, or
by us. 3




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Our standard distribution agreement gives the distributor certain exclusive rights of
distribution in a particular territory, includes sales quotas that increase periodically throughout
the term of the agreement, and requires the distributor to make payment to us within 30 to 60 days
of product shipment. The agreement contains penalties for failure to meet quotas or make payments,
including the loss of certain exclusive rights of distribution. Currently, a number of our
distributors have violated the terms of their agreements for failing to meet their quotas and are
delinquent in payments due Electric City. We are working with our distributors to address these
issues. In addition, the standard distribution agreement has a term of 10 years after which it is
renewable at our discretion. The standard distribution agreement can be terminated at our
discretion if the distributor fails to meet the terms of the distribution agreement. National accounts (such as chain stores, and large multi-site corporations), municipalities
and other large campus customers are managed by our corporate sales engineering group. This group
concentrates its sales efforts on the energy engineering staffs of these types of entities, which
analyze and recommend the purchase of products like ours for their multiple sites. The sales force
also supports, coordinates and manages multiple sales channels. Our Utility Development area is responsible for marketing the VNPP to utilities. Once a
utility signs a VNPP agreement we work jointly with the utility to sign up energy users to
participate in the curtailment program by agreeing to the installation of the EnergySaver in their
facilities at no cost to the user. Great Lakes sells its building automation control systems either directly to end-users
(typically commercial or industrial building owners) or by bidding on contracts let by general
contractors for new construction or building renovation projects. Customers During 2004, sales to two customers accounted for approximately 57% of our total consolidated
revenue. Our largest customers for 2004 were Hill Mechanical Group and Public Energy Solutions.
Hill Mechanical Group is a customer of our building automation controls business, while Public
Energy Solutions is an EnergySaver dealer. During 2003, four customers accounted for approximately
63% of our total consolidated revenue. The top four customers during 2003 were Electric City of
Pennsylvania, Hill Mechanical Group, Jacobsen Power and M&A Railroad and Electric Supply. Hill
Mechanical Group and Jacobsen Power were both customers of our building automation controls
business, while Electric City of Pennsylvania and M&A Railroad and Electric Supply were EnergySaver
dealers. During 2002, sales to our top four customers accounted for 59% of total consolidated
revenue. The top customers for 2002 included Jacobsen Power, M&A Railroad Supply, PSEG Energy
Technologies (which subsequently became Public Energy Solutions) and Teschky, Inc. Jacobsen Power
and Teschky Inc. were both customers of our building automation controls business, while M&A
Railroad and Electric Supply and PSEG Energy Technologies were EnergySaver dealers. During 2004, we have expended a significant amount of effort on our VNPP concept which
focuses on obtaining utility companies as customers. The Company contracts with utility companies
to install Energy Saver units at participating host locations. The utility companies will pay the
Company for the availability of this demand reduction and the Company will recognize revenue under
these contracts over the period for which demand reduction is provided. No revenue has been
recognized under such contracts for the years ended December 31, 2004, 2003 or 2002. During 2004,
the Company focused on recruiting host locations for a VNPP contract with Commonwealth Edison. The
cost of EnergySaver units currently at host locations under this VNPP program of approximately
$900,000 is included in fixed assets and will be depreciated over the 10 year term of this
contract. Revenue related to this program will be recognized over 10 years, beginning in 2005 as
service revenue related to this equipment. 4




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Competition There are a number of products on the market that directly or indirectly compete with the
EnergySaver products. These competing products can be categorized into three general types:  
    those that convert AC to DC at a central location,
    those that pulsate the power to the lighting system; and
    other control products similar to the EnergySaver system. Products that fall into the first category convert AC to DC at a central location and do so
more efficiently than it is done by the standard electronic ballast in each light fixture. The main
drawback to this technology is that the transmission of DC power over any distance is generally
less efficient and more dangerous than transmitting AC power. This technology also requires the
rewiring of every light fixture on the circuit. Products that pulsate the power in the lighting system turn the power off and on so quickly
(120 times/second) that the lights remain on. This process, which is generally known as wave
chopping, distorts the AC waveform and thereby produces harmonics in a buildings electrical
system that can damage other electrical components such as electric motors and electronic devices.
The process also contributes to the reduction of life of lamps and ballasts in lighting fixtures. Control products control power consumption at the lights, at the lighting circuit or at the
control panel. Products that control the power at the lights or at the lighting circuit must be
wired to each fixture or to each circuit, resulting in high installation cost, which makes these
products less competitive from an economic perspective. The EnergySaver controls power consumption
at the lighting panel, making it much simpler and less expensive to install and maintain. There
are other products on the market that also control power consumption at the lighting panel, but the
EnergySaver is the only product that we are aware of that offers total real-time variability of
savings levels, remote communications and savings measurement and verification capabilities. We
also believe that the EnergySaver has the largest installed base of any lighting control power
reduction system of its type. Great Lakes Controlled Energy competes against both large national controls companies and
smaller regional distributors of building controls. Two of the large national controls companies
that Great Lakes competes with are Siemens and Johnson Controls, both of whom have significantly
greater financial and operating resources than Great Lakes. Great Lakes sells its products and
services based on system capabilities, experience, service and price. Manufacturing Our EnergySaver product line is manufactured at our facilities in Elk Grove Village, Illinois,
with manufacturing and assembly scaled to order demand. Rather than adding significantly to our
manufacturing overhead to meet anticipated increases in demand, we plan to outsource the
manufacturing to contract manufacturers. One potential source of contract manufacturing services
we may utilize is GE Industrial, with whom we have a non-binding agreement to provide system
components, joint product development, VNPP participation and additional joint efforts. The primary components for the EnergySaver are sourced from multiple manufacturers. We are in
continuous discussion with additional parts suppliers, seeking to ensure lowest cost pricing and
reliability of supply. During 2004, approximately 52% of our consolidated material purchases were made from three
suppliers. Purchases from any one supplier will vary year-to-year depending on sales and inventory 5




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levels. None of these three largest suppliers sell the Company proprietary products that we could
not purchase from other vendors. Compliance With Environmental Laws Neither the Companys production nor sales of its products in any material way generate
activities or materials that require compliance with federal, state or local environmental laws. Research and Development The Company, through the day-to-day use of the EnergySaver and its components and its use at
various testing sites around the country, develops modifications and improvements to its products.
Total research and development costs charged to operations were approximately $150,000, $70,000 and
$65,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Intellectual Property Certain technologies underlying the EnergySaver products have been patented in the U.S. and
Italy by Giorgio Reverberi. A U.S. patent application was filed by Mr. Reverberi in November 1997,
and a patent was issued in June 2000. Since January 1, 1998, we, along with Mr. Reverberi and Mr. Joseph Marino, have entered into a
number of agreements relating to the license of the EnergySaver technology, which grant us the
exclusive license rights of Mr. Reverberis patent of the EnergySaver technology in all of North
America, Central America, South America (excluding the countries of Argentina, Brazil, Chile,
Paraguay and Uruguay) and the Caribbean (except Cuba), as well as Africa (excluding the countries
of Algeria, Libya, Morocco and Tunisia). Our license expires upon the expiration of Mr. Reverberis
last expiring patent, which we expect to be on or around November 2017. If either party materially
breaches the license and fails to cure the breach within 180 days after notice by the other party
of the breach, the other party can terminate the license. We pay Mr. Reverberi a royalty of $200
and Mr. Marino a royalty of $100 for each EnergySaver product we make or sell in territories in
which Mr. Reverberi holds a valid patent. We have applied for several patents on improvements we have made to the core technology
developed by Mr. Reverberi. On April 6, 2004 we received a 20-year patent on the core technology
utilized by the GlobalCommander. We have other patents that are pending before the U.S. Patent and
Trademark Office, as well as foreign patent offices. We have applied for registration of the name EnergySaver pursuant to a U.S. trademark
application filed September 15, 2000. In addition, we filed with the U.S. Patent and Trademark
Office an intent-to-use trademark application for each of GlobalCommander, Virtual Negawatt Power
Plant and VNPP on November 13, 2000. During January 2002, we were notified that the application for
the name GlobalCommander and VNPP had been approved. We abandoned efforts to register the name
Virtual Negawatt Power Plant because of existing trademarks that included similar terms. The
registration of the name EnergySaver is still pending with the U.S. Patent and Trademark Office. Employees As of March 25, 2005, we had 27 full time employees, of which five were management and
corporate staff, five were engineers, five were engaged in sales and marketing, six were engaged in
field service and six were engaged in manufacturing. Of those employees engaged in manufacturing,
five are covered by collective bargaining agreements between Electric City and the International
Brotherhood of Electrical Workers (IBEW), which is affiliated with the American Federation of
Labor and Congress of 6




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Industrial Organizations (AFL-CIO). In May of 2002 we renewed the collective bargaining agreement
covering all union employees. The new agreement will expire on May 31, 2005. Risk Factors We caution you that the following risk factors may not be exhaustive. We operate in a
continually changing business environment and may as a result enter into new businesses and product
lines. We cannot predict new risk factors that may arise in the future, and we cannot assess the
impact, if any, of these new risk factors on our businesses or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those projected in any
forward-looking statements. Accordingly, you should not rely on forward-looking statements as a
prediction of actual results. In addition, our estimates of future operating results are based on
our current complement of businesses, which is constantly subject to change as we continue to
assess and refine our business strategy. If any of the following risks actually occur, our
business, results of operations, and financial condition could be adversely affected in a material
manner. Risks Related to Our Business We have a limited operating history upon which to evaluate our potential for future success. We were formed in December 1997. To date, we have generated limited revenues from the sale of
our products and do not expect to generate significant revenues until we sell a significantly
larger number of our products. Accordingly, we have only a limited operating history upon which you
can base an evaluation of our business and prospects. The likelihood of our success must be
considered in light of the risks and uncertainties frequently encountered by early stage companies
like ours in an evolving market. If we are unsuccessful in addressing these risks and
uncertainties, our business will be materially harmed. We have incurred significant operating losses since inception and may not achieve or sustain
profitability in the future. We have incurred substantial net losses in each year since we commenced operations in December
1997. We must overcome significant manufacturing and marketing hurdles to sell large quantities of
our products. In addition, we may be required to reduce the prices of our products in order to
increase sales. If we reduce product prices, we may not be able to reduce product costs
sufficiently to achieve acceptable profit margins. As we strive to grow our business, we expect to
spend significant funds (1) for general corporate purposes, including working capital, marketing,
recruiting and hiring additional personnel; and (2) for research and development. To the extent
that our revenues do not increase as quickly as these costs and expenditures, our results of
operations and liquidity will be materially adversely affected. If we experience slower than
anticipated revenue growth or if our operating expenses exceed our expectations, we may not achieve
profitability. Even if we achieve profitability in the future, we may not be able to sustain it. Our auditors have modified
their opinion to our audited financial statements for the year ended
December 31, 2004 to include an emphasis paragraph, stating that our continuing losses and negative cash
flow from operations raise substantial doubt about our ability to continue as a going concern. Our
management has developed a plan that includes among other things, raising additional capital to fund
operations until our sales and internally generated cash flow can support our ongoing operations. If we
are unsuccessful in raising additional capital our ability to continue to operate as a going concern could be in doubt. A decrease in electric retail rates could lessen demand for our EnergySaver products. Our principal products, our EnergySaver products, have the greatest profit potential in areas
where commercial electric rates are relatively high. However, retail electric rates for commercial
establishments in the United States may not remain at their current levels. Due to a potential
overbuilding of power generating stations throughout certain regions of the United States,
wholesale power prices may decrease in the future. Because the price of commercial retail electric
power is largely attributed to the wholesale cost of power, it is reasonable to expect that
commercial retail rates may decrease as well. In addition, much of the wholesale cost of power is
directly related to the price of certain fuels, such as natural gas, oil and coal. If the prices
of those fuels decrease, the prices of the wholesale cost of power 7




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may also decrease. This could result in lower electric retail rates and reduced demand for energy
saving devices such as our EnergySaver products. We have a license under certain patents and our ability to sell our products may be
adversely impacted if the license expires or is terminated. We have entered into a license agreement with Messrs. Giorgio Reverberi and Joseph Marino.
Mr. Reverberi holds a U.S. patent and has applied for several patents in other countries. Pursuant
to the terms of the license, we have been granted the exclusive right to manufacture and sell
products containing the load reduction technology claimed under Mr. Reverberis U.S. patent or any
other related patent held by him in the U.S., the remainder of North America, parts of South
America and parts of Africa. However, the exclusive rights that we received may not have any value
in territories where Mr. Reverberi does not have or does not obtain protectable rights. The term of
the license expires when the last of these patents expires. We expect that these patents will
expire or around November 2017. The license agreement may be terminated if we materially breach its
terms and fail to cure the breach within 180 days after we are notified of the breach. If our
license is terminated it could impact our ability to manufacture, sell or otherwise commercialize
products in those countries where Mr. Reverberi holds valid patents relating to our products,
including the United States. If we are not able to protect our intellectual property rights against infringement or
others obtain intellectual property rights relating to energy management technology, we
could lose our competitive advantage in the energy management market. We regard our intellectual property rights, such as patents, licenses of patents, trademarks,
copyrights and trade secrets, as important to our success. Although we entered into confidentiality
and rights to inventions agreements with our non-union employees and consultants during March 2001
(and non-union employees hired since March 2001 have also signed these agreements), the steps we
have taken to protect our intellectual property rights may not be adequate. Third parties may
infringe or misappropriate our intellectual property rights or we may not be able to detect
unauthorized use and take appropriate steps to enforce our rights. Failure to take appropriate
protective steps could materially adversely affect our competitive advantage in the energy
management market. Furthermore, our license to use Mr. Reverberis patents may have little or no
value to us if Mr. Reverberis patents are not valid. In addition, patents held by third parties
may limit our ability to manufacture, sell or otherwise commercialize products and could result in
the assertion of claims of patent infringement against us. If that were to happen, we could try to
modify our products to be non-infringing, but we might not be successful or such modifications
might not avoid infringing on the intellectual property rights of third parties. Claims of patent infringement against us, regardless of merit, could result in the expenditure
of significant financial and managerial resources by us. We may be forced to seek to enter license
agreements with third parties (other than Mr. Reverberi) to resolve claims of infringement by our
products of the intellectual property rights of third parties. These licenses may not be available
on acceptable terms or at all. The failure to obtain such licenses on acceptable terms could have a
negative effect on our business. The loss of key personnel may harm our ability to obtain and retain customers, manage our
growth and compete effectively. Our future success will depend significantly upon the continued contributions of certain
members of our senior management, including John P. Mitola, our Chief Executive Officer, because we
believe he is critical to obtaining and retaining customers, managing our growth and the future
development of our VNPP concept. Our future success will also depend upon our ability to attract
and retain highly qualified 8




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technical, operating and marketing personnel. We believe that there is intense competition for
qualified personnel in the energy management industry. If we cannot hire, train and retain
qualified personnel or if a significant number of our current employees depart, we may be unable to
successfully manufacture and market our products. If we are unable to manage our growth, it will adversely affect our business, the quality of
our products and our ability to attract and retain key personnel. We are subject to the risks inherent in the expansion and growth of a business enterprise.
Growth in our business will place a strain on our operational and administrative resources and
increase the level of responsibility for our existing and new management personnel. To manage our
growth effectively, we will need to:  
    further develop and improve our operating, information, accounting, financial
and other internal systems and controls on a timely basis;
    improve our business development, marketing and sales capabilities; and
    expand, train, motivate and manage our employee base. Our current senior management has limited experience managing a publicly traded company. Our
systems currently in place may not be adequate if we continue to grow and may need to be modified
and enhanced. The skills of management currently in place may not be adequate if we experience
significant growth. If our management fails to properly identify companies to acquire and to effectively
negotiate the terms of these acquisition transactions, our growth may be impaired. As part of our growth strategy we intend to seek to acquire companies with complementary
technologies, products and/or services. Our management, including our Board of Directors, will have
discretion in identifying and selecting companies to be acquired by us and in structuring and
negotiating these acquisitions. In general, our common stockholders may not have the opportunity to
approve these acquisitions (The holders of Series E Convertible Preferred Stock have certain rights
to approve acquisitions). In addition, in making acquisition decisions, we will rely, in part, on
financial projections developed by our management and the management of potential target companies.
These projections will be based on assumptions and subjective judgments. The actual operating
results of any acquired company or the combination of us and an acquired company may fall
significantly short of projections. We may be unable to acquire companies that we identify for various reasons, including:  §
    our inability to interest such companies in a proposed transaction;§
    our inability to agree on the terms of an acquisition;§
    incompatibility between our management and management of a target company; and§
    our inability to obtain required approvals of the holders of the Series E
Convertible Preferred Stock. If we cannot consummate acquisitions on a timely basis or agree on terms at all, or if we
cannot continue to acquire companies with complementary technologies, products and/or services on
terms acceptable to us, our future growth may be impaired. Our growth may be impaired and our current business may suffer if we do not successfully
address risks associated with acquisitions. During our limited operating history, we have acquired two companies; Switchboard Apparatus
and Great Lakes Controlled Energy, one of which (Switchboard Apparatus) we have subsequently sold.
Our future growth may depend, in part, upon our ability to successfully acquire and operate other 9




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complementary businesses. We may encounter problems associated with such acquisitions,
including the following:  §
    difficulties in integrating acquired operations and products with our existing
operations and products;§
    difficulties in meeting operating expectations for acquired businesses;§
    diversion of managements attention from other business concerns;§
    adverse impact on earnings of amortization or write-offs of goodwill and other
intangible assets relating to acquisitions; and§
    issuances of equity securities that may be dilutive to existing stockholders to
pay for acquisitions. If our EnergySaver products do not achieve or sustain market acceptance, our ability to
compete will be adversely affected. To date, we have not sold our EnergySaver product line in very large quantities and a
sufficient market may not develop for it. Significant marketing will be required in order to
establish a sufficient market for the EnergySaver products. The technology underlying these
products may not become a preferred technology to address the energy management needs of our
customers and potential customers. Failure to successfully develop, manufacture and commercialize
products on a timely and cost-effective basis will have a material adverse effect on our ability to
compete in the energy management market. Failure to meet customers expectations or deliver expected technical performance could
result in losses and negative publicity. Customer engagements involve the installation of energy management equipment that we design to
help our clients reduce energy/power consumption. We rely on outside contractors to install our
EnergySaver products. Any defects in this equipment and/or its installation or any other failure to
meet our customers expectations could result in:  
    delayed or lost revenues due to adverse customer reaction;
    requirements to provide additional products and/or services to a customer at no charge;
    negative publicity regarding us and our products, which could adversely affect our
ability to attract or retain customers; and
    claims for substantial damages against us, regardless of our responsibility for such
failure. If sufficient additional funding is not available to us, the commercialization of our
products and our ability to grow may be hindered. Our operations have not generated positive cash flow since the inception of the Company in
1997. We have funded our operations through the issuance of common and preferred stock and secured
debt. Our ability to continue to operate until our cash flow turns positive may depend on our
ability to continue to raise funds through the issuance of equity or debt. If we are not
successful in raising additional funds, we might have to significantly scale back or delay our
growth plans, or possibly cease operations altogether. Any reduction or delay in our growth plans
could materially adversely affect our ability to compete in the marketplace, take advantage of
business opportunities and develop or enhance our products. Raising additional capital or consummation of additional acquisitions through the issuance
of equity or equity-linked securities could dilute your ownership interest in us. It is likely that we will need to obtain additional funds in the future to grow our product
development, manufacturing, marketing and sales activities at the pace that we intend, to continue
to fund 10




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operating losses until our cash flow turns positive, or to fund acquisitions. If we determine
that we do need to raise additional capital in the future and we are not successful in doing so, we
might have to significantly scale back or delay our growth plans, reduce staff and delay planned
expenditures on research and development and capital expenditures in order to continue as a going
concern. Any reduction or delay in our growth plans could materially adversely affect our ability
to compete in the marketplace, take advantage of business opportunities and develop or enhance our
products. If we receive additional funds through the issuance of equity securities or convertible debt
securities, our existing stockholders will likely experience dilution of their present equity
ownership position and voting rights. Depending on the number of shares issued and the terms and
conditions of the issuance, new equity securities could have rights, preferences, or privileges
senior to those of our common stock. Failure to effectively market our energy management products could impair our ability to
sell significant quantities of these products. One of the challenges we face in commercializing our energy management products is
demonstrating the advantages of our products over more traditional products and competitive
products. To do this, we will need to further develop our marketing and sales force. In addition
to our internal sales force, we rely on third parties to market and sell our products. We currently
maintain a number of relationships and have a number of agreements with third parties regarding the
marketing and distribution of our EnergySaver products and depend to some degree upon the efforts
of these third parties in marketing and selling these products. Maintenance of these relationships
is based primarily on an ongoing mutual business opportunity and a good overall working
relationship. The current contracts associated with certain of these relationships allow the
distributors to terminate the relationship upon 30 days written notice. Without these
relationships, our ability to market and sell our EnergySaver products could be harmed and we may
need to divert even more resources to increasing our internal sales force. If we are unable to
expand our internal sales force and maintain our third party marketing relationships, our ability
to generate significant revenues may be harmed. The distribution rights we have granted to third parties in specified geographic territories
may make it difficult for us to grow our business in such territories if those distributors do not
successfully market and support our products in those territories. We have in the past been and may
in the future be, involved in disputes with distributors that have distribution rights in specified
geographic territories, but are not achieving our goals. During 2000, we repurchased for cash and
stock consideration the distribution rights from three distributors that were not meeting our sales
goals. We recently settled a dispute with a former distributor to avoid the cost of further
litigation. We may have to expend additional funds, incur debt or issue additional securities in
the future to repurchase other distribution rights or pursue legal action to enforce our rights
under distributor agreements that we have granted or may grant in the future. If our Virtual Negawatt Power Plan concept is unsuccessful, distribution of our
EnergySaver product line may be impaired and our growth could suffer. During 2001, we announced our Virtual Negawatt Power Plan concept. The VNPP is intended to
allow a utility to remotely control commercial, industrial and government lighting systems over a
managed and secure IP network. It is envisioned that through the use of the EnergySaver/
GlobalCommander system, a utility will be able to reduce electric demand requirements during
periods of peak demand, providing nearly instantaneous control, measurement and verification of
load reduction. The successful implementation of the VNPP concept could significantly increase the
sales and profitability of our EnergySaver product line. In 2003, we announced an agreement with
Commonwealth Edison to implement a 50-Megawatt VNPP system in northern Illinois. A VNPP agreement
was executed 11




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with ComEd during the third quarter of 2003 and we began installing product under the program in
late 2003, but we have not yet recognized any revenue under this agreement. While we have made progress in implementing this program with ComEd, we still have a number of
hurdles to clear related to this program. Also, if we fail to recruit enough customers to
participate in the program we may not be able to deliver 50MW of demand curtailment, which would
result in less revenue from the program than we expect. If our attempts to advance the VNPP
concept are unsuccessful, our plans to significantly increase the distribution of our EnergySaver
product line may not develop and our growth may be impaired. If we do not successfully compete with others in the very competitive energy management
market, we may not achieve profitability. In the energy management market, we compete with other manufacturers of traditional energy
management products that are currently used by our potential customers. Many of these companies
have substantially greater financial resources, larger research and development staffs and greater
manufacturing and marketing capabilities than us. Our competitors may provide energy management
products at lower prices and/or with superior performance. If we are unable to successfully compete
with conventional and new technologies our business may be materially harmed. Product liability claims could result in losses and could divert our managements time and
resources. The manufacture and sale of our products creates a risk of product liability claims. Any
product liability claims, with or without merit, could result in costly litigation and reduced
sales, cause us to incur significant expenses and divert our managements time, attention and
resources. We do have product liability insurance coverage; however, there is no assurance that
such insurance is adequate to cover all potential claims. The successful assertion of any such
claim against us could materially harm our liquidity and operating results. Our current internal manufacturing capacity is limited and if demand for our products
increases significantly and we are unable to increase our capacity quickly and efficiently
our business could suffer. Our EnergySaver products are manufactured at our facilities. To be financially successful, we
must manufacture our products, including our EnergySaver products, in substantial quantities, at
acceptable costs and on a timely basis. While we have produced approximately 1,200 EnergySaver
units over the past six years, we have never approached what we believe is our production capacity.
To produce larger quantities of our EnergySaver products at competitive prices and on a timely
basis, we will have to further develop our processing, production control, assembly, testing and
quality assurance capabilities. We also intend to hire contract manufacturers and outsource the
manufacturing of some or all of our products. We have had discussions with several potential
contract manufacturers and they have produced units on a trial basis, but their ability to deliver
significant quantities of product in a timely manner is still unproven. We may be unable to
manufacture our EnergySaver products in sufficient volume and may incur substantial costs and
expenses in connection with manufacturing larger quantities of our EnergySaver products. If we are
unable to make the transition to large-scale commercial production successfully, our business will
be negatively affected. We could encounter substantial difficulties if we decide to outsource the
manufacturing of our products, including delays in manufacturing and poor production quality. 12




