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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, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number 001-16265
 
 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:
 (Title of class)
 o þ
 o þ
 þ o
 o
  o o þ
 o þ
   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, 2005 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 1A.Risk Factors
    
    
    9Item 1B.Unresolved Staff Comments
    
    
    17Item 2.Properties
    
    
    17Item 3.Legal Proceedings
    
    
    18Item 4.Submission of Matters to a Vote of Security Holders
    
    
    18PART II
    
    
    19Item 5.Market for Common Equity and Related Stockholder Matters
    
    
    19Item 6.Selected Financial Data
    
    
    21Item 7.Managements Discussion and Analysis or Plan of Operation
    
    
    22Item 7A.Quantitative and Qualitative Disclosures
    
    
    38Item 8.Financial Statements and Supplemental Data
    
    
    38Item 9Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    38Item 9A.Controls and Procedures
    
    
    38Item 9B.Other Information
    
    
    39PART III
    
    
    40Item 10.Directors and Executive Officers of the Registrant
    
    
    40Item 11.Executive Compensation
    
    
    40Item 12.Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    40Item 13.Certain Relationships and Related Transactions
    
    
    40Item 14.Principal Accountant Fees and Services
    
    
    40PART IV
    
    
    41Item 15.Exhibits and Financial Statement Schedules
    
    
    41SIGNATURES
    
    
    46Certificate of Amendment to Certificate of IncorporationEmployment Agreement for Leonard PisanoCode of Business Conduct and EthicsList of SubsidiariesConsent of BDO Seidman LLPSection 302 CertificationSection 302 CertificationSection 906 CertificationSection 906 Certification




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PART I
 
 Item 1. Description of Business
   Overview/History
      1




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Products And Services
  2




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EnergySaver
   GlobalCommander
  Virtual Negawatt Power Plan
  3




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eMAC & uMAC
      4




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Building Control and Automation
  Marketing, Sales and Distribution
     5




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Customers
   Competition
  
    
    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.
  6




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Manufacturing
     7




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Compliance With Environmental Laws
  Research and Development
  Intellectual Property
    Employees
  8




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Item 1A. Risk Factors
  Risks Related to Our Business
 We have a limited operating history upon which to evaluate our potential for future success.
  We have incurred significant operating losses since inception and may not achieve or sustain
profitability in the future.
   9




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Our independent registered public accountants have issued a going concern opinion
raising doubt about our financial viability.
  Failure to replace significant customer could materially and adversely affect our results of
operations and financial condition.
  A decrease in electric retail rates could lessen demand for our products.
  We have a license to use certain patents and our ability to sell our products may be
adversely impacted if the license expires or is terminated.
  10




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If we are not able to protect our intellectual property rights against infringement, or if
others obtain intellectual property rights relating to energy management technology, we
could lose our competitive advantage in the energy management market.
   David Asplund, our new Chief Executive Officer, has limited experience operating a Company
such as ours and no direct industry experience.
  If we are unable to achieve or manage our growth, it will adversely affect our business, the
quality of our products and our ability to attract and retain key personnel.
  
    
    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.
  11




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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.
   
    
    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 any required approvals of the holders of the Series E
Convertible Preferred Stock, or our lender, or if required, the holders of our
Common Stock.
  Our growth may be impaired and our current business may suffer if we do not successfully
address risks associated with acquisitions.
  
    
    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 products do not achieve or sustain market acceptance, our ability to compete will be
adversely affected.
  12




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Failure to meet customers expectations or deliver expected technical performance could
result in losses and negative publicity.
  
    
    delayed or lost revenues due to adverse customer reaction;
    
    requirements to provide additional products, replacement parts 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 whether we have any
responsibility for such failure.
 If sufficient additional funding is not available to us, the commercialization of our
products and our ability to grow is likely to be hindered.
  Raising additional capital or consummation of additional acquisitions through the issuance
of equity or equity-linked securities could dilute your ownership interest in us.
   13




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Failure to effectively market our energy management products could impair our ability to
sell significant quantities of these products.
   If we do not successfully compete with others in the very competitive energy management
market, we may not achieve profitability.
  Product liability claims could result in losses and could divert our managements time and
resources.
  14




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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.
  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 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.
  15




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
    
    a liquidation preference of $200 per share under our Series E Preferred (the
only series of preferred which is currently outstanding);
    
    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 will be senior to or equal to the rights of the Series E Preferred (other
than to pay dividends on the Series E 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 (if
more than 19,999 shares of Series E Preferred are outstanding) 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 related warrants in the event we
issue common equity at a price which is less than the conversion price or exercise
price of their securities.
  Due to the concentration of holdings of our stock, four investors may be able to control
matters requiring common stockholder approval or could cause our stock price to decline
through future sales because they beneficially own a large percentage of our Common Stock.
   16




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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.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
     17




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Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
   18




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PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
   Common StockHigh
    
    
    LowFiscal Year Ended December 31, 2004:Fiscal Quarter Ended March 31, 2004
    
    $
    2.47
    
    
    $
    1.70Fiscal Quarter Ended June 30, 2004
    
    $
    2.08
    
    
    $
    1.55Fiscal Quarter Ended September 30, 2004
    
    $
    1.93
    
    
    $
    1.11Fiscal Quarter Ended December 31, 2004
    
    $
    1.42
    
    
    $
    1.05Fiscal Year Ended December 31, 2005:Fiscal Quarter Ended March 31, 2005
    
    $
    1.30
    
    
    $
    0.86Fiscal Quarter Ended June 30, 2005
    
    $
    1.07
    
    
    $
    0.81Fiscal Quarter Ended September 30, 2005
    
    $
    1.24
    
    
    $
    0.67Fiscal Quarter Ended December 31, 2005
    
    $
    0.91
    
    
    $
    0.50
 Holders
  Dividends
  
    
    On December 14, 2005, the Board of Directors authorized payment of dividends
payable on our Series E Convertible Preferred Stock for the calendar quarter ending
December 31, 2005 to shareholders of record of our Series E Convertible Preferred
Stock as of December 31, 2005. The dividends were paid with 3,491 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.
  19




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Recent Sales of Unregistered Securities
    20




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Item 6. Selected Financial Data
  ELECTRIC CITY CORP. AND SUBSIDIARIES
Selected Financial Data
 Year ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002 (1)
    
    
    2001 (2)Statement of Operations Data:Revenue
    
    $
    4,854,772
    
    
    $
    2,412,635
    
    
    $
    4,631,833
    
    
    $
    5,534,522
    
    
    $
    2,167,660Cost of sales
    
    
    4,489,227
    
    
    
    2,302,104
    
    
    
    4,441,687
    
    
    
    5,339,352
    
    
    
    1,943,895Selling, general and administrative
    
    
    6,450,836
    
    
    
    4,643,203
    
    
    
    4,290,078
    
    
    
    6,043,585
    
    
    
    8,170,351Impairment loss
    
    
    242,830
    
    
    
    
    
    
    
    
    
    
    
    108,000
    
    
    
    Operating loss
    
    
    (6,328,121
    )
    
    
    (4,532,672
    )
    
    
    (4,099,932
    )
    
    
    (5,956,415
    )
    
    
    (7,946,586
    )Other income (expense)
    
    
    (544,617
    )
    
    
    (626,690
    )
    
    
    (355,359
    )
    
    
    (33,615
    )
    
    
    (3,401,494
    )Loss from continuing operations
    
    
    (6,872,738
    )
    
    
    (5,159,362
    )
    
    
    (4,455,291
    )
    
    
    (5,990,030
    )
    
    
    (11,348,080
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1,026,651
    )
    
    
    (1,017,897
    )
    
    
    (1,622,997
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,103,872
    )
    
    
    Net loss
    
    
    (6,872,738
    )
    
    
    (5,159,362
    )
    
    
    (5,481,942
    )
    
    
    (11,111,799
    )
    
    
    (12,971,077
    )Basic and diluted loss per common share
from continuing operations
    
    $
    (0.18
    )
    
    $
    (0.25
    )
    
    $
    (0.27
    )
    
    $
    (0.33
    )
    
    $
    (1.05
    )Basic and diluted loss per common share
    
    
    (0.18
    )
    
    
    (0.25
    )
    
    
    (0.30
    )
    
    
    (0.49
    )
    
    
    (1.10
    )Weighted average common shares outstanding
    
    
    47,859,964
    
    
    
    39,901,387
    
    
    
    33,761,489
    
    
    
    31,213,165
    
    
    
    30,048,043Balance Sheet Data:Cash and cash equivalents
    
    $
    4,229,150
    
    
    $
    1,789,808
    
    
    $
    2,467,023
    
    
    $
    1,555,904
    
    
    $
    5,486,073Working capital
    
    
    646,483
    
    
    
    263,304
    
    
    
    2,050,157
    
    
    
    3,546,270
    
    
    
    7,470,046Total assets
    
    
    17,098,974
    
    
    
    6,479,320
    
    
    
    7,353,627
    
    
    
    8,908,551
    
    
    
    16,435,863Long-term debt, including current portion
    
    
    4,980,032
    
    
    
