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U.S. Securities and Exchange Commission Washington, D. C. 20549 Form 1O-KSB þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934  o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
 Commission File Number : 0-26226 MICROFIELD GROUP, INC.  Oregon
(State or other jurisdiction
of incorporation or organization)
    
    93-0935149
(I. R. S. Employer
Identification No.)
 1631 NW Thurman St., Suite 200
Portland, Oregon 97209
(Address of principal executive offices and zip code) (503) 419-3580
(Issuers telephone number) Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes þ    No
o Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained
in this form, and no disclosure will be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB. o Issuers revenues for its most recent fiscal year were $36,467,000. The aggregate market value of voting stock held by non-affiliates of the registrant at April 1,
2005 was
$5,547,485 computed by reference to the average bid and asked prices as reported on the Nasdaq
Bulletin Board Market. The number of shares outstanding of the Registrants Common Stock as of April 1, 2005 was
18,491,618 shares (this number does not include 951,455 shares
registered in Issuers name and pledged to secure a liability). The index to exhibits appears
on page 81 of this document. Transitional Small Business Disclosure Format (check one): Yes o   No þ




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MICROFIELD GROUP, INC.
FORM 10-KSB INDEX PagePART IItem 1. Description of Business
    
    
    3Item 2. Description of Property
    
    
    8Item 3. Legal Proceedings
    
    
    8Item 4. Submission of Matters to a Vote of Security Holders
    
    
    8PART IIItem 5. Market for Common Equity and Related Stockholder Matters
    
    
    9Item 6. Managements Discussion and Analysis of Financial Condition or Plan of Operation
    
    
    12Item 7. Financial Statements
    
    
    32Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    65Item 8A. Controls and Procedures
    
    
    66PART IIIItem 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act
    
    
    68Item 10. Executive Compensation
    
    
    70Item 11. Security Ownership of Certain Beneficial Owners and Management
    
    
    71Item 12. Certain Relationships and Related Transactions
    
    
    73Item 13. Exhibits
    
    
    78Item 14. Principal Accountant Fees and Services
    
    
    80EXHIBIT 10.22EXHIBIT 10.24EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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This filing includes statements that may constitute forward-looking statements. These
statements are made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that
could cause or contribute to such differences that include, but are not limited to, competitive
factors, the success of new products and services in the marketplace, dependence upon third party
vendors, and the ability to obtain financing. By making these forward-looking statements, the
Company undertakes no obligation to update these statements for revisions or changes after the date
of this filing. 
 PART I 
 Item 1. Description of Business General Microfield Group, Inc. (the Company) specializes in the installation of electrical products and
services. The Companys objective is to leverage its assets and value to successfully build a
viable, profitable electrical services and technology infrastructure business. In September 2003, the Company acquired privately held Velagio, Inc. (Velagio) and Christenson
Technology Services, Inc. (CTS). In December, 2003 the service and technology teams of Velagio and
CTS were consolidated into one subsidiary under the name Christenson Velagio, Inc. (CVI) in order
to take full advantage of inherent synergies within the subsidiaries, as well as capture
competitive advantage. In the remainder of this document, when referring to the acquisitions of
either CTS or Velagio, or both, the acquired business may be referred to as CVI. The newly formed
organization conducts business in the electrical services and technology infrastructure sectors.
CVI has the ability to deliver the following products and services:  
    Computer Telephony Integration
    Digital Video CCTV Systems and Infrastructure
    Telecommunications Systems and Infrastructure
    Enterprise Security Systems
    Wireless Networking Solutions
    Life Safety Systems Design and Installation
    Information Technology Network Design & Engineering
    Voice/Data Systems and Infrastructure
    Electrical Design & Engineering
    Electrical Construction Services
    Lighting Services
    Electrical System Audits During 2003, the Company made the decision to discontinue the operations of Velagio and previously
acquired Innovative Safety Technologies, Inc. (IST). This decision was made based on the declining
sales in these two entities, and the fact that many of the employees whose focus was in sales of
these products and services were no longer with the Company. The net revenue and expenses of those
two entities for the years ended January 1, 2005 and January 3, 2004 are reported as Discontinued operations in the
consolidated statement of operations. The remaining assets and liabilities were merged into CVI in
December in conjunction with the combination of Velagio, IST and CTS. As of January 1, 2005,
Microfield Group, Inc. has one wholly-owned subsidiary, Christenson Velagio, Inc. Prior to October 24, 2000 the Company developed, manufactured, and marketed computer conferencing
and telecommunications products designed to enhance and facilitate group communications. The
Companys product lines consisted of a series of digital whiteboards, interactive rear projection
systems, and interactive plasma display systems sold under the brand name SoftBoard, along with a
variety of application software packages, supplies and accessories. On October 24, 2000 the assets
of the Company that were utilized in operating the SoftBoard business were sold to Greensteel,
Inc., a wholly-owned subsidiary of PolyVision Corporation. Prior to September 2002, the Company
had not been engaged in continuing operations since the date of the sale of its SoftBoard assets to
Greensteel. The Company currently receives royalties from PolyVision, based on sales of SoftBoard
products. These royalties are listed in the income statement under discontinued operations. 3




