##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION    Form 10-Q x
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission file number 000-2791   ELECTRIC CITY CORP.  Delaware
    
    36-4197337(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1280 Landmeier Road, Elk Grove Village, Illinois 60007-2410  (847) 437-1666
(Issuers telephone number)    Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes  x    No  o Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange
Act) Yes  o    No  x 41,613,721 shares of the registrants common stock, $.0001 par value per share,
were outstanding
 as of September 30, 2004.




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ELECTRIC CITY CORP.
FORM 10-Q
For The Quarter Ended September 30, 2004 INDEX PageNumberPart I Financial InformationITEM 1. Financial Statements:Condensed Consolidated Balance Sheets
September 30, 2004 (unaudited) and December 31, 2003
    
    
    1Condensed Consolidated Statement of Operations
Three Months Ended September 30, 2004 and 2003 (unaudited)
    
    
    3Condensed Consolidated Statement of Operations
Nine Months Ended September 30, 2004 and 2003 (unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity
Nine Months Ended September 30, 2004 (unaudited)
    
    
    5Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2004 and 2003 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    17ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27ITEM 4. Control and Procedures
    
    
    27Part II. Other Information:ITEM 2. Changes in Securities
    
    
    28ITEM 6. Exhibits and Reports on Form 8-K
    
    
    28Signatures
    
    
    29CertificationCertificationCertificationCertification




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##### Table of Contents



PART I - FINANCIAL INFORMATION 
 ITEM 1. Financial Statements ELECTRIC CITY CORP. 
 CONDENSED CONSOLIDATED BALANCE SHEET
 September 302004
    
    December 31,(unaudited)
    
    2003(1)AssetsCurrent AssetsCash and cash equivalents
    
    $
    2,657,139
    
    
    $
    2,467,023Accounts receivable, net
    
    
    1,049,824
    
    
    
    1,450,811Inventories
    
    
    1,038,239
    
    
    
    1,200,146Prepaid expenses and other
    
    
    72,546
    
    
    
    203,870Total Current Assets
    
    
    4,817,748
    
    
    
    5,321,850Net Property and Equipment
    
    
    1,851,275
    
    
    
    1,132,592Deferred Financing Costs
    
    
    129,686
    
    
    
    482,612Cost in Excess of Assets Acquired
    
    
    416,573
    
    
    
    416,573$
    7,215,282
    
    
    $
    7,353,627
 - 1 -




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##### Table of Contents



ELECTRIC CITY CORP.
CONDENSED CONSOLIDATED BALANCE SHEET September 30,2004
    
    December 31,(unaudited)
    
    2003(1)Liabilities and Stockholders EquityCurrent LiabilitiesCurrent maturities of long-term debt
    
    $
    890,374
    
    
    $
    536,809Accounts payable
    
    
    740,644
    
    
    
    1,298,821Accrued expenses
    
    
    795,457
    
    
    
    541,588Deferred revenue
    
    
    425,104
    
    
    
    383,308Customer deposits
    
    
    984,941
    
    
    
    511,167Total Current Liabilities
    
    
    3,836,520
    
    
    
    3,271,693Deferred Revenue
    
    
    191,666
    
    
    
    229,166Long-Term Debt, less current maturities, net of unamortized
discount of $64,969 and $241,775 at September 30, 2004 and
December 31, 2003, respectively
    
    
    334,873
    
    
    
    811,836Total Liabilities
    
    
    4,363,059
    
    
    
    4,312,695Stockholders EquityPreferred stock, $.01 par value; 5,000,000 shares authorized
    
    
    
    
    
    
    23,966Convertible Series A  0 and 2,396,590 shares issued and
outstanding as of September 30, 2004 and
December 31, 2003, respectively (liquidation
value of $47,932,000 as of December 31, 2003)Convertible Series C  0 and 233,614 issued and
outstanding as of September 30, 2004 and December 31,
2003, respectively (liquidation value of $4,672,000 as
of December 31, 2003)
    
    
    
    
    
    
    2,336Convertible Series D  0 and 157,769 issued and
outstanding as of September 30, 2004 and December 31,
2003, respectively (liquidation value of $3,155,000 as
of December 31, 2003)
    
    
    
    
    
    
    1,578Convertible Series E  218,566 and 0 issued and
outstanding as of September 30, 2004 and December 31,
2003, respectively (liquidation value of $43,713,200
and $0 at September 30, 2004 and December 31, 2003,
respectively)
    
    
    2,186
    
    
    
    Common stock, $.0001 par value; 120,000,000 shares
authorized, 41,613,722 and 34,342,022 issued as of September 30, 2004 and December 31, 2003, respectively
    
    
    4,163
    
    
    
    3,436Additional paid-in capital
    
    
    55,012,711
    
    
    
    51,376,137Accumulated deficit
    
    
    (52,166,837
    )
    
    
    (48,366,521
    )Total Stockholders Equity
    
    
    2,852,223
    
    
    
    3,040,932$
    7,215,282
    
    
    $
    7,353,627
 See accompanying notes to condensed consolidated financial statements  (1)
    
    Derived from audited financial statements in the Companys annual
report onForm 10-KSBfor the year ended December 31, 2003 - 2 -




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##### Table of Contents



ELECTRIC CITY CORP. 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (Unaudited)
 Three months ended, September 30
    
    2004
    
    2003Revenue
    
    $
    571,780
    
    
    $
    857,021ExpensesCost of sales
    
    
    625,092
    
    
    
    868,773Selling, general and administrative
    
    
    1,166,831
    
    
    
    1,059,4161,791,923
    
    
    
    1,928,189Operating loss
    
    
    (1,220,143
    )
    
    
    (1,071,168
    )Other Income (Expense)Interest income
    
    
    5,924
    
    
    
    3,167Interest expense
    
    
    (83,220
    )
    
    
    (7,953
    )Total other income (expense)
    
    
    (77,296
    )
    
    
    (4,786
    )Net Loss
    
    
    (1,297,439
    )
    
    
    (1,075,954
    )Plus Preferred Stock Dividends
    
    
    (445,634
    )
    
    
    (1,379,889
    )Net Loss Available to Common Shareholder
    
    $
    (1,743,073
    )
    
    $
    (2,455,843
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.04
    )
    
    $
    (0.07
    )Weighted Average Common Shares Outstanding
    
    
    41,467,028
    
    
    
    34,149,435
 See accompanying notes to condensed consolidated financial statements - 3 -




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##### Table of Contents



ELECTRIC CITY CORP. 
 CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
 (Unaudited)
 Nine months ended, September 30
    
    2004
    
    2003Revenue
    
    $
    1,943,559
    
    
    $
    3,676,495ExpensesCost of sales
    
    
    2,008,184
    
    
    
    3,485,217Selling, general and administrative
    
    
    3,168,940
    
    
    
    3,183,7525,177,124
    
    
    
    6,668,969Operating loss
    
    
    (3,233,565
    )
    
    
    (2,992,474
    )Other Income (Expense)Interest income
    
    
    17,660
    
    
    
    6,154Interest expense
    
    
    (584,411
    )
    
    
    (34,398
    )Total other income (expense)
    
    
    (566,751
    )
    
    
    (28,244
    )Loss from continuing operations
    
    
    (3,800,316
    )
    
    
    (3,020,718
    )Discontinued OperationsLoss from discontinued operations
    
    
    
    
    
    
    (302,503
    )Loss on disposal of discontinued operations
    
    
    
    
    
    
    (764,148
    )
    
    
    
    (1,066,651
    )Net Loss
    
    
    (3,800,316
    )
    
    
    (4,087,369
    )Plus Preferred Stock Dividends
    
    
    (4,232,539
    )
    
    
    (3,213,133
    )Net Loss Available to Common Shareholder
    
    $
    (8,032,855
    )
    
    $
    (7,300,502
    )Basic and
diluted loss per common share from continuing operations
    
    $
    (0.20
    )
    
    $
    (0.19
    )Discontinued operations
    
    
    
    
    
    
    (0.03
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.20
    )
    
    $
    (0.22
    )Weighted Average Common Shares Outstanding
    
    
    39,326,768
    
    
    
    33,603,874
 See accompanying notes to condensed consolidated financial statements - 4 -




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##### Table of Contents



ELECTRIC CITY CORP. 
 STATEMENT OF CONDENSED CONSOLIDATED STOCKHOLDERS EQUITY
 (Unaudited)
 Series A
    
    Series A
    
    Series C
    
    Series C
    
    Series DCommon
    
    Common
    
    Preferred
    
    Preferred
    
    Preferred
    
    Preferred
    
    PreferredShares
    
    Stock
    
    Shares
    
    Stock
    
    Shares
    
    Stock
    
    SharesBalance,December 31, 2003
    
    
    34,342,022
    
    
    $
    3,436
    
    
    
    2,396,590
    
    
    $
    23,966
    
    
    
    233,614
    
    
    $
    2,336
    
    
    
    157,769Issuance of common stock (net
of offering costs of $897,135)
    
    
    5,000,000
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of Preferred Stock
    
    
    1,956,700
    
    
    
    196
    
    
    
    (145,000
    )
    
    
    (1,450
    )
    
    
    
    
    
    
    
    
    
    
    Redemption of preferred stock
    
    
    