    1,230,353
    
    
    
    1,348,645
    
    
    
    1,089,791
    
    
    
    1,434,018Total stockholders equity
    
    
    4,377,637
    
    
    
    1,780,271
    
    
    
    3,040,932
    
    
    
    4,284,291
    
    
    
    12,456,833
 
 (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. 21




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Item 7. Managements Discussion and Analysis or Plan of Operation
   Critical Accounting Policies and Estimates
  Use of Estimates
  Revenue Recognition
  22




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Profit Recognition on Long-Term Contracts
  Allowance for Doubtful Accounts
  Impairment of Long-Lived Assets.
  23




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Goodwill
  Material Trends and Uncertainties
   Changes in our senior management and on our Board of Directors.
 24




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The acquisition of Maximum Performance Group.
 Customer concentrations.
 Results of Operations
    25




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
    
    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 and accounting 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.
  Twelve-Month Period Ended December 31, 2005 Compared With the Twelve-Month Period Ended December
31, 2004
 Revenue.
 26




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Gross Profit.
 SG&A Expenses.
 Impairment Loss.
 Other Non-Operating Income (Expense).
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Preferred Stock Dividends.
 Year ended December 31,
    
    2005
    
    
    2004Accrual of dividend on Series A Convertible
Preferred
    
    $
    
    
    
    $
    540,705Accrual of Series C Preferred dividend
    
    
    
    
    
    
    53,206Accrual of Series D Preferred dividend
    
    
    
    
    
    
    35,932Accrual of Series E Preferred dividend
    
    
    1,366,900
    
    
    
    1,006,937Deemed dividend associated with beneficial
conversion price on shares issuable in satisfaction preferred dividends
    
    
    
    
    
    
    1,127,021Deemed dividend associated with the redemption
and exchange of outstanding preferred stock
    
    
    
    
    
    
    1,860,458Deemed dividend associated with change in the
expiration date of warrants to purchase shares
of preferred stock
    
    
    
    
    
    
    15,000Deemed dividend associated with change in the
exercise price of warrants to purchase shares
of common stock
    
    
    484,455
    
    
    
    Total
    
    $
    1,851,345
    
    
    $
    4,639,259
   28




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1 2
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Twelve-Month Period Ended December 31, 2004 Compared With the Twelve-Month Period Ended December
31, 2003
 Revenue.
   Gross Profit.
 SG&A Expenses.
 Other Non-Operating Income (Expense).
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Discontinued Operations.
 Preferred Stock Dividends.
 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
  31




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Liquidity and Capital Resources
    32




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Year ended December 31
    
    2005
    
    
    2004
    
    
    2003Net cash used in operating activities
    
    $
    (6,956,642
    )
    
    $
    (4,039,058
    )
    
    $
    (2,830,117
    )Net cash provided by (used in) investing activities
    
    
    (2,181,846
    )
    
    
    (149,603
    )
    
    
    896,728Net cash provided by financing activities
    
    
    11,577,830
    
    
    
    3,511,446
    
    
    
    2,844,508Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    2,439,342
    
    
    
    (677,215
    )
    
    
    911,119Cash and Cash Equivalents, at beginning of period
    
    
    1,789,808
    
    
    
    2,467,023
    
    
    
    1,555,904Cash and Cash Equivalents, at end of period
    
    $
    4,229,150
    
    
    $
    1,789,808
    
    
    $
    2,467,023
 2005 Compared to 2004
  Operating Activities
  Investing Activities
  Financing Activities
  33




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2004 Compared to 2003
  Operating Activities
  Investing Activities
  Financing Activities
   34




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LIQUIDITY
     35




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
    
    Focus on increasing the commercial sales of our products. Key to this strategy
is the integration of the Electric City and MPG sales forces with the intent that the
integrated sales force will sell all of our products to current, prior and future
customers. We believe that this change will increase our base of commercial opportunities
and allow us to offer a broader array of energy solutions to our customers thereby
increasing the value of each customer relationship. This reorganization of our sales
staffs will involve the cross training of all of our sales people in the sale of the
EnergySaver, eMAC and other energy conservation products and services. We also plan to
hire additional sales people in an attempt to expand our commercial sales efforts.
    
    Expand and improve the product line through internal development or acquisition.
An expanded product line would allow us to offer additional solutions to our customers,
thereby increasing the value of each customer relationship.
    
    Aggressively manage our costs in order to conserve cash. We made some progress
in reducing our costs during the last several years, but we plan to focus on eliminating
redundant operations and leveraging the synergies available as a result of the acquisition
of MPG to further reduce our costs.
    
    Sell our Building Automation Controls business. The sale of this business will
allow us to focus exclusively on the sale of our Energy Technology products and services
and will reduce the cash consumed in future periods.
    
    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.
   36




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Contractual Obligations
  Payments due by periodLess than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsLong-term debt (1)
    
    $
    5,873,702
    
    
    $
    654,695
    
    
    $
    1,578,657
    
    
    $
    3,640,350
    
    
    $
    Capital leases
    
    
    4,739
    
    
    
    4,386
    
    
    
    353
    
    
    
    
    
    
    
    Operating leases
    
    
    371,158
    
    
    
    113,553
    
    
    
    134,506
    
    
    
    123,099
    
    
    
    Employment agreements
    
    
    525,000
    
    
    
    225,000
    
    
    
    300,000
    
    
    
    
    
    
    
    Total
    
    $
    6,774,599
    
    
    $
    997,634
    
    
    $
    2,013,516
    
    
    $
    3,763,449
    
    
    $
    
 
 (1)
    
    Excludes floating rate interest on the long-term debt. Interest payments required during
2006, based on current interest rates, are projected to be $515,000. Recent Accounting Pronouncements
   37




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Item 7A. Quantitative and Qualitative Disclosures
 1 2
 
 Item 8. Financial Statements and Supplemental Data
  F-1
    
    Report of Independent Registered Public Accounting FirmF-2  F-3
    
    Consolidated Balance Sheets as of December 31, 2005 and December 31, 2004F-4
    
    Consolidated Statements of Operations for the years ended December 31, 2005,
2004 and 2003F-5
    
    Statements of Stockholders Equity for the years ended December 31, 2005, 2004
and 2003F-6   F-7
    
    Statements of Consolidated Cash Flows for the years ended December 31,
2005, 2004 and 2003F-8  F-40
    
    Notes to Consolidated Financial StatementsF-41
    
    Schedule II, Valuation and Qualifying Accounts
 
 Item 9 Change in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 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.
 (b)
    
    Changes in internal controls.During the fourth quarter of 2005 there were no change 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.
 38




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##### Table of Contents



Item 9B. Other Information
  39




---



##### Table of Contents



PART III
  
 Item 10. Directors and Executive Officers of the Registrant
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
   
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  40




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)(1)
    
    Financial StatementsThe information required by this item is included in Item 8 of Part II of this report.(a)(2)
    
    Financial Statement ScheduleThe information required by this item is included in Item 8 of Part II of this report.(a)(3)
    
    ExhibitsSee Item 15(b) below.(b)
    
    Exhibits
 ExhibitNumber
    
    Description of Exhibit2.01 (15)
    
    Agreement and Plan of Merger, dated as of April 29, 2005, by and among Electric City
Corp., MPG Acquisition Corporation, and Maximum Performance Group, Inc.3.01 (1)
    
    Certificate of Incorporation3.02 (1)
    
    By-laws3.03 (4)
    
    Certificate of Amendment to Certificate of Incorporation dated August 30, 2001.3.04 (4)
    
    Bylaws, as amended3.05 (5)
    
    Certificate of Amendment to Certificate of Incorporation, dated July 31, 2002.3.06 (10)
    
    Charter of Audit Committee, as restated.3.07 (10)
    
    Charter of Governance and Nominating Committee3.08 *
    
    Certificate of Amendment to Certificate of Incorporation, dated May 4, 2005.4.01(2)
    
    Specimen Stock Certificate4.02 (3)
    
    2001 Stock Incentive Plan4.03 (9)
    
    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.4.04 (9)
    
    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, LP
 41




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.05 (9)
    
    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, LP4.06 (9)
    
    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, LP4.07 (11)
    
    Amended and Restated Directors Stock Option Plan4.08 (14)
    
    Form of Common Stock Warrant Used to Pay Certain Vendors4.09 (14)
    
    Form of Common Stock Warrant (with Cashless Exercise Provision) Used to Pay Certain
Vendors4.10 (15)
    
    Form of Common Stock Warrant, With Vesting Period issued April 28, 20054.11 (15)
    
    Form of Common Stock Warrant, Without Vesting Period issued April 28, 20054.12 (15)
    
    Stock Trading Agreement dated as of April 29, 20054.13 (16)
    
    Warrant Certificate dated November 22, 2005 to Purchase 2,000,000 shares of common
stock Par Value $0.0001 Per Share, of Electric City Corp. issued to Laurus Master
Fund, Ltd.4.14 (16)
    
    Registration Rights Agreement dated November 22, 2005 by and between Electric City
Corp. and Laurus Master Fund, Ltd.10.01(1)
    