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The Company was incorporated in Oregon in 1986. The Companys executive offices are located at 1631
NW Thurman St., Suite 200, Portland, OR 97209 Products and Services The Company conducts business with the goal of providing organizations with electrical and
technology infrastructure products and services. The Companys main products and services include: Electrical Design & Construction Services Since its inception in 1945, the electrical services group that was acquired by the Company
established its business and the value of its name based on the quality and reliability of their
work. The Companys services include installation of lighting systems, wiring of high-rise
buildings, design-build on complex institutional or industrial locations, building control systems
and installation of emergency power systems. The Companys engineers, project managers and field
technicians take projects from concept through implementation. Digital Video CCTV Systems and Infrastructure Surveillance systems have quickly emerged as a high priority for facilities of all sizes in the
private and public sectors due to a number of environmental and social concerns. CVIs knowledge
in the design as well as implementation of sophisticated digital systems including cameras,
multiplexers, monitoring centers, switching devices and network infrastructure allows the Company
to provide a complete, turnkey source for systems of all sizes and levels of complexity. CVIs
engineers and technicians have the capability to design and install state-of-the-art fiber optic
networks and switching gear, IP Video Local Area Network (LAN) and Wide Area Network (WAN)
architectures, as well as highly sophisticated monitoring stations. Telecommunications Systems and Infrastructure Increasing levels of need and flexibility have continued to fuel growth in the area of facilities
telephony and IP Telephony systems. Competencies with most major manufacturers systems and
architectures allows the Company to provide correct scale and functionality in designs and provide
reliability through the installation and maintenance programs. Enterprise Security and Life Safety Systems The Companys extensive knowledge of access control systems, intrusion alarm systems and fire
protection systems, allows CVI to provide the highest level of protection available for most sizes
of enterprises. Providing a safe working environment, protection of company assets including
intellectual property, and reducing liability exposure are critical business needs that are met
with the Companys systems. CVIs ability to perform facility audits assists its customers in
evaluating site requirements or weaknesses in their existing systems and provides a basis for
recommendations. Included in this category of service (beyond physical site security) is our
ability to provide IT Network security including firewalls and VPN/Remote access security
functions. Wireless Networking Solutions Wireless networking solutions is one of the fastest growing segments of communications technology.
The Companys experience with WI-FI Networks, wireless telephony and its capability for on-site
assessments enables CVI to provide complete design and implementation services. The Pacific
Northwest has taken a leading position in the implementation of wireless hot spots both in the
private and public sector. As this high growth area expands, the Companys knowledge and real
world experience will assist customers in providing this level of capability to their locations. Information Technology (IT) Network Design & Engineering From designing of systems and infrastructure to implementation and maintenance, CVI has years of
field experience in the design and installation of complex IT network configurations. Whether it
is in the form of LANS, WANS, or MANS, switching and routing hardware or high speed Internet
access, CVIs employees have the knowledge and 4




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expertise in-house to handle any requirement. The Companys technical support staff capability is
well established and has an excellent reputation for technical competency during system
installation as well as subsequent service and repair. Sales and Distribution CVI generates sales through the relationships it has cultivated and the quality work product it has
maintained over its 58 year history. Prior to its acquisition by the Company, Christenson
Technology Services, in various forms since its inception, has primarily served the Northwest
market since 1945. The Christenson name has been a key component in building a well established,
loyal customer base. Much of the Companys sales are generated by word of mouth or through repeat
customer projects. Growth throughout its existence has been achieved by entering into additional
markets within the electrical services industry. The Companys staff regularly installs products and designs product configurations for customer
sites based on the products and/or services ordered by the customer, or according to plans
specified by the customer or general contractor. The Company may also enlist the assistance of
various subcontractors to provide specific services relative to the contract the Company has with
its customer. The Company normally delivers products or has products delivered directly to its customers, and
then installs those products as a part of the services provided to the customer. The Company does
not sell any products through distributors, dealers or other resellers as a part of its business. Customers With the acquisition of CVI, the Company now provides electrical and technology products and
services for a wide range of end use customers in the western United States. The Companys
customer base changed materially with the acquisitions in September 2003. The Companys revenues
for the eight and a half month period prior to the acquisitions of CVI and Velagio, were less than
$500,000. Revenues attained in the three and a half months of 2003 after the acquisitions were
completed, were in excess of $10 million. Revenues for the year ended January 1, 2005 were in
excess of $36 million. Approximately half of the Companys current revenue base comes as subcontracting work through
general contractors. CVIs customers span all major industries, including: government, education,
retail, entertainment, finance, health care, manufacturing and transportation. Major end user
customers include Evergreen School District, Allied Security, Portland Community College, Legacy,
Melvin Mark Properties and Boeing. For the years ended January 1, 2005 and January 3, 2004, no
single customer accounted for 10% of the Companys revenue. Acquisitions and Investments Microfields strategy was one that focused on the acquisition and deployment of products and
services with strong intellectual property asset value and the potential for significant growth.
During 2003, the Company completed two acquisitions. In September 2003, the Company merged with
privately held Velagio, Inc. (Velagio) and Christenson Technology Services, Inc. (CTS). Velagio
was a consulting firm that provided outsourced services for the development and implementation of
software packages. CTS was an electrical technology and electrical services firm. In December, 2003 the service and technology teams of Velagio and CTS were consolidated into one
subsidiary under the name Christenson Velagio, Inc. (CVI) in order to take advantage of potential
synergies within the subsidiaries. In conjunction with this business rationalization, a new
branding campaign for this consolidated structure was launched. A new logo and hallmarks were
developed to facilitate a cohesive message to the marketplace that leverages the equity and
reputation of the Christenson name in regional markets as well as to communicate the broader array
of service and capabilities brought to customers. During the fourth quarter of 2003, shortly after the acquisitions of Velagio and CTS, the Company
made the decision to discontinue the operations of IST and Velagio. The remaining assets and
liabilities were merged into CVI in December in conjunction with the combination of Velagio, IST
and CTS. The Company did not make any acquisitions in 2004. As of January 1, 2005, Microfield
Group, Inc. has one wholly-owned subsidiary, Christenson Velagio, Inc. 5