    
    
    
    
    
    
    
    (514,375
    )
    
    
    (5,144
    )
    
    
    
    
    
    
    
    
    
    
    (24,087
    )Exchange of preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,737,215
    )
    
    
    (17,372
    )
    
    
    (233,614
    )
    
    
    (2,336
    )
    
    
    (133,682
    )Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Satisfaction of accrued dividends through
the issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of term note
    
    
    130,000
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of warrants
    
    
    185,000
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss for the nine months ended
September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance,September 30, 2004
    
    
    41,613,722
    
    
    $
    4,163
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
   [Continued from above table, first column(s) repeated] Series D
    
    Series E
    
    Series E
    
    Additional
    
    
    
    
    
    TotalPreferred
    
    Preferred
    
    Preferred
    
    Paid-in
    
    Accumulated
    
    StockholdersStock
    
    Shares
    
    Stock
    
    Capital
    
    Deficit
    
    EquityBalance,December 31, 2003
    
    $
    1,578
    
    
    
    
    
    
    $
    
    
    
    $
    51,376,137
    
    
    $
    (48,366,521
    )
    
    $
    3,040,932Issuance of common stock (net
of offering costs of $897,135)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,102,365
    
    
    
    
    
    
    
    10,102,865Conversion of Preferred Stock
    
    
    
    
    
    
    (5,067
    )
    
    
    (51
    )
    
    
    1,305
    
    
    
    
    
    
    
    Redemption of preferred stock
    
    
    (241
    )
    
    
    
    
    
    
    
    
    
    
    (6,994,621
    )
    
    
    
    
    
    
    (7,000,006
    )Exchange of preferred stock
    
    
    (1,337
    )
    
    
    210,451
    
    
    
    2,105
    
    
    
    18,940
    
    
    
    
    
    
    
    Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,308,780
    )
    
    
    
    
    
    
    (1,308,780
    )Satisfaction of accrued dividends through
the issuance of preferred stock
    
    
    
    
    
    
    13,088
    
    
    
    131
    
    
    
    1,308,649
    
    
    
    
    
    
    
    1,308,780Conversion of term note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275,587
    
    
    
    
    
    
    
    275,600Exercise of warrants
    
    
    
    
    
    
    94
    
    
    
    1
    
    
    
    193,629
    
    
    
    
    
    
    
    193,648Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,500
    
    
    
    
    
    
    
    39,500Net loss for the nine months ended
September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,800,316
    )
    
    
    (3,800,316
    )Balance,September 30, 2004
    
    $
    
    
    
    
    218,566
    
    
    $
    2,186
    
    
    $
    55,012,711
    
    
    $
    (52,166,837
    )
    
    $
    2,852,223
 See accompanying notes to condensed consolidated financial statements. - 5 -




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##### Table of Contents



ELECTRIC CITY CORP. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine months ended September 30
    
    2004
    
    2003Cash Flow from Operating ActivitiesNet loss
    
    $
    (3,800,316
    )
    
    $
    (4,087,369
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of asset disposalsDepreciation and amortization
    
    
    56,801
    
    
    
    94,828Recovery on bad debt
    
    
    
    
    
    
    (55,000
    )Warrants issued in exchange for services received
    
    
    39,500
    
    
    
    299,100Loss from disposal of discontinued operations
    
    
    
    
    
    
    764,148Amortization of deferred financing costs
    
    
    352,926
    
    
    
    Amortization of original issue discount
    
    
    176,806
    
    
    
    Accrued interest converted to common stock
    
    
    4,736
    
    
    
    Changes in assets and liabilities, net of dispositionsAccounts receivable
    
    
    400,987
    
    
    
    230,945Inventories
    
    
    (343,222
    )
    
    
    658,914Other current assets
    
    
    (125,790
    )
    
    
    (31,263
    )Accounts payable
    
    
    (558,177
    )
    
    
    (190,401
    )Accrued expenses
    
    
    253,869
    
    
    
    (273,328
    )Deferred revenue
    
    
    4,296
    
    
    
    19,339Customer deposits
    
    
    473,774
    
    
    
    Net cash used in operating activities
    
    
    (3,063,810
    )
    
    
    (2,570,087
    )Cash Flows Used In Investing ActivitiesSale of discontinued operations
    
    
    
    
    
    
    929,032Purchase of property and equipment
    
    
    (13,241
    )
    
    
    (18,135
    )Net cash (used in) provided by investing activities
    
    
    (13,241
    )
    
    
    910,897Cash Flows Provided by (Used in) Financing ActivitiesNet payment on line of credit
    
    
    
    
    
    
    (500,000
    )Proceeds from long-term debt
    
    
    
    
    
    
    1,010,000Payment on long-term debt
    
    
    (29,340
    )
    
    
    (420,769
    )Preferred stock redemption
    
    
    (7,000,006
    )Proceeds from issuance of preferred stock
    
    
    
    
    
    
    1,500,000Proceeds from issuance of common stock
    
    
    11,000,000
    
    
    
    1,669,916Issuance costs related to stock issuances
    
    
    (897,135
    )
    
    
    (301,290
    )Cash paid for deferred financing costs
    
    
    
    
    
    
    (304,400
    )Proceeds from exercise of warrants
    
    
    193,648
    
    
    
    32,000Short-swing profit contribution
    
    
    
    
    
    
    798Net cash provided by financing activities
    
    
    3,267,167
    
    
    
    2,686,255Net Increase in Cash and Cash Equivalents
    
    
    190,116
    
    
    
    1,027,065Cash and Cash Equivalents, at beginning of period
    
    
    2,467,023
    
    
    
    1,555,904Cash and Cash Equivalents, at end of period
    
    $
    2,657,139
    
    
    $
    2,582,969Supplemental Disclosure of Cash Flow InformationCash paid during the periods for interest
    
    $
    63,784
    
    
    $
    36,791Cash paid during the periods for interest  discontinued operations
    
    
    
    
    
    
    8,702Supplemental Disclosures of Noncash Investing and Financing ActivitiesConversion of convertible debt to common stock
    
    $
    270,864
    
    
    $
    Accrued interest satisfied through the issuance of common stock
    
    
    4,736
    
    
    
    
 In February and March of 2004, certain holders of Series A preferred stock converted 145,000 shares of Series A preferred stock into 1,450,000 shares of the Companys common stock.In July and September of 2004, certain holders of Series E preferred stock converted 5,067 shares of Series E preferred stock into 506,700 shares of the Companys common stock.
 See accompanying notes to condensed consolidated financial statements - 6 -




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##### Table of Contents



Electric City Corp. 
 Notes to Financial Statements
 Note 1 - Basis of Presentation The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments), which, in the opinion of management, are necessary for a fair
statement of results for the interim periods. The Company has experienced operating losses and negative cash flow from
operations since inception and currently has an accumulated deficit. At the
rate it is currently consuming cash, its cash balances should be sufficient to
fund operations for 6 to 9 months, after which it will need to utilize its
working capital line. Availability under the working capital line will in part
depend on there being sufficient eligible receivables to support the Companys
borrowing needs, the adequacy of which can not be assured. As of September 30,
2004 eligible receivables would support borrowings of approximately $615,000
under the facility. To date the Company has funded its operations primarily
through the issuance of equity, however, there is no assurance that it will be
able to continue to raise funds in this manner in the future. The Companys
ability to continue as a going concern is ultimately dependent on its ability
to increase sales to a level that will allow it to operate profitably. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern. Please see the
liquidity and capital resources section of Item 2 to this report for additional
information on Managements plan for addressing potential future liquidity
concerns. The results of operations for the three and nine months ended September 30,
2004 and 2003 are not necessarily indicative of the results to be expected for
the full year. For further information, refer to the audited financial statements and the
related footnotes included in the Electric City Corp. Annual Report on Form
10-KSB, for the year ended December 31, 2003. Note 2 - Stock-based Compensation At September 30, 2004, the Company had a stock-based compensation plan, which
is more fully described in Note 16 in the Companys Annual Report on Form
10-KSB as filed on March 29, 2004. The Company applies and intends to continue
to apply the recognition and intrinsic value measurement principles of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations in accounting for those plans. No
stock-based compensation expense was reflected in the net loss for the three
month or nine month periods ended September 30, 2004 or September 30, 2003, as
all options granted under the plan had an exercise price equal to or greater
than the market value of the underlying common stock on the date of the grant.
The following table illustrates the effect on the net loss and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation: - 7 -




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##### Table of Contents



Three Months Ended
    
    Nine months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Net Loss, as reported
    
    $
    (1,297,000
    )
    
    $
    (1,076,000
    )
    
    $
    (3,800,000
    )
    
    $
    (4,087,000
    )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
    
    
    (249,000
    )
    
    
    (223,000
    )
    
    
    (777,000
    )
    
    
    (566,000
    )Net Loss, pro-forma
    
    
    (1,546,000
    )
    
    
    (1,299,000
    )
    
    
    (4,577,000
    )
    
    
    (4,653,000
    )Preferred stock dividends
    
    
    (446,000
    )
    
    
    (1,380,000
    )
    
    
    (4,233,000
    )
    
    
    (3,213,000
    )Net Loss Available to
Common Shareholder
    
    $
    (1,992,000
    )
    