    Sales, Distribution and Patent License Agreement, dated January 1, 1998, by and
between Giorgio Reverberi and Joseph C. Marino10.02(1)
    
    Sublicense Agreement, dated June 24, 1998, by and between the Electric City Corp. and
Joseph C. Marino10.03 (6)
    
    Securities Purchase Agreement dated September 11, 2003 between Electric City Corp. and
Laurus Master Fund, Ltd.10.04 (6)
    
    Convertible Term Note dated September 11, 2003, made by Electric City Corp. in favor
of Laurus Master Fund, Ltd.10.05 (6)
    
    Security Agreement dated September 11, 2003 by and between Electric City Corp. and
Laurus Master Fund, Ltd.10.06 (6)
    
    Common Stock Purchase Warrant dated September 11, 2003 issued by Electric City Corp.
in favor of Laurus Master Fund, Ltd.10.07 (6)
    
    Form of Secured Convertible Revolving Note dated September 11, 2003, made by Electric
City Corp. in favor of Laurus Master Fund, Ltd.10.08 (6)
    
    Security Agreement dated September 11, 2003 by and between Electric City Corp. and
Laurus Master Fund, Ltd.10.09 (6)
    
    Common Stock Purchase Warrant dated September 11, 2003 issued by Electric City Corp.
in favor of Laurus Master Fund, Ltd.10.10 (9)
    
    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 J
 42




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.11 (9)
    
    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, LP10.12 (12)
    
    Amendment to Convertible Term Note dated August 31, 2004 between Electric City Corp.
and Laurus Master Fund, Ltd.10.13 (12)
    
    Amendment to Security Agreement dated August 31, 2004 between Electric City Corp. and
Laurus Master Fund, Ltd.10.14 (13)
    
    Amendment to Security Agreement and registration Rights Agreement dated February 28,
2005 between Electric City Corp. and Laurus Master Fund, Ltd.10.15 (13)
    
    Form of Secured Convertible Revolving Note dated February 28, 2005, made by Electric
City Corp. in favor of Laurus Master Fund, Ltd.10.16 (13)
    
    Form of Secured Convertible Minimum Borrowing Note dated February 28, 2005, made by
Electric City Corp. in favor of Laurus Master Fund, Ltd.10.17 (13)
    
    Security Agreement dated February 28, 2005 between Great Lakes Controlled Energy
Corporation and Laurus Master Fund, Ltd.10.18 (13)
    
    Subsidiary Guarantee dated February 28, 2005 between Great Lakes Controlled Energy
Corporation and Laurus Master Fund, Ltd.10.19 (13)
    
    Stock Pledge Agreement dated February 28, 2005 between Electric City Corp. and Laurus
Master Fund, Ltd.10.20 (15)
    
    Securities Purchase Agreement dated April 28, 200510.21 (16)
    
    Securities Purchase Agreement dated November 22, 2005, between Electric City Corp. and
Laurus Master Fund, Ltd.10.22 (16)
    
    Convertible Term Note dated November 22, 2005, made by Electric City Corp. in favor of
Laurus Master Fund, Ltd.10.23 (16)
    
    Master Security Agreement dated November 22, 2005, by and between Electric City Corp.
and Laurus Master Fund, Ltd.10.24 (16)
    
    Subsidiary Guarantee dated November 22, 2005, between Great Lakes Controlled Energy
Corporation, Maximum Performance Group, Inc., ELC VNPP Sub I, LLC and ELC VNPP Sub II,
LLC and Laurus Master Fund, Ltd.10.25 (16)
    
    Limited Liability Company Agreement of ELC VNPP Sub I, LLC10.26 (16)
    
    Limited Liability Company Agreement of ELC VNPP Sub II, LLC10.27 (16)
    
    Bill of Sale and Debt Guaranty Agreement dated November 22, 2005, between Electric
City Corp. and ELC VNPP Sub I, LLC10.28 (16)
    
    Stock Pledge Agreement dated November 22, 2005 between Electric City Corp. and Laurus
Master Fund, Ltd.10.29 (17)
    
    Third Amended and Restated Mortgage, Assignment of Rents and Security Agreement dated
December 13, 2005 by Electric City Corp. and American Chartered Bank.10.30 (17)
    
    Amended and Restated Mortgage Note made and entered into on the 13th day of December
2005, by and among American Chartered Bank and Electric City Corp., and Great Lakes
Controlled Energy Corporation.
 43




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.31 *
    
    Employment Agreement, dated as of May 3, 2005, between the Company and Leonard Pisano10.32 (18)
    
    Consulting agreement with John Mitola dated January 21, 200610.33(19)
    
    Employment Agreement, dated as of January 23, 2006, between the Company and David
Asplund14.1(8)
    
    Code of Ethics For Chief Executive Officer And Chief Financial Officer of Electric
City Corp.14.2 *
    
    Code of Business Conduct And Ethics (All Officers, Directors and Employees)21 *
    
    List of subsidiaries23.01*
    
    Consent of BDO Seidman LLP with respect to the consolidated financial statements of
Electric City Corp.24
    
    Power of Attorney (included on signature page hereto)
 
 *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-A
filed with the SEC on December 8, 2000 (No. 0-2791).(3)
    
    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)(4)
    
    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).(5)
    
    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).(6)
    
    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).(7)
    
    Incorporated herein by reference to Electric City Corps registration statement on
Form SB-2 filed October 20, 2003 (No. 333-109835).(8)
    
    Incorporated herein by reference to Electric City Corps Annual Report on Form10-KSB
for the year ended December 31, 2003, filed March 29, 2004 (No. 0-2791).(9)
    
    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).(10)
    
    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)(11)
    
    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).(12)
    
    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). 44




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##### Table of Contents



(13)
    
    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).(14)
    
    Incorporated herein by reference to Electric City Corps Annual Report on Form10-K
for the year ended December 31, 2004, filed March 31, 2005, as amended April 14, 2005 (No.
0-2791).(15)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated April 28, 2005 filed with the SEC on May 4, 2005 (No. 0-2791).(16)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated November 22, 2005 filed with the SEC on November 30, 2005, as amended on February 9,
2006 (No. 0-2791).(17)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated December 13, 2005 filed with the SEC on December 15, 2005 (No. 0-2791).(18)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated January 22, 2006 filed with the SEC on January 26, 2006 (No. 0-2791).(19)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated January 22, 2006 filed with the SEC on February 22, 2006 (No. 0-2791). 45




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##### Table of Contents



SIGNATURES
  ELECTRIC CITY CORP.By:
    /s/ David R. AsplundDavid R. AsplundChief Executive Officer   Signature
    
    Date/s/ David R. Asplund
    
    March 21, 2006David R. AsplundChief Executive Officer & Director (principal executive
officer)/s/ Jeffrey R. Mistarz
    
    March 21, 2006Jeffrey R. MistarzChief Financial Officer (principal financial and accounting
officer)
 46




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##### Table of Contents



POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ David Asplund

David Asplund
    
    Chief Executive Officer
    
    March 2, 2006/s/ Jeffrey Mistarz

Jeffrey Mistarz
    
    Chief Financial Officer & Treasurer
    
    March 2, 2006/s/ Richard Kiphart

Richard Kiphart
    
    Chairman of the Board
    
    March 7, 2006/s/ John Bukovski

John Bukovski
    
    Director
    
    March 2, 2006/s/ Daniel Parke

Daniel Parke
    
    Director
    
    March 7, 2006/s/ Gerald Pientka

Gerald Pientka
    
    Director
    
    March 16, 2006/s/ Michael Stelter

Michael Stelter
    
    Director
    
    March 2, 2006/s/ David Valentine

David Valentine
    
    Director
    
    March 3, 2006
 47




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
       
 F-1




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##### Table of Contents



Electric City Corp.
Consolidated Balance Sheets
 December 31,
    
    2005
    
    
    2004AssetsCurrent AssetsCash and cash equivalents
    
    $
    4,229,150
    
    
    $
    1,789,808Accounts receivable, less allowance for doubtful accounts of
$325,000 and $199,000 at December 31, 2005 and 2004,
respectively
    
    
    1,747,019
    
    
    
    1,067,104Inventories (Note 6)
    
    
    1,457,789
    
    
    
    1,029,645Advances to suppliers
    
    
    324,677
    
    
    
    Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    28,462
    
    
    
    Prepaid expenses and other
    
    
    207,480
    
    
    
    90,727Total Current Assets
    
    
    7,994,577
    
    
    
    3,977,284Net Property and Equipment(Note 7)
    
    
    2,514,196
    
    
    
    1,985,561Deferred
Financing Costs,net of amortization of $680,100 and
$586,326 at December 31, 2005 and 2004, respectively (Note 11)
    
    
    299,964
    
    
    
    99,902Intangibles,net of amortization of $471,765 (Note 4)
    
    
    1,960,835
    
    
    
    Cost in Excess of Assets Acquired
    
    
    4,329,402
    
    
    