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Risks Related to Our Common Stock Due to the current market price of our common stock, in conjunction with the fact that we
are a relatively small company with a history of operating losses, the future trading market
for our stock may not be active on a consistent basis, which may make it difficult for you
to sell your shares. The trading volume of our stock in the future will depend in part on our ability to increase
our revenue and reduce or eliminate our operating losses, which should increase the attractiveness
of our stock as an investment, thereby leading to a more liquid market for our stock on a
consistent basis. If an active and liquid trading market does not exist for our common stock, you
may have difficulty selling your shares. The need to raise additional capital will most likely be dilutive to our current
stockholders and could result in new investors receiving rights that are superior to those
of existing stockholders. Since September 2001, we have issued shares of our preferred stock that are currently
convertible into 22,475,200 shares of our common stock (including shares issued as dividends).
These shares of preferred stock are currently accruing dividends at the rate of 6% per year, though
prior to March 22, 2004 they were accruing at the rate of 10% per year. To date we have issued
shares of convertible preferred stock in satisfaction of accrued dividends convertible into
7,016,510 shares of Common Stock. The preferred stockholders all have rights that are superior to
the rights of our common stockholders, including:  §
    a liquidation preference of $200 per share (under our Series E Preferred which was
issued on March 22, 2004 in a 1 for 10 exchange for the outstanding Series A, C and D
Preferred shares. See Liquidity and Capital Resources.);§
    special approval rights in respect of certain actions by the Company, including any
issuance of shares of capital stock by the Company that would have the right to receive
dividends or the right to participate in any distribution upon liquidation which was
senior to or equal to the rights of the Series E Preferred (other than to pay dividends
on the preferred and under certain other limited exceptions such as conversion of
outstanding convertible securities) and any acquisition, sale, merger, joint venture,
consolidation or reorganization involving the Company or any of its subsidiaries;§
    a conversion price that may be below the market price of our common stock;§
    the right to elect up to four directors;§
    the right to vote with the holders of common stock on an as converted basis on all
matters on which holders of our common stock are entitled to vote, except with respect
to the election of directors or as otherwise provided by law;§
    a right of first offer on the sale of equity by the Company in a private
transaction; and§
    anti-dilution protection that would adjust the conversion price on their preferred shares and the exercise price on their warrants in the event we issue equity at a price which is less than the conversion price or exercise price of their securities. These rights associated with our preferred stock are substantially different than the rights
of our common stockholders and may materially decrease the value of our common stock. 13




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Due to the concentration of holdings of our stock, three investors may be able to control
matters requiring stockholder approval or could cause our stock price to decline through
future sales because they beneficially own a large percentage of our common stock. There are 41,828,310 shares of our common stock outstanding as of March 25, 2005, of which
Joseph C. Marino beneficially owns approximately 18%, Richard Kiphart beneficially owns
approximately 19% and Security Benefit beneficially owns approximately 18% (each of the
aforementioned percentages includes stock options and warrants that are currently exercisable and
in the case of Mr. Kiphart include stock issuable upon conversion of Series E Convertible Preferred
Stock). As a result of their significant ownership, Mr. Marino, Mr. Kiphart and Security Benefit
may have the ability to exercise a controlling influence over our business and corporate actions
requiring stockholder approval, including the election of our directors (other than those directors
to be chosen by the holders of our preferred stock), a sale of substantially all of our assets, a
merger between us and another entity or an amendment to our certificate of incorporation. This
concentration of ownership could delay, defer or prevent a change of control and could adversely
affect the price investors might be willing to pay in the future for shares of our common stock.
Also, in the event of a sale of our business, Mr. Marino and Mr. Kiphart and Security Benefit could
elect to receive a control premium to the exclusion of other stockholders. A significant percentage of the outstanding shares of our common stock, including the shares
beneficially owned by Mr. Marino, Mr. Kiphart or Security Benefit, can be sold in the public market
from time to time, subject to limitations imposed by Federal securities laws and, in the case of
Mr. Kiphart, by trading agreements entered into with us. The market price of our common stock could
decline as a result of sales of a large number of our presently outstanding shares of common stock
by Mr. Marino, Mr. Kiphart, Security Benefit or other stockholders in the public market or due to
the perception that these sales could occur. This could also make it more difficult for us to raise
funds through future offerings of our equity securities. Provisions of our charter and by-laws, in particular our blank check preferred stock,
could discourage an acquisition of our company that would benefit our stockholders. Provisions of our charter and by-laws may make it more difficult for a third party to acquire
control of our company, even if a change in control would benefit our stockholders. In particular,
shares of our preferred stock have been issued and may be issued in the future without further
stockholder approval and upon those terms and conditions, and having those rights, privileges and
preferences, as our Board of Directors may determine. The rights of the holders of our common stock
will be subject to, and may be adversely affected by, the rights of the holders of any of our
preferred stock which is currently outstanding or which may be issued in the future. The issuance
of our preferred stock, while providing desirable flexibility in pursuing possible additional
equity financings and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire control of us. This could limit the price that certain investors might
be willing to pay in the future for shares of our common stock and discourage these investors from
acquiring a majority of our common stock. In addition, the price that future investors may be
willing to pay for our common stock may be lower due to the conversion price and exercise price
granted to investors in any such private financing. 14




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Item 2. Description of Property Our headquarters and the EnergySaver system production facility are located at 1280 Landmeier
Road in Elk Grove Village, Illinois. This facility is approximately 13,000 square feet and houses
the corporate headquarters, manufacturing operations and warehouse. We acquired this facility in
August 1998 with a combination of stock and cash. The cash portion of the purchase price was
financed through a mortgage on the building. The mortgage was refinanced in December 2004, bears
interest at the rate of prime plus 0.5%, and is payable in monthly installments of $3,000 plus
interest, until a final balloon payment which is due on February 2006. There is no penalty for
prepayment of the mortgage. As of January 31, 2005, the outstanding principal amount of the
mortgage was $595,000. On June 7, 2001, we acquired Great Lakes Controlled Energy Corporation (Great Lakes). Great
Lakes currently operates its business from a facility located in Elk Grove Village, Illinois, which
is approximately 10,000 square feet. In connection with our acquisition of Great Lakes, we entered
into a three-year building lease beginning on the date of the acquisition. Effective June 7, 2004,
the lease was extended through December 2005. The building is owned by the former shareholders of
Great Lakes, Eugene Borucki and Denis Enberg, both of whom are currently employed by the Company. We believe that the space and location of our current facilities in combination with the
planned outsourcing of a portion of our manufacturing will be sufficient to reach a level of
production projected for the current year. 
 Item 3. Legal Proceedings American Life Insurance Company v. Electric City Corp.; The Stockpage and John Does,
is a lawsuit filed on April 29, 2004 in the Circuit Court of Cook County, Illinois, County
Department  Chancery Division. The suit accuses the defendants of sending out unsolicited
advertisement to telephone facsimile machines in violation of the Telephone Consumer Act, 47
U.S.C.§227 (TCPA), the Illinois Consumer Fraud Act, 815 ILCS 505/2, and Illinois common law. The
complaint seeks class certification and statutory damages of $500 to $1,500 each on behalf of a
class that would include all residents of Illinois who received an unsolicited facsimile
advertisement from us, plus attorneys fees, litigation expenses and costs of the suit. On
November 22, 2004 we filed a motion for summary judgment seeking to have the suit dismissed because
we did not send out the facsimiles in question, nor did we authorize the distribution of
unsolicited facsimiles. The Court has not yet ruled on our motion. Insurance has covered the
costs of defending this suit, and while the insurer has reserved its rights with respect to this
matter, we believe that should the plaintiff ultimately prevail any judgments against us would be
covered by insurance. The Company intends to defend the lawsuit. Based upon information presently
available, and in light of legal and other defenses available to the Company, management does not
consider the liability from this or any threatened or pending litigation to be material to the
Company. 
 Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the three months ended
December 31, 2004. 15




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PART II 
 Item 5. Market for Common Equity and Related Stockholder Matters Our common stock has traded since December 12, 2000 on the American Stock Exchange under the
symbol ELC. The following table sets forth the quarterly high and low closing prices for our common stock
as reported on The American Stock Exchange since January 1, 2003. Common StockHigh
    
    
    LowFiscal Year Ended December 31, 2003:Fiscal Quarter Ended March 31, 2003
    
    $
    1.50
    
    
    $
    0.70Fiscal Quarter Ended June 30, 2003
    
    $
    1.66
    
    
    $
    0.90Fiscal Quarter Ended September 30, 2003
    
    $
    2.21
    
    
    $
    0.92Fiscal Quarter Ended December 31, 2003
    
    $
    2.70
    
    
    $
    2.03Fiscal Year Ended December 31, 2004:Fiscal Quarter Ended March 31, 2004
    
    $
    2.40
    
    
    $
    1.83Fiscal Quarter Ended June 30, 2004
    
    $
    2.07
    
    
    $
    1.62Fiscal Quarter Ended September 30, 2004
    
    $
    1.93
    
    
    $
    1.35Fiscal Quarter Ended December 31, 2004
    
    $
    1.38
    
    
    $
    1.10
 Holders As of March 24, 2005, we had approximately 5,600 holders of record of our common stock and
41,828,310 shares of common stock outstanding. Dividends For the three months ended December 31, 2004, we declared and paid the following dividends on
our Convertible Preferred Stock:  
    On December 1, 2004, the Board of Directors authorized payment of dividends payable on
our Series E Convertible Preferred Stock for the calendar quarter ending December 31, 2004
to shareholders of record of our Series E Convertible Preferred Stock as of December 31,
2004. The dividends were paid with 3,280 additional shares of Series E Convertible
Preferred Stock. Each share of Series E Convertible Preferred Stock is convertible into
100 shares of our common stock. The Company recorded a non-cash deemed dividend of $78,720
related to the issuance of these dividend shares due to the fact that the conversion price
on the dividend shares was lower than the market price of the Companys common stock on the
date of issue. For a further discussion regarding preferred stock dividends, see Item 7  Managements
Discussion and Analysis or Plan of Operations  Preferred Stock Dividends. 16




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We have never declared or paid any cash dividends on our common stock and we do not anticipate
paying any cash dividends in the foreseeable future. We may not pay cash dividends on any of our
capital stock) without the consent of at least 66-2/3% of the Series E Convertible Preferred Stock,
and the consent of our secured lender. See Item 7 - Managements Discussion and Analysis of
Results of Operations and Financial Condition  Liquidity and Capital Resources. Recent Sales of Unregistered Securities During the twelve months ended December 31, 2004, we issued the securities listed below (in
addition to those securities listed under the preceding Dividends and to those issuances which we
have reported on Form 10-Q during the past year): During the fourth quarter of 2004, the holders of warrants to purchase 2,906 shares of Series
E Convertible Stock exercised their warrants at a cost of $100 per share. The proceeds of $290,600
received from the exercise of these warrants was used for general corporate purposes. The sales and issuances of common stock, debt instruments and warrants to purchase common
stock in private placements listed above were made by us in reliance upon the exemptions from
registration provided under Sections 4(2) and 4(6) of the Securities Act of 1933, as amended, and
Rule 506 of Regulation D, promulgated by the SEC under federal securities laws and comparable
exemptions for sales to accredited investors under state securities laws. The offers and sales
were made to accredited investors as defined in Rule 501(a) under the Securities Act and no general
solicitation was made by us or any person acting on our behalf; the securities sold were subject to
transfer restrictions, and the certificates for those shares contained an appropriate legend
stating that they had not been registered under the Securities Act and may not be offered or sold
absent registration unless sale is pursuant to an exemption therefrom. 17




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Item 6. Selected Financial Data The information set forth below is not necessarily indicative of results of future operations,
and should be read in conjunction with Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the Consolidated Financial Statements and notes thereto
included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K, which are
incorporated herein by reference, in order to understand further the factors that may affect the
comparability of the financial data presented below. ELECTRIC CITY CORP. AND SUBSIDIARIES
Selected Financial Data Year ended December 31,2004
    
    
    2003
    
    
    2002 (1)
    
    
    2001 (2)
    
    
    2000 (2)(3)Statement of Operations Data:Revenue
    
    $
    2,412,635
    
    
    $
    4,631,833
    
    
    $
    5,534,522
    
    
    $
    2,167,660
    
    
    $
    4,342,926Cost of sales
    
    
    2,302,104
    
    
    
    4,441,687
    
    
    
    5,339,352
    
    
    
    1,943,895
    
    
    
    4,293,764Selling, general and administrative
    
    
    4,643,203
    
    
    
    4,290,078
    
    
    
    6,043,585
    
    
    
    8,170,351
    
    
    
    8,683,275Impairment loss
    
    
    
    
    
    
    
    
    
    
    108,000
    
    
    
    
    
    
    
    Repurchase of distributor territories and
legal settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,680,394Operating loss
    
    
    (4,532,672
    )
    
    
    (4,099,932
    )
    
    
    (5,956,415
    )
    
    
    (7,946,586
    )
    
    
    (10,314,507
    )Other income (expense)
    
    
    (626,690
    )
    
    
    (355,359
    )
    
    
    (33,615
    )
    
    
    (3,401,494
    )
    
    
    (21,664
    )Loss from continuing operations
    
    
    (5,159,362
    )
    
    
    (4,455,291
    )
    
    
    (5,990,030
    )
    
    
    (11,348,080
    )
    
    
    (10,336,171
    )Income (loss) from discontinued operations
    
    
    
    
    
    
    (1,026,651
    )
    
    
    (1,017,897
    )
    
    
    (1,622,997
    )
    
    
    89,495Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    (4,103,872
    )
    
    
    
    
    
    
    Net loss
    
    
    (5,159,362
    )
    
    
    (5,481,942
    )
    
    
    (11,111,799
    )
    
    
    (12,971,077
    )
    
    
    (10,246,676
    )Basic and diluted loss per common share
from continuing operations
    
    $
    (0.25
    )
    
    $
    (0.27
    )
    
    $
    (0.33
    )
    
    $
    (1.05
    )
    
    $
    (0.43
    )Basic and diluted loss per common share
    
    
    (0.25
    )
    
    
    (0.30
    )
    
    
    (0.49
    )
    
    
    (1.10
    )
    
    
    (0.43
    )Weighted average common shares outstanding
    
    
    39,901,387
    
    
    
    33,761,489
    
    
    
    31,213,165
    
    
    
    30,048,043
    
    
    
    28,505,175Balance Sheet Data:Cash and cash equivalents
    
    $
    1,789,808
    
    
    $
    2,467,023
    
    
    $
    1,555,904
    
    
    $
    5,486,073
    
    
    $
    629,436Working capital (deficiency)
    
    
    263,304
    
    
    
    2,050,157
    
    
    
    3,546,270
    
    
    
    7,470,046
    
    
    
    (1,170,893
    )Total assets
    
    
    6,479,320
    
    
    
    7,353,627
    
    
    
    8,908,551
    
    
    
    16,435,863
    
    
    
    12,134,116Long-term debt, including current portion
    
    
    1,230,353
    
    
    
    1,348,645
    
    
    
    1,089,791
    
    
    
    1,434,018
    
    
    
    1,926,294Total stockholders equity
    
    
    1,780,271
    
    
    
    3,040,932
    
    
    
    4,284,291
    
    
    
    12,456,833
    
    
    
    3,649,046
   (1)
    
    In the year ended December 31, 2002, we adopted FAS 142 Goodwill and Other Intangible
Assets, which required us to test our intangible assets for possible impairment. As a result
of this testing we determined the goodwill associated with the Power Management segment was
impaired and recorded a write-down of the asset in the amount of $4,103,872, which was
reported as a cumulative effect of accounting change in 2002. For a further discussion of
these items please refer to Managements Discussion and Analysis or Plan of Operation.(2)
    
    On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142, which among other things provides that good will no longer be amortized, as a result
the Company has not record any goodwill amortization beginning in 2002, whereas it recorded
approximately $555,000 and $397,000 in 2001 and 2000, respectively.(3)
    
    This selected financial data for the year ended December 31, 2000 has been revised from the
original presentation in the audited financial statements to reflect the Companys Power
Management segment as a discontinued operation (consistent with the years ended December 31,
2001, 2002, and 2003). 18




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Item 7. Managements Discussion and Analysis or Plan of Operation The following discussion should be read in conjunction with the consolidated financial
statements and related notes which appear elsewhere in this report on Form 10-K. The discussion
contains forward-looking statements within the meaning of the Private Securities Litigation Act
of 1995. Such statements consist of any statement other than a recitation of historical fact and
can be identified by the use of forward-looking terminology such as may, expect, anticipate,
estimate or continue or the negative of such terms or other variations of such terms or
comparable terminology. You are cautioned that all forward-looking statements are necessarily
speculative and there are certain risks and uncertainties that could cause actual events or results
to differ materially from those referred to in such forward-looking statements. We do not have a
policy of updating or revising forward-looking statements and, therefore, you should not assume
that our silence over time means that actual events are bearing out as estimated in such
forward-looking statements. We have a limited operating history. All risks inherent in an inexperienced enterprise are
inherent in our business. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at
the date of our financial statements. Actual results may differ from these estimates under
different assumptions or conditions. Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that our critical
accounting policies are limited to those described below. For a detailed discussion on the
application of these and other accounting policies, see Note 3 in the notes to the consolidated
financial statements. Use of Estimates Preparation of the consolidated financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates and assumptions
affecting the reported amounts of assets, liabilities, revenues and expenses and related contingent
liabilities. On an on-going basis, the Company evaluates its estimates, including those related to
revenues, bad debts, warranty accrual, income taxes and contingencies and litigation. The Company
bases its estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. Revenue Recognition We recognize revenue when all four of the following criteria are met: (i) persuasive evidence
has been received that an arrangement exists; (ii) delivery of the products and/or services has
occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably
assured. In addition, we follow the provisions of the Securities and Exchange Commissions Staff
Accounting Bulletin No. 104, Revenue Recognition, which sets forth guidelines in the timing of
revenue recognition based upon factors
such as passage of title, installation, payments and customer acceptance. Any amounts
received or 19




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invoiced prior to satisfying the our revenue recognition criteria is recorded as
deferred revenue in the accompanying balance sheet. Our most common source of deferred revenue
is building automation projects in which the customer is billed in advance for some portion of the
work to be performed. We also record the purchase price for certain distributor territories as
deferred revenue, recognizing the purchase price as revenue over the term of the underlying
distribution agreement. We have also entered into agreements in which we have contracted with utilities to establish a
Virtual Negawatt Power Plan (VNPP). Under these contracts, we install Energy Saver units at
participating host locations. The participating host locations receive the benefit of reduced
utility costs through the operation of the units. We are able to reduce electric demand
requirements during periods of peak demand, providing nearly instantaneous control, measurement and
verification of load reduction. The utility companies typically pay us for the availability of this
demand reduction and we recognize revenue under these contracts over the period for which the
demand reduction is provided. No revenue has been recognized under such contracts for the years
ended December 31, 2004, 2003 or 2002. The cost of the energy saver units currently at host
locations under such VNPP programs is included in fixed assets and depreciated over the term of the
contract. Profit Recognition on Long-Term Contracts We account for long-term contracts under the percentage of completion method. Effective
January 1, 2003, due to our limited experience in estimating the profitability on long-term
building automation control contracts, we elected to begin to defer profit on all long-term
building automation control contracts until completion of the job, at which time actual profit on
the job will be known and recognized. Any anticipated losses on contracts are charged to
operations as soon as they are determinable. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. The allowance is largely based upon specific
knowledge of customers from whom collection is determined to be doubtful and our historical
collection experience with such customers. If the financial condition of our customers or the
economic environment in which they operate were to deteriorate, resulting in an inability to make
payments, or if our estimates of certain customers ability to pay are incorrect, additional
allowances may be required. During 2004, we increased our allowance by $21,000, wrote-off $133,000
and recovered $16,000 on receivables that it had previously reserved for as doubtful. As of
December 31, 2004 our allowance for doubtful accounts was approximately $199,000, or 15.7% of the
outstanding accounts receivable. Impairment of Long-Lived Assets. We record impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of those items. Our cash flow
estimates are based on historical results adjusted to reflect our best estimate of future market
and operating conditions. The net carrying value of assets not recoverable is reduced to fair
value. Our estimates of fair value represent our best estimate based on industry trends and
reference to market rates and transactions. Goodwill The Company has made acquisitions in the past that included a significant amount of goodwill
and other intangible assets. Under generally accepted accounting principles in effect through
December
31, 2001, these assets were amortized over their estimated useful lives, and were tested
periodically to 20




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determine if they were recoverable from operating earnings on an undiscounted basis
over their useful lives. Effective in 2002, goodwill is no longer amortized but is subject to an
annual (or under certain circumstances more frequent) impairment test based on its estimated fair
value. Estimated fair value is less than value based on undiscounted operating earnings because
fair value estimates include a discount factor in valuing future cash flows. There are many
assumptions and estimates underlying the determination of an impairment loss, including economic
and competitive conditions, operating costs and efficiencies. Another estimate using different, but
still reasonable, assumptions could produce a significantly different result. During the year
ended December 31, 2002, the Company determined that the estimated fair value of goodwill
associated with its power management business exceeded the carrying value and as a result
recognized an impairment loss of $4,103,872, which was recorded as a cumulative effect of a change
in an accounting principle. As part of our 2002 year-end assessment of the fair value of our
goodwill we determined that the carrying value of the goodwill associated with the building
automation and control business exceeded the fair value by $108,000. This difference between the
carrying value and the estimated fair value of the goodwill was recorded as an impairment loss in
2002. As part of our 2003 and 2004 year-end assessment, we updated our long-term projections for
the building automation and controls business and estimated the fair value based on the discounted
current value of the expected future cash flows. We then compared the implied fair value of the
goodwill to its carrying value and determined that the value of the goodwill was not impaired. It
is possible that upon completion of future impairment tests, as the result of changes in facts or
circumstances, we may have to take additional charges in future periods to recognize a further
write-down of the value of the goodwill attributed to our acquisitions to their estimated fair
values. Results of Operations During the twelve-month period ended December 31, 2004, we incurred a net loss of $5.16
million and used $4.04 million of cash for operating activities. Primarily as a result of our
continuing losses and lack of liquidity our independent registered public accounting firm modified
their opinion on our December 31, 2004 Consolidated Financial Statement to contain a paragraph
wherein they expressed a substantial doubt about our ability to continue as a going concern. We
have taken steps to improve our current liquidity and provide the growth capital necessary to fund
our plan for future growth. Our efforts to raise additional capital are discussed below. Our revenues reflect the sale of our products and services, net of allowances for returns and
other adjustments. Electric Citys sales are generated from the sale of products and services,
primarily in the U.S. Two customers individually accounted for more than 10% of our consolidated
sales during the year ended December 31, 2004, and four customers individually accounted for more
than 10% of our consolidated sales during the year ended December 31, 2003. One of these customers
individually accounted for more than 10% of our consolidated sales in both years. Our cost of goods sold consists primarily of materials and labor. Also included in our cost of
goods sold are freight, the costs of operating our manufacturing facility, charges from outside
contractors used to install our product in our customers facilities, depreciation, charges for
potential future warranty claims and royalty costs related to EnergySaver sales. Sales and gross profits depend in part on the volume and mix of products sold during any given
period. Generally, products that we manufacture have a higher gross profit margin than products and
services that we purchase and resell. A portion of our operating expense is relatively fixed, such as the cost of our facilities.
Accordingly, an increase in the volume of sales will generally result in an increase to our gross
margins since these fixed expenses do not increase proportionately with sales. We have never fully
utilized the
manufacturing capacity of our facilities and, therefore, believe that the fixed nature of some
of our 21