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The Companys current acquisition strategy is to evaluate potential merger opportunities as they
develop. Competition The Company, through its CVI subsidiary, competes in the electrical services, communications,
networking and energy management services markets. The principal competitive factors in the markets
in which the Company competes include price, service, product performance, the ability to provide a
broad range of products and services, conformance to industry standards, union representation of
the Companys workforce, market presence, and the ability to design and implement cost beneficial
and technologically advanced customer solutions. The electrical services industry is well established, and the Company competes mainly on the basis
of its excellent reputation for providing reliable, timely, cost effective, first class products
and services. A portion of this business is done through the bidding process either directly with
the customer or in a subcontracting role with a general contractor. Winning projects depends on
several factors including size of the jobs, price, customer service and reputation from prior work
completed. The Companys electricians and technicians are members of the local electrical union.
Union representation of the Companys workforce is also a factor in whether the Company is
successful in obtaining work in competitive situations. In the technology side of the business, the markets that the Company competes in are constantly
changing. While the services provided in bringing new technology to customers remain fairly
constant, the technology of the products sold or installed changes continually. This requires that
the Companys engineers and technicians remain in touch with new product introductions, and
advancing or emerging technologies. The Companys engineers and technicians are regularly trained
regarding safety, new products and technologies, and how to adapt or configure their customers
applications to take advantage of the new technologies. The Company has dozens of competitors in the electrical services and technology services markets.
Some of the Companys major competitors include, Capitol Electric Company, Dynalectric, Electrical
Construction Company, Hughes Electrical Contractors, LH Morris, Oregon Electric Group and Tice
Electric Company. Some of these companies compete with CVI across many of its product lines and
service offerings in both the electric services and technology services markets. The barriers to entry in the markets that the Company currently serves are relatively low and new
companies may be created that compete with CVI in various segments of its markets. Several of the
Companys competitors may have greater financial, engineering and technical resources, may be able
to compete for non-union only work, and may be able to provide a broader range of products and
services than the Company. The Companys success in competing in these markets depends on its
ability to provide timely service and creative technology offerings that provide its customers
long-term, cost effective solutions to their electrical and technology service requirements. Any
inability to effectively control and manage these competitive factors could have a material adverse
effect on the Companys business, operating results and the financial condition of the Company. Manufacturing and Supply CVI purchases telecommunication equipment, networking equipment, cabling, wiring and various other
equipment and supplies that it uses in customer applications, or that it sells and installs at
customer sites. The Company relies on various vendors for these products, and does not manufacture
any of the products that it sells or installs. The electrical services industry is a mature industry. As such, there are numerous vendors that
supply the products that CVI uses in this market. CVI purchases supplies from several of these
vendors, and has secondary sources for all products that it buys. CVI has had negative operating
cash flows in its business since it was acquired by Microfield. This negative cash flow has had a
measurable impact on the operations of the Company, and there is no assurance that the supply of
products and materials will continue to be available if the Companys working capital position
further deteriorates. The Companys goal is to keep its inventory of parts and supplies to a minimum. A fleet of
vehicles is leased by the Company for use by technicians and electricians in servicing customers.
Each vehicle has a stock of parts and/or tools used by CVI employees in their work. The inventory
on board the vehicles is kept at a fairly constant level, to match the work flow throughout the
year. Each technician and electrician has the authority to order and pick up parts 6




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as needed to fulfill job requirements in conjunction with the Companys purchase order policy. CVI
also maintains a stock of inventory and supplies at its main plant. The technology services business is subject to rapid technological developments, evolving industry
standards, changes in customer requirements, and new product introductions and enhancements. The
Companys future success in this industry depends on its ability to keep pace with these new
developments and requirements, and to provide customer solutions using current technology, on a
cost-effective and timely basis. Failure to keep pace with these customer requirements, industry
standards and technological developments could have a material adverse effect on the Companys
results of operations and financial condition. The Companys principal suppliers include Graybar Electric Co., Inc., Anixter, Inc., Platt Electric
Supply, Inc., Ronco Communications, Inc., Crescent Electric Supply, Inc., and North Coast Electric,
Inc. The Company generally believes it has good relationships with its current principal vendor
base. The Company buys products and supplies on both open account and job accounts, up to various limits,
specified by each particular vendor. Job accounts can be set up by a vendor for products or
supplies used on specific projects. The vendor is protected from the Companys non payment by lien
rights. Lien rights give vendors the legal ability to receive payment directly from their
creditors customer. The Company does not have a history of having lien rights filed against its
jobs. Should the Companys cash situation worsen, vendors could exercise their lien rights against
the Company, which could harm the Companys reputation in the markets where it does business. This
could have a material adverse effect on the Companys business, its operating results and financial
condition. The Company does not have any long-term contracts for the purchase of products or supplies with any
of its material vendors. Intellectual Property As a part of the purchase of IST in 2002, the Company owns United States Patent No. 5,288,945.
This patent covers the No Tug Plug and was issued in February 1994. The patent was purchased by
Innovative Safety Technologies, LLC in July 2002 from the original inventor. IST was granted the
Trademark for the mark No Tug Plug, in November, 2002. In November 2003, the Company made the
decision to discontinue the operations of IST. The Company still owns the above mentioned patent
and trademark. In September 2003, through the acquisition of CTS, the Company shares ownership of the
Christenson trade name. The previous owners of CTS own a separate entity that continues to do
business under the name Christenson Power Services (CPS). CPS uses the same branding and trade
dress of the Christenson name as does CVI, but with their separate name. CPS focuses on the
utility segment of this industry, which is not a major market for the Company. The Companys joint
ownership of the Christenson name and trade dress is not limited in any way. The owners of CPS
also maintain a significant ownership position in Microfield Group, Inc. Also in September 2003 through the acquisition of Velagio, the Company acquired the rights to the
Velagio name, which it now uses in its subsidiary Christenson Velagio, Inc. The Company protects its intellectual property rights through a combination of patent, trademark,
trade secret and other intellectual property law, nondisclosure agreements and other measures. The
Company believes, however, that its financial performance will depend more upon the service
excellence, technical knowledge and innovative design abilities of its employees, than upon such
protection. Government Approval or Regulations The Company is subject to certain local government regulations regarding Uniform Commercial
Building Codes. Many projects require inspection by local government building code inspectors.
There are no federal regulations related to the business. Employees The Company employed
approximately 255 and 285 full time persons as of January 1, 2005 and January 3, 2004,
respectively. The Companys workforce fluctuates based on the project work flow at any specific
point in time. 7