    416,573$
    17,098,974
    
    
    $
    6,479,320
 F-2




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##### Table of Contents



Electric City Corp.
Consolidated Balance Sheets
 December 31,
    
    2005
    
    
    2004Liabilities and Stockholders EquityCurrent LiabilitiesLine of credit (Note 10)
    
    $
    2,000,000
    
    
    $
    Notes payable (Note 12)
    
    
    150,000
    
    
    
    Current maturities of long-term debt (Notes 11 and 12)
    
    
    651,313
    
    
    
    424,451Accounts payable
    
    
    913,369
    
    
    
    1,284,421Accrued expenses (Note 8)
    
    
    1,228,765
    
    
    
    567,689Deferred revenue
    
    
    984,728
    
    
    
    437,419Customer deposits
    
    
    1,419,919
    
    
    
    1,000,000Total Current Liabilities
    
    
    7,348,094
    
    
    
    3,713,980Deferred Revenue
    
    
    1,044,524
    
    
    
    179,167Long-Term Debt,less current maturities net of unamortized
discount of $898,409 and $50,048 as of December 31, 2005
and 2004, respectively (Notes 11 and 12)
    
    
    4,328,719
    
    
    
    805,902Total Liabilities
    
    
    12,721,337
    
    
    
    4,699,049Commitments(Note 14 and 16)Stockholders Equity(Notes 17, 18 and 19)Preferred stock, $.01 par value; 5,000,000 shares authorized,
Series E 236,254 and 224,752 issued and outstanding as of
December 31, 2005 and December 31, 2004, respectively
(liquidation value of $47,250,800 and $44,950,400 at
December 31, 2005 and December 31, 2004, respectively)
    
    
    2,363
    
    
    
    2,248Common stock, $.0001 par value; 200,000,000 shares authorized,
50,797,024 and 41,612,610 issued as of December 31, 2005
and December 31, 2004, respectively
    
    
    5,081
    
    
    
    4,163Additional paid-in capital
    
    
    64,768,814
    
    
    
    55,299,743Accumulated deficit
    
    
    (60,398,621
    )
    
    
    (53,525,883
    )Total Stockholders Equity
    
    
    4,377,637
    
    
    
    1,780,271$
    17,098,974
    
    
    $
    6,479,320
 See accompanying notes to consolidated financial statements.
 F-3




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##### Table of Contents



Electric City Corp.
Consolidated Statements of Operations
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003Revenue
    
    $
    4,854,772
    
    
    $
    2,412,635
    
    
    $
    4,631,833ExpensesCost of sales
    
    
    4,489,227
    
    
    
    2,302,104
    
    
    
    4,441,687Selling, general and administrative
    
    
    6,450,836
    
    
    
    4,643,203
    
    
    
    4,290,078Impairment loss
    
    
    242,830
    
    
    
    
    
    
    
    11,182,893
    
    
    
    6,945,307
    
    
    
    8,731,765Operating loss
    
    
    (6,328,121
    )
    
    
    (4,532,672
    )
    
    
    (4,099,932
    )Other Income (Expense)Interest income
    
    
    58,737
    
    
    
    22,505
    
    
    
    10,329Interest expense
    
    
    (603,354
    )
    
    
    (649,195
    )
    
    
    (365,688
    )Total other income (expense)
    
    
    (544,617
    )
    
    
    (626,690
    )
    
    
    (355,359
    )Loss from continuing operations before discontinued operations
    
    
    (6,872,738
    )
    
    
    (5,159,362
    )
    
    
    (4,455,291
    )Discontinued Operations:Loss from operation of discontinued business
    
    
    
    
    
    
    
    
    
    
    (262,503
    )Loss on disposal of switchgear business
    
    
    
    
    
    
    
    
    
    
    (764,148
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1,026,651
    )Net Loss
    
    
    (6,872,738
    )
    
    
    (5,159,362
    )
    
    
    (5,481,942
    )Preferred Stock Dividends(Note 18)
    
    
    (1,851,345
    )
    
    
    (4,639,259
    )
    
    
    (4,817,917
    )Net Loss Available to Common Shareholders
    
    $
    (8,724,083
    )
    
    $
    (9,798,621
    )
    
    $
    (10,299,859
    )Basic and diluted loss per common share from
continuing operations
    
    $
    (0.18
    )
    
    $
    (0.25
    )
    
    $
    (0.27
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.03
    )Basic and Diluted Loss Per Common Share
    
    $
    (0.18
    )
    
    $
    (0.25
    )
    
    $
    (0.30
    )Weighted Average Common Shares Outstanding
    
    
    47,859,964
    
    
    
    39,901,387
    
    
    
    33,761,489
 See accompanying notes to consolidated financial statements.
 F-4




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##### Table of Contents



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, 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
    )
    
    $
    
    
    
    $
    1,780,271Issuance of common stock (net of offering costs of $211,787)
    
    
    6,250,000
    
    
    
    625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,412,588
    
    
    
    
    
    
    
    
    
    
    
    5,413,213Conversion of preferred stock
    
    
    216,700
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,167
    )
    
    
    (22
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued for the acquisition of Maximum Performance
Group, Inc.
    
    
    2,492,229
    
    
    
    249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,691,358
    
    
    
    
    
    
    
    
    
    
    
    2,691,607Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,366,900
    )
    
    
    
    
    
    
    
    
    
    
    (1,366,900
    )Satisfaction of accrued dividends through the issuance of
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,669
    
    
    
    137
    
    
    
    1,366,763
    
    
    
    
    
    
    
    
    
    
    
    1,366,900Warrants issued in connection with convertible debt issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    920,000
    
    
    
    
    
    
    
    
    
    
    
    920,000Common stock issued for services received
    
    
    225,485
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,462
    
    
    
    
    
    
    
    
    
    
    
    125,484Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,800
    
    
    
    
    
    
    
    
    
    
    
    319,800Net loss for the year ended December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,872,738
    )
    
    
    
    
    
    
    (6,872,738
    )Balance,December 31, 2005
    
    
    50,797,024
    
    
    $
    5,081
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    236,254
    
    
    $
    2,363
    
    
    $
    64,768,814
    
    
    $
    (60,398,621
    )
    
    $
    
    
    
    $
    4,377,637
 See accompanying notes to
consolidated financial statements.
 F-5




---



##### Table of Contents



Electric City Corp.
Statement of Cash Flows
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003Cash Flows From Operating ActivitiesNet loss
    
    $
    (6,872,738
    )
    
    $
    (5,159,362
    )
    
    $
    (5,481,942
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of assets acquired and disposed of:Provision for (recovery on) bad debts
    
    
    96,872
    
    
    
    5,865
    
    
    
    (21,511
    )Depreciation and amortization
    
    
    601,869
    
    
    
    58,878
    
    
    
    110,632Amortization of deferred financing costs
    
    
    93,774
    
    
    
    382,710
    
    
    
    203,616Amortization of issuance discount
    
    
    71,639
    
    
    
    191,727
    
    
    
    102,006Issuance of shares and warrants in exchange for
services received
    
    
    319,800
    
    
    
    72,500
    
    
    
    393,550Accrued interest converted to common stock
    
    
    
    
    
    
    4,736
    
    
    
    654Loss on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    764,148Loss on disposal of fixed assets
    
    
    11,743
    
    
    
    
    
    
    
    Goodwill impairment
    
    
    242,830
    
    
    
    
    
    
    
    Changes in assets and liabilities, net of dispositionsAccounts receivable
    
    
    (484,685
    )
    
    
    377,842
    
    
    
    (67,222
    )Inventories
    
    
    (102,022
    )
    
    
    (334,628
    )
    
    
    713,689Advances to suppliers
    
    
    148,012
    
    
    
    
    
    
    
    Other current assets
    
    
    (81,604
    )
    
    
    (143,971
    )
    
    
    (87,660
    )Accounts payable
    
    
    (1,299,561
    )
    
    
    (14,401
    )
    
    
    74,346Accrued liabilities
    
    
    2,136
    
    
    
    26,101
    
    
    
    (328,898
    )Deferred revenue
    
    
    401,050
    
    
    
    4,112
    
    
    
    283,308Customer deposits
    
    
    (105,757
    )
    
    
    488,833
    
    
    
    511,167Net cash used in operating activities
    
    
    (6,956,642
    )
    
    
    (4,039,058
    )
    
    
    (2,830,117
    )Cash Flows From Investing ActivitiesAcquisition (including acquisition costs), net of cash acquired
    
    
    (1,632,972
    )
    
    
    
    
    
    
    -Sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    929,032Purchase of property and equipment
    
    
    (548,874
    )
    
    
    (149,603
    )
    
    
    (32,304
    )Net cash (used in) provided by investing activities
    
    
    (2,181,846
    )
    
    
    (149,603
    )
    
    
    896,728Cash Flows From Financing ActivitiesBorrowings (payments) on line of credit
    
    
    2,000,000
    
    
    
    
    
    
    
    (500,000
    )Proceeds from long-term debt
    
    
    5,000,000
    
    
    
    
    
    
    
    1,010,000Payments on long-term debt
    
    
    (541,547
    )
    
    
    (39,155
    )
    
    
    (427,514
    )Preferred stock redemption
    
    
    