    $
    (2,679,000
    )
    
    $
    (8,810,000
    )
    
    $
    (7,866,000
    )Net loss per shareBasic and diluted 
as reported
    
    $
    (0.04
    )
    
    
    (0.07
    )
    
    $
    (0.20
    )
    
    
    (0.22
    )Basic and diluted 
pro- forma
    
    $
    (0.05
    )
    
    
    (0.08
    )
    
    $
    (0.22
    )
    
    
    (0.24
    )
 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.
 Note 3 - Recent Accounting Pronouncements In March, 2004, the FASB issued an exposure document entitled Share-Based
Payment  an amendment of Statements No. 123 and 95 (Proposed Statement of
Financial Accounting Standards). The proposed Statement would eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25 and generally require instead that such transactions be accounted for
using a fair-value-based method. This accounting, if approved, will result in
compensation expense charges to our future results of operations. The proposed
Statement, if adopted, would be applied to public entities prospectively for
fiscal years beginning after December 15, 2004, as if all share-based
compensation awards granted, modified, or settled after December 15, 1994, had
been accounted for using the fair-value method of accounting. Retrospective
application of the proposed Statement is not permitted. Note 4  Net Loss Per Share The Company computes loss per share under Statement of Financial Accounting
Standards (SFAS) No. 128 Earnings Per Share, which requires presentation of
two amounts: basic and diluted loss per - 8 -




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##### Table of Contents



common share. Basic loss per common share is computed by dividing loss
available to common stockholders by the number of weighted average common
shares outstanding, and includes all common stock issued. Diluted earnings
would include all common stock equivalents. The Company has not included the
outstanding options, warrants or shares issuable upon conversion of the
preferred stock and convertible debt as common stock equivalents in the
computation of diluted loss per share for the three and nine months ended
September 30, 2004 and 2003 because the effect would be antidilutive. The following table sets forth the weighted average shares issuable upon
exercise of outstanding options and warrants and conversion of preferred stock
and convertible debt that are not included in the basic and diluted loss per
share available to common stockholders because to do so would be antidilutive: Three Months Ended
    
    Nine months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Weighted average shares
issuable upon exercise of
outstanding options
    
    
    10,776,000
    
    
    
    10,319,000
    
    
    
    10,590,000
    
    
    
    10,282,000Weighted average shares
issuable upon exercise of
outstanding warrants
    
    
    11,262,000
    
    
    
    9,447,000
    
    
    
    10,904,000
    
    
    
    9,037,000Weighted average shares
issuable upon conversion
of preferred stock
    
    
    21,682,000
    
    
    
    26,544,000
    
    
    
    23,438,000
    
    
    
    24,135,000Weighted average shares
issuable upon conversion of
convertible debt
    
    
    350,000
    
    
    
    103,000
    
    
    
    339,000
    
    
    
    35,000Total
    
    
    44,070,000
    
    
    
    46,413,000
    
    
    
    45,271,000
    
    
    
    43,489,000
 - 9 -




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Note 5 - Warranty Obligations The Company warrants to the purchasers of its EnergySaver line of products that
the product will be free of defects in material and workmanship for one year
from the date of installation. The Company records the estimated cost that may
be incurred under its warranties at the time the product revenue is recognized
based upon the relationship between historical and anticipated warranty costs
and sales volumes. The Company periodically assesses the adequacy of its
recorded warranty liability and adjusts the amounts as necessary. While the
Company believes that its estimated liability for product warranties is
adequate and that the judgment applied is appropriate, the estimated liability
for product warranties could differ materially from actual future warranty
costs. Changes in the Companys warranty liability are as follows: Three Months Ended
    
    Nine months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Balance, beginning of period
    
    $
    128,182
    
    
    $
    122,892
    
    
    $
    121,702
    
    
    $
    107,127Warranties issued
    
    
    10,000
    
    
    
    5,250
    
    
    
    22,750
    
    
    
    48,750Settlements
    
    
    (1,026
    )
    
    
    (6,741
    )
    
    
    (7,296
    )
    
    
    (34,476
    )Balance, as of September 30
    
    $
    137,156
    
    
    $
    121,401
    
    
    $
    137,156
    
    
    $
    121,401
 Note 6 - Inventories Inventories consisted of the following: September 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    502,711
    
    
    $
    496,906Work in process
    
    
    
    
    
    
    12,817Finished goods
    
    
    535,528
    
    
    
    690,423$
    1,038,239
    
    
    $
    1,200,146
 - 10 -




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Note 7 - Dividends Dividends are comprised of the following: Three Months Ended
    
    Nine months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Accrual of Dividend on Series
A Convertible Preferred
    
    $
    
    
    
    $
    570,277
    
    
    $
    540,705
    
    
    $
    1,669,444Accrual of Dividend on Series
C Convertible Preferred
    
    
    
    
    
    
    55,589
    
    
    
    53,206
    
    
    
    162,733Accrual of Dividend on Series
D Convertible Preferred
    
    
    
    
    
    
    37,542
    
    
    
    35,932
    
    
    
    39,208Accrual of Dividend on Series
E Convertible Preferred
    
    
    325,280
    
    
    
    
    
    
    
    678,937
    
    
    
    Deemed dividend associated
with beneficial conversion
feature of Series D
Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    386,984Deemed dividend associated
with beneficial conversion
price on shares issued in
satisfaction of convertible
preferred dividends
    
    
    120,354
    
    
    
    716,481
    
    
    
    1,048,301
    
    
    
    954,764Deemed 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
    
    $
    445,634
    
    
    $
    1,379,889
    
    
    $
    4,232,539
    
    
    $
    3,213,133
 - 11 -




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Note 8  Business Segment Information The Company organizes and manages its business in two distinct segments: the
Energy Technology segment, and the Building Control and Automation segment. In
classifying its operational entities into a particular segment, the Company
segregated its businesses with similar economic characteristics, products and
services, production processes, customers, and methods of distribution into
distinct operating groups. The Energy Technology segment designs, manufactures and markets energy saving
technologies, primarily to commercial and industrial customers. The principal
products produced and marketed by this segment are the EnergySaver, the Global
Commander and negative power systems under the trade name, Virtual Negawatt
Power Plan or VNPP. This segment is headquartered, and most of its
operations are located, in Elk Grove Village, Illinois. The Building Control and Automation segment, which is comprised of our Great
Lakes Controlled Energy subsidiary, provides integration of building and
environmental control systems for commercial and industrial customers. Great
Lakes Controlled Energy is headquartered in, and operates out of its own
facility, located in Elk Grove Village, Illinois. The following is the Companys business segment information: Three Months Ended
    
    Nine months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Revenues:Energy Technology
    
    $
    98,000
    
    
    $
    275,000
    
    
    $
    594,000
    
    
    $
    1,841,000Building Automation
Controls
    
    
    475,000
    
    
    
    597,000
    
    
    
    1,377,000
    
    
    
    1,884,000Intercompany sales 
Energy Technology
    
    
    
    
    
    
    (15,000
    )
    
    
    (25,000
    )
    
    
    (36,000
    )Intercompany sales 
Building Control and
Automation
    
    
    (1,000
    )
    
    
    
    
    
    
    (2,000
    )
    
    
    (13,000
    )Total
    
    
    572,000
    
    
    
    857,000
    
    
    
    1,944,000
    
    
    
    3,676,000Operating Loss:Energy Technology
    
    
    (651,000
    )
    
    
    (488,000
    )
    
    
    (1,684,000
    )
    
    
    (1,327,000
    )Building Automation
Controls
    
    
    (113,000
    )
    
    
    (147,000
    )
    
    
    (344,000
    )
    
    
    (459,000
    )Corporate Overhead
    
    
    (456,000
    )
    
    
    (436,000
    )
    
    
    (1,205,000
    )
    
    
    (1,207,000
    )Total
    
    
    (1,220,000
    )
    
    
    (1,071,000
    )
    
    
    (3,233,000
    )
    
    
    (2,993,000
    )Other Expense
    
    
    (77,000
    )
    
    
    (5,000
    )
    
    
    (567,000
    )
    
    
    (28,000
    )Loss from continuing
operations
    
    
    (1,297,000
    )
    
    
    (1,076,000
    )
    
    
    (3,800,000
    )
    
    
    (3,021,000
    )
 - 12 -




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September
    
    December30, 2003
    
    31, 2003Total Assets:Energy Technology
    
    $
    5,936,000
    
    
    $
    5,824,000Building Automation
Controls
    
    
    1,279,000
    
    
    