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expenses would contribute to an increase in our gross margin in future periods if sales
volumes increase. In particular we believe that our facility in Elk Grove Village can support a
sales level of EnergySavers of approximately $15 million to $20 million without a significant
investment in fixed assets. It is our intent to outsource manufacturing to third party contract
manufacturers once we approach the capacity of our current facility.  Selling, general and administrative (SG&A) expenses include the following components:  §
    direct labor and commission costs related to our employee sales force;§
    expenses related to our non-manufacturing management, supervisory and staff salaries
and employee benefits;§
    commission costs related to our independent sales representatives and our
distributors;§
    costs related to insurance, travel and entertainment and office supplies and the
cost of non-manufacturing utilities;§
    costs related to marketing and advertising our products;§
    legal expenses;§
    research and development expenses;§
    costs related to administrative functions that serve to support the existing
businesses of the Company, as well as to provide the infrastructure for future growth. Interest expense for continuing operations includes the costs and expenses associated with
working capital indebtedness, the mortgage on our headquarters building, a convertible term loan,
and various auto loans, all as reflected on our current and prior financial statements. Also
included in interest expense is amortization of debt discount and deferred financing costs. Debt
discount includes the fair value of the warrants issued to Laurus Master Fund in 2003, as well as
the value of beneficial conversion feature attributed to the Convertible Term Loan which was
borrowed in 2003. Audited Twelve-Month Period Ended December 31, 2004 Compared With the Audited Twelve-Month Period
Ended December 31, 2003 Revenue.Our revenue declined $2,219,198 or 47.9% to $2,412,635 during the year ended
December 31, 2004 from $4,631,833 during the year earlier period. Revenue from the sale of
EnergySaver related products and services declined $1,330,467 or 64.5% to $733,630 from $2,064,097
in 2003. Energy Saver unit sales declined 48.4% from 217 units in 2003 to 112 units during 2004
(excluding units shipped under the ComEd VNPP program). The decline in EnergySaver related revenue
is directly attributable to our decision to focus on utility programs such as the ComEd, Xcel and
Pacificorp VNPP programs, rather than on commercial sales as we have in past years. We anticipate
that as a result of this shift in focus service revenue related to long-term contracts will
represent a larger portion of our future revenue December 31, 2004, we had shipped 89 EnergySavers
to 52 customer hosts under the ComEd program, but we have not recognized revenue related to this
program pending completion of an amendment to the existing agreement with ComEd. The ComEd VNPP is currently structured as a service agreement with a 13 year term in which
Electric City will provide up to 50 MWs of curtailment capacity to ComEd at a fixed price per
kilowatt of installed capacity, payable quarterly in arrears whether the capacity is used or not as
the capacity is installed. As currently structured, we will recognize revenue under the ComEd
program over the life of the program. During the fourth quarter of 2004 we signed a memorandum of
understanding with ComEd, which, among other things, contemplates, subject to certain conditions, a
doubling of the size of the program to 100 megawatts and modification of pricing in a manner which
we believe should be favorable for the Company. A prerequisite to increasing the size of the
program and modifying the pricing is finalization of regulatory changes necessary for ComEd to
include the costs of the program in its rate base
so that it can recover the cost of the program from its customers. A plan that would permit
this was submitted to the Illinois Commerce Commission in February 2005. The Illinois Commerce
Commission 22




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has historically encouraged demand response programs such as our VNPP, and thus far has
not indicated that it will oppose the proposed changes sought by ComEd. If the rules are not
adopted by the end of 2006, ComEd will have the option to cap the size of the system at 10 MWs and
will also have the option to purchase the equipment outright. We hope that the amendment to our
agreement with ComEd will be executed in definitive form in the first half of 2005 and that the
necessary regulatory approvals will be obtained sometime thereafter. We had not shipped any product under the Xcel or PacifiCorp programs as of December 31, 2004.
We began shipping product under the Xcel program during the first quarter of 2005 and anticipate
the first shipments under the PacifiCorp program will occur during the second quarter of 2005. The
structure of the Xcel program, which provides upfront incentives to offset a portion of the cost of
the equipment, will allow us to recognize revenue upon customer acceptance of the installed units.
Product must be shipped, installed and accepted prior to June 30, 2005 in order to be eligible for
incentives under the current Xcel program. The PacifiCorp program is similar to the existing ComEd
program, as a result revenue and expenses will be recognized over the 10-year term of the contract. Revenue at our building automation and controls segment declined 34.9% to $1,705,341 in 2004
from $2,618,486 in 2003. Revenue in this segment is recognized as work is completed and material
is delivered to the job site, thus will vary based on the level of activity during a particular
period. This segment completed two of the five long-term projects it was working on during the
fourth quarter of 2003, one during the first quarter of 2004 and another during the fourth quarter
of 2004. The last of the five long term projects should be completed during the first quarter of
2005. We are currently bidding on a couple of potentially significant new long term projects. If
we are selected for any of these projects we expect to begin work during the first half of 2005.
In the interim, this segment is working on various short term retro-fit projects. We expect the
revenue for this segment to remain largely unchanged in future periods from the level realized
during 2004. Gross Profit.Our consolidated gross profit declined $79,615 or 41.9% to $110,531during 2004,
as compared to $190,146 earned during 2003, while our gross margin during 2004 increased to 4.6%
from 4.1% in 2003. The EnergySaver related business generated a loss at the gross profit line of
approximately $130,000 during 2004 as compared to earning a gross profit of approximately $296,000
during 2003. The decline in profitability was due primarily to the decline in revenue and the
shift in focus to our utility programs. The building automation controls business recognized a
gross profit of approximately $240,000 during 2004, as compared to a loss of approximately $106,000
in 2003. The improvement in the gross profit in 2004 was the result of recognition of profit on
long term jobs that were completed during the year. SG&A Expenses.Selling, general and administrative expenses increased $353,125 or 8.2% to
$4,643,203 in 2004 from $4,290,078 in 2003. The increase in SG&A expense was primarily due to
legal costs related to arbitration we were involved in with a dealer. If it were not for this
legal expense our SG&A would have declined year over year as a result of reductions in labor costs,
sales commissions to third party dealers and distributors and travel and entertainment expenses.
The dealer arbitration was settled in February 2005, thus our legal expenses are expected to
decline significantly in 2005. Overall SG&A expense is expected to remain unchanged or increase
slightly during 2005 as we add additional resources to assist in the execution of the ComEd,
Pacificorp and Xcel programs. Other Non-Operating Income (Expense).Other non-operating expense is comprised of interest
expense and interest income. Interest expense increased $283,507 to $649,195 during 2004 from
$365,688 in 2003. Almost all of the increase in interest expense during 2004 was due to a $268,815
increase in amortization of deferred issuance costs and the original issue discount. Interest
expense included amortization expense totaling $574,437 for 2004 as compared to $305,622 for 2003.
Interest 23




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income increased $12,176 or 117.9% to $22,505 for 2004 as compared to $10,329 for 2003.
The increase in interest income is the result of higher interest rates earned on invested balances
and higher average invested balances. Discontinued Operations.During 2003 we agreed to sell substantially all of the assets and to
transfer most of the liabilities of our Power Management segment to a group of investors that
included members of the segments management. The sale closed on June 3, 2003, effective as of May
31, 2003. As required by SFAS 144 we have presented the operating results as well as the loss on
disposal for this segment as discontinued operations. During the twelve-month period ended
December 31, 2003 the Power Management segments operating loss was $262,503 and in addition, we
recognized a $764,148 loss on the disposal of the segment during 2003. Preferred Stock Dividends.The dividend expense recognized during 2004 and 2003 was comprised
of the following: Year ended December 31,
    
    2004
    
    
    2003Accrual of dividend on Series A Convertible
Preferred
    
    $
    540,705
    
    
    $
    2,253,978Accrual of Series C Preferred dividend
    
    
    53,206
    
    
    
    219,712Accrual of Series D Preferred dividend
    
    
    35,932
    
    
    
    77,689Accrual of Series E Preferred dividend
    
    
    1,006,937
    
    
    
    Deemed dividend associated with beneficial
conversion price on shares issuable in
satisfaction of preferred dividends
    
    
    1,127,021
    
    
    
    1,879,554Deemed dividend associated with beneficial
conversion feature of Series D Preferred stock
    
    
    
    
    
    
    386,984Deemed dividend associated with the redemption
and exchange of outstanding preferred stock
    
    
    1,860,458
    
    
    
    Deemed dividend associated with change in the
expiration date of warrants to purchase shares
of preferred stock
    
    
    15,000
    
    
    
    Total
    
    $
    4,639,259
    
    
    $
    4,817,917
 24




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Our dividend expense for 2004 declined $178,658 or 3.7% to $4,639,259 from $4,817,917 for
2003. We accrued dividends of $1,636,780 and $2,551,379 on our Convertible Preferred Stock during
2004 and 2003, respectively. This decline in accrued dividends was the result of the reduction in
the number of preferred shares outstanding and a reduction in the dividend rate that resulted from
the redemption and exchange effected in March 2004. Also contributing to the decline was a
reduction in the number of preferred shares outstanding resulting from the voluntary conversion of
shares of preferred stock into 1,956,700 shares of common stock. The dividends accrued during 2004
and 2003 were satisfied through the issuance of 16,368 shares of preferred stock (convertible into
1,636,800 shares of common stock) and 255,138 shares of preferred stock (convertible into 2,551,380
shares of common stock), respectively. As part of the redemption and exchange completed in March
2004, shares of old preferred stock were exchanged for shares of the new Series E preferred stock
at the rate of 10 shares of old preferred for each share of new Series E preferred stock.
Additionally, each share of old preferred stock was convertible into 10 shares of common stock,
whereas each share of new Series E preferred stock is convertible into 100 shares of common stock.
We were required to recognize non-cash deemed dividends of $1,127,021 and $1,879,554 during 2004
and 2003, respectively, due to the fact that the conversion price on these dividend shares was
lower than the market price of our common stock on the date of issue. The decline in this deemed
dividend is primarily the result of the reduction in the difference between the market price of our
common stock and the conversion price of the dividend shares on the date of issuance of these
dividend shares. In addition, despite the fact that we believe the redemption and exchange
transaction was favorable for the Company and its common stockholders (see note 15(p) to the
financial statements), we were required to record a non-cash deemed dividend on the transaction of
$1,860,458. For accounting purposes the transaction was viewed as a redemption for cash and shares
of Series E Preferred stock. The non-cash deemed dividend was determined by comparing the fair
value of the consideration given (the cash and the market value of the Series E Preferred) to the
carrying value of the preferred stock that was redeemed. The fair value of the consideration given
exceeded the carrying value of the existing preferred primarily due to the fact that the market
price of our common stock was higher on the day the redemption and exchange transaction closed than
it was when the shares of the old preferred stock were originally issued. We also incurred a
$15,000 deemed dividend during 2004 when we agreed to extend the expiration date on warrants to
purchase shares of our Series E Convertible Preferred stock from September 30, 2004 to December 31,
2004. We agreed to extend these warrants to permit holders who participated in the redemption and
exchange more time to exercise their warrants so that if they chose to exercise they could do so
without violating the short swing trading rules of section 16(b) of the Securities Act of 1934 or
our insider trading policy which prohibits the trading of our securities during certain blackout
periods prior to the filing of our financial statements. Dividend expenses for 2003 also included
$386,984 of non-cash deemed dividends associated with the issuance of the Series D Convertible
Preferred stock. Again this was due to the fact that the conversion price on the Series D was
lower than the market price when the shares of Series D were issued. As is more fully described in Note 15(p) to our financial statements, we completed a
redemption and exchange offering on March 22, 2004 in which we redeemed 538,462 shares of our
outstanding Series A, Series C and Series D Convertible Preferred Stock (the Existing Preferred),
and exchanged the remaining 2,104,509 shares of Existing Preferred into 210,451 shares of a new
Series E Convertible Preferred Stock at the rate of 10 shares of Series E Convertible Preferred
Stock for each share of Existing Preferred. The Existing Preferred Stock carried a dividend rate
of 10% payable at the Companys election in cash or in additional shares of preferred stock during
the first three years following issuance. After the third anniversary of issuance we were required
to pay all dividends in cash and the dividend rate was to increase by
1/2 % every six months until it
reached 15%, where it would remain until the shares were converted or redeemed. The Series E
Preferred carries a 6% dividend that is payable at the Companys election in cash or additional
shares of Series E Preferred for as long as the shares remain outstanding. The reduction in the
number of outstanding shares of preferred stock, in combination with
the reduction in the dividend rate, significantly reduces the dilutive effect of the
payment-in-kind dividend on the preferred stock in periods after March 22, 2004. 25




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Audited Twelve-Month Period Ended December 31, 2003 Compared With the Audited Twelve-Month Period
Ended December 31, 2002 Revenue.Our revenue declined $902,689 or 16.3% to $4,631,833 during the twelve months ended
December 31, 2003 from $5,534,522 for the year earlier period. EnergySaver related revenue
decreased 33% or $1,025,908, to $2,064,097 in 2003 from $3,090,005 in 2002. EnergySaver unit sales
decreased 34% from 327 units in 2002 to 217 units in 2003. We believe the decline in EnergySaver
revenue was the result of (1) our customers continued deferral of discretionary expenditures until
economic conditions improve, and (2) to managements decision to shift resources to focus on the
Companys new utility initiative, and in particular the Commonwealth Edison (ComEd) VNPP. Revenue from our building controls and automation segment decreased $306,898 or 10.5%, to
$2,618,486 in 2003 from $2,925,384 million in 2002. Revenue in this segment is recognized as work
is completed and material is delivered to the job site and thus will vary based on the level of
activity during a particular period. 2003 revenue was derived primarily from five major building
automation projects, two of which were begun during 2002 and completed in 2003. One of the
projects begun in 2002 and completed in 2003 was the expansion of the Discover Card headquarters in
Riverwoods, Illinois. The majority of this project was completed during 2002, contributing to the
declined in total revenue for 2003. Gross Profit.Our consolidated gross profit decreased $5,024, or 2.6%, to $190,146 for 2003
compared to $195,170 for 2002. Our gross profit as a percentage of sales increased to 4.1% during
2003 compared to 3.5% during 2002. The gross margin earned on EnergySaver sales, including
ancillary products and service, increased from 10.8% in 2002 to 14.3% in 2003. The improvement in
the EnergySaver margin was primarily the result of increased labor efficiency and a shift in the
mix of products sold. Our building automation and controls business reported a loss at the gross profit line during
2003 and 2002 of approximately $106,000 and $115,000, respectively. We account for long-term
building automation control contracts under the percentage of completion method. Effective January
1, 2003, due to our limited experience in estimating the profitability on long-term contracts, we
elected to begin to defer profit on all long-term contracts until completion of the job, at which
time the actual profit on the job will be known and recognized. Only two long-term jobs were
completed during 2003, the most significant of which was the expansion of the Discover Card
headquarters. The Discover Card project was completed at a loss, but was a strategically important
contract for Great Lakes because we believe the building automation system installed by Great Lakes
is one of the most sophisticated systems ever completed anywhere. The success of this project has
resulted in Great Lakes receiving opportunities to bid on other projects of similar size, but with
better profit margins. The combination of the policy to defer profits until project completion and
the loss on the Discover Card project contributed to the loss reported in 2003. The 2002 loss was
due primarily to aggressive bidding on projects as we attempted to gain market share for Great
Lakes in a new market. SG&A Expenses.SG&A expense declined 29.0% or $1,753,507 to $4,290,078 for the year ended
December 31, 2003 from $6,043,585 during the year ended December 31, 2002. Labor expense was
reduced by $837,000, or 30% as a result of the annualization of layoffs implemented in 2002 and
further reductions in labor during 2003. Bad debt expense declined $357,000 during 2003 and sales
commissions declined $271,000, the result of fewer sales by third party dealers and reduced sales
into territories owned by state distributors. 26




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Impairment Loss.The Company reported an impairment loss of $108,000 during 2002 related to
the reduction in the carrying value of the goodwill associated with the acquisition of Great Lakes
Controlled Energy to its estimated fair value. Under SFAS 142 we are required to assess our
goodwill for impairment at least annually. We used a discounted cash flow valuation to determine
the estimated fair value of the goodwill utilizing assumptions based on known facts and
circumstances and estimates of future revenues and profits for the business. As a result of the
losses incurred by the building automation and controls segment of our business during 2002, we
adjusted our estimates for future profitability, which led to the reduction in the estimated fair
value of the goodwill. Other Non-Operating Income (Expense).Other non-operating expense is comprised of interest
expense and interest income. Interest expense increased $308,798 to $365,688 during 2003 as
compared to $56,890 for the year ended December 31, 2002. As is more fully explained in note 10 to
the consolidated financial statements, included in the 2003 interest expense is amortization of the
deferred issuance costs and debt discount related to the Laurus convertible term loan totaling
$305,621. The other components of 2003 interest expense included $32,000 on our mortgage, $18,000
on our convertible term loan and $9,500 on our revolving line of credit. Interest expense for 2002
included interest of $48,000 on our mortgage, $3,000 on our revolving line of credit and $5,500 on
a note payable to the sellers of Marino Electric. Interest income earned during the year ended December 31, 2003 decreased $12,946 or 56% to
$10,329 from $23,275 earned during the same period in 2002. The decline in interest income was the
result of lower average cash balances during 2003 as compared to 2002 and lower interest rates paid
on invested balances. Discontinued Operations.During 2003 we agreed to sell substantially all of the assets and to
transfer most of the liabilities of our Power Management segment to a group of investors that
included members of the segments management. The sale closed on June 3, 2003, effective as of May
31, 2003. As required by SFAS 144 we have presented the operating results as well as the loss on
disposal for this segment as discontinued operations. During the twelve-month period ended
December 31, 2003 the Power Management segments operating loss was $262,503 as compared to an
operating loss of $1,017,897 for the year earlier period. We also recorded a $764,148 loss on the
disposal of the segment during 2003. Cumulative Effect of Accounting Change.On January 1, 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets effective for fiscal
years beginning after December 15, 2001. In accordance with SFAS No. 142, we completed our
transitional impairment testing of intangible assets during the second quarter of fiscal 2002.
Subsequent to the first quarter of fiscal 2002, with the assistance of a third-party valuation
firm, we finalized the testing of goodwill subject to SFAS 142. The testing resulted in a
write-down of recorded goodwill related to our Power Management segment in the amount of
$4,103,872, which was recorded as a cumulative effect of a change in an accounting principle. 27




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Preferred Stock Dividends.The dividend expense recognized during 2003 and 2002 was comprised
of the following: Year ended December 31,
    
    2003
    
    
    2002Accrual of Dividend on Series A Convertible
Preferred
    
    $
    2,253,978
    
    
    $
    2,041,992Accrual of Series C Preferred dividend
    
    
    219,712
    
    
    
    116,426Accrual of Series D Preferred dividend
    
    
    77,689
    
    
    
    Deemed dividend associated with beneficial
conversion price on shares issuable in
satisfaction of preferred dividends
    
    
    1,879,554
    
    
    
    507,992Deemed dividend associated
with beneficial conversion feature of Series C
Convertible Preferred Stock
    
    
    
    
    
    
    1,444,697Deemed dividend associated
with beneficial conversion feature of Series D
Convertible Preferred Stock
    
    
    386,984
    
    
    
    Total
    
    $
    4,817,917
    
    
    $
    4,111,107
 There were three series of our convertible preferred stock issued and outstanding at various
times during 2002 and 2003, up to March 22, 2004 including: our Series A Convertible Preferred
Stock (Series A Preferred Stock), which was first issued during September 2001, our Series C
Convertible Preferred Stock (Series C Preferred Stock), which was first issued during June 2002
and our Series D Convertible Preferred Stock (Series D Preferred Stock), which was first issued
in June 2003. The Series A Preferred Stock accrued a dividend at the rate of 10%, which was payable during
the first three years following initial issuance at our option in cash or additional shares of
Series A Preferred Stock (the dividend rate was scheduled to
increase by 1/2% each six months,
beginning on October 1, 2004 until the dividend rate equaled 15%). We accrued dividends on the
shares of Series A Preferred Stock totaling $2,041,992 and $2,253,978 during 2002 and 2003,
respectively, which we elected to pay by issuing additional shares of Series A Preferred Stock. We
were required to recognize non-cash deemed dividends of $495,589 and $1,627,985 during 2002 and
2003, respectively, due to the fact that the conversion price on these dividend shares was lower
than the market price of our common stock on the dates of issuance. The increase in this deemed
dividend is primarily the result of the increased difference in the market price of our common
stock relative to the conversion price of the dividend shares on the dates we issued the dividend
shares. On June 4, 2002 we raised $2.0 million in gross proceeds through the issuance of a package of
securities that included shares of our Series C Convertible Preferred Stock, shares of our common
stock, 28




---



##### 



warrants to purchase additional shares of our Series C Convertible Preferred Stock (which have
expired unexercised) and warrants to purchase additional shares of our common stock. For
accounting purposes, proceeds from this transaction were allocated to the Series C Convertible
Preferred Stock, the common stock and warrants issued as part of the transaction based on their
relative fair values. The difference between the value allocated to the Series C Convertible
Preferred Stock and the market price of our common stock on the date of issue, in addition to the
value of the stock and warrants issued as part of the transaction were deemed to be equivalent to a
non-cash preferred stock dividend. We recorded the deemed dividend on the date of issuance by
offsetting charges and credits to additional paid-in capital in the amount of $1,444,697, without
any effect on total stockholders equity. The Series C Preferred Stock accrued a dividend at the rate of 10%, which was payable during
the first three years following initial issuance at our option in cash or additional shares of
Series C Preferred Stock (the dividend rate was scheduled to increase by 1/2% each six months,
beginning on July 1, 2005 until the dividend rate equaled 15%). We accrued dividends on the shares
of Series C Preferred Stock totaling $116,426 and $219,712 during 2002 and 2003, respectively,
which we elected to pay by issuing additional shares of Series C Preferred Stock. We were required
to recognize non-cash deemed dividends of $12,403 and $158,691 during 2002 and 2003, respectively,
due to the fact that the conversion price on these dividend shares was lower than the market price
of our common stock on the dates of issuance. The increase in the deemed dividend is related to
the fact that the Series C was outstanding for the entire twelve month period during 2003, where as
it was only outstanding for slightly more than six months during 2002. Also contributing to the
increase in the deemed dividend was the increased difference in the market price of our common
stock relative to the conversion price of the dividend shares on the dates we issued the dividend
shares. On June 27, 2003 we raised $1.5 million in gross proceeds through the issuance of a package of
securities that included shares of our Series D Convertible Preferred Stock, shares of our common
stock, warrants to purchase additional shares of our Series D Convertible Preferred Stock and
warrants to purchase additional shares of our common stock. For accounting purposes, proceeds from
this transaction were allocated to the Series D Convertible Preferred Stock, the common stock and
warrants issued as part of the transaction based on their relative fair values. The difference
between the value allocated to the Series D Convertible Preferred Stock and the market price of our
common stock on the date of issue, in addition to the value of the stock and warrants issued as
part of the transaction were deemed to be equivalent to a non-cash preferred stock dividend. We
recorded the deemed dividend on the date of issuance by offsetting charges and credits to
additional paid-in capital in the amount of $386,984, without any effect on total stockholders
equity. The Series D Preferred Stock accrued a dividend at the rate of 10%, which was payable during
the first three years following initial issuance at our option in cash or additional shares of
Series D Preferred Stock (the dividend rate was scheduled to increase by 1/2% each six months,
beginning on July 1, 2006 until the dividend rate equaled 15%). We accrued dividends on the shares
of Series D Preferred Stock totaling $77,689 during 2003, which we elected to pay by issuing
additional shares of Series D Preferred Stock. We were required to recognize non-cash deemed
dividends of $92,878 during 2003, due to the fact that the conversion price on these dividend
shares was lower than the market price of our common stock on the dates we issued the dividend
shares. All outstanding shares of Series A, Series C and Series D Preferred stock were redeemed or
exchanged for shares of Series E Convertible Preferred stock on March 22, 2004. See Liquidity and
Capital Resources below for additional information on this transaction. 29




---



##### 



Liquidity and Capital Resources During the twelve-month period ended December 31, 2004, we incurred a net loss of $5.16
million and used $4.04 million of cash for operating activities. Primarily as a result of our
continuing losses and lack of liquidity our independent registered public accounting firm modified
their opinion on our December 31, 2004 Consolidated Financial Statement to contain a paragraph
wherein they expressed a substantial doubt about our ability to continue as a going concern. We
have taken steps to improve our current liquidity and provide the growth capital necessary to fund
our plan for future growth. Our efforts to raise additional capital are discussed below. As of December 31, 2004, we had cash and cash equivalents of $1,789,808, compared to cash and
cash equivalents of $2,467,023 on December 31, 2003. Our debt obligations as of December 31, 2004
consisted of a convertible term loan in the amount of $676,790, a mortgage in the amount of
$598,000 on our facility in Elk Grove Village Illinois, and a vehicle loan of $5,611. The Companys principal cash requirements are for operating expenses, including employee
costs, the costs related to research and development, advertising costs, the cost of outside
services including those providing accounting, legal, engineering and electrical contracting
services, and the funding of inventory and accounts receivable, and capital expenditures. The
Company has financed its operations since inception primarily through the private placement of its
common and preferred stock, as well as through various forms of secured debt. The following table summarizes, for the periods indicated, selected items in our consolidated
statement of cash flows: Year ended December 31,2004
    
    
    2003
    
    
    2002Net cash used in operating activities
    
    $
    (4,039,058
    )
    
    $
    (2,830,117
    )
    
    $
    (6,880,511
    )Net cash provided by (used in) investing activities
    
    
    (149,603
    )
    
    
    896,728
    
    
    
    (6,987
    )Net cash provided by financing activities
    
    
    3,511,446
    
    
    
    2,844,508
    
    
    
    2,957,329Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (677,215
    )
    
    
    911,119
    
    
    
    (3,930,169
    )Cash and Cash Equivalents, at beginning of period
    
    
    2,467,023
    
    
    
    1,555,904
    
    
    
    5,486,073Cash and Cash Equivalents, at end of period
    
    $
    1,789,808
    
    
    $
    2,467,023
    
    
    $
    1,555,904
 2004 Compared to 2003 Net cash declined $677,215 during the year ended December 31, 2004 while net cash increased
$911,119 during the year ended December 31, 2003. Operating Activities The cash consumed by operating activities increased $1,208,941 or 42.7% to $4,039,058 during
the twelve-month period ended December 31, 2004 as compared to consuming $2,830,117 during the
twelve-month period ended December 31, 2003. The cash consumed by operating activities in both
periods are largely the result of losses from operations. The increase in cash used in operating
activities during 2004 was primarily attributable to the increase in SG&A expense and lower gross
profit realized during the year, partially offset by the elimination of the loss from discontinued
operations. 30