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Approximately 206 of the Companys employees are covered by collective bargaining agreements, and
the Company believes its relations with its employees are good. 
 Item 2. Properties The Company leased six facilities in Portland and Eugene, Oregon, during 2004. These facilities
consist of approximately 14,000 square feet of office space. The facilities are occupied pursuant
to both fixed-term, and month-to-month leases. The Company does not own or lease any manufacturing
space, and considers the premises adequate for its purposes for the immediate future. 
 Item 3. Legal Proceedings In March, 2004, Kurt Underwood (former President/CEO of Microfield Group, Inc.) filed a lawsuit in
Multnomah County Circuit Court, Portland, Oregon under case number 0403-02370 against Robert J.
Jesenik, JMW Capital Partners, Inc., Destination Capital, LLC, Microfield Group, Inc., Christenson
Electric, Inc., Steven M. Wright, Andrew S. Craig, Thomas A. Sidley, R. Patrick Hanlin, Michael
Stansell, Brian A. Oliver, Brian N. Christopher, Kevin D. Robertson, Christenson Group, LLC, and
Christenson Velagio, Inc. The lawsuit alleged that the Defendants violated Oregon securities law
and Oregon common law in connection with the following transactions (which closed simultaneously in
September 2003): (1) the merger of CTS Acquisition Co. (a wholly-owned subsidiary of the Company)
with and into Christenson Technology Services, Inc.; and (2) the merger of VSI Acquisition Co. (A
wholly-owned subsidiary of the Company) with and into Velagio, Inc. In addition, the lawsuit
alleged that Mr. Underwood was terminated as an employee entitling him to severance pay. The
lawsuit sought damages of approximately $1.4 million. On May 27, 2004, the Company, certain executives, board members and related companies filed two
separate answers, affirmative defenses, and counterclaims against Mr. Underwood in Multnomah County
Circuit Court alleging violations of Oregon Securities law and Oregon common law in connection with
the above named transactions. In addition, the countersuit alleged that Mr. Underwood was
terminated by the Company for good cause. The lawsuit sought damages of not less than $2.5 million
and return of the 3.4 million shares of Microfield stock held by Mr. Underwood in exchange for the
return of the shares of Velagio stock held by the Company. On May 11, 2005 the Company and Mr. Underwood entered into a Settlement Agreement under which both
parties agreed to drop their respective lawsuits. The Settlement Agreement provides that the
Company and certain defendants will jointly and severally purchase Mr. Underwoods Microfield Stock
for the aggregate purchase price of $362,500. The purchase price will be allocated as follows:
$50,000 to the purchase of Mr. Underwoods 119,050 Series 2 preferred shares and the balance to the
purchase of Mr. Underwoods 3,404,958 common shares. Additionally, the Settlement Agreement
terminates Mr. Underwoods Microfield Warrant. Payment under the Settlement Agreement must occur
no later than August 1, 2005 at 1:00 p.m. Pacific standard time. From time to time, claims are made against the Company in the ordinary course of our business,
which could result in litigation. Claims and associated litigation are subject to inherent
uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or
injunctions prohibiting the Company from selling one or more products or engaging in other
activities. The occurrence of an unfavorable outcome in any specific period could have a material
adverse affect on the Companys results of operations, financial position or cash flows for that period or future periods. 
 Item 4. Submission of Matters of a Vote of Security Holders Two matters were submitted to votes of the Companys shareholders during the year ended January 1,
2005. On September 1, 2004, the Company held a special Shareholders meeting, at which the
shareholders voted to increase the number of authorized shares of the Companys common stock from
25 million to 125 million. No other matters were brought before the shareholders. There were 19,878,059 votes represented at the meeting, and all were
unanimously cast for this matter, out of a total possible of 32,747,886 votes. Also on September 1, 2004, the Companys shareholders adopted the 2004 Stock Incentive Plan which
replaced the Companys 1995 Stock Incentive Plan. This new plan increased the number of shares
available for issuance by 10 8




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million shares. There were 19,878,059 votes represented at the meeting, and all were unanimously
cast for this matter, out of a total possible of 32,747,886 votes. 
 PART II 
 Item 5. Market for Common Equity and Related Stockholder Matters The Companys common stock is quoted on the Nasdaq Bulletin Board Market under the symbol
MICG.OB. The following table sets forth the high and low sales prices as reported by the Nasdaq
Bulletin Board Market for the periods indicated. Fiscal 2003
    
    
    Low
    
    
    
    HighFirst Quarter
    
    $
    0.16
    
    
    $
    0.44Second Quarter
    
    
    0.20
    
    
    
    0.57Third Quarter
    
    
    0.23
    
    
    
    0.80Fourth Quarter
    
    
    0.36
    
    
    
    0.73Fiscal 2004First Quarter
    
    $
    0.30
    
    
    $
    0.51Second Quarter
    
    
    0.31
    
    
    
    0.68Third Quarter
    
    
    0.31
    
    
    
    0.75Fourth Quarter
    
    
    0.35
    
    
    