    
    
    
    (7,000,006
    )
    
    
    -Proceeds from issuance of preferred stock
    
    
    
    
    
    
    11,000,000
    
    
    
    1,500,000Proceeds from issuance of common stock
    
    
    5,625,000
    
    
    
    
    
    
    
    1,669,914Costs related to stock issuances
    
    
    (211,787
    )
    
    
    (910,393
    )
    
    
    (297,462
    )Cash paid for deferred financing costs
    
    
    (293,836
    )
    
    
    
    
    
    
    (308,228
    )Proceeds from exercise of warrants
    
    
    
    
    
    
    461,000
    
    
    
    197,000Short-swing profit contribution
    
    
    
    
    
    
    
    
    
    
    798Net cash provided by financing activities
    
    
    11,577,830
    
    
    
    3,511,446
    
    
    
    2,844,508Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    2,439,342
    
    
    
    (677,215
    )
    
    
    911,119Cash and Cash Equivalents, at beginning of period
    
    
    1,789,808
    
    
    
    2,467,023
    
    
    
    1,555,904Cash and Cash Equivalents, at end of period
    
    $
    4,229,150
    
    
    $
    1,789,808
    
    
    $
    2,467,023
 F-6




---



##### Table of Contents



Electric City Corp.
Statement of Cash Flows
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003Supplemental Disclosures of Cash Flow InformationCash paid
during the period for interest  continuing
operations
    
    $
    214,622
    
    
    $
    83,000
    
    
    $
    44,000Cash paid
during the period for interest  discontinued
operations
    
    
    
    
    
    
    
    
    
    
    9,000Stock, warrants and options issued in
exchange for services received
    
    
    319,800
    
    
    
    72,500
    
    
    
    393,550Accrual satisfied through the issuance of
common stock
    
    
    
    
    
    
    4,736
    
    
    
    654Inventory 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 shares of Series A Preferred stock during
the year ended December 31, 2003
    
    
    
    
    
    
    540,705
    
    
    
    2,253,978Satisfaction 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 shares of Series C Preferred stock during the
year ended December 31, 2003
    
    
    
    
    
    
    53,206
    
    
    
    219,712Satisfaction 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
    
    
    
    77,689Satisfaction of accrued dividends on Series E Preferred
Stock through the issuance of 13,669 and 10,070 shares of
Series E Preferred stock during the years ended
December 31, 2005 and December 31, 2004, respectively
    
    
    1,366,900
    
    
    
    1,006,937
    
    
    
    Conversion of convertible debt to common stock
    
    $
    
    
    
    $
    270,864
    
    
    $
    52,346
 See accompanying notes to consolidated financial statements.
 F-7




---



##### Table of Contents



Note
1  Description of Business
  Note 2  Basis of Presentation
  Note 3  Summary of Significant Accounting Policies
 Principles of Consolidation
  F-8




---



##### Table of Contents



Use of Estimates
  Cash and Cash Equivalents
  Concentration of Risk
    Allowance for Doubtful Accounts
  Inventories
  F-9




---



##### Table of Contents



Properties & Equipment
  Buildings
    
    39 yearsComputer equipment
    
    3 yearsOffice Equipment
    
    3 - 5 yearsFurniture
    
    5 - 10 yearsManufacturing equipment
    
    3 - 5 yearsTransportation equipment
    
    3 - 5 yearsVNPP assets
    
    10 years
 Cost in Excess of Assets Acquired
  BuildingControl and
    
    
    EnergyAutomation
    
    
    Technology
    
    
    TotalBalance at
January 1, 2004
    
    $
    416,573
    
    
    
    
    
    
    $
    416,573Balance at December 31, 2004
    
    
    416,573
    
    
    
    
    
    
    
    416,573Acquisition of Maximum Performance
Group, Inc.
    
    
    
    
    
    
    4,155,660
    
    
    
    4,155,660Impairment charge
    
    
    (242,831
    )
    
    
    
    
    
    
    (242,831
    )Balance at December 31, 2005
    
    $
    173,743
    
    
    $
    4,155,660
    
    
    $
    4,329,402
   F-10




---



##### Table of Contents



Deferred Financing Costs
  Impairment of Long-Lived Assets
  Revenue Recognition
    F-11




---



##### Table of Contents



Shipping and Handling Costs
  Research and Development Costs
  Advertising, Marketing and Promotional Costs
  F-12




---



##### Table of Contents



Income Taxes
  Net Loss Per Share
   December 31,
    
    2005
    
    
    2004
    
    
    2003Weighted average shares
issuable upon exercise of
outstanding options
    
    
    11,720,374
    
    
    
    10,690,540
    
    
    
    10,291,351Weighted average shares
issuable upon exercise of
outstanding warrants
    
    
    13,660,171
    
    
    
    11,003,904
    
    
    
    9,211,143Weighted average shares
issuable upon conversion of
preferred stock
    
    
    22,788,135
    
    
    
    23,045,739
    
    
    
    25,532,617Weighted average shares
issuable upon conversion of
convertible debt
    
    
    2,358,382
    
    
    
    357,680
    
    
    
    142,274Total
    
    
    50,527,062
    
    
    
    45,097,863
    
    
    
    45,177,385
 Financial Instruments
  Stock-based Compensation
  F-13




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##### Table of Contents



December 31,
    
    2005
    
    
    2004
    
    
    2003Risk-free interest rate
    
    
    4.91
    %
    
    
    4.95
    %
    
    
    5.02
    %Expected volatility
    
    
    98.4
    %
    
    
    99.0
    %
    
    
    99.5
    %Expected life (years)
    
    
    8.5
    
    
    
    8.5
    
    
    
    8.5Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
   Year ended December 31,
    
    2005
    
    
    2004
    
    
    2003Net Loss, as reported
    
    $
    (6,873,000
    )
    
    $
    (5,159,000
    )
    
    $
    (5,482,000
    )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
    
    
    (774,000
    )
    
    
    (898,000
    )
    
    
    (889,000
    )Pro forma net loss
    
    $
    (7,647,000
    )
    
    $
    (6,057,000
    )
    
    $
    (6,371,000
    )Net loss per shareBasic and
diluted  as reported
    
    $
    (0.18
    )
    
    $
    (0.25
    )
    
    $
    (0.30
    )Basic and
diluted  pro forma
    
    $
    (0.20
    )
    
    $
    (0.27
    )
    
    $
    (0.33
    )
 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.  F-14




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##### Table of Contents



Warranty Obligations
  Insurance Reserves
  Recent Accounting Pronouncements
   F-15




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##### Table of Contents



Note
4  Acquisition of Maximum Performance Group, Inc.
      F-16




---



##### Table of Contents



Accounts receivable
    
    $
    292,102Inventory
    
    
    326,122Advances to suppliers
    
    
    472,689Other current assets
    
    
    63,611Net property and equipment
    
    
    121,608Identifiable intangible assets
    
    
    2,432,600Goodwill
    
    
    4,155,659Total assets acquired
    
    
    7,864,391Accounts payable
    
    
    928,509Accrued expenses
    
    
    658,940Deferred revenue
    
    
    1,011,616Other current liabilities
    
    
    525,676Notes payable
    
    
    289,587Total liabilities acquired
    
    
    3,414,328Net assets acquired
    
    
    4,450,063Less valuation of shares issued for
acquisition
    
    
    (2,691,607
    )Acquisition costs paid through the
issuance of common stock
    
    
    (125,484
    )Total cash paid, including acquisition
costs, net of cash acquired
    
    $
    1,632,972
  Estimated
    
    
    EstimatedAsset Class
    
    Value
    
    
    Useful LifeeMac technology and software
    
    $
    1,979,900
    
    
    
    4.0Customer relationships
    
    
    267,800
    
    
    
    9.7Customer contracts
    
    
    184,900
    
    
    
    1.0
 F-17




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##### Table of Contents



Year ended December 31,
    
    2005
    
    
    2004Revenue:As Reported
    
    $
    4,854,772
    
    
    $
    2,412,635Pro-forma
    
    
    5,111,454
    
    
    
    4,724,950Net Loss:As Reported
    
    $
    (6,872,738
    )
    
    $
    (5,159,362
    )Pro-forma
    
    
    (8,560,744
    )
    
    
    (8,278,842
    )Basic and Diluted Loss per Share:As Reported
    
    $
    (0.18
    )
    
    $
    (0.25
    )Pro-forma
    
    
    (0.20
    )
    
    
    (0.32
    )
 Note
5  Discontinued Operations
    Year ended December 31
    
    2005
    
    
    2004
    
    
    2003Revenue
    
    $
    
    
    
    $
    
    
    
    $
    2,484,336Net Loss
    
    
    
    
    
    
    
    
    
    
    (262,503
    )
 F-18




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##### Table of Contents



Note
6  Inventories
  December 31,
    
    2005
    
    
    2004Raw materials
    
    $
    919,832
    
    
    $
    528,718Finished goods
    
    
    537,957
    
    
    