    1,530,000Total
    
    $
    7,215,000
    
    
    $
    7,354,000
 Note 9  Private Placement and Redemption and Exchange Offer 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.
(Security Benefit), whereby the Company issued to such purchasers, in
exchange for $11,000,000 in gross proceeds, a package of securities that
included 5,000,000 shares of the Companys common stock and 5 year warrants to
purchase 1,750,000 additional shares of common stock at $2.42 per share in cash
(the Common Stock Warrants). The exercise price under the Common Stock
Warrants is subject to adjustment if the Company issues shares of common stock
at a price below the lower of the exercise price or the market price at the
time. Also on March 19, 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 Existing Preferred Stock) under which the Company
agreed to redeem 538,462 shares of Existing Preferred Stock at a price of $13
per share (the Redemption) and to exchange shares of its newly authorized
Series E Convertible Preferred Stock (the Series E Preferred) for all
remaining outstanding shares of Existing Preferred Stock (the Exchange) on a
1 for 10 basis (one share of Series E Preferred exchanged for 10 shares of
Existing Preferred Stock). The Company used $7 million of the proceeds from
the issuance of securities to Security Benefit to accomplish the Redemption,
which closed on March 22, 2004. Under the Redemption and Exchange transaction, the Company redeemed 538,462
shares of its outstanding Existing Preferred Stock (which were convertible into
5,384,620 shares of common stock), at a price equivalent to $1.30 per common
share, and exchanged 210,451 shares of the new Series E Preferred) for the
remaining 2,104,509 outstanding shares of the Existing Preferred Stock. All of
the Existing Preferred Stock has been cancelled. The Series E Preferred has
substantially the same rights as the shares of Existing Preferred Stock that it
replaced, including:  
    
    special approval rights in respect of certain actions by the
Company, including any issuance of shares of capital stock by the
Company that would have the right to receive dividends or the right to
participate in any distribution upon liquidation which was senior to or
equal to the rights of the Series E Preferred (other than issuances to
pay dividends on the preferred and under certain other limited
exceptions such as conversion of outstanding convertible securities)
and any acquisition, sale, merger, joint venture, consolidation or
reorganization involving the Company or any of its subsidiaries;
    
    a conversion price equivalent to $1.00 per share;
    
    the right to elect up to four directors;
    
    the right to vote with the holders of common stock on an as
converted basis on all matters on which holders of our common stock
are entitled to vote, except with respect to the election of directors
or as otherwise provided by law; - 13 -




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
    
    a right of first offer on the sale of equity by the Company in a
private transaction; and
    
    anti-dilution protection that would adjust the conversion price in
the event we issue equity at a price which is less than the conversion
price . The Exchange was effected on a 1 for 10 basis: whereas each share of the
Existing Preferred Stock was convertible into 10 shares of Common Stock and had
a liquidation preference of $20 per share, each share of the Series E Preferred
is convertible into 100 shares of Common Stock and has a liquidation preference
of $200 per share. 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, but the expiration
date was extended from September 30, 2004 to October 31, 2004, which was
subsequently extended to December 31, 2004. Such Series E warrants issued are
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. In addition the Existing Preferred Stock carried a dividend rate of 10% payable
at the Companys election in cash or in additional shares of preferred stock
during the first three years following issuance. After the third anniversary
of issuance we were required to pay all dividends in cash and the dividend rate
increased by 1⁄2% every six months until it reached 15%, where it would
remain until the shares were converted or redeemed. The Series E Preferred
carries a 6% dividend that is payable at the Companys election in cash or
additional shares of Series E Preferred for as long as the shares remain
outstanding. The dilutive effect of the payment-in-kind dividend on the preferred stock has
been reduced significantly as a result of the Redemption and Exchange because
of the lower dividend rate on the Series E Preferred stock. Based on the terms
and number of shares of the Existing Preferred outstanding prior to the
Redemption and Exchange, if the Company continued to pay preferred dividends by
issuing additional preferred shares, the Company would have issued shares of
preferred stock convertible into 10,306,790 shares of common stock over the
next three years, whereas it only expects to issue shares of Series E preferred
convertible into 4,473,919 shares of common stock over the same period, a
reduction of 5,832,871 shares or 56.6%. As part of the Redemption and Exchange, the preferred stockholders agreed to
amend and restate their existing stock trading agreements, effectively
replacing them with a new three year agreement containing volume and price
limitations which became effective on September 8, 2004, the day after the
original expiration date of September 7, 2004. The Investor Rights Agreement
and the Stockholders Agreement among the Company, the preferred stockholders
and certain other parties were also amended and restated as part of the
Redemption and Exchange, principally to reflect the changes in the outstanding
preferred stock resulting from the transactions. For accounting purposes the Redemption and Exchange transaction was viewed as a
redemption for cash and shares of Series E preferred stock. As a result of the
transaction the Company incurred a non-cash deemed dividend of $1,860,458.
This non-cash deemed dividend was determined by comparing the fair value of the
consideration given (the cash and the market value of the Series E Preferred)

to the carrying value of the Existing Preferred Stock. The fair value of the
consideration given exceeded the carrying value of the Existing Preferred
primarily due to the fact that the market price of the Companys common stock
was higher on the day the Redemption and Exchange transaction closed than it
was when the Existing Preferred Stock was originally issued. The deemed
dividend was recorded as offsetting charges and credits to additional paid-in
capital, without any effect on total stockholders equity. Morgan Keegan & Company, Inc. acted as placement agent for the Company with
respect to the transaction and was paid a placement agent fee of $660,000. The
Stockpage.com was also paid a finders fee of $55,000 and William Blair & Co.
was paid a consulting fee of $75,000 related to the transaction. Other
issuance costs related to the transaction totaled $107,135. - 14 -




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Note 10  Amendment to Credit Facility On August 31, 2004, the Company and Laurus Master Fund, Ltd. (Laurus) entered
into an amendment to the credit facility dated September 11, 2003. The
original credit facility provided for a $1,000,000 term loan (the Term Loan)
and a revolving credit facility of up to $2,000,000 (the Revolver), both of
which were convertible into Electric Citys common stock at $2.12 per share.
As of August 31, 2004 the outstanding balance on the Term Loan was $676,790 and
there were no borrowings under the Revolver. As part of the amendment to the
facility Laurus agreed to extend the maturity of both the term loan and
revolving credit facility from September 1, 2005 to September 1, 2006 and defer
scheduled Term Loan principal payments for nine months in exchange for
adjusting the conversion price on the Term Loan and the Revolver to $1.64 per
share. The revised Term Loan payment schedule calls for monthly principal
payments of $35,000 plus interest beginning on February 1, 2005, with a final
principal payment of $11,790 on September 1, 2006. Note 11  Equity Issuances During the first quarter of 2004 Laurus Master Funds has converted $270,863 of
principal on the Companys Convertible Term Note into 130,000 shares of common
stock. During the first quarter of 2004 holders of the Companys Series A Convertible
Preferred Stock converted 145,000 shares of Series A Convertible Preferred
Stock into 1,450,000 shares of common stock. 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., as
described in Note 9 above. On March 19, 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
as described in Note 9 above. On April 7, 2004, the Board of Directors declared dividends payable on our
Series E Convertible Preferred Stock for the calendar quarter ending March 31,
2004 to shareholders of record of our Series E Convertible Preferred Stock as
of March 31, 2004. The dividends were paid with 6,579 additional shares of
Series E Convertible Preferred Stock. Each share of Series E Convertible
Preferred Stock is convertible into 100 shares of our common stock. The
Company recorded a non-cash deemed dividend of $638,163 related to the issuance
of these dividend shares due to the fact that the conversion price on the
dividend shares was lower than the market price of the Companys common stock
on the date of issue. On June 16, 2004, Mr. David Asplund, a director of the Company, exercised a
warrant to purchase 94 shares of the Companys Series E Convertible Preferred
Stock at $100 per share. During the second quarter of 2004 the holders of warrants to purchase 185,000
shares of the Companys common stock at $1.00 per share exercised their
warrants in full. On May 26, 2004, the Board of Directors declared dividends payable on our
Series E Convertible Preferred Stock for the calendar quarter ending June 30,
2004 to shareholders of record of our Series E Convertible Preferred Stock as
of June 30, 2004. The dividends were paid with 3,256 additional shares of
Series E Convertible Preferred Stock. Each share of Series E Convertible
Preferred Stock is convertible into 100 shares of our common stock. The
Company recorded a non-cash deemed dividend of $289,784 related to the issuance
of these dividend shares due to the fact that the conversion price on the
dividend shares was lower than the market price of the Companys common stock
on the date of issue. - 15 -




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On July 15, 2004, a holder of the Companys Series E Convertible Preferred
Stock converted 4,000 shares of Series E Convertible Preferred Stock into
400,000 shares of common stock. On September 2, 2004 the Company issued a two year warrant to purchase 65,000
shares of its Common Stock at $1.59 per share to a company controlled by
Michael Stelter, one of the Companys directors, as compensation for marketing
services received. The warrants were valued at $29,900 using a modified
Black-Sholes option pricing model and were charged to operations during the
period. On September 3, 2004 the Company issued a two year warrant to purchase 20,000
shares of its Common Stock at $1.55 per share to a consultant for services
received. The warrants were valued at $9,600 using a modified Black-Sholes
option pricing model and were charged to operations during the period. On September 13, 2004, a holder of the Companys Series E Convertible Preferred
Stock converted 1,067 shares of Series E Convertible Preferred Stock into
106,700 shares of common stock. On October 20, 2004, the Board of Directors authorized payment of dividends
payable on our Series E Convertible Preferred Stock for the calendar quarter
ending September 30, 2004 to shareholders of record of our Series E Convertible
Preferred Stock as of September 30, 2004. The dividends were paid with 3,253
additional shares of Series E Convertible Preferred Stock. Each share of
Series E Convertible Preferred Stock is convertible into 100 shares of our
common stock. The Company recorded a non-cash deemed dividend of $120,354
related to the issuance of these dividend shares due to the fact that the
conversion price on the dividend shares was lower than the market price of the
Companys common stock on the date of issue. - 16 -