---



##### 



Investing Activities Investing activities consumed $149,603 during the 2004 compared to generating cash of $896,728
during 2003. The increase in investing activities for 2004 primarily reflects the costs of
building and installing equipment for the ComEd VNPP program. These capitalized costs will be
amortized over the term of the underlying contract with ComEd. During 2003, we sold certain assets
and transferred certain liabilities of our Power Management business, generating cash proceeds of
$929,032. Financing Activities Financing activities generated cash of $3,511,446 during 2004 as compared to generating cash
of $2,844,508 during 2003. During 2004, we raised $11,000,000 through the issuance of a package of
securities that included shares of our common stock and common stock warrants. We used $7,000,006
of the net proceeds from this issuance to effectuate a redemption and exchange offer for our Series
A, Series C and Series D Convertible Preferred Stock. We incurred expenses related to these
transactions of $910,393. During the period we also made scheduled principal payments on our
mortgage and auto loan of $39,155 and received $461,000 in net proceeds from the exercise of
warrants to purchase shares of our common and preferred stock. During 2003 we raised $1,000,000 in gross proceeds through the issuance of a convertible term
note to Laurus Funds. These proceeds were partially offset by issuance costs totaling $308,228.
In November 2003 Laurus converted $52,346 in principal of the note into shares of our common stock.
We also raised gross proceeds of $1.5 million from the issuance of our Series D Convertible
Preferred Stock and $1,669,914 from the issuance of 1,815,125 shares of our common stock in three
separate private placements during 2003. The proceeds from these private placements of our common
stock were partially offset by issuance costs of $297,462. During 2003, various holders of
warrants exercised their rights under the warrants generating $197,000 in cash. We used a portion
of the proceeds generated from the sale of our Power Management segment to repay $298,000 in
equipment loans and to pay down to zero the outstanding balance on our revolving line of credit of
$500,000. We also prepaid $47,000 on our mortgage as an inducement for the lender to refinance the
mortgage and extend the maturity until February 1, 2005. We made scheduled payments during 2003 of
$33,000 on our mortgage, $51,500 on our equipment loan, and $7,014 on various auto loans. We also
received a payment of $798 from a board member that represented the short-swing profit
inadvertently earned when he purchased shares of our stock within six months of selling shares,
which is a violation of section 16(b) of the Securities Exchange Act of 1934. 2003 Compared to 2002 Operating Activities The cash consumed by operating activities declined $4,050,394 or 58.9% to $2,830,117 during
the twelve-month period ended December 31, 2003 as compared to $6,880,511 consumed during the
twelve-month period ended December 31, 2002. Cash used to fund the net loss, calculated at the net
loss less non-cash charges declined $2,262,673 or 36.5% in 2003 to $3,928,847 from $6,191,520 in
2002. The improvement in cash used to fund the net loss was primarily due to a $1.8 million
reduction in SG&A expense, and the $755,394 reduction in the loss from discontinued operations. Changes in net working capital generated $1,098,730 in cash during 2003 as compared to
consuming $688,991 during 2002. Most of the improvement in cash used for working capital purposes
was due to reductions in inventory, the result of continued focus on better inventory management,
and the receipt of a significant customer deposits related to the ComEd VNPP program. These
improvements 31




---



##### 



were partially offset by a reduction in accrued expenses during 2003 as amounts owed to
subcontractors on building automation control projects were paid during the year. Investing Activities Investing activities generated cash of $896,728 during 2003 as compared to consuming cash of
$6,987 during 2002. In June 2003, we sold certain assets and transferred certain liabilities of
our Power Management business, generating cash proceeds of $929,032. This source of cash was
partially offset by the purchase of equipment during 2003 totaling $32,304. During 2002 we spent
$17,487 on new equipment, but this use of cash was partially offset by $10,500 generated through
the sale of equipment we no longer used. Financing Activities Financing activities generated cash of $2,844,508 and $2,957,329 during 2003 and 2002,
respectively. In September 2003 we raised $1,000,000 in gross proceeds through the issuance of a
convertible term note. These proceeds were partially offset by issuance costs totaling $308,228.
In November 2003 holder of the Convertible Term Note converted $52,346 in principal into shares of
our common stock. We also raised gross proceeds of $1.5 million from the issuance of our Series D
Convertible Preferred Stock and $1,669,914 from the issuance of 1,815,125 shares of our common
stock in three separate private placements during 2003. The proceeds from these private placements
of our common stock were partially offset by issuance costs of $297,462. During 2003, various
holders of warrants exercised their rights under the warrants to purchase 197,000 shares of common
stock for $197,000 in cash. We used a portion of the proceeds generated from the sale of our Power
Management segment to repay $298,000 in equipment loans and to pay down the outstanding balance on
our revolving line of credit of $500,000. We also prepaid $47,000 on our mortgage as an inducement
for the lender to refinance the mortgage and extend the maturity until February 1, 2005. During
2003 we made scheduled payments of $33,000 on our mortgage, $51,500 on our equipment loan, and
$7,014 on various auto loans. During 2003 we also received a payment of $798 from a board member
that represented the short-swing profit inadvertently earned when he purchased shares of our stock
within six months of selling shares, which is a violation of section 16(b) of the Securities
Exchange Act of 1934. During 2002 we issued preferred and common stock which generated net proceeds of $2,800,257.
We also refinanced the mortgage on our building and our equipment loan, generating $22,000 after
the repayment of the existing loans, and borrowed $500,000 on our line of credit. Offsetting these
sources of cash were scheduled payments of $147,000 on our long-term debt and $219,067 on the
Marino Sellers note. During 2002 we also received $1,300 from one of our 10% stockholders, which
represented the short-swing profit inadvertently earned when he purchased shares of our stock
within six months of selling shares, which is a violation of section 16(b) of the Securities
Exchange Act of 1934. LIQUIDITY Our primary sources of liquidity are our available cash reserves and borrowing capacity under
our working capital line. During fiscal 2005,
we anticipate our cash usage will be similar to fiscal 2004 in which
the Company used approximately $4 million. We anticipate that our cash needs will be funded
primarily by financing activities including its $2 million line of credit and additional sales of its preferred and common stock. There can be no assurance that
the Company will be successful in
raising required funds through the sale of its preferred and common stock. We currently have a $2 million secured convertible working capital line with Laurus Master
Fund, Ltd. (Laurus). As of December 31, 2004 we had not borrowed under the facility. The shift
in our focus away from commercial sales to utility programs has resulted in a significant reduction
in the amount of receivables generated. As of December 31, 2004 eligible receivables would have
supported borrowings of approximately $89,000 under the facility. To address the problem created
by our low borrowing base, we negotiated an amendment to the Laurus credit facility in February
2005, which 32




---



##### 



among other things granted us an overadvance on the working capital line though December 2005.
Since then, on February 28, 2005 we borrowed the full $2 million available under the facility
without the requirement that we have eligible receivables to support the advance. For a more
detailed description of this credit facility and the recent amendment, please see note 9 of our
consolidated financial statements. Our ability to continue the development, manufacturing and expansion of sales of our products,
including the EnergySaver and the GlobalCommander, will require the continued commitment of
significant funds. The actual timing and amount of our future funding requirements will depend on
many factors, including the amount and timing of future revenues, the level and amount of product
marketing and sales efforts, the magnitude of research and development, and our ability to improve
margins on our products. During the last four fiscal years we have raised net proceeds of $28.6 million through the
issuance of shares of our common and preferred stock, which has allowed us to continue to execute
our business plan. Most of these funds have been consumed by operating activities, either to fund
our losses or for working capital requirements. As of December 31, 2004 our cash balance was
$1,789,808. In an attempt to move the Company to a position where it can start to generate
positive cash flow our management has set the following key objectives for cash flow improvement in
2005:  §
    Successfully execute on the ComEd and Pacificorp contracts. We believe that this is
important from several different perspectives. We believe the contracts will establish
Electric City as the leader in negative power development, thereby supporting VNPP
opportunities with other utilities. And we also believe the contracts will lead to
increased commercial sales of the EnergySaver as customers who participate in the VNPP
programs with operations outside the territories covered by the VNPPs gain exposure to the
technology. Both of these projects are currently under contract, therefore we are focusing
a great deal of our resources on these projects and will be hiring additional personnel in
an attempt to keep the projects on schedule.§
    Increase the profitability of EnergySaver sales and increase direct sales of
EnergySavers to customers who gain familiarity with the technology through their
participation in VNPP programs. Increasing the margins earned on EnergySaver sales will
also have an immediate and positive impact on our cash flow. We have seen improvements in
EnergySaver margins at times over the past three years with increases in volume. We
believe that increased volumes that will result from the VNPP programs will lead to
consistently higher margins as a result of increased capacity utilization. We have already
seen VNPP customers proceed to a point whereby they will place large scale direct orders
for EnergySaver systems.§
    Secure additional VNPP projects. We are currently in discussions with several utilities
regarding implementing VNPP programs in their service territories. Recent legislative
actions by various states are encouraging or mandating utilities to include demand
reduction goals in their long term energy plans. We believe we are well positioned to take
advantage of these new requirements. Securing one or two additional VNPP contracts during
2005 should lead to improvements in cash flow beginning in 2006 and we hope, to increased
profitability.§
    Expand and improve the product line through internal development or acquisition. We
would like to develop or acquire additional cost effective demand response technology that
we can incorporate into our VNPP offering and find ways to reduce the cost of our current
technology. Our ability to do this will expand our opportunities with utilities, increase
the rate of VNPP development by allowing us to control additional load with existing
customers and increase our profitability. In March 2005, we signed a non-binding letter of
intent to acquire Maximum Performance Group  a maker of air conditioning control
technology. 33




---



##### 



§
    Build on the recent project successes at Great Lakes Controlled Energy to make the
Building Controls and Automation business grow and become profitable. Great Lakes has
recently or will soon successfully complete several projects which have contributed to
improvements in the segments profitability and cash flow. Great Lakes successful
execution on these projects has led to opportunities to bid on other significant projects.
If this segment continues to improve as it has during the last two years, we believe it
will turn profitable during 2005.§
    Continue to aggressively manage our costs in order to conserve cash. While we made
significant progress in reducing our costs during the last several years, we must continue
to effectively manage all of our costs so that they do not negate the improvements in
profitability we are working to create in our Energy Technology and Building Automation and
Control segments.§
    Secure additional capital to continue to fund operations until the business turns cash
flow positive. Our ability to raise additional capital in the future will depend a great
deal on our ability to make progress toward the goals outline above. We believe that if we are successful in achieving these priorities we should have sufficient
liquidity to allow us to operate until our operations turn cash flow positive. If we are not able
to achieve some or all of these priorities we may begin to experience a liquidity shortage in the
latter half of 2005 which could force us to scale back our growth plans, or in the worst case cease
operations. If we raise additional capital (which may require stockholder approval), our existing
stockholders will likely experience dilution of their present equity ownership position and voting
rights, depending upon the number of shares issued and the terms and conditions of the issuance.
The new equity securities will likely have rights, preferences or privileges senior to those of our
common stock. Contractual Obligations Our obligations to make future payments under contracts as of December 31, 2004 are as follows: Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    
    
    
    1 to 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    3 to 5
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    1 year
    
    
    
    
    
    
    
    
    
    
    
    
    
    years
    
    
    
    
    
    
    
    
    
    
    
    
    
    years
    
    
    
    
    
    
    
    
    5 yearsLong-term debt
    
    
    
    
    
    
    
    
    
    
    $
    
    
    1,280,401
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    424,451
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    855,950
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    Capital leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employment agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    610,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    610,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    $
    
    
    1,989,001
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    1,104,051
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    884,950
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
 Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No.
46, Consolidation of Variable Interest Entities (FIN 46). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity investors that do
not provide sufficient financial resources for the entity to support its activities. FIN 46
requires certain variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its 34




---



##### 



activities without additional
subordinated financial support from other parties. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created after January
31, 2003. We adopted the provisions of FIN 46 effective February 1, 2003 and such adoption did not
have a material impact on our consolidated financial statements since we currently have no variable
interest entities. In December 2003, the FASB issued FIN 46R with respect to variable interest
entities created before January 31, 2003, which among other things, revised the implementation date
to the first fiscal year or interim period ending after March 15, 2004, with the exception of
Special Purpose Entities (SPE). The consolidation requirements apply to all SPEs in the first
fiscal year or interim period ending after December 15, 2003. We adopted the provisions of FIN 46R
effective January 1, 2004 and such adoption did not have a material impact on our consolidated
financial statements since we currently have no SPEs. In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
123(R), Share-Based Payment. This statement revises FASB Statement No. 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123(R) focuses primarily on the accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS No. 123(R) requires companies
to recognize in the statement of operations the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards (with limited
exceptions). This Statement is effective as of the first reporting period that begins after June
15, 2005. Accordingly, we will adopt SFAS 123(R) in the third quarter of fiscal 2005. We are
currently evaluating the provisions of SFAS 123(R) and have not yet determined the impact that this
Statement will have on our results of operations or financial position. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material and requires that such items be recognized as
current-period charges regardless of whether they meet the so abnormal criterion outlined in ARB
No. 43. SFAS No. 151 also introduces the concept of normal capacity and requires the allocation
of fixed production overheads to inventory based on the normal capacity of the production
facilities. Unallocated overheads must be recognized as an expense in the period incurred. SFAS No.
151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
While we are still evaluating the impact of this statement, we do not currently believe it will
have a material impact on our consolidated financial statements. 
 Item 7A. Quantitative and Qualitative Disclosures The only significant exposure the Company has to market risk is the risk of changes in market
interest rates. The interest rates on the Companys debt facilities are variable and change with
changes in the prime rate. The interest rate on the Companys convertible term loan is equal to
the prime rate plus 1.75% or 6%, whichever is greater. The interest rate on the revolving loan is
equal to prime plus 1.75%. As of December 31, 2004, the prime rate was 5.25% and the rate on the
term loan was 7.0%. The interest rate on the Companys mortgage is equal to the prime rate plus
1/2%. If the prime rate were to increase 1 percentage point, the aggregate annual interest cost
on the mortgage, the term loan and revolving loan (which was borrowed on February 28, 2005) would
increase by approximately $33,000. 35




---



##### 



Item 8. Financial Statements and Supplemental Data Index to Financial Statements F-1
    
    Report of Independent Registered Public Accounting FirmF-2 - F-3
    
    Consolidated Balance Sheets as of December 31, 2004 and December 31, 2003F-4
    
    Consolidated Statements of Operations for the years ended December 31, 2004,
2003 and 2002F-5
    
    Statements of Stockholders Equity for the years ended December 31, 2004, 2003
and 2002F-6 - F-7
    
    Statements of Consolidated Cash Flows for the years ended December 31,
2004, 2003 and 2002F-8 - F-35
    
    Notes to Consolidated Financial StatementsF-36
    
    Schedule II, Valuation and Qualifying Accounts
 
 Item 9 Change in and Disagreements with Accountants on
Accounting and Financial Disclosure None 
 Item 9A. Controls and Procedures  (a)
    Explanation of disclosure controls and procedures.Our chief executive officer and chief
financial officer, after evaluating the effectiveness of the Companys disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934 (the Exchange Act)) as of the end of the period covered by this report, have
concluded that our disclosure controls and procedures were effective and designed to ensure
that material information relating to the Company and its consolidated subsidiaries would be
made known to them by others within those entities.(b)
    Changes in internal controls.During the fourth quarter of 2004 there were no significant
changes in the Companys internal controls or in other factors which materially affected or
are reasonably likely to materially affect our internal controls over financial reporting. 
 Item 9B. Other Information None 36




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##### 



PART III Certain information required by Part III is omitted from this report because we intend to file
a definitive Proxy Statement pursuant to Regulation 14A (the Proxy Statement) no later than 120
days after the end of the fiscal year covered by this report, and certain information to be
included therein is incorporated herein by reference. 
 Item 10. Directors and Executive Officers of the Registrant The information required by this Item is incorporated by reference to the Proxy Statement
under the sections captioned Proposal 1- Election of Directors, Executive Compensation and
Compliance with Section 16(a) of the Securities Exchange Act of 1934. 
 Item 11. Executive Compensation Information regarding compensation of the Companys named executive officers is set forth
under Executive Compensation in the Proxy Statement, which information is incorporated herein by
reference. Information regarding compensation of the Companys directors is set forth under
Compensation of Directors in the Proxy Statement, which information is incorporated herein by
reference. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters Information regarding security ownership of certain beneficial owners, directors and executive
officers is set forth under Security Ownership of Principal Stockholders and Management in the
Proxy Statement, which information is incorporated herein by reference. Information regarding the Companys equity compensation plans, including both stockholder
approved plans and plans not approved by stockholders, is set forth in the section entitled
Executive Compensation  in the Proxy Statement, which information is incorporated herein by
reference. 
 Item 13. Certain Relationships and Related Transactions Information regarding certain relationships and related transactions is set forth under
Certain Relationships and Related Transactions in the Proxy Statement, which information is
incorporated herein by reference. 
 Item 14. Principal Accountant Fees and Services Information regarding principal auditor fees and services is set forth under Principal
Accountant Fees and Services in the Proxy Statement, which information is incorporated herein by
reference. 37




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##### 



PART IV 
 Item 15. Exhibits, Financial Report Schedules, and Reports on Form 8-K  (a)
    Exhibits 
 EXHIBITS ExhibitNumber
    
    Description of Exhibit3.1(1)
    
    Certificate of Incorporation3.2(1)
    
    By-laws3.3(9)
    
    Certificate of Amendment to Certificate of Incorporation dated August 30, 2001.3.4(9)
    
    Bylaws, as amended3.5(12)
    
    Certificate of Amendment to Certificate of Incorporation, dated July 31, 2002.3.6(12)
    
    Charter of Audit Committee, as restated.3.7(21)
    
    Charter of Governance and Nominating Committee4.1(2)
    
    Certificate of Designation of the Relative Rights and Preferences of the Series B
Convertible Preferred Stock of Electric City Corp.4.2(3)
    
    Specimen Stock Certificate4.3(7)
    
    Certificate of Designations, Preferences and Relative, Participating, Optional and
Other Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series A Convertible Preferred Stock of Electric City Corp.
dated August 30, 2001.4.4(10)
    
    Securities Purchase Agreement dated as of May 31, 2002 between Electric City Corp. and
Richard Kiphart.4.5(10)
    
    Certificate of Designations, Preferences and Relative, Participating, Optional and
Other Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series C Convertible Preferred Stock of Electric City Corp.
dated June 3, 2002.4.6(10)
    
    Certificate of Correction Filed to Correct a Certain Error in the Certificate of
Designations, Preferences and Relative, Participating, Optional and Other Special
Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of
Series C Convertible Preferred Stock of Electric City Corp. dated June 11, 20024.7(10)
    
    Stock Trading Agreement, dated as of June 4, 2002, between Electric City Corp. and
Richard P. Kiphart.4.8(6)
    
    2001 Stock Incentive Plan4.9(12)
    
    Securities Purchase Agreement dated December 16, 2002, between Electric City Corp. and
Munder Power Plus Fund, A Series of the Munder Funds, Inc.4.10(12)
    
    Stock Trading Agreement dated December 16, 2002, between Electric City Corp. and
Munder Power Plus Fund, A Series of the Munder Funds, Inc.4.11(12)
    
    Securities Purchase Agreement dated February 27, 2003, between Electric City Corp. and
SF Capital Partners4.12(12)
    
    Stock Trading Agreement dated February 27, 2003, between Electric City Corp. and SF
Capital Partners
 38




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##### 



ExhibitNumber
    
    Description of Exhibit4.13(13)
    
    Securities Purchase Agreement dated April 17, 2003, between Electric City Corp. and
Munder Power Plus Fund, A Series of the Munder Funds, Inc.4.14(13)
    
    Acknowledgment and Amendment to Stock Trading Agreement dated April 17, 2003, between
Electric City Corp. and Munder Power Plus Fund, A Series of the Munder Funds, Inc.4.15(13)
    
    Securities Purchase Agreement dated April 23, 2003, between Electric City Corp. and
Richard P. Kiphart4.16(13)
    
    Stock Trading Agreement dated April 23, 2003, between Electric City Corp. and Richard
P. Kiphart4.17(14)
    
    Stock Trading Agreement dated May 31, 2003 between Dale Hoppensteadt and Electric City
Corp.4.18(15)
    
    Securities Purchase Agreement dated June 27, 2003, between Electric City Corp. and
Cinergy Ventures II, LLC, Mr. Richard Kiphart, SF Capital Partners, John Thomas Hurvis
Revocable Trust and Mr. David Asplund4.19(15)
    
    Certificate Of Designations, Preferences And Relative, Participating, Optional And
Other Special Rights Of Preferred Stock And Qualifications,
Limitations And Restrictions Thereof Of Series D Convertible Preferred Stock Of Electric City Corp.4.20(16)
    
    Registration Rights Agreement dated September 11, 2003 by and between Electric City
Corp. and Laurus Master Fund, Ltd.4.21(16)
    
    Registration Rights Agreement dated September 11, 2003 by and between Electric City
Corp. and Laurus Master Fund, Ltd.4.22(18)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Jason Diamond.4.23(18)
    
    Warrant Certificate to Purchase 27,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to William Ritger4.24(18)
    
    Warrant Certificate to Purchase 15,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Stockbroker.com4.25(18)
    
    Warrant Certificate to Purchase 5,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Engle Group4.26(18)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to R&R Investments4.27(18)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Barretto Pacific Corporation4.28(18)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Wall & Broad Equities4.29(18)
    
    Warrant Certificate to Purchase 20,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Gregory Hawkins4.30(18)
    
    Warrant Certificate to Purchase 160,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to TheStockPage.com4.31(18)
    
    Warrant Certificate to Purchase 40,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Henning Capital Ltd.4.32(18)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Wall & Broad Equities
 39




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##### 



ExhibitNumber
    
    Description of Exhibit4.33(18)
    
    Warrant Certificate to Purchase 10,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Catalina Capital Management4.34(18)
    
    Warrant Certificate to Purchase 100,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Utica Properties4.35(20)
    
    Warrant Certificate to Purchase 442,750 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to UMBTRU for benefit of Security Equity Fund,
Mid Cap Value Series4.36(20)
    
    Warrant Certificate to Purchase 350,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to UMBTRU for benefit of SBL Fund, Series V4.37(20)
    
    Warrant Certificate to Purchase 311,500 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to UMBTRU for benefit of Security Mid Cap Growth
Fund4.38(20)
    
    Warrant Certificate to Purchase 645,750 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to UMBTRU for benefit of SBL Fund, Series J4.39(20)
    
    Certificate Of Designations, Preferences And Relative, Participating, Optional And
Other Special Rights Of Preferred Stock And Qualifications, Limitations
And Restrictions Thereof Of Series E Convertible Preferred Stock Of Electric City Corp.4.40(20)
    
    Amended and Restated Investor Rights Agreement, dated as of March 19, 2004 made by and
among Electric City Corp. and Newcourt Capital USA Inc., CIT Capital Securities, Inc.,
Morgan Stanley Dean Witter Equity Funding, Inc., Originators Investment Plan, L.P.,
Cinergy Ventures II, LLC, Leaf Mountain Company, LLC, SF Capital Partners, Ltd.,
Richard Kiphart, David P. Asplund, John Thomas Hurvis Revocable Trust, John Donohue,
Augustine Fund, LP, And Technology Transformation Venture Fund, LP4.41(20)
    
    Amended And Restated Stockholders Agreement dated as of March 19, 2004 made by and
among Electric City Corp., Newcourt Capital USA Inc., Morgan Stanley Dean Witter
Equity Funding, Inc., Originators Investment Plan, L.P., Cinergy Ventures II, LLC,
Leaf Mountain Company, LLC, Richard Kiphart, David P. Asplund, John Thomas Hurvis
Revocable Trust, John Donohue, Augustine Fund, LP, And Technology Transformation
Venture Fund, LP4.42(20)
    
    Amended And Restated Stock Trading Agreement dated as of March 19, 2004 made by and
among Electric City Corp., Newcourt Capital USA Inc., CIT Capital Securities, Inc.,
Morgan Stanley Dean Witter Equity Funding, Inc., Originators Investment Plan, L.P.,
Cinergy Ventures II, LLC, Leaf Mountain Company, LLC, SF Capital Partners, Ltd.,
Richard Kiphart, David P. Asplund, John Thomas Hurvis Revocable Trust, John Donohue,
Augustine Fund, LP, And Technology Transformation Venture Fund, LP4.43(22)
    
    Amended and Restated Directors Stock Option Plan4.44*
    
    Form of Common Stock Warrant Used to Pay Certain Vendors4.45*
    
    Form of Common Stock Warrant (With Cashless Exercise Provision) Used to Pay Certain
Vendors10.1(1)
    
    Sales, Distribution and Patent License Agreement, dated January 1, 1998, by and
between Giorgio Reverberi and Joseph C. Marino10.2(1)
    