    0.90
 There were 175 shareholders of record and the Company believes approximately 765 beneficial
shareholders at April 1, 2005. There were no cash dividends declared or paid in fiscal years 2004
or 2003. In April 2004, 4,605.265 shares of Series 4 preferred stock were issued in conjunction with a
$1,750,000 private placement. Each of these shares of preferred stock is convertible into 1,000
shares of the Companys common stock. Also in April 2004, 3,640.803 shares of Series 3 preferred stock were issued in exchange for the
conversion of previously existing debt in the amount of $1,529,000 owed to various related parties.
Each of these shares of preferred stock is convertible into 1,000 shares of the Companys common
stock. In November 2003, 3,333,333 preferred shares were issued in exchange for the conversion of a
previously existing $1.4 million debt owed by the Company. This conversion was completed in
conjunction with a $750,000 Series 2 preferred stock private placement subscribed to on September
26, and a conversion of $765,000 of existing debt into shares of Series 2 preferred stock, also on
September 26, 2003. Under the terms of the private placement agreements and the debt conversion agreements, a 6.5%
cumulative dividend based on the value converted and issued, is due to those shareholders of all three series
of preferred shares when declared by the board of directors. Dividends on those preferred shares
can only be declared if, in the discretion of the board of directors, the Company is in a cash flow
position sufficient to pay a dividend. The Company does not anticipate declaring such dividends on
that converted amount before there are legally available funds to pay that dividend. The Company
does not anticipate declaring any dividends on common stock. Securities Authorized for Issuance Under Equity Compensation Plans The following equity compensation information, as of January 1, 2005, is presented in compliance
with SEC regulation S-B Item 201(d). 9




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Number ofsecuritiesremainingavailable forNumber of
    
    
    
    
    
    
    future issuanceSecurities to be
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted average
    
    
    compensationexercise of
    
    
    exercise price of
    
    
    plans (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions and
    
    
    options and
    
    
    reflected inwarrants
    
    
    warrants
    
    
    column (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    2,163,049
    
    
    $
    0.46
    
    
    
    8,748,139Equity compensation
plans not approved
by security holders
    
    
    5,645,439
    
    
    $
    0.37
    
    
    
    -0-Total
    
    
    7,808,488
    
    
    $
    0.40
    
    
    
    8,748,139
 The Company has a Stock
Incentive Plan. At January 1, 2005, 2,163,049 shares of common
stock were reserved for issuance to employees, officers and directors to whom options have been
granted. Under the Plan, options may be granted to purchase shares of the Companys common stock
at fair market value, as determined by the Companys Board of Directors, at the date of grant. The
options are exercisable over a period of up to five years from the date of grant or such shorter
term as provided for in the Plans. The options become exercisable
over periods ranging between zero
and four years. On September 10, 2004, the Company entered into a Master Vehicle Lease Termination Agreement with
CLLLC (see Note 18), under which the Company terminated its previous master vehicle lease agreement
with CLLLC. Under the terms of this termination agreement, the Company was released from its
obligation under the previous master vehicle lease agreement. In consideration for this release
the Company issued 1,000,000 warrants to purchase the Companys common shares, which were valued at
$515,000 using the Black Scholes model. This warrant value was recorded in the Companys
consolidated balance sheet as common stock warrants, with a corresponding expense recorded in the
Companys consolidated statement of operations. In connection with the August 24, 2004 debt issuance by Destination Capital, LLC (see Note 18), the
Company is obligated to issue warrants to purchase the Companys common stock. According to the
terms of the debt issuance, warrants in the amount of 12.5% of the loan balance, outstanding on the
first day of each month, will be issued to the debt holders for each calendar month that the debt
is outstanding. Each warrant is exercisable into one share of common stock at the lesser of $0.38
per share or the price applicable to any shares, warrants or options issued (other than options
issued to employees or directors) while the loan is outstanding, and will expire in 2009. Prior to
this debt issuance, the Company exercised an option to convert $1,400,000 of outstanding debt into
preferred stock that is convertible into shares of common stock. This exercise, when aggregated
with all other outstanding equity arrangements, resulted in the total number of common shares that
could be required to be delivered to exceed the number of authorized common shares. In accordance
with EITF 00-19, the fair value of the 37,500 warrants initially issued in connection with the debt
issuance must be recorded as a liability for warrant settlement in the financial statements using
the Black-Scholes model, and any subsequent changes in the Companys stock price to be recorded in
earnings. Accordingly, the aggregate fair value of these warrants, issued prior to September 1,
2004, was determined to be $17,513. At September 1, 2004, the Companys shareholders voted to
increase the authorized shares available for issuance or conversion, which cured the situation
described above. Accordingly, the fair value of the warrants on September 1, 2004 was determined
to be $20,775. The warrant liability was reclassified to shareholders equity and the increase
from the initial warrant value was recorded in earnings. On July 28, 2004, The Company
issued an aggregate of 1,600,000 shares of common stock to a consultant in exchange for $560,000 of
services rendered, which approximated the fair value of the shares issued during the period
services were completed and rendered. Compensation costs of $560,000 were charged to operations
during the year ended January 1, 2005. For the months from September 1, to January 1, 2005, according to the terms of the warrant
provision of the August 24, 2004 debt agreement, the Company is obligated to issue 693,500
additional warrants. The value of these warrants of $283,988 was added to shareholders equity on
the consolidated balance sheet, with a corresponding expense charged to interest expense in the
consolidated statement of operations. In connection with the January 22, 2004 debt issuance (see Note 15), the Company is obligated to
issue warrants to purchase the Companys common stock. According to the terms of the debt
issuance, warrants in the amount of one percent of the Companys fully diluted common stock will be
issued to the debt holders on the first day of each calendar month that the debt is outstanding.
The Company repaid this debt in April 2004, and accordingly is obligated to issue 1,403,548
warrants, which is equivalent to 4% of the fully diluted common stock outstanding under the terms
outlined in that agreement. Each warrant is exercisable into one share of common stock at $0.31
per 10