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion regarding the Company along with the
Companys financial statements and related notes included in this quarterly
report. This quarterly report, including the following discussion, contains
forward-looking statements that are subject to risks, uncertainties and
assumptions. The Companys actual results, performance and achievements in
2004 and beyond may differ materially from those expressed in, or implied by,
these forward-looking statements. See Cautionary Note Regarding
Forward-Looking Statements. Overview We are a developer, manufacturer and integrator of energy savings technologies,
and building automation systems as well as an independent developer of
scalable, negative power systems. We currently market the EnergySaver, and the
GlobalCommander energy conservation technologies, as well as our independent
development of scalable, negative power systems under the trade name, Virtual
Negawatt Power Plan or VNPP. Electric City is based in Elk Grove Village,
Illinois and is traded on The American Stock Exchange under the symbol ELC.
Our premier energy saving product is the EnergySaver system, which reduces
energy consumed by lighting, typically by 20% to 30%, with minimal reduction in
lighting levels. This technology has applications in commercial buildings,
factories and office structures, as well as street lighting and parking lot
lighting. Combining the technologies of the EnergySaver and GlobalCommander
led to the development of our Virtual Negawatt Power Plan concept, which is
essentially a negative power system which we market primarily to utilities as a
demand response system. We believe that the Electric City VNPP is the first
demand response system to provide this level of control to a utility without
requiring active customer participation and without impacting a customers
operations or ability to do business. In October 2003, we entered into an
agreement with Commonwealth Edison (ComEd) to develop the first 50-megawatt
VNPP system, to be located in northern Illinois. We anticipate that
approximately 1,500 EnergySavers will be required to deliver the 50 megawatts
of curtailment envisioned under this contract. We have begun to install
EnergySavers under this program and expect to complete the installation of
units over the next 18 to 24 months. In addition to our EnergySaver system, we
design, install and monitor building control and environmental systems through
our subsidiary Great Lakes Controlled Energy Corporation (Great Lakes). Results of Operations Our revenues reflect the sale of our products, net of allowances for returns
and other adjustments. Revenues of Electric City and its subsidiary are
generated from the sale of products and services, the vast majority of which
are sold in the U.S. Our cost of goods sold consists primarily of materials and labor. Also
included in our cost of goods sold are freight, charges from third parties for
installation of our products, costs of operating our manufacturing facility,
charges for potential future warranty claims, and royalty costs related to
EnergySaver sales. Cost of goods sold also includes the wages and expenses of
our engineering group at Great Lakes. Sales and gross profits depend, in part, on the volume and mix of products sold
during any given period. Generally, products that we manufacture have a higher
gross profit margin than products that we purchase and resell. A portion of our operating expense is relatively fixed, such as the cost of our
facilities. Accordingly, an increase in the volume of sales will generally
result in an increase to our gross margins since these fixed expenses do not
increase proportionately with sales. We have not consistently utilized the
manufacturing capacity of our facility and, therefore, believe that the fixed
nature of some of our expenses would - 17 -




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##### Table of Contents



contribute to an increase in our gross margin in future periods if sales
volumes increase. In particular we believe that our facility in Elk Grove
Village can support a sales level of EnergySaver products of approximately $15
million to $20 million per year without a significant further investment in
fixed assets. Selling, general and administrative (SG&A) expenses include the following
components:  
    
    direct labor and commission costs related to our employee sales
force;
    
    expenses related to our non-manufacturing management, supervisory
and staff salaries and employee benefits;
    
    commission costs related to our independent sales representatives
and our distributors;
    
    costs related to insurance, travel and customer entertainment and
office supplies costs and the cost of non-manufacturing utilities;
    
    costs related with marketing and advertising our products;
    
    costs of outside professionals such as lawyers, accountants, and
investor relations professionals;
    
    research and development expenses;
    
    costs related to administrative functions that serve to support the
existing businesses of the Company, as well as to provide the
infrastructure for future growth. Interest expense for continuing operations includes the costs and expenses
associated with working capital indebtedness, the mortgage on our headquarters
building, a convertible term loan, and various auto loans, all as reflected on
our current and prior financial statements. Also included in interest expense
is amortization of the debt discount which includes the fair value of the
warrants issued to Laurus Master Fund, as well as the value of beneficial
conversion feature attributed to the Convertible Term Loan. Interest expense
also includes amortization of deferred financing costs related to the credit
facility with Laurus Master Fund. Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003. Our total revenue for the three-month period ended September 30, 2004 declined
$285,241 or 33.3% to $571,780 as compared to $857,021 for the three month
period ended September 30, 2003. Revenue related to EnergySaver sales declined
approximately $162,000, or 62%, to approximately $98,000 for the three months
ended September 30, 2004 as compared to approximately $260,000 for the same
period in 2003. Results for the third quarter of 2004 do not include revenue
from the sale of equipment under the ComEd contract as is more fully described
below. The decline in EnergySaver revenue is primarily due to a shift in the
Companys focus from commercial sales to the Companys utility initiatives, and
in particular the ComEd and Xcel VNPPs. The ComEd VNPP agreement was finalized
during the third quarter of 2003 and may increase in size by another 50
megawatts as the result of a non-binding letter of understanding signed during
the third quarter of 2004. As a result, the Companys in house sales resources
have been focusing efforts on the project and actively seeking users to
participate in the program. In addition to working to finalize the letter of understanding with ComEd to
explore expanding the VNPP program to 100 megawatts, management was also
focused during the most recent quarter on negotiations with Pacificorp on a
contract to provide a 27 megawatt VNPP for its service territory in Salt Lake
City, Utah. The Company recently received notice that its bid to provide 27
megawatts of curtailment capacity to Pacificorp was conditionally accepted,
pending completion of contracts satisfactory to both parties. We now believe
that contract negotiations can be completed before the end of November. While working on the foregoing, Company management directed selling efforts
toward scalable, multi-site customers to participate in the VNPP systems in
Chicago, Denver, Ontario and beyond. Customers who have signed contracts or
letters of intent to participate include but are not limited to Cintas, Dean
Foods, Galyans, Georgia Pacific, Heinz North America, Home Depot, Kohls, Meijer
Stores, Midwest - 18 -




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Warehouse, Petes Fresh Markets, Owens Corning, Sharp Electronics, and
Westfield Shopping Centers. While not all customer facilities will fit the
VNPP program requirements due to facility size, installation cost or other
issues, many do. The ComEd VNPP is structured as a service agreement with a 13 year term in
which Electric City will provide up to 50 MWs of curtailment capacity to ComEd
at a fixed price per kilowatt of installed capacity, payable quarterly in
arrears whether the capacity is used or not as the capacity is installed.
During the third quarter of 2004 we signed a letter of understanding with
ComEd, which among other things contemplates a doubling of the size of the
program to 100 megawatts and subject to certain conditions, modification of
pricing in a manner which we believe should be favorable for the Company.
While we have agreed in principle with ComEd to these changes, execution of
amended agreements will depend upon finalization of regulatory changes
necessary for ComEd to include the costs of the program in its rate base so
that it can recover the cost of the program from its customers. The Illinois
Commerce Commission has historically encouraged demand response programs such
as our VNPP, and thus far has not indicated it will oppose the proposed changes
sought by ComEd. We hope that the amendment to our agreement with ComEd will
be executed in definitive form in late 2004 or early 2005 and that the
necessary regulatory approvals will be obtained sometime thereafter.. ComEd has provided $1 million as a deposit toward the future purchase of
curtailment capacity under the VNPP program. These funds have helped cover the
cost of building and installing equipment during the initial phases of the
program. We hope that funding required to complete the project will be
generated through the sale of the contract and equipment to a limited liability
company (the LLC) which will be created by a Chicago based investment bank.
We believe that we have investors and lenders who are ready and willing to fund
the LLC, but the closing, including completion of final documentation, is
awaiting execution of the amendment to the ComEd agreement. Our ability to
close this transaction has been delayed as a result of ComEds desire to await
ICC approval of regulatory changes necessary to include the cost of the VNPP in
it rate base. As a result of this delay, we have requested ComEd to provide
additional advanced funding in the form of additional deposits so that we can
continue to ship and install product prior to securing the funding from the
LLC. ComEd has no obligation to provide additional advanced funding. We have not recognized revenue on equipment shipped to date under the ComEd
agreement, pending execution of the amendment to agreement and the possible
transfer to the LLC. We hope that if we sell the contract and equipment to the
LLC as described above, we will be able to recognize revenue on the sale at the
time of transfer to the LLC, but there is a chance that due to the structure of
the LLC or the terms of the sale we will not be permitted to do so under
current accounting rules. In this case, we would receive payment for the
equipment at the time of transfer, but would recognize the revenue and related
costs over the 13 year term of the underlying ComEd contract. This would
result in the conversion of equipment revenue to annualized service revenue.
It is possible that future VNPPs will be treated similarly, which could result
in annualized service revenue from multiple contracts with terms of 10 to 15
years. The effect of this treatment would be to build a base of longer-term
recurring revenue versus up-front equipment revenue for accounting purposes
(although we would receive payment earlier than the revenue is recognized).
After the first transfer to the LLC, we anticipate transferring newly installed
equipment and receiving payment on a regular basis. The ComEd agreement is
expected to result in shipments of approximately 1,500 units over the next 18
to 24 months. EnergySaver shipments are expected to increase during 2005 as a
result of the ComEd program in combination with continuing and new sales to
commercial customers. Revenue from the sale of building automation products and services decreased
approximately $123,000, or 21% to $474,000 during the three month period ended
September 30, 2004, from approximately $597,000 recorded in the same period of
2003. Revenue in this segment is recognized as work is completed and material
is delivered to the job site, thus will vary based on the level of activity
during a particular period. This segment completed two of the five long-term
projects it was working on during - 19 -