    500,927$
    1,457,789
    
    
    $
    1,029,645
 Note
7  Property and Equipment
  December 31,
    
    2005
    
    
    2004Land
    
    $
    205,000
    
    
    $
    205,000Building
    
    
    984,396
    
    
    
    984,396Furniture
    
    
    75,005
    
    
    
    60,365Manufacturing equipment
    
    
    47,169
    
    
    
    40,725Office equipment
    
    
    288,271
    
    
    
    202,520Transportation equipment
    
    
    95,516
    
    
    
    37,676VNPP assets
    
    
    1,376,005
    
    
    
    897,7563,071,362
    
    
    
    2,428,438Less accumulated depreciation
    
    
    557,166
    
    
    
    442,877$
    2,514,196
    
    
    $
    1,985,561
 F-19




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##### Table of Contents



Note
8  Accrued Expenses
  December 31,
    
    2005
    
    
    2004Commissions
    
    $
    124,736
    
    
    $
    26,145Compensation
    
    
    133,463
    
    
    
    55,979Contract labor
    
    
    293,456
    
    
    
    Insurance
    
    
    73,432
    
    
    
    Interest
    
    
    71,216
    
    
    
    6,925Lease expense
    
    
    55,191
    
    
    
    Legal
    
    
    14,456
    
    
    
    65,000Professional fees
    
    
    26,328
    
    
    
    169,427Real estate taxes
    
    
    73,135
    
    
    
    79,496Royalties
    
    
    12,900
    
    
    
    6,900Sales tax payable
    
    
    43,439
    
    
    
    1,350Warranty reserve
    
    
    228,331
    
    
    
    151,008Other
    
    
    78,682
    
    
    
    5,459$
    1,228,765
    
    
    $
    567,689
 Note
9  Warranty Liability
  December 31,
    
    2005
    
    
    2004Balance, beginning of year
    
    $
    151,008
    
    
    $
    121,702Warranties issued
    
    
    116,298
    
    
    
    36,750Settlements
    
    
    (38,975
    )
    
    
    (7,444
    )Balance, end of year
    
    $
    228,331
    
    
    $
    151,008
 Note
10  Line of Credit
  F-20




---



##### Table of Contents



Note 11  Convertible Term Loans
  F-21




---



##### Table of Contents



F-22




---



##### Table of Contents



Period
    
    PercentageFollowing
    
    of ProjectRepayment of
    
    Cash Flowthe New Term
    
    Paid toLoan
    
    LaurusYear 1
    
    
    50
    %Year
 2
    
    
    40
    %Year 3
    
    
    30
    %Year 4
    
    
    20
    %Year 5
    
    
    10
    %Year 6+
    
    
    0
    %
 F-23




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##### Table of Contents



Note 12  Notes Payable
  Note 13  Long Term Debt
  December 31,
    
    2005
    
    2004Mortgage note to American Chartered Bank, prime (7.25%)
plus 1/2%, payable in monthly installments of $3,000, plus
interest until January 2007. A final payment of $523,000
is due in February 2007. This note is collateralized by
the building and land.
    
    $
    562,000
    
    
    $
    598,000Convertible term note to Laurus Master Fund (less debt discount
of $7,768 and $50,048, as of December 31, 2005 and 2004,
respectively), interest rate equal to the greater of the
prime rate (7.25%) plus 1.75%, or 6.00%, payable in
monthly installments of $35,000 plus interest through
August 2006 with a final payment of $11,790 due 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 12)
    
    
    284,022
    
    
    
    626,742Convertible term note to Laurus Master Fund (less debt discount
of $890,641 as of December 31, 2005) interest rate equal
to the greater of the prime rate (7.25%) plus 2.00%, or
6.75%, payable monthly. In addition, the Company is
required to pay contingent interest as disclosed in Note
12. Beginning June 1, 2006 the Company must begin making
monthly principal payments of $43,860 with a final
payment of $3,201,754 due on November 1, 2009 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 12)
    
    
    4,109,359
    
    
    
    Various other notes
    
    
    24,651
    
    
    
    5,611Total debt
    
    
    4,980,032
    
    
    
    1,230,353Less current portion
    
    
    651,313
    
    
    
    424,451Total long-term debt
    
    $
    4,328,719
    
    
    $
    805,902
 F-24




---



##### Table of Contents



2006
    
    $
    659,0812007
    
    
    1,052,6942008
    
    
    526,3162009
    
    
    3,640,3502010
    
    
    $
    5,878,441
 Note 14  Lease Commitments
   Related
    
    
    UnrelatedYear ending December 31,
    
    Party
    
    
    Party
    
    
    Total2006
    
    $
    34,800
    
    
    $
    78,753
    
    
    $
    113,5532007
    
    
    
    
    
    
    66,423
    
    
    
    66,4232008
    
    
    
    
    
    
    68,083
    
    
    
    68,0832009
    
    
    
    
    
    
    69,785
    
    
    
    69,7852010
    
    
    
    
    
    
    53,314
    
    
    
    53,314Total
    
    $
    34,800
    
    
    $
    336,358
    
    
    $
    371,158
 Note 15 Income Taxes
  Year ended December 31
    
    2005
    
    
    2004
    
    
    2003DeferredFederal
    
    $
    (2,272,000
    )
    
    $
    (2,025,000
    )
    
    $
    (1,558,000
    )State
    
    
    (401,000
    )
    
    
    (358,000
    )
    
    
    (275,000
    )Change in valuation allowance
    
    
    2,673,000
    
    
    
    2,383,000
    
    
    
    1,833,000Benefit for
income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
 F-25




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##### Table of Contents



December 31
    
    2005
    
    
    2004Deferred tax asset
consisting principally
of net operating losses
    
    $
    21,689,000
    
    
    $
    19,016,000Less valuation allowance
    
    
    (21,689,000
    )
    
    
    (19,016,000
    )Total net deferred tax asset
    
    $
    
    
    
    $
    
   Year ended December 31,
    
    2005
    
    
    2004
    
    
    2003Income tax (benefit) at federal
statutory rate
    
    $
    (2,337,000
    )
    
    $
    (1,754,000
    )
    
    $
    (1,864,000
    )State taxes (net of federal tax benefit)
    
    
    (336,000
    )
    
    
    (258,000
    )
    
    
    (275,000
    )Other nondeductible expenses
    
    
    
    
    
    
    34,000
    
    
    
    144,000Other
    
    
    
    
    
    
    (404,000
    )
    
    
    162,000Increase in valuation allowance
    
    
    2,673,000
    
    
    
    2,382,000
    
    
    
    1,833,000Income tax expense (benefit)
    
    $
    
    
    
    $
    
    
    
    $
    
 Note 16  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 certain technologies used in 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 $60,000, $34,000, and $65,000 of expense
was incurred under the agreement
 F-26




---



##### Table of Contents



for the years ended December 31, 2005, 2004 and 2003, respectively. The Company has accrued
$12,900 and $6,900 in royalties payable at December 31, 2005 and 2004, respectively.b)
    
    The Company entered into employment agreements with certain officers and employees expiring
2008. Total future commitments under these agreements are as follows:
 Year ending December 31,2006
    
    $
    225,0002007
    
    
    225,0002008
    
    
    75,000Total
    
    $
    525,000
 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 17  Equity Transactions
 2003 Transactions
 a)
    
    In a series of transactions during February and April 2003, the Company sold 1,815,125 shares
of its common stock for $0.92 per share and issued five year warrants to purchase 500,974
shares of common stock at $0.92 per share resulting in gross proceeds of $1,669,916. The
Company incurred offering costs of $154,790 related to these transactions.b)
    
    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.Proceeds from the transaction were allocated to the Series D Convertible Preferred Stock, the
common stock and the 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
 F-27




---



##### Table of Contents



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, and effective January 23, 2006 the Companys Chief Executive Officer.c)
    
    During September 2003, the Company entered into a financing arrangement with Laurus Master
Fund, Ltd. (Laurus) to provide the Company with a $1 million convertible secured term loan
and a $2 million convertible revolving line of credit. As part of this transaction the
Company issued warrants to Laurus to purchase 420,000 shares of its common stock. The
warrants have exercise prices ranging from $2.44 per share to $3.18 per share and have terms
of five years. The warrants were valued at $483,400 using a modified Black-Sholes option
pricing model utilizing the following assumptions: risk free rate of 0.951%, expected
volatility of 78.0%, expected dividend of $0 and expected life of 5 years. Of the total
value, $163,400 was recorded as a discount to the term loan and $320,000 was recorded as
deferred financing costs, both of which are being amortized over the term of the underlying
debt.d)
    
    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.e)
    
    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.f)
    
    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.
The warrants were valued at $393,550 using a modified Black-Sholes option pricing model
utilizing the following assumptions: risk-free rates of 0.901% to 1.712%, expected volatility
of 73% to 90%, expected dividend of $0 and expected lives of 0.4 to 3 years. The Company
recognized total expense of $393,550 relating to the issuance of these warrants during 2003.g)
    
    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.
 F-28




---



##### Table of Contents



h)
    
    During fiscal 2003, Laurus Master Fund Ltd. 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.
 2004 Transactions
 i)
    
    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.j)
    