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share, subject to changes specified in the debt agreement, and will expire in 2008. Prior to
this debt issuance, the Company exercised an option to convert $1,400,000 of outstanding debt into
preferred stock that is convertible into shares of common stock. This exercise, when aggregated
with all other outstanding equity arrangements, resulted in the total number of common shares that
could be required to be delivered to exceed the number of authorized common shares. In accordance
with EITF 00-19, the fair value of the warrants issued in connection with the debt issuance must be
recorded as a liability for warrant settlement in the financial statements using the Black-Scholes
model, and any subsequent changes in the Companys stock price to be recorded in earnings.
Accordingly, the aggregate fair value of these warrants, on the date each of the obligations to
issue warrants arose, was determined to be $701,824. At September 1, 2004, the Companys
shareholders voted to increase the authorized shares available for issuance or conversion, which
cured the situation described above. Accordingly, the fair value of the warrants on September 1,
2004 was determined to be $780,372. The warrant liability was reclassified to shareholders equity
and the increase from the initial warrant value was recorded in earnings. In September 2003, in connection with a preferred stock private placement, the Company issued
333,334 warrants to purchase common stock. Each warrant is exercisable into one share of common
stock at $0.42 per share and will expire in 2008. Subsequent to this private placement, the
Company exercised an option to convert $1,400,000 of outstanding debt into preferred stock that is
convertible into shares of common stock. This exercise, when aggregated with all other outstanding
equity arrangements, resulted in the total number of common shares that could be required to be
delivered to exceed the number of authorized common shares. In accordance with EITF 00-19, the
fair value of the warrants issued in the private placement must be recorded as a liability in the
financial statements using the Black-Scholes model, and any subsequent changes in the Companys
stock price to be recorded in earnings. Accordingly, the fair value of these warrants at the date
of issuance was determined to be $64,902. At September 1, 2004, the Companys shareholders voted
to increase the authorized shares available for issuance or conversion, which cured the situation
described above. Accordingly, the fair value of the warrants on September 1, 2004 was determined
to be $139,000. The warrant liability was reclassified to shareholders equity and the increase
from the initial warrant value was recorded in earnings. In connection with an April 2003 common stock private placement, the Company issued 111,308
warrants to purchase common stock. Each warrant is exercisable into one share of common stock at
$0.40 per share and will expire in 2008. Subsequent to this private placement, the Company
exercised an option to convert $1,400,000 of outstanding debt into preferred stock that is
convertible into shares of common stock. This exercise, when aggregated with all other outstanding
equity arrangements, resulted in the total number of common shares that could be required to be
delivered to exceed the number of authorized common shares. In accordance with EITF 00-19, the
fair value of the warrants issued in the private placement must be recorded as a liability in the
financial statements using the Black-Scholes model, and any subsequent changes in the Companys
stock price to be recorded in earnings. Accordingly, the fair value of these warrants at the date
of issuance was determined to be $19,832. At September 1, 2004, the Companys shareholders voted
to increase the authorized shares available for issuance or conversion, which cured the situation
described above. Accordingly, the fair value of the warrants on September 1, 2004 was determined
to be $48,976. The warrant liability was reclassified to shareholders equity and the increase
from the initial warrant value was recorded in earnings. In connection with debt financing entered into during fiscal year 2000, the Company issued
2,066,000 detachable warrants to purchase common stock. The warrants had an initial term of 3
years and were to expire in June 30, 2005. Proceeds from the debt were allocated between the debt
and warrants based on the fair value of the warrants issued using the Black-Scholes model. The
combined value assigned to the warrants when they were issued was approximately $357,000 and was
initially recorded as debt discount and recognized as interest expense over the life of the debt.
On September 15, 2003, the Company extended the life of 1,239,600 of these warrants until June 30,
2007 as partial consideration to satisfy a $150,000 promissory note between CTS and JMW Capital
Partners, Inc. (now known as Aequitas Capital Management), In accordance with FIN 44, the fair
value of the warrants on the date of the settlement of the $150,000 promissory note between CTS and
JMW Capital Partners, Inc. was determined to be $468,000. The difference between the initial fair
value and the fair value at the date of the extension was recorded as equity and a loss on debt
extinguishment. 11




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Item 6. Managements Discussion and Analysis of Financial Condition or Plan of Operation Overview Microfield Group, Inc. (the Company) specializes in the installation of electrical products and
services. The Companys objective is to leverage its assets and value to successfully build a
viable, profitable electrical services and technology infrastructure business. In September 2003, the Company acquired privately held Velagio, Inc. (Velagio) and Christenson
Technology Services, Inc. (CTS). In December, 2003 the service and technology teams of Velagio and
CTS were consolidated into one subsidiary under the name Christenson Velagio, Inc. (CVI) in order
to take full advantage of inherent synergies within the subsidiaries, as well as capture
competitive advantage. The newly formed organization conducts business in the electrical services
and technology infrastructure sectors. CVI has the ability to deliver the following products and
services:  
    Computer Telephony Integration
    Digital Video CCTV Systems and Infrastructure
    Telecommunications Systems and Infrastructure
    Enterprise Security Systems
    Wireless Networking Solutions
    Life Safety Systems Design and Installation
    Information Technology Network Design & Engineering
    Voice/Data Systems and Infrastructure
    Electrical Design & Engineering
    Electrical Construction Services
    Lighting Services
    Electrical System Audits These services and capabilities are expected to provide the substantial majority of the Companys
sales in the foreseeable future. The Companys results will therefore depend on continued and
increased market acceptance of these products and the Companys ability to install and service them
to meet the needs of its customers. Any reduction in demand for, or increase in competition with
respect to these products could have a material adverse effect on the Companys financial condition
and results of operations. During the fourth quarter of 2003, shortly after the acquisitions of Velagio and CTS, the Company
made the decision to discontinue the operations of IST and Velagio. This decision was made based
on the declining sales in these two entities, and the fact that many of the employees whose focus
was in sales of these products and services were no longer with the Company. The remaining assets
and liabilities were merged into CVI in December in conjunction with the combination of Velagio,
IST and CTS. As of January 1, 2005, Microfield Group, Inc. has one wholly-owned subsidiary,
Christenson Velagio, Inc. The Companys current acquisition strategy is to evaluate potential merger opportunities as they
develop. Managements Focus in Evaluating Financial Condition and Operating Performance. Management meets regularly to review the business along two main divisions. These divisions
include Operations, which consists of customer solicitation and project work performance, and
Finance and Administration, which consists of the administration and support of the Company. Based
on the kinds of information reviewed, meetings are held daily, weekly and monthly. Following is a
list of the most critical information which management examines when evaluating the performance and
condition of the Company. Revenue. Sales personnel and project managers are responsible for obtaining work to
be performed by the Company. Revenue is booked daily based on the Companys revenue recognition
policy (see Critical Accounting Policies). These bookings are reviewed the following day by the
President, the Chief Financial Officer (CFO) and several of their direct reports. Decisions about
various aspects of the business are made, and actions are taken based on the prior days revenue,
and whether or not it met daily and weekly revenue goals and expectations. Monthly 12