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the fourth quarter of 2003 and anticipates completing another project during
the fourth quarter of 2004. We are hoping to begin work on one or two new long
term projects before the end of 2004 and have been working on various short
term retro-fit projects in the interim. We expect the revenue for this segment
to remain largely unchanged in future periods from the level realized in the
most recent quarterly reporting period. Cost of sales for the three-month period ended September 30, 2004 declined
$243,681, or 28% to $625,092 from $868,773 for the three-month period ended
September 30, 2003. Gross profit for the third quarter of 2004 declined
$41,560 to a loss of $53,312 from a loss of $11,752 in the third quarter of
2003. The decline in gross profit is primarily due to the decline in revenue.
In addition, the Building Automation and Controls segment defers recognition of
all job related profits until the completion of the associated project and did
not complete any long-term projects during the third quarter of 2004. This
segment anticipates completing one of its long-term projects during the fourth
quarter of 2004, at which time it will recognize any profit associated with the
project. Profits in the EnergySaver business are in part influenced by sales
volume due to the fixed nature of our manufacturing overhead. As volume
increases as a result of the ComEd project, this fixed overhead will be spread
over more production, which should contribute to an improvement in the gross
margin in this business segment. SG&A for the three-month period ended September 30, 2004 increased $107,415 or
10.1% to $1,166,831, from $1,059,416 for the three-month period ended September
30, 2003. The increase in SG&A expense was primarily the result of increases
in legal expenses related to an ongoing dealer arbitration and personnel
related costs as we have added headcount to ensure proper execution of the
ComEd contract as a result of our need to implement installations in the latter
part or 2004 and throughout 2005. The arbitration is scheduled to be heard in
November 2004, after which our legal expenses should return to normal levels,
but we expect to experience a slight increase in SG&A in future periods as a
result of these headcount additions. Other expense for the three-month period ending September 30, 2004 increased
$72,510, to $77,296 from $4,786 for the three-month period ended September 30,
2003. Interest expense for the three-month period ended September 30, 2004
increased $75,267 as the result of the addition of a $1 million convertible
term loan in September 2003. Included in interest expense for the third
quarter of 2004 was amortization of the deferred issuance costs and the debt
discount related to this convertible term loan totaling $64,784. There was no
such amortization recorded in the year earlier period. Interest income of
$5,924 for the third quarter of 2004 was $2,757 higher than that recorded in
the third quarter of 2003 due to higher invested cash balances and slightly
higher interest rates. Our dividend expense for the third quarter of 2004 decreased $934,255, or 67.7%
to $445,634 from $1,379,889 for the same period in 2003. We accrued dividends
of $325,280 and $663,408 on our Convertible Preferred Stock during the
three-month periods ended September 30, 2004 and 2003, respectively. The
dividends accrued during the third quarter of 2004 were satisfied through the
issuance of 3,253 additional shares of our Series E convertible preferred
stock, while the dividends accrued during the third quarter of 2003 were
satisfied through the issuance of 66,341 shares of our Series A, C and D
convertible preferred stock. We were required to recognize non-cash deemed
dividends of $120,354 and $716,481 on September 30, 2004 and September 30,
2003, respectively due to the fact that the conversion price on the shares
issued in satisfaction of the accrued dividend had a conversion price that was
lower than the market price of our common stock on the date of issuance of the
dividend shares. The closing market price of our stock on September 30, 2004
was $1.37 as compared to $2.08 on September 30, 2003. Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003. Our total revenue for the nine-month period ended September 30, 2004 declined
$1,732,936 or 47.1% to $1,943,559 as compared to $3,676,495 for the nine-month
period ended September 30, 2003. Revenue related to EnergySaver sales declined
approximately $1,236,000, or 68%, to approximately $569,000 for - 20 -




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the nine-month period ended September 30, 2004 as compared to approximately
$1,805,000 for the same period in 2003. Results for the nine-month period
ended September 30, 2004 do not include revenue from the sale of equipment
under the ComEd contract, as described above. The decline in EnergySaver
revenue is primarily the result of a shift in the markets response to the
Companys new utility initiative, and in particular the ComEd and Xcel VNPPs.
The Companys in-house sales resources have been focusing on signing up hosts
to participate in the ComEd program rather than on commercial sales. The
Company continues to rely upon third party distributors and dealers for direct
sales of EnergySavers in markets where a VNPP does not exist. For additional
information on the ComEd VNPP please refer to the discussion of the third
quarter results above. Revenue from the sale of building automation products and services declined
approximately $496,000, or 27% to approximately $1,375,000 during the nine
month period ended September 30, 2004, from approximately $1,871,000 recorded
in the same period of 2003. Revenue in this segment is recognized as work is
completed and material is delivered to the job site, thus will vary based on
the level of activity during a particular period. The segment had several
large projects that were particularly active during the first nine months of
2003 which contributed to the higher level of revenue during that period. All
but two of these projects have since been completed and been replaced by
various smaller projects that the segment has been working on during 2004. We
expect revenue for this segment to remain at current levels through the balance
of 2004 and into 2005. Cost of sales for the nine-month period ended September 30, 2004 declined
$1,477,033 or 42.4% to $2,008,184 from $3,485,217 for the nine-month period
ended September 30, 2003. Gross profit for the first nine months of 2004
decreased $255,903 to a loss of $64,625 from a profit of $191,278 during the
same period in 2003. The decline in gross profit is primarily due to the
decline in revenue. In addition, the Building Automation and Controls segment
defers recognition of all job related profits until the completion of the
associated project and did not complete any long-term projects during the first
nine months of 2004. This segment anticipates completing one of its long-term
projects during the fourth quarter of 2004, at which time it will recognize any
profit associated with the project. SG&A for the nine-month period ended September 30, 2004 declined $14,812 or
0.5% to $3,168,940, as compared to $3,183,752 for the nine-month period ended
September 30, 2003. Contributing to the decline in SG&A were reductions in
salary expense, sales commissions and charges related to investor relation
services. These reductions were largely offset by increases in legal and
marketing expenses. Other expense for the nine-month period ending September 30, 2004 increased
$538,507 to $566,751 from $28,244 for the same period in 2003. Interest
expense for the nine-month period ended September 30, 2004 increased $550,013
as the result of the addition of a $1 million convertible term loan in
September 2003. Included in interest expense for the first three quarters of
2004 was amortization of the deferred issuance costs and the debt discount
related to this convertible term loan totaling $529,733. There was no such
amortization recorded in the year earlier period. Interest income of $17,660
for the first nine months of 2004 was $11,506 higher than the same period in
the prior year due to higher invested cash balances and higher interest rates. During the first nine months of 2003 we agreed to sell substantially all of the
assets and to transfer most of the liabilities of our Power Management segment
to a group of investors that included members of the segments management. The
sale closed on June 3, 2003, effective as of May 31, 2003. As required by SFAS
144 the operating results as well as the loss on disposal for this segment have
been presented as discontinued operations. During the nine-month period ended
September 30, 2003 we recorded an operating loss of $302,503 and a $764,148
loss on the disposal of the segment. Our dividend expense for the first nine months of 2004 increased $1,019,406 to
$4,232,539 from $3,213,133 for the same period in 2003. We accrued dividends
of $1,308,780 and $1,871,385 on our Convertible Preferred Stock during the
nine-month periods ended September 30, 2004 and 2003, - 21 -