    Sublicense Agreement, dated June 24, 1998, by and between the Electric City Corp. and
Joseph C. Marino10.3(4)
    
    Warrant Certificate to Purchase 3,314,830 Shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Newcourt Securities, Inc.
 40




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##### 



ExhibitNumber
    
    Description of Exhibit10.4(7)
    
    Warrant Certificate to Purchase 750,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Newcourt Capital USA, Inc.10.5(7)
    
    Warrant Certificate to Purchase 712,500 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Morgan Stanley Dean Witter Equity Funding,
Inc.10.6(7)
    
    Warrant Certificate to Purchase 37,500 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Originators Investment Plan, L.P.10.7(7)
    
    Warrant Certificate to Purchase 750,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Duke Capital Partners, LLC.10.8(7)
    
    Warrant Certificate to Purchase 750,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to EP Power Finance, L.L.C.10.9(8)
    
    Warrant Certificate to Purchase 421,876 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Leaf Mountain Company, LLC.10.10(10)
    
    Warrant Certificate to Purchase 281,250 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Richard Kiphart.10.11(10)
    
    Warrant Certificates to Purchase 25,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to each of Thomas Duszynski, Brian Porter, John
Porter and David R. Asplund, replacing a Warrant Certificate to Purchase 100,000
shares of Common tock Par Value $0.0001 Per Share, of Electric City Corp. previously
issued to Delano Group Securities.10.12(11)
    
    Amendment of contract between Electric City Corp. and the Stockpage, dated June 18,
2002.10.13(11)
    
    Fourth Amendment To The Warrant To Purchase Common Stock Of Electric City Corp. dated
June 18, 2002 by and between Electric City Corp. and the Stockpage.10.14(12)
    
    Warrant Certificate to Purchase 300,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Munder Power Plus Fund, A Series of the Munder
Funds, Inc.10.15(12)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Capstone Investments.10.16(12)
    
    Warrant Certificate to Purchase 300,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to SF Capital Partners.10.17(12)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Capstone Investments.10.18(12)
    
    Employment Agreement, dated as of January 13, 2003, between the Company and John Mitola10.19(13)
    
    Warrant Certificate to Purchase 75,000 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Munder Power Plus Fund, A Series of the Munder
Funds, Inc.10.20(13)
    
    Warrant Certificate to Purchase 125,974 shares of Common Stock Par Value $0.0001 Per
Share, of Electric City Corp. issued to Richard P. Kiphart10.21(13)
    
    Employment Agreement, effective January 1, 2003, between the Company and Jeffrey
Mistarz10.22(14)
    
    Asset Purchase Agreement dated June 3, 2003, by and among Electric City Corp.,
Switchboard Apparatus, Inc., and Hoppensteadt Acquisition Corp.10.23(14)
    
    Strategic Alliance, Co-Marketing and Licensing Agreement dated May 31, 2003 by and
between Hoppensteadt Acquisition Corp. and Electric City Corp.
 41




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##### 



ExhibitNumber
    
    Description of Exhibit10.24(15)
    
    Form of Common Stock Warrant issued by Electric City in favor of Cinergy Ventures II,
LLC, Mr. Richard Kiphart, SF Capital Partners, John Thomas Hurvis Revocable Trust and
Mr. David Asplund10.25(16)
    
    Securities Purchase Agreement dated September 11, 2003 between Electric City Corp. and
Laurus Master Fund, Ltd.10.26(16)
    
    Convertible Term Note dated September 11, 2003, made by Electric City Corp. in favor
of Laurus Master Fund, Ltd.10.27(16)
    
    Security Agreement dated September 11, 2003 by and between Electric City Corp. and
Laurus Master Fund, Ltd.10.28(16)
    
    Common Stock Purchase Warrant dated September 11, 2003 issued by Electric City Corp.
in favor of Laurus Master Fund, Ltd.10.29(16)
    
    Form of Secured Convertible Revolving Note dated September 11, 2003, made by Electric
City Corp. in favor of Laurus Master Fund, Ltd.10.30(16)
    
    Security Agreement dated September 11, 2003 by and between Electric City Corp. and
Laurus Master Fund, Ltd.10.31(16)
    
    Common Stock Purchase Warrant dated September 11, 2003 issued by Electric City Corp.
in favor of Laurus Master Fund, Ltd.10.32(20)
    
    Securities Purchase Agreement dated March 19, 2004, between Electric City Corp. and
Security Equity Fund, Mid Cap Value Series, SBL Fund, Series V, Security Mid Cap
Growth And SBL Fund, Series J10.33(20)
    
    Redemption and Exchange Agreement dated March 19, 2004, by and among Electric City
Corp. and Newcourt Capital USA Inc., Morgan Stanley Dean Witter Equity Funding, Inc.,
Originators Investment Plan, L.P., Cinergy Ventures II, LLC, Leaf Mountain Company,
LLC, SF Capital Partners, Ltd., Richard Kiphart, David P. Asplund, John Thomas Hurvis
Revocable Trust, John Donohue, Augustine Fund, LP, And Technology Transformation
Venture Fund, LP10.34(23)
    
    Amendment to Convertible Term Note dated August 31, 2004 between Electric City Corp.
and Laurus Master Fund, Ltd.10.35(23)
    
    Amendment to Security Agreement dated August 31, 2004 between Electric City Corp. and
Laurus Master Fund, Ltd.10.36(24)
    
    Second Amended and Restated Mortgage, Assignment of Rents and Security Agreement dated
December 31, 2004 by Electric City Corp. and American Chartered Bank.10.37(24)
    
    Amended and Restated Mortgage Note made and entered into on the 31st day of December
2004, by and among American Chartered Bank and Electric City Corp., and Great Lakes
Controlled Energy Corporation.10.38*
    
    Agreement between Delano Group Securities, LLC and Electric City Corp. dated August
31, 2004.10.39 (25)
    
    Amendment To Security Agreement And Registration Rights Agreement dated February 28,
2005 between Electric City Corp. and Laurus Master Fund, Ltd.10.40 (25)
    
    Form of Secured Convertible Revolving Note dated February 28, 2005, made by Electric
City Corp. in favor of Laurus Master Fund, Ltd.10.41 (25)
    
    Form of Secured Convertible Minimum Borrowing Note dated February 28, 2005, made by
Electric City Corp. in favor of Laurus Master Fund, Ltd.
 42




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##### 



ExhibitNumber
    
    Description of Exhibit10.42 (25)
    
    Security Agreement dated February 28, 2005 by and between Great Lakes Controlled
Energy Corporation and Laurus Master Fund, Ltd.10.43 (25)
    
    Subsidiary Guaranty dated February 28, 2005 made by Great Lakes Controlled Energy
Corporation in favor of Laurus Master Fund, Ltd.10.44 (25)
    
    Stock Pledge Agreement dated February 28, 2005 between Electric City Corp. and Laurus
Master Fund, Ltd.14(19)
    
    Code Of Ethics For Chief Executive Officer And Chief Financial Officer Of Electric
City Corp.21(17)
    
    List of subsidiaries23.1*
    
    Consent of BDO Seidman LLP with respect to the consolidated financial statements of
Electric City Corp.23.2(5)
    
    Consent of John R. Waters and Company24
    
    Power of Attorney (included on signature page hereto)31.1*
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or
15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or
15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   *
    Filed herewith(1)
    Incorporated herein by reference to Electric City Corp.s registration statement on Form 10SB
filed on September 9, 1999 (No. 000-2791).(2)
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K dated
October 17, 2000 filed with the SEC on November 30, 2000 (No. 0-2791).(3)
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-A filed
with the SEC on December 8, 2000 (No. 0-2791).(4)
    Incorporated herein by reference to Electric City Corps Quarterly Report on Form 10-QSB for
the period ended June 30, 2001, filed with the SEC on August 13, 2001 (No. 0-2791).(5)
    Incorporated herein by reference to Electric City Corps registration statement on Form SB-2
filed August 16, 2001 (No. 333-67642).(6)
    Incorporated herein by reference to the Companys definitive Proxy Statement for the 2000
Annual Meeting of Stockholders, filed August 14, 2001 (No. 0-2791)(7)
    Incorporated herein by reference to Electric City Corps Amendment No. 1 to Registration
Statement on Form SB-2 filed September 27, 2001 (No. 333-67642).(8)
    Incorporated herein by reference to Electric City Corps Post-Effective Amendment No. 1 to
Registration Statement on Form SB-2 filed December 7, 2001 (No. 333-67642). 43




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##### 



(9)
    Incorporated herein by reference to Electric City Corps Annual Report on Form10-KSB for the
year ended December 31, 2001, filed April 15, 2002 (No. 0-2791).(10)
    Incorporated herein by reference to Electric City Corps Post-Effective Amendment No. 3 to
Registration Statement on Form SB-2 filed July 16, 2002 (No. 333-67642).(11)
    Incorporated herein by reference to Electric City Corps Quarterly Report on Form 10-QSB for
the period ended June 30, 2002, filed with the SEC on August 14, 2002 (No. 0-2791).(12)
    Incorporated herein by reference to Electric City Corps Annual Report on Form10-KSB for the
year ended December 31, 2002, filed March 31, 2003 (No. 0-2791).(13)
    Incorporated herein by reference to Electric City Corps registration statement on Form S-3

filed May 8, 2003 (No. 333-105084).(14)
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K dated
June 3, 2003 filed with the SEC on June 5, 2003 (No. 0-2791).(15)
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K dated
June 27, 2003 filed with the SEC on July 2, 2003 (No. 0-2791).(16)
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K dated
September 11, 2003 filed with the SEC on September 16, 2003 (No. 0-2791).(17)
    Incorporated herein by reference to Electric City Corps registration statement on Form SB-2
filed October 20, 2003 (No. 333-109835).(18)
    Incorporated herein by reference to Electric City Corps post-effective amendment to its
registration statement on Form S-3/A filed February 19, 2004 (No. 333-105084).(19)
    Incorporated herein by reference to Electric City Corps Annual Report on Form10-KSB for the
year ended December 31, 2003, filed March xx, 2004 (No. 0-2791).(20)
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K dated
March 19, 2004 filed with the SEC on March 23, 2004 (No. 0-2791).(21)
    Incorporated herein by reference to the Companys definitive Proxy Statement for the 2004
Annual Meeting of Stockholders, filed April 30, 2004 (No. 0-2791)(22)
    Incorporated herein by reference to Electric City Corps Quarterly Report on Form 10-Q for
the period ended March 31, 2004, filed with the SEC on May 13, 2004 (No. 0-2791).(23)
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K dated
August 31, 2004 filed with the SEC on September 2, 2004 (No. 0-2791).(24)
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K dated
December 31, 2004 filed with the SEC on January 4, 2005 (No. 0-2791).(25)
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K dated
February 28, 2005 filed with the SEC on March 4, 2005 (No. 0-2791).  (b)
    We filed the following report on Form 8-K during the last quarter of the period covered
by this report:  §
    We filed a Current Report on Form 8-K on November 16, 2004, pursuant to Items
2.02 and 9.01, in which we incorporated a press release that we filed on November
15, 2004, announcing our results for the three-month and nine-month periods ended
September 30, 2004. 44




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##### 



SIGNATURES
 ELECTRIC CITY CORP.By:
    
    /s/ John P. MitolaJohn P. MitolaChief Executive Officer
 March 31, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the registrant in the capacities and on the
dates indicated. Signature
    
    
    
    Date/s/ John P. Mitola
    
    
    
    March 31, 2005John P. MitolaChief Executive Officer & Director (principal executive officer)/s/ Jeffrey R. Mistarz
    
    
    
    March 31, 2005Jeffrey R. MistarzChief Financial Officer (principal financial and accounting officer)
 45




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##### 



POWER OF ATTORNEY The undersigned hereby constitutes and appoints John Mitola and Jeffrey Mistarz, and each of
them, as his true and lawful attorneys-in-fact and agents, jointly and severally, with full power
of substitution and resubstitution, for and in his stead, in any and all capacities, to sign on his
behalf this Form 10-K, and to file the same, with all exhibits thereto, and all other documents in
connection therewith, with the Securities and Exchange Commission and granting unto said
attorneys-in-fact and agents, and each of them, jointly and severally, the full power and authority
to do and perform each and every act and thing necessary or advisable to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, jointly or severally, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ John Mitola
    
    Chief Executive Officer
    
    February 9, 2005John Mitola/s/ Jeffrey Mistarz
    
    Chief Financial Officer & Treasurer
    
    February 9, 2005Jeffrey Mistarz/s/ Robert Manning
    
    Chairman of the Board
    
    February 9, 2005Robert Manning/s/ David Asplund
    
    Director
    
    February 9, 2005David Asplund/s/ John Bukovski
    
    Director
    
    February 9, 2005John Bukovski/s/ Gerald Pientka
    
    Director
    
    February 9, 2005Gerald Pientka/s/ Michael Stelter
    
    Director
    
    February 9, 2005Michael Stelter/s/ David Valentine
    
    Director
    
    February 9, 2005David Valentine/s/ Robert Wagner, Jr.
    
    Director
    
    February 9, 2005Robert Wagner, Jr.
 46




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##### 



Report of Independent Registered Public Accounting Firm Electric City Corp.
Elk Grove Village, Illinois We have audited the accompanying consolidated balance sheets of Electric City Corp. as of December
31, 2004 and 2003, and the related consolidated statements of operations, stockholders equity and
cash flows for each of the three years in the period ended December 31, 2004. We have also audited
the schedule in the accompanying index. These financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial
statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Electric City Corp. at December 31, 2004 and 2003, and
the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted in the United States
of America. The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the consolidated financial statements,
the Company has suffered recurring losses and negative cash flow from operations that raise
substantial doubt about its ability to continue as a going concern. Managements plans in regard to
these matters are also described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. As discussed in Note 3 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1,
2002. Chicago, Illinois
    
    /s/ BDO SEIDMAN, LLPFebruary 11, 2005, except
Note 9, which is as of
February 28, 2005
 F-1




---



##### 



Electric City Corp. 
 Consolidated Balance Sheets
 December 31,
    
    2004
    
    
    2003AssetsCurrent AssetsCash and cash equivalents
    
    $
    1,789,808
    
    
    $
    2,467,023Accounts receivable, less allowance for doubtful accounts of
$199,000 and $326,000 at December 31, 2004 and 2003,
respectively
    
    
    1,067,104
    
    
    
    1,450,811Inventories (Note 5)
    
    
    1,029,645
    
    
    
    1,200,146Prepaid expenses and other
    
    
    90,727
    
    
    
    203,870Total Current Assets
    
    
    3,977,284
    
    
    
    5,321,850Net Property and Equipment(Note 6)
    
    
    1,985,561
    
    
    
    1,132,592Deferred Financing Costs,net of amortization of $586,326 and
$203,616 at December 31, 2004 and 2003, respectively (Note 9)
    
    
    99,902
    
    
    
    482,612Cost in Excess of Assets Acquired
    
    
    416,573
    
    
    
    416,573$
    6,479,320
    
    
    $
    7,353,627
 F-2




---



##### 



Electric City Corp.
Consolidated Balance Sheets December 31,
    
    2004
    
    
    2003Liabilities and Stockholders EquityCurrent LiabilitiesLine of credit (Note 9)
    
    $
    
    
    
    $
    Current maturities of long-term debt (Notes 10 and 11)
    
    
    424,451
    
    
    
    536,809Accounts payable
    
    
    1,284,421
    
    
    
    1,298,821Accrued expenses (Note 7)
    
    
    567,689
    
    
    
    541,588Deferred revenue
    
    
    437,419
    
    
    
    383,308Customer deposits
    
    
    1,000,000
    
    
    
    511,167Total Current Liabilities
    
    
    3,713,980
    
    
    
    3,271,693Deferred Revenue
    
    
    179,167
    
    
    
    229,166Long-Term
Debt,less current maturities net of unamortized discount of $50,048 and $241,775 as of December 31, 2004 and
2003, respectively (Notes 10 and 11)
    
    
    805,902
    
    
    
    811,836Commitments(Note 14)Stockholders Equity(Notes 15, 16 and 17)Preferred stock, $.01 par value; 5,000,000 shares authorized,Series A  0 and 2,396,590 issued and outstanding as of
December 31, 2004 and December 31, 2003, respectively
(liquidation value of $0 and $47,932,000 at December 31,
2004 and December 31, 2003, respectively)
    
    
    
    
    
    
    23,966Series C  0 and 233,614 issued and outstanding as of
December 31, 2004 and December 31, 2003, respectively
(liquidation value of $0 and $4,672,000 at December 31,
2004 and December 31, 2003, respectively)
    
    
    
    
    
    
    2,336Series D  0 and 157,769 issued and outstanding as of
December 31, 2004 and December 31, 2003, respectively
(liquidation value of $0 and $3,155,000 at December 31,
2004 and December 31, 2003, respectively)
    
    
    
    
    
    
    1,578Series E 224,752 issued and outstanding as of December 31, 2004
(liquidation value of $44,950,400 at December 31, 2004)
    
    
    2,248Common stock, $.0001 par value; 120,000,000 shares authorized,
41,612,610 and 34,342,022 issued as of December 31, 2004 and
December 31, 2003, respectively
    
    
    4,163
    
    
    
    3,436Additional paid-in capital
    
    
    55,299,743
    
    
    
    51,376,137Accumulated deficit
    
    
    (53,525,883
    )
    
    
    (48,366,521
    )Total Stockholders Equity
    
    
    1,780,271
    
    
    
    3,040,932$
    6,479,320
    
    
    $
    7,353,627
 See accompanying notes to consolidated financial statements. F-3




---



##### 



Electric City Corp. 
 Consolidated Statements of Operations
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Revenue
    
    $
    2,412,635
    
    
    $
    4,631,833
    
    
    $
    5,534,522ExpensesCost of sales
    
    
    2,302,104
    
    
    
    4,441,687
    
    
    
    5,339,352Selling, general and administrative
    
    
    4,643,203
    
    
    
    4,290,078
    
    
    
    6,043,585Impairment loss
    
    
    
    
    
    
    
    
    
    
    108,0006,945,307
    
    
    
    8,731,765
    
    
    
    11,490,937Operating loss
    
    
    (4,532,672
    )
    
    
    (4,099,932
    )
    
    
    (5,956,415
    )Other Income (Expense)Interest income
    
    
    22,505
    
    
    
    10,329
    
    
    
    23,275Interest expense
    
    
    (649,195
    )
    
    
    (365,688
    )
    
    
    (56,890
    )Total other income (expense)
    

    
    (626,690
    )
    
    
    (355,359
    )
    
    
    (33,615
    )Loss from continuing operations before discontinued operations
and cumulative effect of accounting change
    
    
    (5,159,362
    )
    
    
    (4,455,291
    )
    
    
    (5,990,030
    )Discontinued Operations:Loss from operation of discontinued business
    
    
    
    
    
    
    (262,503
    )
    
    
    (1,017,897
    )Loss on disposal of switchgear business
    
    
    
    
    
    
    (764,148
    )
    
    
    Loss from discontinued operations
    
    
    
    
    
    
    (1,026,651
    )
    
    
    (1,017,897
    )Net loss before cumulative effect of accounting change
    
    
    (5,159,362
    )
    
    
    (5,481,942
    )
    
    
    (7,007,927
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    (4,103,872
    )Net Loss
    
    
    (5,159,362
    )
    
    
    (5,481,942
    )
    
    
    (11,111,799
    )Preferred Stock Dividends(Note 16)
    
    
    (4,639,259
    )
    
    
    (4,817,917
    )
    
    
    (4,111,107
    )Net Loss Available to Common Shareholders
    
    $
    (9,798,621
    )
    
    $
    (10,299,859
    )
    
    $
    (15,222,906
    )Basic and diluted loss per common share from
continuing operations
    
    $
    (0.25
    )
    
    $
    (0.27
    )
    
    $
    (0.33
    )Discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    
    (0.03
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    (0.13
    )Basic and Diluted Loss Per Common Share
    
    $
    (0.25
    )
    
    $
    (0.30
    )
    
    $
    (0.49
    )Weighted Average Common Shares Outstanding
    
    
    39,901,387
    
    
    
    33,761,489
    
    
    
    31,213,165
 See accompanying notes to consolidated financial statements. F-4




---



##### 



Electric City Corp. 
 Consolidated Statements of Stockholders Equity
 Series A
    
    
    Series A
    
    
    Series C
    
    
    Series C
    
    
    Series D
    
    
    Series D
    
    
    Series E
    
    
    Series E
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    TotalCommon
    
    
    Common
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Paid-in
    
    
    Accumulated
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Stock
    
    
    Shares
    
    
    Stock
    
    
    Shares
    
    
    Stock
    
    
    Shares
    
    
    Stock
    
    
    Shares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Stock
    
    
    EquityBalance,December 31, 2001
    
    
    31,113,842
    
    
    $
    3,112
    
    
    
    1,966,993
    
    
    $
    19,670
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    44,215,331
    
    
    $
    (31,772,780
    )
    
    $
    (8,500
    )
    
    $
    12,456,833Issuance of Series C Convertible Preferred Stock for
cash (net of offering costs of $119,743)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,878,257
    
    
    
    
    
    
    
    
    
    
    
    1,880,257Issuance of common stock to purchasers of
Series C Convertible Preferred Stock
    
    
    30,082
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock (net of offering costs
of $80,000)
    
    
    1,086,957
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    919,891
    
    
    
    
    
    
    
    
    
    
    
    920,000Cumulative dividends on Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,158,418
    )
    
    
    
    
    
    
    
    
    
    
    (2,158,418
    )Satisfaction of accrued dividends through the issuance
of preferred stock
    
    
    
    
    
    
    
    
    
    
    204,199
    
    
    
    2,042
    
    
    
    11,643
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,156,260
    
    
    
    
    
    
    
    
    
    
    
    2,158,418Short-swing profit contribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,300
    
    
    
    
    
    
    
    
    
    
    
    1,300Warrants issued in exchange for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    
    
    
    
    
    
    
    
    80,000Exercise of warrant in exchange for services received
    
    
    52,454
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,695
    
    
    
    
    
    
    
    
    
    
    
    57,700Net loss for the year ended December 31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,111,799
    )
    
    
    
    
    
    
    (11,111,799
    )Balance,December 31, 2002
    
    
    32,283,335
    
    
    $
    3,229
    
    
    
    2,171,192
    
    
    $
    21,712
    
    
    
    211,643
    
    
    $
    2,116
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    47,150,313
    
    
    $
    (42,884,579
    )
    
    $
    (8,500
    )
    
    $
    4,284,291Issuance of common stock (net of offering costs of $154,790)
    
    
    1,815,125
    
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,514,944
    
    
    
    
    
    
    
    
    
    
    
    1,515,126Issuance of Series D Convertible Preferred Stock for
cash (net of offering costs of $142,672)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    1,355,828
    
    
    
    
    
    
    
    
    
    
    
    1,357,328Issuance of common stock to purchasers of
Series D Convertible Preferred Stock
    
    
    22,562
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Cumulative dividends on Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,551,379
    )
    
    
    
    
    
    
    
    
    
    
    (2,551,379
    )Satisfaction of accrued dividends through the issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    225,398
    
    
    
    2,254
    
    
    
    21,971
    
    
    
    220
    
    
    
    7,769
    
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    2,548,827
    
    
    
    
    
    
    
    
    
    
    
    2,551,379Warrants issued in connection with convertible debt issuance
and line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    541,400
    
    
    
    
    
    
    
    
    
    
    
    541,400Value of beneficial conversion feature on convertible debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180,381
    
    
    
    
    
    
    
    
    
    
    
    180,381Conversion of term note
    
    
    25,000
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,997
    
    
    
    
    
    
    
    
    
    
    
    53,000Exercise of warrants
    
    
    197,000
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196,980
    
    
    
    
    
    
    
    
    
    
    
    197,000Warrants issued in exchange for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    393,550
    
    
    
    
    
    
    
    
    
    
    
    393,550Short-swing profit contribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    798
    
    
    
    
    
    
    
    
    
    
    
    798Retirement of shares held in treasury
    
    
    (1,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,500
    )
    
    
    
    
    
    
    8,500
    
    
    
    Net loss for the year ended December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,481,942
    )
    
    
    
    
    
    
    (5,481,942
    )Balance,December 31, 2003
    
    
    34,342,022
    
    
    $
    3,436
    
    
    
    2,396,590
    
    
    $
    23,966
    
    
    
    233,614
    
    
    $
    2,336
    
    
    
    157,769
    
    
    $
    1,578
    
    
    
    
    
    
    $
    
    
    
    $
    51,376,137
    
    
    $
    (48,366,521
    )
    
    $
    
    
    
    $
    3,040,932Issuance of common stock (net of offering costs of $910,393)
    
    
    5,000,000
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,089,107
    
    
    
    
    
    
    
    
    
    
    
    10,089,607Conversion of preferred stock
    
    
    1,956,700
    
    
    
    196
    
    
    
    (145,000
    )
    
    
    (1,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,067
    )
    
    
    (51
    )
    
    
    1,305
    
    
    