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customer revenue is also examined, in detail, as a part of a review of the Companys financial
statements for the prior month, by the Companys executive team and its board of directors. Expense Control. The Company has various controls in place to monitor spending.
These range from authorization and approvals by the President and CFO as well as review of the
periodic check runs by the CFO and reviews of labor efficiency and utilization by the President and
the Companys project managers. The organizational team, which is comprised of the President, CFO,
several department heads and key employees, meets weekly to review reports that monitor expenses
and cost efficiency, among other factors. Additionally, the executive team, comprised of the
Companys President and CFO, meets weekly to review operations, and monthly with the board of
directors to review monthly spending patterns and expenses as a part of the review of the prior
months financial statements. Cash Requirements. The Company focuses on cash daily, through a series of meetings
that highlight cash received from borrowings on the prior days billings, cash required to fund
daily operating needs, cash received from customers and several other factors that impact cash.
Management reviews accounts receivable reports, ineligible receivables and accounts payable reports
in conjunction with preparing a daily cash flow schedule that projects and tracks all cash sources
and uses. Management and the board of directors use this information in determining cash
requirements. Customer service. Management considers the Companys reputation as one of its most
valuable assets. Much of the Companys revenue is based either on repeat business or referrals
from its loyal customer base. The Company reviews service issues and any customer feedback
continually to ensure continued customer satisfaction through timely and high quality work. Safety. Safety is of utmost importance to the Company and its employees. The
Companys engineers, electricians and technicians are required to undergo regular educational
seminars, which include safety training. The Company has well defined procedures designed to
prevent accidents. Management reviews reports on the Companys safety record, and examines the
facts and circumstances surrounding specific accidents to ensure that all procedures were followed,
or to modify procedures if needed. Business Characteristics. Revenue. The Company generates revenue by performing electrical service work and
technology infrastructure design and installation. These projects are obtained by the Companys
sales force and project managers. These projects come from direct solicitation of work, the
bidding process, referrals, regular maintenance relationships and repeat customer projects. Cash. The Company generates cash mainly through operations. Cash is borrowed daily
from an asset based lender under a revolving credit facility. These borrowings are repaid through
collections from customers accounts. Each day, the Company submits to its lender, a summary of
customer billings, cash collections, ineligible accounts and the amount of the borrowing requested.
The lender approves the submission and deposits funds directly into the Companys bank account. The Company has also generated cash through debt issuances and private placements of common and
preferred stock. The board of directors reviews both short and long range business plans and
projections, and implements funding strategies based on the cash needs produced in the projections. Opportunities and Risks. Some of the significant business risks CVI faces, among
others, include interruption in the flow of materials and supplies, interruption of its work force
through disagreements with its union, business contraction and expansion caused by the economy in
general and its general lack of liquidity. As a part of its regular business planning, the Company anticipates the effect that these risks may
potentially have on its financial condition. Some of the risks are planned for contractually to
minimize the Companys liability in cases where it is subject to contract performance. Others are
anticipated by forging plans for staff reductions or increases should the economy move drastically
in one direction. The Company also continually looks for additional funding sources and cash
availability, both by improving operating performance internally and from external debt and equity
sources, should its cash be strained by certain factors. Business Goal Attainment. 13




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When entering into the acquisitions of CTS and Velagio, the Companys goal was to realize certain
synergies within the resulting organization, save costs from eliminating duplicate processes, and
come out of the combination as a breakeven or slightly profitable company. Due to management
turnover in the months following the acquisition, broader than anticipated process issues, lower
than anticipated sales achievements and professional costs associated with the acquisition that
were higher than anticipated the Company has not yet met its interim post-acquisition
profitability goals. Management is continuing to improve internal processes, cut costs and
maximize revenue opportunities. The Company initiated a cost reduction effort in the fourth quarter of 2003 that continued
throughout 2004. The Company has been successful in improving monthly cash flow in its effort to
reach profitability. This is being done through a combination of staff reductions, lease
restructurings and general expense cutbacks. Trends. CVIs business is closely tied to the economy. In a down economy, the Companys work becomes more
dependent on repeat business from ongoing customer relationships. When the service, manufacturing
and retail industries arent expanding, CVIs service projects are more focused toward changes,
adds, moves, and fixes within this customer base. The Company is sensing a modest improvement in
the economy at the current time, and may experience modest fluctuations in sequential quarterly
revenues due to seasonal general economic trends. In the last three years the Company has seen a dramatic downturn in spending for technology
infrastructure. This affected the technology side of CVIs business prior to its acquisition by
the Company. It is anticipated that as the economy improves, CVI will see increasing revenue from
the sales of technology products and services. Critical Accounting Policies The discussion and analysis of financial condition and results of operations is based upon the
Consolidated Financial Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
The Company evaluates, on an on-going basis, its estimates and judgments, including those related
to revenue recognition, sales returns, bad debts, excess inventory,
impairment of goodwill and intangible assets, income taxes, contingencies and
litigation. Its estimates are based on historical experience and assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its consolidated financial
statements: Revenue recognition and allowances; Accruals for contingent liabilities; Inventories and reserves for shrinkage and obsolescence; Bad debt reserves; Impairment of intangible and long-lived assets; Significant portions of the Companys revenues are derived from construction and service projects.
Revenues from fixed-price, cost-plus-fee, time and material and unit-price contracts are recognized
using the percentage-of-completion method of accounting which recognizes income as work on a
contract progresses. Recognition of revenues and profits generally are related to costs incurred
in providing the services required under the contract. Earned revenue is the amount of cost
incurred on the contract in the period plus the proportional amount of gross 14