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respectively. This decline in accrued dividends is the result of the reduction
in the number of preferred shares outstanding and a reduction in the dividend
rate that resulted from the redemption and exchange effected in March 2004.
Also contributing to the decline was a reduction in the number of preferred
shares outstanding resulting from the election of two holders of preferred
stock to convert a total of 5,067 shares of preferred stock to shares of common
stock. The dividends accrued during the first nine months of 2004 and 2003
were satisfied through the issuance of 13,088 and 187,139 additional shares of
our preferred stock, respectively. As part of the redemption and exchange,
shares of old preferred stock were exchanged for shares of the new Series E
preferred stock at the rate of 10 shares of old preferred for each share of new
Series E preferred stock. Additionally, each share of old preferred stock was
convertible into 10 shares of common stock, whereas each share of new Series E
preferred stock is convertible into 100 shares of common stock. We were
required to recognize non-cash deemed dividends of $1,048,301 and $954,764
during the first nine months of 2004 and 2003, respectively, due to the fact
that the conversion price on these dividend shares was lower than the market
price of our common stock on the date of issue. The increase in this deemed
dividend is primarily the result of the increased difference in the market
price of our common stock relative to the conversion price of the dividend
shares on the date of issuance of these dividend shares. In addition, despite
the fact that we believe the redemption and exchange transaction was favorable
for the Company and its common stockholders (see note 9 to the financial
statements), we were required to record a non-cash deemed dividend on the
transaction of $1,860,458. For accounting purposes the transaction, which
closed in March 2004, was viewed as a redemption for cash and shares of Series
E Preferred stock. The non-cash deemed dividend was determined by comparing
the fair value of the consideration given (the cash and the market value of the
Series E Preferred) to the carrying value of the preferred stock that was
redeemed. The fair value of the consideration given exceeded the carrying
value of the existing preferred primarily due to the fact that the market price
of our common stock was higher on the day the redemption and exchange
transaction closed than it was when the preferred stock was originally issued.
During the first nine months of 2004 we also incurred a $15,000 deemed dividend
when we agreed to extend the expiration date on warrants to purchase shares of
our Series E Convertible Preferred stock from September 30, 2004 to December
31, 2004. We agreed to extend these warrants to permit holders who
participated in the redemption and exchange more time to exercise their
warrants so that if they choose to exercise they can do so without violating
the short swing trading rules of section 16(b) of the Securities Act of 1934 or
our insider trading policy which prohibits the trading of our securities during
certain blackout periods prior to the filing of our financial statements.
Dividend expenses for the first nine months of 2003 also included $386,984 of
non-cash deemed dividends associated with the issuance of the Series D
Convertible Preferred stock. As is more fully described in Note 9 to our financial statements, we completed
a redemption and exchange offering on March 22, 2004 in which we redeemed
538,462 shares of our outstanding Series A, Series C and Series D Convertible
Preferred Stock (the Existing Preferred), and exchanged the remaining
2,104,509 shares of Existing Preferred into 210,451 shares of a new Series E
Convertible Preferred Stock at the rate of 10 shares of Series E Convertible
Preferred Stock for each share of Existing Preferred. The Existing Preferred
Stock carried a dividend rate of 10% payable at the Companys election in cash
or in additional shares of preferred stock during the first three years
following issuance. After the third anniversary of issuance we were required
to pay all dividends in cash and the dividend rate increased by 1⁄2% every
six months until it reached 15%, where it would remain until the shares were
converted or redeemed. The Series E Preferred carries a 6% dividend that is
payable at the Companys election in cash or additional shares of Series E
Preferred for as long as the shares remain outstanding. The reduction in the
number of outstanding shares of preferred stock, in combination with the
reduction in the dividend rate, will significantly reduce the dilutive effect
of the payment-in-kind dividend on the preferred stock in future periods. Liquidity and Capital Resources As of September 30, 2004, we had cash and cash equivalents of $2,657,139
compared to $2,467,023 on December 31, 2003. Our debt obligations as of
September 30, 2004 consisted of a convertible secured - 22 -




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term note of $676,790, a mortgage of $607,000 on our facility in Elk Grove
Village Illinois, and a vehicle loan of approximately $6,400. Our principal cash requirements are for operating expenses, including employee
costs, the costs related to research and development, advertising costs, the
cost of outside services including those providing accounting, legal,
engineering and consulting services, and the funding of inventory and accounts
receivable, and capital expenditures. We have financed our operations since
inception through the private placement of our common stock, preferred stock
and various secured and unsecured loans. Net cash increased $190,116 during the first nine months of 2004 as compared to
increasing $1,027,065 during the same period in 2003. Cash consumed by
operating activities increased 19.2% to $3,063,810 during the first nine months
of 2004 as compared to $2,570,087 during the same period in 2003. Cash used to
fund the net loss before changes in working capital, increased $185,254 or
6.2%, to $3,169,547 during the first nine months of 2004 from $2,984,293 during
the same period in 2003. The increased use of cash is primarily the result of
the decline in gross profit resulting from lower revenue during the first nine
months of 2004 and higher legal expenses related to an ongoing dealer
arbitration. Changes in working capital generated cash of $17,480 during the first nine
months of 2004 as compared to $414,206 during the same period of 2004.
Declines in accounts receivable generated $400,987 during the first nine months
of 2004, while increases in inventory and other current assets consumed
$469,012 during the same period. The decline in accounts receivable resulted
from receipt of amounts held as retention until completion of larger Building
Automation and Controls projects as well as improved collections and the
slowdown in sales during the period. The increases in inventory and other
current assets were both related to the ramp-up in the ComEd program. Declines
in accounts payable and accrued expenses consumed cash of $304,308 during the
nine-month period ended September 30, 2004. This decline is primarily the
result of payments by Great Lakes to subcontractors who worked on long term
projects that were completed in the fourth quarter of 2003. Increases in
deferred revenue and customer deposits offset the decline in accounts payable
and accrued expenses. Deferred revenue increased $4,296 as a result of the
deferred recognition of profits on building automation projects and customer
deposits increased $473,774 due to the receipt of a $500,000 pre-payment from
ComEd for curtailment capacity. Declines in accounts receivable and inventory
generated $889,859 during the first nine months of 2003, while other current
assets increased consuming $31,263. The decline in accounts receivable
resulted from improved collections and the slowdown in sales during the third
quarter of 2003. The decline in inventory came primarily from the Energy
Technology segment where we focused on reducing the working capital tied up in
inventory by doing a better job of forecasting our raw material and finished
goods requirements. Declines in accounts payable and accrued expenses consumed
cash of $463,729 during the nine-month period ended September 30, 2003. The
decline in accounts payable and accrued expenses was due in large part to a
decrease in purchases in the Energy Technology segment during the period. Investing activities consumed cash of $13,241 during the nine-month period
ending September 30, 2004 as compared to generating $910,897 during the same
period in 2003. We invested $13,241 and $18,135 in new equipment during the
nine month periods ended September 30, 2004 and 2003, respectively. In June
2003, we sold certain assets and transferred certain liabilities of our Power
Management business, generating cash proceeds of $929,032. Financing activities generated cash of $3,276,167 and $2,686,255 during the
nine-month periods ended September 30, 2004 and 2003, respectively. During
2004, we raised $11,000,000 through the issuance of a package of securities
that included shares of our common stock and 5 year warrants to purchase
additional shares of common stock. We used $7,000,006 of the net proceeds from
this issuance to effectuate a redemption and exchange offer for our Series A,
Series C and Series D Convertible Preferred Stock. We incurred expenses related
to these transactions of $897,135. During the period we also made scheduled
principal payments on our mortgage and auto loan of $29,340 and received
$193,648 in net - 23 -




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proceeds from the exercise of warrants to purchase shares of our common and
preferred stock. During 2003, we entered into several private placement
transactions in which we sold securities including shares of our common stock,
shares of our Series D Convertible Preferred stock, preferred stock warrants
and common stock warrants, generating gross proceeds of $3,169,916, which was
partially offset by issuance costs of $301,290. We used a portion of the
proceeds generated from the sale of our Power Management segment to repay
$298,000 in equipment loans and to pay down the outstanding balance on our
revolving line of credit of $500,000. We made scheduled principal payments of
$75,769 on various loans during the first nine months of 2003 and borrowed
$10,000 to finance the purchase of new equipment. In September 2003 we closed
on a new financing agreement under which we generated gross proceeds of
$1,000,000 through the issuance of a term note and gained access to a
$2,000,000 revolving credit facility, which as of September 30, 2004 was
unused. The proceeds from the term note were partially offset by issuance cost
of $304,400. Also during September 2003, in consideration of a $47,000
prepayment, American Chartered Bank agreed to renew and extend the mortgage on
our building to February 1, 2005. During 2003 holders of certain warrants
exercised their rights to purchase common stock, generating $32,000 in cash.
During 2003 we also received a payment of $798 from a stockholder which
represented the short-swing profit inadvertently earned when he purchased
shares of our stock within six months of selling shares, which is a violation
of section 16(b) of the Securities Act of 1934. Our mortgage with American Chartered Bank matures on February 1, 2005, at which
time we will owe a balloon payment of $595,000, unless we refinance or extend
the mortgage prior to the maturity. It is our intent to attempt to refinance
the mortgage with American Chartered Bank or another lender prior to the end of
2004. We currently have a $2 million convertible revolving credit facility with
Laurus Master Fund, Ltd. (Laurus). The revolving credit facility provides
for borrowings of up to the lesser of (i) $2 million or (ii) 90% of our
eligible accounts receivable. We have not borrowed under the facility, thus it
remains fully available to the extent of our eligible receivables. As of
September 30, 2004 eligible receivables would support borrowings of
approximately $615,000 under the facility. The revolving credit facility
expires on September 11, 2006 and accrues interest at the rate of prime
(currently 4.75%) plus 1.75%. We have the option of paying interest and
principal, or prepaying all or a portion of the advances under each Secured
Convertible Revolving Note, with shares of our common stock at the fixed
conversion price of $1.64 per share, provided that the closing price of our
common stock is greater than $1.88 per share for the 11 trading days
immediately proceeding the payment date and that the shares are registered with
Securities and Exchange Commission. We have filed a registration statement
with respect to these shares. In addition, Laurus has the option to convert
all or a portion of the advances under any Secured Convertible Revolving Note
into shares of our common stock at any time, subject to certain limitations, at
a fixed conversion price of $1.64 per share. The revolving credit facility is
secured by a blanket lien on all of our assets, except for our real estate. Our ability to continue the development, manufacturing and the expansion of
sales of our products, including the EnergySaver, the GlobalCommander, VNPP and
building automation products, will require the continued commitment of
significant funds. The actual timing and amount of our future funding
requirements will depend on many factors, including the amount and timing of
future revenues, our ability to collect our receivables in a timely manner, the
level and amount of our product marketing and sales efforts, the magnitude of
research and development, and our ability to improve margins. In an attempt to move the Company to a position where it can start to generate
positive cash flow, our management has set the following key objectives for
cash flow improvement:  
    
    Successfully execute on the ComEd contract. Executing on ComEd
includes signing up hosts, installing equipment and transferring the
equipment and contract to a third party investor. We believe that this
is important from several different perspectives. First we anticipate
that it will have a positive impact on our cash flow. Secondly, we
believe it will establish Electric City as a - 24 -




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leader in negative power development, thereby supporting VNPP
opportunities with other utilities. And finally we believe it will lead
to increased commercial sales of the EnergySaver as hosts who participate
in the ComEd VNPP but also have operations outside the ComEd territory
gain exposure to the technology. This project is under contract and
therefore we are focusing a great deal of our resources on this project.
We have hired and will be hiring additional personnel as part of our
efforts to keep this project on schedule.
    