    
    
    
    
    
    
    
    
    Redemption of preferred stock
    
    
    
    
    
    
    
    
    
    
    (514,375
    )
    
    
    (5,144
    )
    
    
    
    
    

    
    
    
    
    
    (24,087
    )
    
    
    (241
    )
    
    
    
    
    
    
    
    
    
    
    (6,994,621
    )
    
    
    
    
    
    
    
    
    
    
    (7,000,006
    )Exchange of preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,737,215
    )
    
    
    (17,372
    )
    
    
    (233,614
    )
    
    
    (2,336
    )
    
    
    (133,682
    )
    
    
    (1,337
    )
    
    
    210,451
    
    
    
    2,105
    
    
    
    18,940
    
    
    
    
    
    
    
    
    
    
    
    Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,636,780
    )
    
    
    
    
    
    
    
    
    
    
    (1,636,780
    )Satisfaction of accrued dividends through the issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,368
    
    
    
    164
    
    
    
    1,636,616
    
    
    
    
    
    
    
    
    
    
    
    1,636,780Conversion of term note
    
    
    130,000
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275,587
    
    
    
    
    
    
    
    
    
    
    
    275,600Exercise of warrants (net of offering costs of $24,000)
    
    
    185,000
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    30
    
    
    
    460,952
    
    
    
    
    
    
    
    
    
    
    
    461,000Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,500
    
    
    
    
    
    
    
    
    
    
    
    72,500Other
    
    
    (1,112
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss for the year ended December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,159,362
    )
    
    
    
    
    
    
    (5,159,362
    )Balance,December 31, 2004
    
    
    41,612,610
    
    
    $
    4,163
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    224,752
    
    
    $
    2,248
    
    
    $
    55,299,743
    
    
    
    (53,525,883
    )
    
    $
    
    
    
    $
    1,780,271
 See accompanying notes to consolidated financial statements. F-5




---



##### 



Electric City Corp. 
 Statement of Cash Flows
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Cash Flows From Operating ActivitiesNet loss
    
    $
    (5,159,362
    )
    
    $
    (5,481,942
    )
    
    $
    (11,111,799
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of assets disposed of:Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    4,103,872Provision for (recovery on) bad debts
    
    
    5,865
    
    
    
    (21,511
    )
    
    
    335,505Depreciation and amortization
    
    
    58,878
    
    
    
    110,632
    
    
    
    232,051Amortization of deferred financing costs
    
    
    382,710
    
    
    
    203,616
    
    
    
    Amortization of original issue discount
    
    
    191,727
    
    
    
    102,006
    
    
    
    Issuance of shares and warrants in exchange for
services received
    
    
    72,500
    
    
    
    393,550
    
    
    
    137,700Accrued interest converted to common stock
    
    
    4,736
    
    
    
    654
    
    
    
    Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    108,000Loss on disposal of discontinued operations
    
    
    
    
    
    
    764,148
    
    
    
    Loss on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    3,151Changes in assets and liabilities, net of dispositionsAccounts receivable
    
    
    377,842
    
    
    
    (67,222
    )
    
    
    (244,483
    )Inventories
    
    
    (334,628
    )
    
    
    713,689
    
    
    
    (941,584
    )Other current assets
    
    
    (143,971
    )
    
    
    (87,660
    )
    
    
    12,639Accounts payable
    
    
    (14,401
    )
    
    
    74,346
    
    
    
    416,867Accrued liabilities
    
    
    26,101
    
    
    
    (328,898
    )
    
    
    555,167Deferred revenue
    

    
    4,112
    
    
    
    283,308
    
    
    
    (487,597
    )Customer deposits
    
    
    488,833
    
    
    
    511,167
    
    
    
    Net cash used in operating activities
    
    
    (4,039,058
    )
    
    
    (2,830,117
    )
    
    
    (6,880,511
    )Cash Flows From Investing ActivitiesSale of discontinued operations
    
    
    
    
    
    
    929,032
    
    
    
    Proceeds from sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    10,500Purchase of property and equipment
    
    
    (149,603
    )
    
    
    (32,304
    )
    
    
    (17,487
    )Net cash (used in) provided by investing activities
    
    
    (149,603
    )
    
    
    896,728
    
    
    
    (6,987
    )Cash Flows From Financing ActivitiesPayment of amounts due sellers
    
    
    
    
    
    
    
    
    
    
    (219,067
    )Borrowings (payments) on line of credit
    
    
    
    
    
    
    (500,000
    )
    
    
    500,000Proceeds from long-term debt
    
    
    
    
    
    
    1,010,000
    
    
    
    1,135,000Payments on long-term debt
    
    
    (39,155
    )
    
    
    (427,514
    )
    
    
    (1,260,161
    )Preferred stock redemption
    
    
    (7,000,006
    )
    
    
    
    
    
    
    Proceeds from issuance of preferred stock
    
    
    11,000,000
    
    
    
    1,500,000
    
    
    
    2,000,000Proceeds from issuance of common stock
    
    
    
    
    
    
    1,669,914
    
    
    
    1,000,000Costs related to stock issuances
    
    
    (910,393
    )
    
    
    (297,462
    )
    
    
    (199,743
    )Cash paid for deferred financing costs
    
    
    
    
    
    
    (308,228
    )
    
    
    Proceeds from exercise of warrants
    
    
    461,000
    
    
    
    197,000
    
    
    
    Short-swing profit contribution
    
    
    
    
    
    
    798
    
    
    
    1,300Net cash provided by financing activities
    
    
    3,511,446
    
    
    
    2,844,508
    
    
    
    2,957,329Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (677,215
    )
    
    
    911,119
    
    
    
    (3,930,169
    )Cash and Cash Equivalents, at beginning of period
    
    
    2,467,023
    
    
    
    1,555,904
    
    
    
    5,486,073Cash and Cash Equivalents, at end of period
    
    $
    1,789,808
    
    
    $
    2,467,023
    
    
    $
    1,555,904
 F-6




---



##### 



Electric City Corp.
Statement of Cash Flows Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Supplemental Disclosures of Cash Flow InformationCash paid during the period for interest  continuing
operations
    
    $
    83,000
    
    
    $
    44,000
    
    
    $
    52,000Cash paid during the period for interest  discontinued
operations
    
    
    
    
    
    
    9,000
    
    
    
    22,000Stock, warrants and options issued in
exchange for services received
    
    
    72,500
    
    
    
    393,550
    
    
    
    137,700Accrual satisfied through the issuance of
common stock
    
    
    4,736
    
    
    
    654
    
    
    
    Inventory transferred to fixed assets (VNPP assets)
    
    
    762,243
    
    
    
    
    
    
    
    Satisfaction of accrued dividends on Series A Preferred
Stock through the issuance of 5,407 shares of
Series E Preferred stock during the year ended
December 31, 2004 and 225,398 and 204,199 shares of
Series A Preferred stock during the years ended
December 31, 2003 and 2002 respectively
    
    
    540,705
    
    
    
    2,253,978
    
    
    
    2,041,992Satisfaction of accrued dividends on Series C Preferred
Stock through the issuance of 532 shares of Series
E Preferred stock during the year ended December
31, 2004 and 21,971 and 11,643 shares of Series C
Preferred stock during the years ended December 31,
2003 and 2002 respectively
    
    
    53,206
    
    
    
    219,712
    
    
    
    116,426Satisfaction of accrued dividends on Series D Preferred
Stock through the issuance of 359 shares of Series
E Preferred stock during the year ended December
31, 2004 and 7,769 shares of Series D Preferred
stock during the year ended December 31, 2003
    
    
    35,932
    
    
    
    77,689
    
    
    
    Satisfaction of accrued dividends on Series E Preferred
Stock through the issuance of 10,070 shares of
Series E Preferred stock during the year ended
December 31, 2004
    
    
    1,006,937
    
    
    
    
    
    
    
    Conversion of convertible debt to common stock
    
    $
    270,864
    
    
    $
    52,346
    
    
    $
    
 See accompanying notes to consolidated financial statements. F-7




---



##### 



Electric City Corp. 
  Note 1  Description of Business Electric City Corp. (the Company), a Delaware corporation, is a developer, manufacturer and
integrator of energy savings technologies and building automation systems as well as an independent
developer of scalable, negative power systems. The Company is made up of two separate companies,
each comprising a distinct business segment: Electric City Corp. comprises the energy technology
segment and Great Lakes Controlled Energy Corporation comprises the control and automation segment.
The two companies operate out of separate facilities, both located in Elk Grove Village, Illinois,
a suburb of Chicago. Negative power system development is considered part of the energy
technology segment. Note 2  Basis of Presentation The accompanying consolidated financial statements have been prepared on the going concern
basis which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has experienced operating losses and negative cash flow
from operations since inception and currently has an accumulated deficit. These factors raise
substantial doubt about the Companys ability to continue as a going concern. The Companys
ability to continue as a going concern is ultimately dependent on its ability to obtain additional
funding and increase sales to a level that will allow it to operate profitably and sustain positive
operating cash flows. Management is in the process of negotiating additional funding through the
issuance of additional equity and continues its efforts to improve profitability through expansion
of the Companys business in both current and new markets. The Company has historically funded its
operations through the issuance of additional equity. However, there is no assurance that the
Company will continue to be successful in obtaining additional funding in the future or improving
its operating results. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the Company to
continue as a going concern. Note 3  Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Electric City Corp. and its
wholly owned subsidiary, Great Lakes Controlled Energy Corporation. All significant intercompany
balances and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents. F-8




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements Concentration of Risk The Companys customers are primarily distributors of its EnergySaver product line, building
owners, general contractors and electrical contractors. During the year ended December 31, 2004
two customers accounted for 46% and 11% of the Companys consolidated revenue, respectively. Four
customers accounted for 26%, 15%, 12% and 10% of the Companys consolidated revenue, respectively
during the year ended December 31, 2003, and four customers accounted for 22%, 16%, 11% and 10% of
the Companys consolidated revenue, respectively, during the year ended December 31, 2002. Of the
customers accounting for more than 10% of the Companys consolidated sales in 2004, one also
accounted for more than 10% of consolidated sales in 2003, and of the customers accounting for more
than 10% of the Companys consolidated sales in 2003, one also accounted for more than 10% of
consolidated sales in 2002. The Company purchases its raw materials from a variety of suppliers and continues to seek out
alternate suppliers for critical components so that it can be assured that its manufacturing
processes will not be interrupted by the inability of a single supplier to deliver product. During
the year ended December 31, 2004, three suppliers accounted for 23%, 17% and 12% of the Companys
total material purchases, respectively. During the year ended December 31, 2003, one supplier
accounted for 44% of the Companys total material purchases. During the year ended December 31,
2002, two suppliers accounted for approximately 17% and 14% of the Companys total material
purchases, respectively. The Company maintains cash and cash equivalents in accounts with a financial institution in
excess of the amount insured by the Federal Deposit Insurance Corporation. The Company monitors the
financial stability of this institution regularly and management does not believe there is
significant credit risk associated with deposits in excess of federally insured amounts. Allowance for Doubtful Accounts The Company records an allowance for doubtful accounts based on specifically identified
amounts that it believes to be uncollectible. If actual collections experience changes, revisions
to the allowance may be required. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance. Based on the information available to us, we
believe our allowance for doubtful accounts is adequate. However, actual write-offs might exceed
the recorded allowance. Inventories Inventories are stated at the lower of FIFO cost or market. F-9




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements Properties & Equipment Property and equipment are stated at cost. For financial reporting purposes depreciation is
computed over the estimated useful lives of the assets by the straight-line method over the
following lives: Buildings
    
    39 yearsComputer equipment
    
    3 yearsOffice Equipment
    
    5 yearsFurniture
    
    5 - 10 yearsManufacturing equipment
    
    3 - 5 yearsTransportation equipment
    
    3 yearsVNPP assets
    
    10 years
 Cost in Excess of Assets Acquired Goodwill represents the purchase price in excess of the fair value of assets acquired in
business combinations. Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, requires the Company to assess goodwill for impairment at least annually
in the absence of an indicator of possible impairment and immediately upon an indicator of possible
impairment. If it is determined that the fair values are less than the carrying amount of goodwill
recorded on its Consolidated Balance Sheet, the Company must recognize an impairment in its
financial statements. With the adoption of SFAS 142, goodwill is no longer amortized. The Company
had made acquisitions in the past that included a significant amount of goodwill and other
intangible assets. Under generally accepted accounting principles in effect through December 31,
2001, these assets were amortized over their estimated useful lives, and were tested periodically
to determine if they were recoverable from operating earnings on an undiscounted basis over their
useful lives. Effective in 2002, goodwill is no longer amortized but is subject to an annual (or
under certain circumstances more frequent) impairment test based on its estimated fair value. Other
intangible assets that meet certain criteria will continue to be amortized over their useful lives
and will also be subject to an impairment test based on undiscounted cash flows. Estimated fair
value is less than values based on undiscounted operating earnings because fair value estimates
include a discount factor in valuing future cash flows. There are many assumptions and estimates
underlying the determination of an impairment loss. Another estimate using different but still
reasonable assumptions could produce a significantly different result. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets effective for fiscal years beginning after December 15,
2001. In accordance with SFAS No. 142, the Company completed its transitional impairment testing
of intangible assets during the second quarter of fiscal 2002. The impairment testing was performed
in two steps: first, determining whether there was an impairment, based upon the fair value of a
reporting unit as compared to its carrying value, and second, if there was an impairment, the
determination of the impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill. Subsequent to the first quarter of fiscal 2002, with the
assistance of a third-party valuation firm, the Company finalized the testing of goodwill subject
to SFAS 142. Using conservative, but realistic, assumptions to model its power management business
and building control and automation business, it determined that the carrying value of the power
management business was greater than the derived fair value, indicating an impairment in the
recorded goodwill. To determine fair value, the Company relied on a discounted cash flow analysis.
For goodwill valuation purposes only, the revised fair value of this unit was allocated to the assets and liabilities of the reporting unit to arrive at an implied fair
value of goodwill, based upon known facts and circumstances, as if the acquisition occurred
currently. The testing F-10




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements resulted in a write-down of recorded goodwill in the amount of $4,103,872, which was recorded as a
cumulative effect of a change in an accounting principle. As part of the 2002 year-end assessment
of the fair value of its goodwill the Company determined that the carrying value of the goodwill
associated with the building automation and control business exceeded the fair value by $108,000.
This difference between the carrying value and the estimated fair value of the goodwill was
recorded as an impairment loss in 2002. As part of its 2003 and 2004 year-end assessments, the
Company updated its long-term projections for the building automation and controls business and
estimated the fair value based on the discounted current value of the expected future cash flows.
The Company then compared the implied fair value of the goodwill to its carrying value and
determined that the value of the goodwill was not impaired. It is possible that upon completion of
future impairment tests, as the result of changes in facts or circumstances, the Company may have
to take additional charges to recognize a further write-down of the value of our acquisitions to
their estimated fair values. Deferred Financing Costs The Company has capitalized as deferred financing costs $686,228 of expense incurred in
arranging its convertible revolving credit facility and convertible term loan. These deferred
financing costs are being amortized over the life of the convertible term loan using the effective
interest method. Upon conversion of any portion of the term loan a corresponding portion of the
deferred financing costs are recognized as interest expense. The Company included $382,710,
$203,616 and $0 of amortization of deferred financing costs in interest expense in 2004, 2003 and
2002, respectively. Impairment of Long-Lived Assets The Company records impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of those items. Our cash flow
estimates are based on historical results adjusted to reflect our best estimate of future market
and operating conditions. The net carrying value of assets not recoverable is reduced to fair
value. Our estimates of fair value represent our best estimate based on industry trends and
reference to market rates and transactions. Revenue Recognition The Company recognizes revenue when all four of the following criteria are met: (i) persuasive
evidence has been received that an arrangement exists; (ii) delivery of the products and/or
services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is
reasonably assured. In addition, the Company follows the provisions of the Securities and Exchange
Commissions Staff Accounting Bulletin No. 104, Revenue Recognition, which sets forth guidelines in
the timing of revenue recognition based upon factors such as passage of title, installation,
payments and customer acceptance. Any amounts received prior to satisfying the Companys revenue
recognition criteria is recorded as deferred revenue in the accompanying balance sheet. Revenues on long-term contracts are recorded under the percentage of completion, cost-to-cost
method of accounting. Any anticipated losses on contracts are charged to operations as soon as
they are determinable and all contract related profits are deferred until completion of the
contract. Costs in excess of billings on long-term jobs of $0 and $96,724 are included in accounts
receivable at December 31, 2004 and 2003, respectively. Billings in excess of costs on long-term
jobs of $387,419 and $280,140 are included in deferred revenue at December 31, 2004 and 2003,
respectively. F-11




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements Under certain long-term contracts, customers may withhold payment of approximately 5% to 10%
of billings (retainage) until completion of the job. Retainage of $315,922 and $260,442 is
included in accounts receivable at December 31, 2004 and 2003. All of the retainage outstanding as
of December 31, 2004 is expected to be collected during fiscal 2005. The Company also has entered into agreements in which it has contracted with utilities to
establish a Virtual Negawatt Power Plan (VNPP). Under these contracts, the Company installs
Energy Saver units at participating host locations. The participating host locations receive the
benefit of reduced utility costs through the operation of the units. The Company is able to reduce
electric demand requirements during periods of peak demand, providing nearly instantaneous control,
measurement and verification of load reduction. The utility companies will pay the Company for
the availability of this demand reduction and the Company will recognize revenue under these contracts
over the period for which the demand reduction is provided. No revenue has been recognized under
such contracts for the years ended December 31, 2004, 2003 or 2002. The cost of the energy saver
units currently at host locations under such VNPP programs is included in fixed assets and
depreciated over the term these units will be used under the existing contract. Shipping and Handling Costs The Company classifies freight costs billed to customers as revenue. Costs related to freight
are classified as cost of sales. Research and Development Costs Research and development costs are charged to operations when incurred and are included in
selling, general and administrative expenses. Total research and development costs charged to
operations were $150,000, $70,000 and $65,000 for the periods ended December 31, 2004, 2003 and
2002, respectively. Advertising, Marketing and Promotional Costs Expenditures on advertising, marketing and promotions are charged to operations in the period
incurred and totaled $2,000, $19,000 and $33,000 for the periods ended December 31, 2004, 2003 and
2002, respectively. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred income taxes
are recognized for the tax consequences in future years of the differences between the tax basis of
assets and liabilities and their financial reporting amounts at each period end based on enacted
tax laws and statutory tax rates applicable to the periods in which the differences are expected to
affect taxable earnings. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount more likely than not to be realized. Net Loss Per Share The Company computes loss per share under Statement of Financial Accounting Standards No. 128,
Earnings Per Share. The statement requires presentation of two amounts; basic and diluted loss
per share. Basic loss per share is computed by dividing the loss available to common stockholders
by the weighted average common shares outstanding. Dilutive earnings per share would include all
common stock equivalents unless anti-dilutive. The Company has not included the outstanding
options, warrants, or convertible preferred stock as common stock equivalents because the effect
would be antidilutive. F-12




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements The following table sets forth the weighted average shares issuable upon exercise of
outstanding options and warrants and conversion of preferred stock that is not included in the
basic and diluted net loss per share available to common stockholders: December 31,
    
    2004
    
    
    2003
    
    
    2002Weighted average shares
issuable upon exercise of
outstanding options
    
    
    10,690,540
    
    
    
    10,291,351
    
    
    
    9,227,761Weighted average shares
issuable upon exercise of
outstanding warrants
    
    
    11,003,904
    
    
    
    9,211,143
    
    
    
    11,247,819Weighted average shares
issuable upon conversion of
preferred stock
    
    
    23,045,739
    
    
    
    25,532,617
    
    
    
    21,464,327Weighted average shares
issuable upon conversion of
term loan
    
    
    357,680
    
    
    
    142,274
    
    
    
    Total
    
    
    45,097,863
    
    
    
    45,177,385
    
    
    
    41,949,291
 Financial Instruments The carrying amounts reported in the consolidated balance sheets for cash, accounts
receivable, accounts payable and accrued expenses approximate fair value because of the short-term
nature of these amounts. The Companys long-term debt approximates fair value based on instruments
with similar terms. Stock-based Compensation At December 31, 2004, the Company has a stock-based compensation plan, which is described in
Note 17. The Company applied the recognition and intrinsic value measurement principles of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations in accounting for such plan. No stock-based compensation expense was
reflected in the 2004, 2003 or 2002 net loss as all options granted during those years had an
exercise price equal to or greater than the market value of the underlying common stock on the date
of the grant. The following table illustrates the effect on the net loss and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based compensation: F-13




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Net Loss, as reported
    
    $
    (5,159,000
    )
    
    $
    (5,482,000
    )
    
    $
    (11,112,000
    )Deduct: Stock-based employee
compensation expense included in
reported net loss
    
    
    
    
    
    
    
    
    
    
    Add: Total stock-based employee
compensation expense
determined under fair value
based method for awards
1
    
    
    (898,000
    )
    
    
    (889,000
    )
    
    
    (1,990,000
    )Pro forma net loss
    
    
    (6,057,000
    )
    
    $
    (6,371,000
    )
    
    $
    (13,102,000
    )Net loss per shareBasic and diluted  as reported
    
    
    (0.25
    )
    
    $
    (0.30
    )
    
    $
    (0.49
    )Basic and diluted  pro forma
    
    
    (0.27
    )
    
    $
    (0.33
    )
    
    $
    (0.55
    )
   1
    
    All awards refer to awards granted, modified, or settled in fiscal periods beginning after December
15, 1994  that is, awards for which the fair value was required to be measured and disclosed under Statement 123. Warranty Obligations The Company warrants to the purchasers of its products that the product will be free of
defects in material and workmanship for one year from the date of installation. The Company records
the estimated cost that may be incurred under its warranties at the time the product revenue is
recognized based upon the relationship between historical and anticipated warranty costs and sales
volumes. The Company periodically assesses the adequacy of its recorded warranty liability and
adjusts the amounts as necessary. While the Company believes that its estimated liability for
product warranties is adequate and that the judgment applied is appropriate, the estimated
liability for product warranties could differ materially from actual future warranty costs. See
Note 8 for additional information about the Companys warranty liability. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No.
46, Consolidation of Variable Interest Entities (FIN 46). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity investors that do
not provide sufficient financial resources for the entity to support its activities. FIN 46
requires certain variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003. The Company adopted
the F-14




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##### 



Electric City Corp.
Notes to Consolidated Financial Statements provisions of FIN 46 effective February 1, 2003 and such adoption did not have a material
impact on its consolidated financial statements since it currently has no variable interest
entities. In December 2003, the FASB issued FIN 46R with respect to variable interest entities
created before January 31, 2003, which among other things, revised the implementation date to the
first fiscal year or interim period ending after March 15, 2004, with the exception of Special
Purpose Entities (SPE). The consolidation requirements apply to all SPEs in the first fiscal year
or interim period ending after December 15, 2003. The Company adopted the provisions of FIN 46R
effective January 1, 2004 and such adoption did not have a material impact on its consolidated
financial statements since it currently has no SPEs. In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
123(R), Share-Based Payment. This statement revises FASB Statement No. 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123(R) focuses primarily on the accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS No. 123(R) requires companies
to recognize in the statement of operations the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards (with limited
exceptions). This Statement is effective as of the first reporting period that begins after June
15, 2005. Accordingly, the Company will adopt SFAS 123(R) in its third quarter of fiscal 2005. The
Company is currently evaluating the provisions of SFAS 123(R) and has not yet determined the impact
that this Statement will have on its results of operations or financial position. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material and requires that such items be recognized as
current-period charges regardless of whether they meet the so abnormal criterion outlined in ARB
No. 43. SFAS No. 151 also introduces the concept of normal capacity and requires the allocation
of fixed production overheads to inventory based on the normal capacity of the production
facilities. Unallocated overheads must be recognized as an expense in the period incurred. SFAS No.
151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
While the Company is still evaluating the impact of this statement, it does not currently believe
it will have a material impact on its consolidated financial statements. Note 4  Discontinued Operations The Company adopted Statement of Financial Accounting Standards No. 144 (SFAS 144) at the
beginning of 2002. Among other things, SFAS 144 requires that the results of operations and
related disposal costs as well as the gain or loss on the disposal of a business unit be presented
on the statement of operations as a separate component of income before extraordinary items for all
periods presented. On June 3, 2003, the Company entered into an asset purchase agreement with Hoppensteadt
Acquisition Corp., whereby Hoppensteadt acquired all of the assets, except for certain receivables
and cash, and assumed all of the liabilities, except for bank debt, of the Companys Power
Management segment as of May 31, 2003, in exchange for $929,032 in cash. Hoppensteadt Acquisition
Corp. is owned by a group of investors that includes former managers of the Companys Power
Management segment. F-15




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements The revenue and loss related to discontinued operations were as follows: Year ended December 31
    
    2004
    
    
    2003
    
    
    2002Revenue
    
    $
    
    
    
    $
    2,484,336
    
    
    $
    6,231,750Net Loss
    
    
    
    
    
    
    (262,503
    )
    