    Also during 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.k)
    
    On March 19, 2004, the Company entered into a securities purchase agreement with a group of
four mutual funds managed by Security Benefit Group, Inc. whereby it issued to such
purchasers, in exchange for $11,000,000 in gross proceeds, a package of securities that
included 5,000,000 shares of its 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, the Company entered into a Redemption and Exchange Agreement with the holders
of its outstanding Series A Convertible Preferred Stock, Series C Convertible Preferred Stock
and Series D Convertible Preferred Stock (collectively, the Old Preferred Stock) under which
it redeemed 538,462 shares of the outstanding Old 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 its newly authorized Series E Convertible Preferred Stock (the
Series E Preferred) for the remaining 2,104,509 outstanding shares of the Old Preferred Stock
(the Exchange) on a 1 for 10 basis (one share of Series E Preferred exchanged for 10 shares of
Old Preferred Stock). All of the Old 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.Except as respects dividends, the Series E Preferred has substantially the same rights as the
shares of Old Preferred Stock that it replaced, including:
 
    
    special approval rights with respect to 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;
 F-29




---



##### Table of Contents




    
    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 the
Company issues equity at a price which is less than the conversion price .
    l)
    
    During fiscal 2004, the Company received proceeds of $485,000 in connection with the exercise
of 185,000 common stock warrants and 3,000 Series E Convertible Preferred warrants.m)
    
    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 consultants for services received. The
warrants were valued at $42,600 using a modified Black-Sholes option pricing model utilizing
the following assumptions: risk free rate of 1.607% to 2.772%, expected volatility of 42.5 to
53.6%, expected dividend of $0 and expected life of 2 to 3 years. The value of the warrants
was charged to operations during the period.n)
    
    During fiscal 2004, Laurus Master Fund Ltd. 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.o)
    
    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-30




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##### Table of Contents



2005 Transactions
 p)
    
    During 2005, two holders of the Companys Series E Convertible Preferred Stock converted
2,167 shares of Series E Convertible Preferred Stock into 216,700 shares of common stock.q)
    
    During 2005, the Company issued the following warrants:
 
    
    Delano Group Securities, LLC received a five year warrant to purchase 30,000 shares
at $1.03 per share, pursuant to an agreement to provide investment banking services.
Delano Group Securities, LLC, is a company owned by Mr. David Asplund, one of the
Companys directors and effective January 23, 2006 the Companys CEO. The warrant was
valued at $13,200 using a modified Black-Sholes option pricing model utilizing the
following assumptions: risk free rate of 2.53%, expected volatility of 45.3%, expected
dividend of $0 and expected life of 5 years. The value of the warrant was charged to
operations during the period.
    
    M&A Railroad and Electric Supply, LLC received a three year warrant to purchase
100,000 options at $1.13 per share to as part of a legal settlement. This warrant was
valued at $35,000 using a modified Black-Sholes option pricing model utilizing the
following assumptions: risk free rate of 2.767%, expected volatility of 45.0%, expected
dividend of $0 and expected life of 3 years. Of the total warrant value $33,000 was
charged to operations during the forth quarter of 2004 and $2,000 was charged to
operations during the first quarter of 2005.
    
    Laurus Master Fund, Ltd. received a warrant to purchase 400,000 shares of the
Companys common stock in exchange for its consent to the Company entering into the
PIPE Transaction described under r) below and acquiring MPG, as well as waiving its
right to adjust the conversion price on its convertible term note and convertible
revolving note. The warrant has an exercise price of $1.00 per share and a term of
five years. The warrant was valued at $160,000 using a modified Black-Sholes option
pricing model utilizing the following assumptions: risk free rate of 2.941%, expected
volatility of 43.7%, expected dividend of $0 and expected life of 5 years. The value
of the warrant was charged to interest expense during 2005.
    
    Various consultants received warrants to purchase 410,000 shares of the Companys
common stock with exercise prices between $1.00 and $1.03 per share and terms of three
to ten years. The warrants were valued collectively at $144,600 using a modified
Black-Sholes option pricing model utilizing the following assumptions (depending on the
warrant being valued): risk free rate of 2.366% to 3.029%, expected volatility of 40.7%
to 46.5%, an expected dividend of $0 and an expected life of 3 to 10 years. The values
of the warrants were charged to operations during the 2005.
 F-31




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##### Table of Contents



r)
    
    On April 28, 2005 the Company issued to five (5) institutional investors, for an aggregate
gross purchase price of $5,625,000, 6,250,000 shares of the Companys common stock and 42
month warrants to purchase 3,125,000 additional shares of common stock at $1.05 per share
(collectively the PIPE Transaction or the PIPE). Warrants to purchase 2,100,000 shares of
common stock were immediately exercisable and the remaining warrants became exercisable six
months after closing on October 28, 2005. Net proceeds from the transaction were
approximately $5,413,000, of which approximately $1,644,000 was used to fund the acquisition
of Maximum Performance Group, Inc., as discussed in Note 4.Due to the sale price of the securities issued as part of this PIPE Transaction, the Company was
required to adjust the exercise price on warrants to purchase 5,054,830 shares of its common
stock held by two investors who had participated in previous equity offerings. The exercise
prices on these warrants were reduced from $2.42 and $1.00, respectively, to $0.90. The Company
compared the value of the warrants with the old exercise price to the value of the warrants with
the reduced exercise price, as determined through the use of a modified Black-Sholes option
pricing model, and determined that the reduction in the exercise price had increased the value
of the warrants by $484,445. Since these warrants were issued as part of a security offering
the increase in value is considered to be a deemed dividend to the security holders. The
Company recorded the deemed dividend by offsetting charges and credits to additional paid-in
capital, 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, 2005.Delano Group Securities LLC and Mr. David Valentine acted as advisors on the PIPE Transaction.
The Company paid Delano Group Securities LLC $16,250 and 50,000 shares of common stock and Mr.
Valentine 50,000 shares of common stock for their services. Mr. Asplund and Mr. Valentine both
serve as directors of Electric City and effective January 23, 2006, Mr. Asplund became the
Companys CEO.s)
    
    As discussed in Note 4, the Company issued 2,492,229 shares of common stock in connection
with the acquisition of Maximum Performance Group, Inc. (MPG). In addition, 2,492,229
shares of common stock are being held in escrow and will be issued in the event MPG meets
specific performance criteria during the two year period following the acquisition.Delano Group Securities LLC acted as an advisor on the acquisition of MPG and was paid $82,176
and 125,485 shares of common stock for its services. These shares were valued at $1.00 per
share, which was the closing market price of the Companys common stock on April 28th. In
addition, the Company will issue up to 125,485 additional shares of common stock to Delano as
the MPG shares held in escrow are released. Delano Group Securities LLC is owned by Mr. David
Asplund, one of Electric Citys directors and effective January 23, 2006, the Companys CEO.
 F-32




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##### Table of Contents



t)
    
    As discussed in Note 11, in November 2005 the Company entered into a securities purchase
agreement with Laurus Master Fund, Ltd. (Laurus) whereby it issued to Laurus a $5 million
secured convertible term note and a warrant to purchase 2 million shares of its common stock
at $1.16 per share anytime prior to November 22, 2012. The warrants were valued at $920,000
using a modified Black-Sholes option pricing model utilizing the following assumptions: risk
free rate of 4.034%, expected volatility of 67.4%, expected dividend of $0 and expected life
of 7 years. The value of the warrants was recorded as a discount to the term loan and will be
amortized over the term of the underlying debt utilizing the effective interest method.u)
    
    During the year ended December 31, 2005, the Companys Board of Directors declared dividends
payable on the Companys Series E Convertible Preferred Stock of $1,366,900. The dividends
were paid with 13,699 additional shares of Series E Convertible Preferred Stock. Each share
of Series E Convertible Preferred Stock is convertible into 100 shares of the Companys common
stock.v)
    
    The Company had outstanding warrants to purchase 16,182,992 and 10,954,867 shares of its
common stock as of December 31, 2005 and 2004, respectively, at an exercise price of between
$0.90 per share and $6.56 per share. These warrants can be exercised at any time prior to
their expiration dates which range between April 2004 and May 2015. The following table
summarizes information about warrants outstanding as of December 31, 2005:
 Warrants OutstandingWeightedNumber
    
    
    Average
    
    
    WeightedOutstanding at
    
    
    Remaining
    
    
    AverageDecember 31,
    
    
    Contractual
    
    
    ExerciseExercise Price
    
    2005
    
    
    Life
    
    
    Price$0.90 - $1.00
    
    
    10,142,992
    
    
    2.7 years
    
    $
    0.95$1.01 - $2.00
    
    
    5,475,000
    
    
    3.9 years
    
    
    1.11$2.01  $3.00
    
    
    410,000
    
    
    2.7 years
    
    
    2.56$3.01  $6.56
    
    
    155,000
    
    
    2.8 years
    
    
    3.2516,182,992
    
    
    3.1 years
    
    $
    1.07
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##### Table of Contents



Note 18  Dividends
  Year ended December 31,
    
    2005
    
    
    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
    
    
    1,366,900
    
    
    