    Increase the profitability of EnergySaver sales. Increasing the
margins earned on EnergySaver sales will also have an immediate and
positive impact on our cash flow. We have seen improvements in
EnergySaver margins over the past two years, but believe that the
product has the potential for significantly higher margins. We believe
that increased volumes that will result from the ComEd program will
lead to higher margins as a result of increased capacity utilization.
In addition, a price increase that we implemented effective January 1,
2004 should also lead to improved profitability of the EnergySaver.
    
    Build on the recent project successes at Great Lakes Controlled
Energy to make the Building Controls and Automation business become
profitable. Great Lakes has recently been awarded new business and is
currently working on existing projects that we believe will result in
this segment turning profitable during 2004. This segment must execute
effectively in order to realize the profitability potential of these
projects.
    
    Seek to opportunistically acquire complementary products, services
and/or technologies to expand our product offerings to the expanding
list of customer relationships we are developing through the VNPP
programs.
    
    Continue to aggressively manage our costs in order to conserve
cash. While we made significant progress in reducing our costs during
the last two years, we must continue to effectively manage all of our
costs so that they do not negate the anticipated improvement in
profitability in our Energy Technology and Building Automation and
Control segments.
    
    Be prepared to raise additional capital in limited amounts if
necessary to continue to fund operations until the business turns cash
flow positive. Our ability to raise additional capital in the future
will depend a great deal on our ability to make progress toward the
goals outline above. We believe that if we are successful in achieving these priorities we should
have sufficient liquidity to allow us to operate until our operations turn cash
flow positive, hopefully sometime during 2005. Our projections contain certain
key assumptions which may or may not occur. If any of the key assumptions
contained in our projections are proven wrong, we may begin to experience a
liquidity shortage sometime in 2005 that could force us to scale back our
growth plans, or, in the worst case, cease operations. If in the future we find that we need to raise additional capital (which may
require stockholder approval), our existing stockholders will likely experience
dilution of their present equity ownership position and voting rights,
depending upon the number of shares issued and the terms and conditions of the
issuance. Any new equity securities will likely have rights, preferences or
privileges senior to those of our common stock. Cautionary Note Regarding Forward-Looking Statements This discussion includes forward-looking statements that reflect the Companys
current expectations about its future results, performance, prospects and
opportunities. The Company has tried to identify these forward-looking
statements by using words such as may, will, expects, anticipates,
believes, intends, estimates or similar expressions. These
forward-looking statements are based on information currently available to the
Company and are subject to a number of risks, uncertainties and - 25 -




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other factors that could cause the Companys actual results, performance,
prospects or opportunities in the remainder of 2004 and beyond to differ
materially from those expressed in, or implied by, these forward-looking
statements. These risks, uncertainties and other factors include, without
limitation, the Companys limited operating history, the Companys history of
operating losses, customers acceptance of our products, the Companys use of
licensed technologies, risk of increased competition, risk that the Virtual
Negawatt Power Plan concept does not succeed, the Companys commercial scale
development of products and technologies to satisfy customers demands and
requirements, the possible need for additional financing and the terms and
conditions of any financing that is consummated, the limited trading market for
the Companys securities, the possible volatility of the Companys stock price,
the concentration of ownership, and the potential fluctuation in the Companys
operating results. For further information about these and other risks,
uncertainties and factors, please review the disclosures included under the
caption Risk Factors in Electric Citys filings with the Securities and
Exchange Commission. Except as required by Federal securities laws, Electric
City undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, changed
circumstances or any other reason, after the date of this document. - 26 -




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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The only significant exposure we have to market risk at this time is the risk
of changes in market interest rates. The interest rates on our debt facilities
are variable and change with changes in the prime rate. The interest rate on
our convertible term loan is equal to the prime rate (currently 4.75%) plus
1.75% or 6.5%, whichever is greater. The interest rate on our mortgage is
equal to the prime rate plus 1/2%. If the prime rate were to increase 1
percentage point, the annual interest cost on the term loan and mortgage would
increase by approximately $13,000. 
 ITEM 4. Controls and Procedures  a.
    
    Evaluation 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 as of the end of the period covered by this
report.b.
    
    Changes in internal controls.There were no significant changes in our internal controls or in other
factors that could significantly affect the Companys internal controls
during the period covered by this report.c.
    
    Disclosure controls and procedures.Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure. - 27 -




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PART II. OTHER INFORMATION 
 ITEM 2. Changes In Securities  (1)
    
    On September 2, 2004 the Company issued a two year warrant to purchase
65,000 shares of its Common Stock at $1.59 per share to a company
controlled by Michael Stelter, one of the Companys directors, as
compensation for marketing services received. The warrants were valued at
$29,900 using a modified Black-Sholes option pricing model and were
charged to operations during the period.(2)
    
    On September 3, 2004 the Company issued a two year warrant to purchase
20,000 shares of its Common Stock at $1.55 per share to a consultant for
services received. The warrants were valued at $9,600 using a modified
Black-Sholes option pricing model and were charged to operations during
the period.(3)
    
    On September 13, 2004, a holder of the Companys Series E Convertible
Preferred Stock converted 1,067 shares of Series E Convertible Preferred
Stock into 106,700 shares of common stock.(4)
    
    On October 20, 2004, the Board of Directors authorized payment of
dividends payable on our Series E Convertible Preferred Stock for the
calendar quarter ending September 30, 2004 to shareholders of record of
our Series E Convertible Preferred Stock as of September 30, 2004. The
dividends were paid with 3,253 additional shares of Series E Convertible
Preferred Stock. Each share of Series E Convertible Preferred Stock is
convertible into 100 shares of our common stock. The Company recorded a
non-cash deemed dividend of $120,354 related to the issuance of these
dividend shares due to the fact that the conversion price on the dividend
            shares was lower than the market price of the Companys common stock on
the date of issue. No underwriters were involved in any of the transactions described above. All
of the securities issued in the foregoing transactions were issued by us in
reliance upon the exemption from registration available under Section 4(2) of
the Securities Act, including Regulation D promulgated thereunder, in that the
transactions involved the issuance and sale of our securities to financially
sophisticated individuals or entities that were aware of our activities and
business and financial condition and took the securities for investment
purposes and understood the ramifications of their actions. The purchasers also
represented that they were accredited investors as defined in Regulation D
and/or were acquiring such securities for investment for their own account and
not for distribution. Other than the shares issued pursuant to the exercise of
the warrants referred to in (2) and (3) above, which have been registered under
the Securities Act of 1933, as amended, all certificates representing the
common stock so issued have a legend imprinted on them stating that the shares
have not been registered under the Securities Act and cannot be transferred
until properly registered under the Securities Act or an exemption applies.
Proceeds of the sales referred to in (1), (2) and (3) above were used for
general corporate purposes. 
 ITEM 6. Exhibits And Reports On Form 8-K.  (a)
    
    Exhibits 31.1
    
    
    Certificate of Chief Executive Officer pursuant
to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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31.2
    
    
    Certificate of Chief Financial Officer pursuant
to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    
    Certification of the Chief Executive Officer of
the Corporation Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code Pursuant to Section 906 of
the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of the Chief Financial Officer of
the Corporation Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
  (b)
    
    On August 16, 2004, the Company filed a report on Form 8-K
announcing the financial results of the quarter ended June 30, 2004.(c)
    
    On September 2, 2004, the Company filed a report on Form 8-K
announcing that it and Laurus Master Fund, Ltd. had entered into an
amendment to the credit facility dated September 11, 2003. 
 SIGNATURES In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. ELECTRIC CITY CORP.:Dated: November 15, 2004
    
    By:
    
    /s/ John MitolaJohn MitolaChief Executive Officer (principalexecutive officer)Dated: November 15, 2004
    
    By:
    
    /s/ Jeffrey MistarzJeffrey MistarzChief Financial Officer (principalfinancial and accounting officer)
 - 29 -