    
    (1,017,897
    )
 Note 5  Inventories Inventories consisted of the following: December 31,
    
    2004
    
    
    2003Raw materials
    
    $
    528,718
    
    
    $
    496,906Work in process
    
    
    
    
    
    
    12,817Finished goods
    
    
    500,927
    
    
    
    690,423$
    1,029,645
    
    
    $
    1,200,146
 Note 6  Property and Equipment Property and equipment consist of the following: December 31,
    
    2004
    
    
    2003Land
    
    $
    205,000
    
    
    $
    205,000Building
    
    
    984,396
    
    
    
    984,396Furniture
    
    
    60,365
    
    
    
    60,365Manufacturing equipment
    
    
    40,725
    
    
    
    34,620Office equipment
    
    
    202,520
    
    
    
    194,534Transportation equipment
    
    
    37,676
    
    
    
    37,676VNPP Assets
    
    
    897,756
    
    
    
    2,428,438
    
    
    
    1,516,591Less accumulated depreciation
    
    
    442,877
    
    
    
    383,999$
    1,985,561
    
    
    $
    1,132,592
 F-16




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##### 



Electric City Corp.
Notes to Consolidated Financial Statements Note 7  Accrued Expenses Accrued expenses are comprised of the following: December 31,
    
    2004
    
    
    2003Compensation
    
    $
    55,979
    
    
    $
    60,706Contract Labor
    
    
    
    
    
    
    108,723Interest
    
    
    6,925
    
    
    
    19,937Professional fees
    
    
    169,427
    
    
    
    44,963Real estate taxes
    
    
    79,496
    
    
    
    74,506Commissions
    
    
    26,145
    
    
    
    45,743Sales tax payable
    
    
    1,350
    
    
    
    41,562Accrued royalties
    
    
    6,900
    
    
    
    6,300Warranty reserve
    
    
    151,008
    
    
    
    121,702Legal
    
    
    65,000
    
    
    
    Other
    
    
    5,459
    
    
    
    17,446$
    567,689
    
    
    $
    541,588
 Note 8  Warranty Liability Changes in the Companys warranty liability are as follows: December 31,
    
    2004
    
    
    2003Balance, beginning of year
    
    $
    121,702
    
    
    $
    107,127Warranties issued
    
    
    36,750
    
    
    
    55,500Settlements
    
    
    (7,444
    )
    
    
    (40,925
    )Balance, end of year
    
    $
    151,008
    
    
    $
    121,702
 Note 9  Line of Credit On September 11, 2003 the Company closed on a new credit facility with Laurus Master Fund.
The new facility included a $1,000,000 convertible term loan and a $2,000,000 convertible revolving
line of credit. The credit line replaced an expiring credit line the Company had with American
Chartered Bank. The Laurus revolving credit facility provides for borrowings of up to the lesser
of (i) $2 million or (ii) 90% of the Companys eligible accounts receivable. As of December 31,
2004 eligible receivables would support borrowings of approximately $89,000 under the facility.
The Company has not borrowed under the revolving facility. The revolving credit facility had an
initial term of two years, but on August 31, 2004 the maturity date on the facility was extended to
September 1, 2006. The revolving credit facility accrues interest on outstanding balances at the
rate of prime (5.25% as of December 31, 2004) plus 1.75%. Laurus has the option to convert all or
a portion of the advances under any secured convertible
revolving note into shares of the Companys common stock at any time, subject to certain
limitations, at a fixed conversion price (originally $1.64 per share, but amended (see below) to
$1.05 per share). As F-17




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##### 



Electric City Corp.
Notes to Consolidated Financial Statements amounts are drawn on this line-of-credit, to the extent the current market price exceeds the
fixed conversion price, additional interest expense will be recognized for this beneficial
conversion feature. The revolving credit facility is secured by a blanket lien on all of the
Companys assets, except for its real estate. All stock conversion prices and exercise prices are
subject to adjustment for stock splits, stock dividends or similar events. On February 28, 2005, the Company and Laurus entered into an amendment to the revolving credit
facility which among other things permits the Company to borrow an amount in excess of the amount
supported by the borrowing base (an Overadvance), up to the $2 million limit of the facility,
reduces the fixed conversion price on the revolving credit line to $1.05 per share. The Company
may remain in the Overadvance position until January 1, 2006 (the Overadvance Period). Prior to
the end of the Overadvance Period the Company can repay the Overadvance in cash at 125% of the
principal amount. The Overadvance Period will be extended on a month to month basis if the average
closing price of the Companys stock for the five last trading days of the prior month are greater
than or equal to $1.16 (110% of the fixed conversion price). If the Overadvance Period is not
extended, the Company will be required to repay the Overadvance at 100% of the principal amount at
the end of the Overadvance Period. If at any time after the date the shares underlying the
revolving credit facility are registered and the average closing price of the Companys common
stock for an eleven day period exceeds $1.21 per share (115% of the fixed conversion price), Laurus
will be required to convert to common stock the lesser of the outstanding balance of revolving
credit line or 25% of the average aggregate dollar weighted trading volume of the Companys common
stock for the eleven days prior to the conversion (a Mandatory Conversion). Only one Mandatory
Conversion can be effected in any 22 day period. Note 10  Convertible Term Loan On September 11, 2003, the Company entered into a $1,000,000 convertible Term Loan with Laurus
Master Fund. The Term Loan had an initial term of two years and was scheduled to amortize at the
rate of $50,000 per month beginning February 1, 2004, if not offset by the conversion of all or a
portion of the loan prior to the due date of the amortization payment. On August 31, 2004, the
maturity date for the Term Loan was extended to September 1, 2006, the amortization schedule was
modified to defer the first principal payment to February 1, 2005 and reduce the monthly payments
to $35,000 per month, with a final payment of $11,790 due on September 1, 2006 (if not offset by
the conversion of all or a portion of the loan prior to the due date of the amortization payment)
and the conversion price was reduced from $2.12 to $1.64 per share. The Term Loan accrues interest
at the greater of prime (5.25% as of December 31, 2004) plus 1.75%, or 6%, and is payable monthly
in arrears. The Company has the option of paying scheduled interest and principal, or prepaying
all or a portion of the Term Loan with shares of its common stock at the fixed conversion price of
$1.64 per share, provided that the closing price of the common stock is greater than $1.89 per
share for the 11 trading days immediately preceding the payment date and that the shares are
registered with the Securities and Exchange Commission. Laurus also has the option to convert all
or a portion of the Term Loan into shares of the Companys common stock at any time, subject to
certain limitations, at a fixed conversion price of $1.64 per share. The Term Loan is secured by a
blanket lien on all of the Companys assets, except for its real estate. In conjunction with the
Term Loan, Laurus received a five year warrant to purchase up to 140,000 shares of the Companys
common stock at prices ranging from $2.44 per share to $3.07 per share. The warrants were valued
at $163,400 using a modified Black-Scholes option pricing model. The value of these warrants was
recorded as a discount to the Term Loan and will be amortized over the term of the loan using the
effective interest method. F-18




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements In conjunction with the term loan and revolving credit facility, Laurus was paid a fee of
$150,000 and received an additional five year warrant to purchase up to 280,000 shares of the
Companys common stock at prices ranging from $2.54 per share to $3.18 per share. This warrant was
valued at $320,000 using a modified Black-Scholes option pricing model. In addition, the Company
issued a one-year warrant to purchase 50,000 shares of common stock to Wall & Broad Equities as
part of its commission for this transaction. These warrants were valued at $58,000 using a
modified Black-Scholes option pricing model. The value of the warrants along with $158,228 in
other fees and expenses related to the transaction have been recorded as capitalized costs of
financing and are being amortized using the effective interest method over the term of the Term
Loan. The Term Loan is considered to have a beneficial conversion feature since the fair market
value of the common stock issuable upon conversion of the Term Loan exceeded the value allocated to
the Term Loan on the date of issuance. On the date of issuance, the Term Loan was convertible into
471,698 shares of common stock, which at the then current market price of $2.05 per share was worth
$966,981. The difference between the market value of the shares issuable upon conversion and the
value allocated to the Term Loan of $180,381 is considered to be the value of the beneficial
conversion feature. The value of the beneficial conversion feature has also been recorded as a
discount to the term note and will be amortized over the term of the loan using the effective
interest method. On November 26, 2003, Laurus converted $52,346 of principal and $654 of accrued interest into
25,000 shares of the Companys common stock, and during January 2004, Laurus converted $270,864 of
principal and $4,736 of accrued interest into 130,000 of the Companys common stock. F-19




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##### 



Electric City Corp.
Notes to Consolidated Financial Statements Note 11  Long Term Debt The Companys long term debt consists of the following: December 31,
    
    2004
    
    
    2003Mortgage note to American Chartered Bank, prime (5.25%)
plus 1/2%, payable in monthly installments of $3,000, plus
interest until January 2006. A final payment of
$559,000 is due in February 2006. This note is
collateralized by the building and land.
    
    $
    598,000
    
    
    $
    634,000Convertible term note to Laurus Master Fund (less debt discount
of $50,048 and $241,775, as of December 31, 2004 and
2003, respectively), interest rate equal to the greater
of the prime rate (5.25%) plus 1.75%, or 6.00%, payable
in monthly installments of $35,000 plus interest
beginning in February 2005 with a final payment of
$11,790 on September 1, 2006, if not converted to common
stock prior to the payment due date. The note is
collateralized by a general lien on all of the Companys
assets, other than its real estate. (see Note 10)
    
    
    626,742
    
    
    
    705,879Various other notes
    
    
    5,611
    
    
    
    8,766Total long-term debt
    
    
    1,230,353
    
    
    
    1,348,645Less current portion
    
    
    424,451
    
    
    
    536,809$
    805,902
    
    
    $
    811,836
 The aggregate amounts of long-term debt maturing in each of the next five years as of December
31, 2004, are as follows: 2005
    
    $
    424,4512006
    
    
    855,9502007
    
    
    2008
    
    
    2009
    
    
    $
    1,280,401
 Note 12  Lease Commitments The Company leases a facility in Elk Grove Village, Illinois from the two former owners of
Great Lakes Controlled Energy Corporation, both of whom are currently employees of the Company.
Total rent expense for this facility amounted to $90,600, $120,000 and $120,000 for the years ended
December 31, 2004, 2003
and 2002. F-20




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements Future minimum rentals to be paid by the Company as of December 31, 2004 are as follows: Related
    
    
    UnrelatedYear ending December 31,
    
    Party
    
    
    Party
    
    
    Total2005
    
    $
    69,600
    
    
    $
    
    
    
    $
    69,6002006
    
    
    29,000
    
    
    
    
    
    
    
    29,0002007
    
    
    
    
    
    
    
    
    
    
    2008
    
    
    
    
    
    
    
    
    
    
    2009
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    98,600
    
    
    $
    
    
    
    $
    98,600
 Note 13 Income Taxes The composition of income tax expense (benefit) is as follows: Year ended December 31
    
    2004
    
    
    2003
    
    
    2002DeferredFederal
    
    $
    (2,025,000
    )
    
    $
    (1,558,000
    )
    
    $
    (3,145,000
    )State
    
    
    (358,000
    )
    
    
    (275,000
    )
    
    
    (555,000
    )Change in valuation allowance
    
    
    2,383,000
    
    
    
    1,833,000
    
    
    
    3,700,000Benefit for
income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
 Significant components of the Companys deferred tax asset are as follows: December 31
    
    2004
    
    
    2003Net operating loss
    
    $
    18,880,000
    
    
    $
    16,486,000Other
    
    
    135,000
    
    
    
    147,000Less valuation allowance
    
    
    (19,016,000
    )
    
    
    (16,633,000
    )Total net deferred tax asset
    
    $
    
    
    
    $
    
 The Company has recorded a valuation allowance equaling the deferred tax asset due to the
uncertainty of its realization in the future. At December 31, 2004, the Company has U.S. federal
net operating loss carryforwards available to offset future taxable income of approximately
$42,200,000, which expire in the years 2018 through 2024. The reconciliation of income tax expense (benefit) to the amount computed by applying the
federal statutory rate is as follows: F-21




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Income tax (benefit) at federal
statutory rate
    
    $
    (1,754,000
    )
    
    $
    (1,864,000
    )
    
    $
    (3,778,000
    )State taxes (net of federal tax benefit)
    
    
    (258,000
    )
    
    
    (275,000
    )
    
    
    (561,000
    )Other nondeductible expenses
    
    
    34,000
    
    
    
    144,000
    
    
    
    639,000Other
    
    
    (404,000
    )
    
    
    162,000
    
    
    
    Increase in valuation allowance
    
    
    2,382,000
    
    
    
    1,833,000
    
    
    
    3,700,000Income tax expense (benefit)
    
    $
    
    
    
    $
    
    
    
    $
    
 Note 14  Commitments and Contingencies  a)
    Pursuant to the Consolidated Agreement dated January 8, 2001, among the Company, Giorgio
Reverberi (Reverberi), the owner of the patent relating to the EnergySaver, and Joseph
Marino, former Chairman and CEO of Electric City (who assigned the rights to the Company), the
Company agreed to pay Reverberi a royalty of $200 for each EnergySaver unit made by or for the
Company and sold by the Company. Mr. Marino is also paid a royalty of $100 for each unit sold
by the Company. The term of the license granted to the Company expires when the last of
Reverberis patents expires, which the Company expect to be in November, 2017. The license
may be terminated by Reverberi if the Company materially breaches its terms and fails to cure
the breach within 180 days after Reverberi gives the Company written notice of the breach.
Approximately $34,000, $65,000 and $99,000 of expense was incurred under the agreement for the
years ended December 31, 2004, 2003 and 2002, respectively. The Company has accrued $6,900
and $6,300 in royalties payable at December 31, 2004 and 2003, respectively.b)
    The Company entered into employment agreements with certain officers and employees expiring
2005. Total future commitments under these agreements are as follows: Year ending December 31,2005
    
    $
    610,000Total
    
    $
    610,000
  c)
    The Company is involved in certain litigation in the normal course of its business.
Management intends to vigorously defend these cases. In the opinion of management, the
litigation now pending will not have a material adverse affect on the consolidated financial
statements of the Company. Note 15  Equity Transactions F-22




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements  a)
    During 2002, the Company issued 52,454 shares of its common stock pursuant to the exercise of
stock options with an exercise price of $1.10. The Company received consulting services as
consideration for this exercise.b)
    On June 4, 2002, the Company entered into a securities purchase agreement with Richard
Kiphart under which the Company received $2,000,000 in gross proceeds for the issuance of a
package of securities that included 200,000 shares of Series C Convertible Preferred Stock,
30,082 shares of common stock, warrants to purchase 50,000 shares of the Series C Convertible
Preferred Stock initially exercisable at a price of $10.00 per share and warrants to purchase
281,250 shares of the Companys common stock initially exercisable at a price of $1.00 per
share.Proceeds from the transaction were allocated to the Series C Convertible Preferred Stock, the
common stock and the warrants issued as part of the transaction based on their relative fair
values. The Series C Convertible Preferred Stock contained a beneficial conversion feature as
a result of its initial conversion price, which was lower than the market value of the
Companys common stock on the date of issue. The value of this beneficial conversion feature
was determined based on the value allocated to the Series C Convertible Preferred Stock, along
with the discount to the market value of the common stock on the date of issuance. The value of
the beneficial conversion feature is deemed to be equivalent to a non-cash preferred stock
dividend. The Company recorded the deemed dividend on the date of issuance by offsetting
charges and credits to additional paid-in capital in the amount of $1,444,697, without any
effect on total stockholders equity. The deemed dividend increases the loss applicable to
common shareholders in the calculation of the basic and diluted net loss per common share for
the year ended December 31, 2002.c)
    On December 16, 2002, the Company entered into a securities purchase agreement with the
Munder Power Plus Fund (Munder), whereby the Company issued, in exchange for $1,000,000 in
gross proceeds, a package of securities that included 1,086,957 shares of its common stock and
a five year warrant to purchase 300,000 additional shares of its common stock at an initial
exercise price of $0.92 per share.The Company issued a three-year warrant to purchase 50,000 shares of its common stock at $1.00
per share to Capstone Investments as part of the commission on this transaction.d)
    During 2002, we amended an existing warrant held by a consultant to extend its expiration
date from June 30, 2002 to June 30, 2003 as payment for services received in a private
transaction not involving any solicitation or offering of such warrant to anyone else. The
warrant was for 200,000 shares with an exercise price of $2.00 per share. The extension of
this warrant was valued at $80,000 using a modified Black-Sholes option pricing model.e)
    During the year ended December 31, 2002, the Company satisfied the accrued dividend on its
preferred stock of $2,158,418 though the issuance of 204,199 shares of its Series A Preferred
stock and 11,643 shares of its Series C Preferred stock. Since these shares of preferred
stock were convertible into common stock at a price below the market price on the dates of
issuance, the Company was required to recognize deemed dividends of $495,589 on the shares
issued in satisfaction of the Series A Preferred dividend and $12,403 on the shares issued in
satisfaction of the Series C Preferred dividend. These deemed dividends were calculated as
the difference between (1) the market value of the F-23




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements common shares into which the Series A shares were convertible on the dates of issuance and (2) the
accrued dividend obligation on the outstanding preferred stock.  f)
    During the year ended December 31, 2002, two of our stockholders who are subject to Section
16 of the Securities Exchange Act of 1934 unintentionally violated Section 16(b) of the Act by
selling and then repurchasing shares of the Companys common stock during a six-month period
(a short-swing profit). Pursuant to the Act, the shareholders were required to turn over the
short-swing profits, which totaled $2,098, to the Company. The Company received $1,300 from
one of the shareholders during 2002, and $798 was received from the other shareholder during
2003.g)
    On February 27, 2003, the Company entered into a securities purchase agreement with SF
Capital Partners, Ltd. (SF) whereby the Company issued, in exchange for $1,000,000 in gross
proceeds, a package of securities that included 1,086,957 shares of its common stock and a
five year warrant to purchase 300,000 additional shares of its common stock at an initial
exercise price of $0.92 per share.The holders of the Series A and the Series C Convertible Preferred Stock waived their rights of
first offer on the transaction and their right to adjust the conversion price of their
preferred shares and the exercise price on their warrants as a result of the issuance price of
the common stock and the exercise price of the warrant issued in this transaction. Munder
Power Plus Fund also had a right of first offer with respect to this transaction. In exchange
for its agreement to waive this right, the Company gave Munder a 30 day option to purchase
securities under the same terms as those offered to SF (see note (b) below). Munder elected to
exercise this option during the option period with respect to an investment of $250,000.h)
    On April 17, 2003, the Company entered into a securities purchase agreement with Munder Power
Plus Fund (Munder) whereby the Company issued, in exchange for $250,000 in gross proceeds, a
package of securities that included 271,739 shares of its common stock and a five year warrant
to purchase 75,000 additional shares of its common stock at an initial exercise price of $0.92
per share.On April 23, 2003, the Company entered into a securities purchase agreement with Mr. Richard
Kiphart whereby the Company issued, in exchange for $419,914 in gross proceeds, a package of
securities that included 456,429 shares of its common stock and a five year warrant to purchase
125,974 additional shares of its common stock at an initial exercise price of $0.92 per share.The holders of the Series A and the Series C Convertible Preferred Stock waived their rights of
first offer on the transaction and their right to adjust the conversion price of their
preferred shares and the exercise price on their warrants as a result of the issuance price of
the common stock and the exercise price of the warrant issued in this transaction.i)
    On June 27, 2003, the Company entered into a securities purchase agreement with a group of
investors that included Cinergy Ventures II, LLC, Mr. Richard Kiphart, SF Capital Partners,
Ltd., John Thomas Hurvis Revocable Trust and Mr. David Asplund whereby the Company issued, in
exchange for $1,500,000 in gross proceeds, a package of securities that included 150,000
shares of its Series D Convertible Preferred Stock (the Series D Preferred), 22,562 shares
of its Common
Stock, one year warrants to purchase 37,500 additional shares of its Series D Preferred and
four year warrants to purchase 210,938 additional shares of its Common Stock. F-24




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements  Proceeds from the transaction were allocated to the Series D Convertible Preferred Stock, the
common stock and warrants issued as part of the Transaction based on their relative fair
values. The Series D Convertible Preferred Stock contained a beneficial conversion feature as
a result of its initial conversion price, which was lower than the market value of the
Companys common stock on the date of issue. The value of this beneficial conversion feature
was determined based on the value allocated to the Series D Convertible Preferred Stock, along
with the discount to the market value of the common stock on the date of issuance. The value of
the beneficial conversion feature was deemed to be equivalent to a non-cash preferred stock
dividend. The Company recorded the deemed dividend on the date of issuance by offsetting
charges and credits to additional paid-in capital in the amount of $386,984, without any effect
on total stockholders equity. The deemed dividend increased the loss applicable to common
shareholders in the calculation of the basic and diluted net loss per common share for the year
ended December 31, 2003.Delano Group Securities, LLC acted as placement agent for the Company with respect to the
transaction and was paid a placement agent fee of $120,000. Delano Group Securities, LLC is
controlled by Mr. David Asplund, one of the investors in the transaction and one of the
Companys directors.j)
    On July 23, 2003, the Board of Directors approved the retirement of 1,000 shares of common
stock held as treasury stock, which are now deemed authorized but unissued shares.k)
    During the year ended December 31, 2003, the Company satisfied the accrued dividend on its
preferred stock of $2,551,379 though the issuance of 225,398 shares of its Series A Preferred
stock, 21,971 shares of its Series C Preferred stock and 7,769 shares of its Series D
Preferred stock. Since these shares of preferred stock were convertible into common stock at
a price below the market price on the dates of issuance, the Company was required to recognize
deemed dividends of $1,627,985 on the shares issued in satisfaction of the Series A Preferred
dividend, $158,691 on the shares issued in satisfaction of the Series C Preferred dividend and
$92,878 on the shares issued in satisfaction of the Series D Preferred dividend. These deemed
dividends were calculated as the difference between (1) the market value of the common shares
into which the preferred shares were convertible on the dates of issuance and (2) the accrued
dividend obligation on the outstanding preferred stock.l)
    During fiscal 2003, the Company issued warrants to purchase 647,000 shares of its Common
Stock to consultants as compensation for services received. As the fair market value of these
services was not readily determinable, these services were valued based on the fair market
value of the warrants at the time of issuance, which ranged from $0.29 to $1.42 per warrant.
These warrants had terms ranging from one to three years and exercise prices ranging from
$1.00 to $2.10. The Company recognized total expense of $393,550 relating to the issuance of
these warrants.m)
    During fiscal 2003, the Company received proceeds of $197,000 in connection with the exercise
of 197,000 warrants, resulting in the issuance of 197,000 shares of the Companys Common
Stock.n)
    During fiscal 2003, Laurus Master Fund converted $52,346 of principal and $654 of accrued
interest on the Companys Convertible Term Note into 25,000 shares of our common stock. F-25




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements  o)
    During fiscal 2004, holders of our Series A Convertible Preferred Stock converted 145,000
shares of Series A into 1,450,000 shares of common stock.p)
    On March 19, 2004, we entered into a securities purchase agreement with a group of four
mutual funds managed by Security Benefit Group, Inc. whereby we issued to such purchasers, in
exchange for $11,000,000 in gross proceeds, a package of securities that included 5,000,000
shares of the Companys common stock and 5 year warrants to purchase 1,750,000 additional shares of common stock at $2.42 per share.On March 22, 2004, we entered into a Redemption and Exchange Agreement with the holders of our
outstanding Series A Convertible Preferred Stock, Series C Convertible Preferred Stock and
Series D Convertible Preferred Stock (collectively, the Existing Preferred Stock) under which
we redeemed 538,462 shares of our outstanding Existing Preferred Stock which were convertible
into 5,384,620 shares of common stock, at a redemption price equivalent to $1.30 per common
share, and exchanged 210,451 shares of our newly authorized Series E Convertible Preferred Stock
(the Series E Preferred) for the remaining 2,104,509 outstanding shares of the Existing
Preferred Stock (the Exchange) on a 1 for 10 basis (one share of Series E Preferred exchanged
for 10 shares of Existing Preferred Stock). All of the Existing Preferred Stock has been
cancelled. As part of the Exchange, all outstanding warrants to purchase shares of Series D
Convertible Preferred Stock were exchanged for similar warrants to purchase shares of Series E
Preferred and the expiration date was changed from June 30, 2004 to October 31, 2004 (and
subsequently extended to December 31, 2004). Such Series E warrants issued were exercisable for
an aggregate of 3,750 shares of Series E Preferred at a price of $100 per share. They replaced
warrants exercisable for 37,500 shares of Series D Preferred at an exercise price of $10 per
share.The Series E Preferred has substantially the same rights as the shares of Existing Preferred
Stock that it replaced, including:  §
    special approval rights in respect of certain actions by the Company, including any
issuance of shares of capital stock by the Company that would have the right to receive
dividends or the right to participate in any distribution upon liquidation which was
senior to or equal to the rights of the Series E Preferred (other than issuances to pay
dividends on the preferred and under certain other limited exceptions such as
conversion of outstanding convertible securities) and any acquisition, sale, merger,
joint venture, consolidation or reorganization involving the Company or any of its
subsidiaries;§
    a conversion price of $1.00 per share ;§
    the right to elect up to four directors;§
    the right to vote with the holders of common stock on an as converted basis on all
matters on which holders of our common stock are entitled to vote, except with respect
to the election of directors or as otherwise provided by law;§
    a right of first offer on the sale of equity by the Company in a private
transaction; and§
    anti-dilution protection that would adjust the conversion price in the event we
issue equity at a price which is less than the conversion price . For accounting purposes the Redemption and Exchange transaction was viewed as a redemption for
cash and shares of Series E preferred stock. As a result of the transaction the Company
incurred a non-cash deemed dividend of $1,860,458 which increased the loss available to
shareholders. This F-26