    1,006,937
    
    
    
    Deemed dividend associated with
beneficial conversion price on
shares issuable in satisfaction
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
    
    
    
    Deemed dividend associated with
change in the exercise price of
warrants to purchase shares of
common stock
    
    
    484,445
    
    
    
    
    
    
    
    Total
    
    $
    1,851,345
    
    
    $
    4,639,259
    
    
    $
    4,817,917
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##### Table of Contents



Note 19  Stock Options
      F-35




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##### Table of Contents



WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseShares
    
    
    Share
    
    
    PriceOutstanding at December 31, 2002
    
    
    9,193,848
    
    
    $
    1.00 - $12.99
    
    
    $
    3.78Granted
    
    
    1,370,000
    
    
    $
    0.84 - $2.51
    
    
    $
    0.99Forfeited
    
    
    (341,667
    )
    
    $
    1.00 - $8.00
    
    
    $
    2.88Outstanding at December 31, 2003
    
    
    10,222,181
    
    
    $
    0.84 - $12.99
    
    
    $
    3.45Granted
    
    
    1,016,500
    
    
    $
    1.15 - $2.36
    
    
    $
    1.70Forfeited
    
    
    (121,666
    )
    
    $
    1.25 - $7.00
    
    
    $
    5.32Outstanding at December 31, 2004
    
    
    11,117,015
    
    
    $
    0.84 - $12.99
    
    
    $
    3.27Granted
    
    
    1,047,500
    
    
    $
    1.00 - $1.24
    
    
    $
    1.04Forfeited
    
    
    (164,500
    )
    
    $
    1.00 - $8.00
    
    
    $
    1.56Outstanding at December 31, 2005
    
    
    12,000,015
    
    
    $
    0.84 - $12.99
    
    
    $
    3.10Options exercisable at
December 31, 2005
    
    
    10,852,771
    
    
    $
    0.84 - $12.99
    
    
    $
    3.22Options 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
    
    
    $
    3.54
 F-36




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##### Table of Contents



Year ended December 31,
    
    2005
    
    
    2004
    
    
    2003Weighted average fair value per options granted
    
    $
    0.68
    
    
    $
    1.16
    
    
    $
    0.57Significant assumptions (weighted average):Risk-free interest rate at grant date
    
    
    2.27
    %
    
    
    1.04
    %
    
    
    1.13
    %Expected stock price volatility
    
    
    65
    %
    
    
    72
    %
    
    
    73
    %Expected dividend payout
    
    
    
    
    
    
    
    
    
    
    Expected option life (years)
    
    
    9.1
    
    
    
    9.1
    
    
    
    8.8
  Options Outstanding
    
    
    Options ExercisableWeightedNumber
    
    
    Average
    
    
    Weighted
    
    
    Number
    
    
    WeightedOutstanding at
    
    
    Remaining
    
    
    Average
    
    
    Exercisable at
    
    
    AverageDecember 31,
    
    
    Contractual
    
    
    Exercise
    
    
    December 31,
    
    
    ExerciseExercise Price
    
    2005
    
    
    Life
    
    
    Price
    
    
    2005
    
    
    Price$0.84 - $2.00
    
    
    7,630,381
    
    
    4.9 years
    
    $
    1.17
    
    
    
    6,691,469
    
    
    $
    1.17$2.01 - $4.00
    
    
    508,334
    
    
    7.3 years
    
    
    2.50
    
    
    
    438,334
    
    
    
    2.55$4.01 - $6.00
    
    
    175,000
    
    
    4.3 years
    
    
    4.53
    
    
    
    175,000
    
    
    
    4.53$6.01 - $8.00
    
    
    3,634,000
    
    
    4.3 years
    
    
    7.09
    
    
    
    3,495,668
    
    
    
    7.09$8.01 - $10.00
    
    
    52,000
    
    
    4.1 years
    
    
    9.00
    
    
    
    52,000
    
    
    
    9.00$10.01 - $13.00
    
    
    300
    
    
    5.2 years
    
    
    12.99
    
    
    
    300
    
    
    
    12.9912,000,015
    
    
    4.8 years
    
    $
    3.10
    
    
    
    10,852,771
    
    
    $
    3.22
 Note 20  Related Parties
   F-37




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##### Table of Contents



Note 21  Business Segment Information
      F-38




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##### Table of Contents



Year ended December 31,
    
    2005
    
    
    2004
    
    
    2003Revenues:Energy Technology
    
    $
    3,699,373
    
    
    $
    733,630
    
    
    $
    2,064,097Building Control and Automation
    
    
    1,161,356
    
    
    
    1,705,341
    
    
    
    2,618,486Intercompany sales  Energy Technology
    
    
    (5,957
    )
    
    
    (24,992
    )
    
    
    (36,940
    )Intercompany sales  Building Control
and Automation
    
    
    
    
    
    
    (1,344
    )
    
    
    (13,810
    )Total
    
    
    4,854,772
    
    
    
    2,412,635
    
    
    
    4,631,833Operating Loss:Energy Technology
    
    
    (4,578,753
    )
    
    
    (2,386,678
    )
    
    
    (1,975,441
    )Building Control and Automation
    
    
    (305,497
    )
    
    
    (225,239
    )
    
    
    (550,595
    )Corporate
    
    
    (1,443,871
    )
    
    
    (1,920,755
    )
    
    
    (1,573,896
    )Total
    
    
    (6,328,121
    )
    
    
    (4,532,672
    )
    
    
    (4,099,932
    )Interest Expense, net
    
    
    (544,617
    )
    
    
    (626,690
    )
    
    
    (355,359
    )Loss from continuing operations
    
    
    (6,872,738
    )
    
    
    (5,159,362
    )
    
    
    (4,455,291
    )Depreciation and Amortization:Energy Technology
    
    
    592,271
    
    
    
    50,257
    
    
    
    47,425Building Control and Automation
    
    
    9,598
    
    
    
    8,621
    
    
    
    10,103Power Management
    
    
    
    
    
    
    
    
    
    
    53,104Total
    
    
    601,869
    
    
    
    58,878
    
    
    
    110,632Capital Additions:Energy Technology
    
    
    530,925
    
    
    
    149,603
    
    
    
    19,474Building Control and Automation
    
    
    17,949
    
    
    
    
    
    
    
    12,830Power Management
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    548,874
    
    
    
    149,603
    
    
    
    32,304Total Assets:Energy Technology
    
    
    16,424,460
    
    
    
    5,167,814
    
    
    
    5,824,080Building Control and Automation
    
    
    674,514
    
    
    
    1,311,506
    
    
    
    1,529,547Power Management
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    17,098,974
    
    
    $
    6,479,320
    
    
    $
    7,353,627
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##### Table of Contents



Note 22  Selected Quarterly Financial Data (unaudited)
  Fiscal 2005 Quarters EndedMarch 31
    
    June 30
    
    September 30
    
    December 31
    
    TotalRevenue
    
    $
    741,274
    
    
    $
    1,791,480
    
    
    $
    1,312,584
    
    
    $
    1,009,434
    
    
    $
    4,854,772Gross profit (loss)
    
    
    472,313
    
    
    
    101,575
    
    
    
    (35,777
    )
    
    
    (172,566
    )
    
    
    365,545Operating loss
    
    
    (607,307
    )
    
    
    (1,585,635
    )
    
    
    (1,936,562
    )
    
    
    (2,198,617
    )
    
    
    (6,328,121
    )Net loss
    
    
    (675,257
    )
    
    
    (1,824,634
    )
    
    
    (2,014,095
    )
    
    
    (2,358,752
    )
    
    
    (6,872,738
    )Preferred dividends
    
    
    (334,800
    )
    
    
    (339,000
    )
    
    
    (344,000
    )
    
    
    (833,545
    )
    
    
    (1,851,345
    )Net loss available to common shareholders
    
    
    (1,010,057
    )
    
    
    (2,163,634
    )
    
    
    (2,358,095
    )
    
    
    (3,192,297
    )
    
    
    (8,724,083
    )Basic and Diluted Loss Per Common Share
    
    
    (0.02
    )
    
    
    (0.05
    )
    
    
    (0.05
    )
    
    
    (0.06
    )
    
    
    (0.18
    )
 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
    )
 Note
23  Subsequent Events
  F-40




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Additions/(recoveries)Balance at
    
    charged to
    
    Deductionsbeginning of
    
    costs and
    
    Amounts
    
    Other
    
    Balance at endperiod
    
    expenses
    
    written-off
    
    adjustments
    
    of periodAllowance for doubtful
accounts:Year ended December 31, 2003
    
    $
    410,000
    
    
    $
    (22,000
    )
    
    $
    (2,000
    )
    
    $
    (60,000
    )
    
    $
    326,000Year ended December 31, 2004
    
    
    326,000
    
    
    
    6,000
    
    
    
    (133,000
    )
    
    
    
    
    
    
    199,000Year ended December 31, 2005
    
    $
    199,000
    
    
    $
    97,000
    
    
    $
    (13,000
    )
    
    $
    42,000
    
    

    $
    325,000
   F-41