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements  non-cash deemed dividend was determined by comparing the fair value of the consideration given
(the cash and the market value of the Series E Preferred) to the carrying value of the Existing
Preferred Stock. The fair value of the consideration given exceeded the carrying value of the
Existing Preferred primarily due to the fact that the market price of the Companys common stock
was higher on the day the Redemption and Exchange transaction closed than it was when the
Existing Preferred Stock was originally issued. The deemed dividend was recorded as offsetting
charges and credits to additional paid-in capital, without any effect on total stockholders
equity.Morgan Keegan & Company, Inc. acted as placement agent for the Company with respect to the
transaction and was paid a placement agent fee of $660,000. The Stockpage.com was also paid a
finders fee of $55,000 related to the transaction. Other issuance costs related to the
transaction totaled $195,393.q)
    During fiscal 2004, the Company received proceeds of $185,000 in connection with the exercise
of 185,000 warrants, resulting in the issuance of 185,000 shares of the Companys Common
Stock.r)
    On September 2, 2004 the Company issued a two year warrant to purchase 65,000 shares of its
Common Stock at $1.59 per share to a company controlled by Michael Stelter, one of the
Companys directors, as compensation for marketing services received. The warrants were
valued at $29,900 using a modified Black-Sholes option pricing model and were charged to
operations during the period.s)
    During fiscal 2004, the Company issued warrants to purchase 120,000 shares of its
Common Stock at prices between $1.00 and $1.55 per share to a consultant for services received. The warrants were
valued at $42,600 using a modified Black-Sholes option pricing model and were charged to
operations during the period.t)
    During fiscal 2004, holders of the Companys Series E Convertible Preferred Stock converted
5,067 shares of Series E Convertible Preferred Stock into 506,700 shares of common stock.u)
    During fiscal 2004, the Company received proceeds of $300,000 in connection with the exercise
of 3,000 warrants, resulting in the issuance of 3,000 shares of the Companys Series E
Convertible Preferred Stock.v)
    During fiscal 2004, Laurus Master Fund converted $270,864 of principal and $4,736 of accrued
interest on the Companys Convertible Term Note into 130,000 shares of our common stock.w)
    During fiscal 2004, the Company satisfied the accrued dividend on its preferred stock of
$1,636,780 though the issuance of 16,368 shares of its Series E Preferred stock. Since these
 shares of preferred stock are convertible into common stock at a price below the market price
on the dates of issuance, the Company was required to recognize deemed dividends of $1,127,021
during the period. These deemed dividends were calculated as the difference between (1) the
market value of the common shares into which the preferred shares were convertible on the
dates of issuance and (2) the accrued dividend obligation on the outstanding preferred stock. F-27




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements  x)
    As of December 31, 2002 the Company had an outstanding warrant to purchase 50,000 shares of
its Series C Convertible Preferred stock at an exercise price of $10.00 per share. This
warrant expired unexercised on June 4, 2003.y)
    As of December 31, 2003 the Company had outstanding warrants to purchase 37,500 shares of its
Series D Convertible Preferred stock at an exercise price of $10.00 per share. On March 22,
2004, these warrants were exchanged for warrants to purchase 3,750 shares of Series E
Convertible stock at an exercise price of $100.00 per share. Holders of warrants to purchase
3,000 shares of Series E Convertible stock exercised the warrants during fiscal 2004. The
remaining warrant to purchase 750 shares of Series E Convertible stock expired unexercised on
December 31, 2004.z)
    The Company had outstanding warrants to purchase 10,954,867 and 9,369,867 shares of its
common stock as of December 31, 2004 and 2003, respectively, at an exercise price of between
$0.92 per share and $6.56 per share. These warrants can be exercised at any time prior to
their expiration date which range between April 2004 and May 2010. The following table
summarizes information about warrants outstanding as of December 31, 2004: Warrants OutstandingWeightedNumber
    
    
    Average
    
    
    WeightedOutstanding at
    
    
    Remaining
    
    
    AverageDecember 31,
    
    
    Contractual
    
    
    ExerciseExercise Price
    
    2004
    
    
    Life
    
    
    Price$0.92 - $1.00
    
    
    8,104,867
    
    
    3.3 years
    
    $
    1.00$1.01 - $2.00
    
    
    235,000
    
    
    1.6 years
    
    
    1.68$2.01  $3.00
    
    
    2,160,000
    
    
    4.1 years
    
    
    2.45$3.01  $6.56
    
    
    455,000
    
    
    1.8 years
    
    
    4.0910,954,867
    
    
    3.4 years
    
    $
    1.43
 F-28




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements Note 16  Dividends The dividend expense recognized during 2004, 2003 and 2002 is comprised of the following: Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Accrual of dividend on Series A
Convertible Preferred
    
    $
    540,705
    
    
    $
    2,253,978
    
    
    $
    2,041,992Accrual of Series C Preferred
dividend
    
    
    53,206
    
    
    
    219,712
    
    
    
    116,426Accrual of Series D Preferred
dividend
    
    
    35,932
    
    
    
    77,689
    
    
    
    Accrual of Series E Preferred
dividend
    
    
    1,006,937
    
    
    
    
    
    
    
    Deemed dividend associated with
beneficial conversion price on
shares issuable in satisfaction
preferred dividends
    
    
    1,127,021
    
    
    
    1,879,554
    
    
    
    507,992Deemed dividend associated with
beneficial conversion feature
of Series C Preferred stock
    
    
    
    
    
    
    
    
    
    
    1,444,697Deemed dividend associated with
beneficial conversion feature
of Series D Preferred stock
    
    
    
    
    
    
    386,984
    
    
    
    Deemed dividend associated with
the redemption and exchange of
outstanding preferred stock
    
    
    1,860,458
    
    
    
    
    
    
    
    Deemed dividend associated with
change in the expiration date
of warrants to purchase shares
of preferred stock
    
    
    15,000
    
    
    
    
    
    
    
    Total
    
    $
    4,639,259
    
    
    $
    4,817,917
    
    
    $
    4,111,107
 F-29




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements Note 17  Stock Options On August 30, 2001, the Companys shareholders approved the adoption of the 2001 Stock
Incentive Plan (the Plan), which provides that up to 800,000 shares of the Companys common stock
may be delivered under the Plan to certain employees of the Company or any of its subsidiaries and
to consultants and directors who are not employees. In addition, the Plan provides for an
additional number of shares of the Companys common stock to be reserved for issuance under the
plan on January 1st of each succeeding year, beginning January 1, 2002, in an amount equal to the
lesser of (i) 5% of the number of outstanding shares of Common Stock, or (ii) 500,000 shares. The
awards to be granted under the Plan may be incentive stock options or non-qualified stock options.
The exercise price for any incentive stock option (ISO) may not be less than 100% of the fair
market value of the stock on the date the option is granted, except that with respect to a
participant who owns more than 10% of the common stock the exercise price must be not less than
110% of fair market value. The exercise price of any non-qualified option shall be in the sole
discretion of the Compensation Committee or the Board. To qualify as an ISO the aggregate fair
market value of the shares (determined on the grant date) granted to any participant may not exceed
$100,000 in the first year that they can be exercised. There is no comparable limitation with
respect to non-qualified stock options. The term of all options granted under the Plan will be
determined by the Compensation Committee or the Board in their sole discretion, provided, however,
that the term of each ISO shall not exceed 10 years from the date of grant thereof. In addition to the ISOs and non-qualified options, the Plan permits the Compensation
Committee, consistent with the purposes of the Plan, to grant stock appreciation rights and/or
shares of Common Stock to non-employee directors and such employees (including officers and
directors who are employees) of, or consultants to, the Company or any of its Subsidiaries, as the
Committee may determine, in its sole discretion Under applicable tax laws, however, ISOs may only
be granted to employees.. The Plan is administered by the Board, which is authorized to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to the Plan and to determine the
individuals to whom, and the time, terms and conditions under which, options and awards are to be
granted. The Board may also amend, suspend or terminate the Plan in any respect at any time.
However, no amendment may (i) adversely affect the rights of a participant under an award
theretofore granted without the consent of such participant, (ii) increase the number of shares
reserved for option under the Plan, (iii) modify the requirements for participation in the Plan, or
(iv) modify the Plan in any way that would require stockholder approval under the rules and
regulations under the Exchange Act or the rules of any stock exchange or market on which the Common
Stock is listed (unless such stockholder approval is obtained). As of December 31, 2004, there were approximately 27 employees of the Company eligible to
participate in the Plan, and 2,300,000 shares of Common Stock reserved under the Plan. Effective April 1, 2000, the Company adopted a stock option plan for all independent
directors, which is separate and distinct from the 2001 Stock Incentive Plan described above. The
directors stock option plan provides that eligible directors receive an initial option grant to

purchase 75,000 shares upon being appointed to our Board of Directors and additional grants to
purchase 25,000 shares on each anniversary of their appointment to the Board. These options have
exercise prices equal to the greater of the closing price of our common stock on the grant date, or
$1.00, terms of ten years and vest in three equal amounts, beginning on the grant date and on each
of the next two anniversaries of the initial grant F-30




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements During 2002, certain directors, officers and key employees of the Company were granted options
to acquire 400,000 shares of common stock at exercise prices ranging from $1.00 to $1.34 per share.
These options vest over periods through November 2005. Of the options granted in 2002, 208,333
were forfeited during 2003. During 2003, certain directors, officers and key employees of the Company were granted options
to acquire 1,370,000 shares of common stock at exercise prices ranging from $0.84 to $2.51 per
share. These options vest over periods through December 2005. During 2004, certain directors, officers and key employees of the Company were granted options
to acquire 1,116,500 shares of common stock at exercise prices ranging from $1.15 to $2.36 per
share. These options vest over periods through December 2006. The following table summarizes the options granted, exercised and outstanding as of December
31, 2003: WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseShares
    
    
    Share
    
    
    PriceOutstanding at December 31, 2001
    
    
    9,819,634
    
    
    $
    1.10-$12.99
    
    
    $
    4.12Granted
    
    
    400,000
    
    
    $
    1.00-$1.34
    
    
    $
    1.10Exercised
    
    
    (52,454
    )
    
    $
    1.10-$1.10
    
    
    $
    1.10Forfeited
    
    
    (973,332
    )
    
    $
    1.75-$7.75
    
    
    $
    6.18Outstanding at December 31, 2002
    
    
    9,193,848
    
    
    $
    1.00-$12.99
    
    
    $
    3.78Granted
    
    
    1,370,000
    
    
    $
    0.84-$2.51
    
    
    $
    0.99Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (341,667
    )
    
    $
    1.00-$8.00
    
    
    $
    2.88Outstanding at December 31, 2003
    
    
    10,222,181
    
    
    $
    0.84-$12.99
    
    
    $
    3.45Granted
    
    
    1,116,500
    
    
    $
    1.15-$2.36
    
    
    $
    1.71Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (121,666
    )
    
    $
    1.25-$7.00
    
    
    $
    5.32Outstanding at December 31, 2004
    
    
    11,217,015
    
    
    $
    0.84-$12.99
    
    
    $
    3.26Options exercisable at
December 31, 2004
    
    
    9,778,439
    
    
    $
    0.84-$12.99
    
    
    $
    3.40Options exercisable at
December 31, 2003
    
    
    8,850,189
    
    
    $
    0.84-$12.99
    
    
    $
    3.54Options exercisable at
December 31, 2002
    
    
    7,910,103
    
    
    $
    1.00-$12.99
    
    
    $
    3.63
 F-31




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements The weighted-average, grant-date fair value of stock options granted to employees during
the year, and the weighted-average significant assumptions used to determine those fair values,
using a modified Black-Scholes option pricing model for stock options under Statement of Financial
Accounting Standards No. 123, are as follows: Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Weighted average fair value per options granted
    
    $
    1.16
    
    
    $
    0.57
    
    
    $
    0.79Significant assumptions (weighted average):Risk-free interest rate at grant date
    
    
    1.04
    %
    
    
    1.13
    %
    
    
    1.71
    %Expected stock price volatility
    
    
    72
    %
    
    
    73
    %
    
    
    92
    %Expected dividend payout
    
    
    
    
    
    
    
    
    
    
    Expected option life (years)
    
    
    9.1
    
    
    
    8.8
    
    
    
    9.4
 The following table summarizes information about stock options outstanding at December
31, 2004: Options Outstanding
    
    
    Options ExercisableWeightedNumber
    
    
    Average
    
    Weighted
    
    
    Number
    
    
    WeightedOutstanding at
    
    
    Remaining
    
    Average
    
    
    Exercisable at
    
    
    AverageDecember 31,
    
    
    Contractual
    
    Exercise
    
    
    December 31,
    
    
    ExerciseExercise Price
    
    
    2004
    
    
    Life
    
    Price
    
    
    2004
    
    
    Price$
    0.84 - $2.00
    
    
    
    6,812,381
    
    
    5.3 years
    
    $
    1.19
    
    
    
    5,714,219
    
    
    $
    1.18$
    2.01 - $4.00
    
    
    
    538,334
    
    
    8.1 years
    
    
    2.48
    
    
    
    431,668
    
    
    
    2.50$
    4.01  $6.00
    
    
    
    175,000
    
    
    5.3 years
    
    
    4.53
    
    
    
    175,000
    
    
    
    4.53$
    6.01  $8.00
    
    
    
    3,639,000
    
    
    5.3 years
    
    
    7.09
    
    
    
    3,405,252
    
    
    
    7.09$
    8.01 - $10.00
    
    
    
    52,000
    
    
    5.1 years
    
    
    9.00
    
    
    
    52,000
    
    
    
    9.00$
    10.01 - $13.00
    
    
    
    300
    
    
    6.2 years
    
    
    12.99
    
    
    
    300
    
    
    
    12.9911,217,015
    
    
    5.4 years
    
    $
    3.26
    
    
    
    9,778,439
    
    
    $
    3.40
 Note 18  Related Parties Related party transactions, other than those disclosed in Notes 12 and 14 consist of the
following:  a)
    On January 5, 2000, the Company entered into a distributor agreement with Electric City
of Southern California L.L.C., of which Joseph Marino is a member, which provides for an
initial term of 10 years. Mr. Marino is one of the Companys founders and its former
Chairman and CEO. The agreement grants to Electric City of Southern California a
distribution territory which extends from Monterey to Fresno to the northern edge of Death
Valley, south to the southern border of California. This agreement provides for terms which
members of the Companys board believe are substantially similar to those of other
distributor agreements and as favorable to the Company as if negotiated with an
unaffiliated third party. F-32




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements  b)
    Effective August 31, 2004, the Company entered into a consulting agreement with Delano
Group Securities LLC (Delano), a company owned and controlled by Mr. David Asplund, one
of the Companys directors. Under the terms of the agreement, Delano is to act as the
Companys financial advisor with respect to matters including capital formation and mergers
and acquisitions. For its services the Company is obligated to pay Delano an initial
one-time retainer of $10,000, a warrant to purchase 30,000 shares of common stock at $1.03
per share and ongoing retainer payments of $7,500 per month for the duration of the
engagement. In addition, Delano will receive a commission of 5% on any capital raised
through its direct efforts and a success fee for any merger or acquisition transaction
facilitated by Delano. The success fee, which is payable in cash or stock at the Companys
option, will be equal to 5% of the first $5 million of transaction consideration, plus 2.5%
of the next $5 million in transaction consideration and 1.5% of any transaction
consideration in excess of $10 million, but the success fees are not to exceed $700,000 in
total (except with respect to one specific transaction then under consideration, as to
which such fees are capped at $2 million in total). Before entering into the consulting
agreement with Delano the Board reviewed quotes from other investment banks and determined
that the Delano agreement is fair and as favorable to the Company as of negotiated with an
unaffiliated third party. Note 19  Business Segment Information The Company organizes and manages its business in two distinct segments: the Energy Technology
segment, and the Building Control and Automation segment. In classifying its operational entities
into a particular segment, the Company segregated its businesses with similar economic
characteristics, products and services, production processes, customers, and methods of
distribution into distinct operating groups. The Energy Technology segment designs, manufactures and markets energy saving technologies,
primarily to commercial and industrial customers. The principal products produced and marketed by
this segment are the EnergySaver, the Global Commander and negative power systems under the trade
name, Virtual Negawatt Power Plan or VNPP. This segment is headquartered, and most of its
operations are located, in Elk Grove Village, Illinois. The Building Control and Automation segment, which is comprised of the Great Lakes Controlled
Energy subsidiary, provides integration of building and environmental control systems for
commercial and industrial customers. Great Lakes Controlled Energy is headquartered in, and
operates out of its own leased facility, located in Elk Grove Village, Illinois. Prior to fiscal year 2003, the Companys reportable segments included the Power Management
segment, which designed, manufactured and marketed a wide range of commercial and industrial
switching gear and distribution panels. Effective May 31, 2003, the Company divested this segment,
accordingly, the net assets and operating results have been separately reported as discontinued
operations. Prior year segment information has been restated to reflect corporate costs previously
allocated to the Power Management segment, which will continue despite the divestiture of the
segment. F-33




---



##### 



Electric City Corp.
Notes to Consolidated Financial Statements An analysis and reconciliation of the Companys business segment information to the respective
information in the consolidated financial statements is as follows: Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Revenues:Energy Technology
    
    $
    733,630
    
    
    $
    2,064,097
    
    
    $
    3,090,005Building Control and Automation
    
    
    1,705,341
    
    
    
    2,618,486
    
    
    
    2,925,384Intercompany sales  Energy Technology
    
    
    (24,992
    )
    
    
    (36,940
    )
    
    
    (37,343
    )Intercompany sales  Building Control
and Automation
    
    
    (1,344
    )
    
    
    (13,810
    )
    
    
    (443,524
    )Total
    
    
    2,412,635
    
    
    
    4,631,833
    
    
    
    5,534,522Operating Loss:Energy Technology
    
    
    (2,386,678
    )
    
    
    (1,975,441
    )
    
    
    (3,222,689
    )Building Control and Automation (1)
    
    
    (225,239
    )
    
    
    (550,595
    )
    
    
    (840,195
    )Corporate
    
    
    (1,920,755
    )
    
    
    (1,573,896
    )
    
    
    (1,893,531
    )Total
    
    
    (4,532,672
    )
    
    
    (4,099,932
    )
    
    
    (5,956,415
    )Interest Expense, net
    
    
    (626,690
    )
    
    
    (355,359
    )
    
    
    (33,615
    )Loss from continuing operations
    
    
    (5,159,362
    )
    
    
    (4,455,291
    )
    
    
    (5,990,030
    )Depreciation and Amortization:Energy Technology
    
    
    50,257
    
    
    
    47,425
    
    
    
    76,367Building Control and Automation
    
    
    8,621
    
    
    
    10,103
    
    
    
    7,284Power Management
    
    
    
    
    
    
    53,104
    
    
    
    148,400Total
    
    
    58,878
    
    
    
    110,632
    
    
    
    232,051Capital Additions:Energy Technology
    
    
    149,603
    
    
    
    19,474
    
    
    
    8,829Building Control and Automation
    
    
    
    
    
    
    12,830
    
    
    
    6,316Power Management
    
    
    
    
    
    
    
    
    
    
    2,342Total
    
    
    149,603
    
    
    
    32,304
    
    
    
    17,487Total Assets:Energy Technology
    
    
    5,167,814
    
    
    
    5,824,080
    
    
    
    4,999,300Building Control and Automation
    
    
    1,311,506
    
    
    
    1,529,547
    
    
    
    1,028,839Power Management
    
    
    
    
    
    
    
    
    
    
    2,880,412Total
    
    $
    6,479,320
    
    
    $
    7,353,627
    
    
    $
    8,908,551
   (1)
    
    2002 operating loss includes a $108,000 impairment loss F-34




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##### 



Electric City Corp.
Notes to Consolidated Financial Statements Note 20  Selected Quarterly Financial Data (unaudited) The following represents the Companys unaudited quarterly results for fiscal 2004 and fiscal
2003. These quarterly results were prepared in accordance with U.S. generally accepted accounting
principles and reflect all adjustments (consisting solely of normal recurring adjustments) which,
in the opinion of management, are necessary for a fair statement of the results. Fiscal 2004 Quarters EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31
    
    
    TotalRevenue
    
    $
    816,242
    
    
    $
    555,537
    
    
    $
    571,780
    
    
    $
    469,076
    
    
    $
    2,412,635Gross profit (loss)
    
    
    30,233
    
    
    
    (41,545
    )
    
    
    (53,312
    )
    
    
    175,155
    
    
    
    110,531Operating loss
    
    
    (997,406
    )
    
    
    (1,016,015
    )
    
    
    (1,220,143
    )
    
    
    (1,299,108
    )
    
    
    (4,532,672
    )Net loss
    
    
    (1,357,728
    )
    
    
    (1,145,148
    )
    
    
    (1,297,439
    )
    
    
    (1,359,047
    )
    
    
    (5,159,362
    )Preferred dividends
    
    
    (3,164,021
    )
    
    
    (622,884
    )
    
    
    (445,634
    )
    
    
    (406,720
    )
    
    
    (4,639,259
    )Net loss available to common shareholders
    
    
    (4,521,749
    )
    
    
    (1,768,032
    )
    
    
    (1,743,073
    )
    
    
    (1,765,767
    )
    
    
    (9,798,621
    )Basic and Diluted Loss Per Common Share
    
    
    (0.13
    )
    
    
    (0.04
    )
    
    
    (0.04
    )
    
    
    (0.04
    )
    
    
    (0.25
    )
 Fiscal 2003 Quarters EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31
    
    
    TotalRevenue
    
    $
    1,150,752
    
    
    
    1,668,721
    
    
    
    857,021
    
    
    
    955,339
    
    
    
    4,631,833Gross profit (loss)
    
    
    34,248
    
    
    
    168,781
    
    
    
    (11,752
    )
    
    
    (1,131
    )
    
    
    190,146Loss from continuing operations
    
    
    (999,518
    )
    
    
    (945,248
    )

    
    
    (1,075,954
    )
    
    
    (1,434,571
    )
    
    
    (4,455,291
    )Loss from discontinued operations
    
    
    (244,811
    )
    
    
    (821,839
    )
    
    
    
    
    
    
    39,999
    
    
    
    (1,026,651
    )Net loss
    
    
    (1,244,329
    )
    
    
    (1,767,087
    )
    
    
    (1,075,954
    )
    
    
    (1,394,572
    )
    
    
    (5,481,942
    )Preferred dividends
    
    
    (833,992
    )
    
    
    (999,252
    )
    
    
    (1,379,889
    )
    
    
    (1,604,784
    )
    
    
    (4,817,917
    )Net loss available to common shareholders
    
    
    (2,078,321
    )
    
    
    (2,766,339
    )
    
    
    (2,455,843
    )
    
    
    (2,999,356
    )
    
    
    (10,299,859
    )Basic and diluted loss per common share from
continuing operations
    
    
    (0.05
    )
    
    
    (0.06
    )
    
    
    (0.07
    )
    
    
    (0.09
    )
    
    
    (0.27
    )Discontinued operations
    
    
    (0.01
    )
    
    
    (0.03
    )
    
    
    
    
    
    
    
    
    
    
    (0.03
    )Basic and Diluted Loss Per Common Share
    
    
    (0.06
    )
    
    
    (0.08
    )
    
    
    (0.07
    )
    
    
    (0.09
    )
    
    
    (0.30
    )
 F-35




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##### 



ELECTRIC CITY CORP. 
  Additions/
    
    
    Deductions(recoveries)Balance at
    
    
    charged tobeginning of
    
    
    costs and
    
    
    Amounts
    
    
    Other
    
    
    Balance at endperiod
    
    
    expenses
    
    
    written-off
    
    
    deductions
    
    
    of periodAllowance for doubtful
accounts:Year ended December 31, 2002
    
    $
    256,000
    
    
    $
    336,000
    
    
    $
    (182,000
    )
    
    $
    
    
    
    $
    410,000Year ended December 31, 2003
    
    
    410,000
    
    
    
    (22,000
    )
    
    
    (2,000
    )
    
    
    (60,000
    )
    
    
    326,000Year ended December 31, 2004
    
    $
    326,000
    
    
    $
    6,000
    
    
    $
    (133,000
    )
    
    $
    
    
    
    $
    199,000
 Other deductions of $60,000 in 2003 resulted from the sale of Switchboard Apparatus, Inc. F-36