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profit earned during the same period. This method is used because management considers total cost
to be the best available measure of completion of construction contracts in progress. Provisions
for estimated losses on construction contracts in progress are made in their entirety in the period
in which such losses are determined without reference to the percentage complete. Changes in job
performance, job conditions and estimated profitability, including those arising from contract
penalty provisions and final contract settlements, may result in revisions to revenue and costs,
and are recognized in the period in which the revisions are determined. Claims for additional
revenue are not recognized until the period in which such claims are allowed. Direct contract
costs include all direct labor, direct materials and some estimating costs and shop and equipment
costs. General and administrative costs are charged to expense as incurred. Revenue from
discontinued operations was recognized when persuasive evidence of an arrangement existed, the
price was fixed, title had transferred, collection of resulting receivables was probable, no
customer acceptance requirements existed and there were no remaining significant obligations. The Company makes estimates of liabilities that arise from various contingencies for which values
are not fully known at the date of the accrual. These contingencies may include accruals for
reserves for costs and awards involving legal settlements, costs associated with vacating leased
premises or abandoning leased equipment, and costs involved with the discontinuance of a segment of
a business. Events may occur that are resolved over a period of time or on a specific future date.
Management makes estimates of the potential cost of these occurrences, and charges them to expense
in the appropriate periods. If the ultimate resolution of any event is different than managements
estimate, compensating entries to earnings may be required. The Company adjusts inventory for estimated excess and obsolete inventory equal to the difference
between the cost of inventory and the estimated fair value based upon assumptions about future
demand and market conditions. At January 1, 2005, the allowance for inventory obsolescence was
$143,020 and reflects managements current estimate of potentially obsolete inventory based on
these factors. Any significant unanticipated changes in demand or competitive product developments
could have a significant impact on the value of the Companys inventory and its reported results.
If actual market conditions are less favorable than those projected, additional inventory
write-downs and charges against earnings may be required. The Company maintains allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. Accounts receivable, historical bad debts,
customer concentrations, customer creditworthiness, current economic trends, and changes in
customer payment terms and practices are analyzed when evaluating the adequacy of the allowance for
doubtful accounts. At January 1, 2005, the allowance for doubtful accounts was $103,969. This
allowance was determined by reviewing customer accounts and considering each customers
creditworthiness as of January 1, 2005, and the potential that some of these accounts may be
uncollectible. If the financial condition of the Companys customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional allowances and charges
against earnings may be required. Intangible and long-lived assets to be held and used, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amounts of such assets may not be
recoverable. Determination of recoverability is based on an estimate of discounted future cash
flows resulting from the use of the asset, and its eventual disposition. Measurement of an
impairment loss for intangible and long-lived assets that management expects to hold and use is
based on the fair value of the asset as estimated using a discounted cash flow model. After the
acquisitions of Velagio and CTS in September 2003, management decided to discontinue the operations
of IST because that business was not the focus of any of the Companys future plans. Accordingly,
net intangible assets of $255,000 were expensed in 2003 under Loss for discontinued operations in
the consolidated statement of operations. The Company measures the carrying value of goodwill recorded in connection with the acquisitions
for potential impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.
To apply SFAS 142, a company is divided into separate reporting units, each representing groups
of products that are separately managed. For this purpose, the Company has one reporting unit. To
determine whether or not goodwill may be impaired, a test is required at least annually, and more
often when there is a change in circumstances that could result in an impairment of goodwill. If
the trading of our common stock is below book value for a sustained period, or if other negative
trends occur in our results of operations, a goodwill impairment test will be performed by
comparing book value to estimated market value. To the extent goodwill is determined to be
impaired, an impairment charge is recorded in accordance with SFAS 142. 15




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The Company tested the trade name value
for impairment as of the end 2004, and the result indicated
that the recorded book value of trade name exceeded its fair value, as determined
by discounted cash flows. Upon completion of the assessment, the Company
recorded a non-cash impairment charge of $376,000, net of tax, or $0.02
per share at January 1, 2005 to reduce the carrying value of trade name
to its estimated value of $872,771 (Note 8). During the fourth quarter of 2003, management determined that the goodwill recorded for both IST
and Velagio was impaired due to the fact that operations of both of these entities were
discontinued. A charge was recorded in 2003 under Loss from discontinued operations, in the
consolidated statement of operations in the amount of $1,295,000 for Velagio and $250,000 for IST. Results of Operations The following table sets forth, as a percentage of sales, certain consolidated statement of
operations data relating to the business for the periods indicated. Fiscal
    
    
    Fiscal2004
    
    
    2003Net sales
    
    
    100
    %
    
    
    100
    %Cost of goods sold
    
    
    83
    
    
    
    84Gross profit
    
    
    17
    
    
    
    16Sales General & administrative expenses
    
    
    29
    
    
    
    40Loss from continuing operations
    
    
    (12
    )
    
    
    (24
    )Other income (expense)
    
    
    (5
    )
    
    
    (6
    )Loss before income taxes
    
    
    (17
    )
    
    
    (30
    )Benefit from income taxes
    
    
    
    
    
    
    Loss before discontinued operations
    
    
    (17
    )
    
    
    (30
    )Discontinued operations
    
    
    1
    
    
    
    (28
    )Net loss
    
    
    (16
    )%
    
    
    (58
    )%
 The financial information presented for the year ended January 1, 2005, represents activity in CVI
for the full twelve months of 2004. Due to the acquisition of CTS and Velagio on September 16,
2003, the financial information presented for the year ended January 3, 2004, represents activity
in Velagio and CTS for the three and a half months from the date of their acquisitions to the end
of the fiscal year, combined with revenue, other income and S G & A expenses of IST and Microfield
Group, Inc. for the year ended January 3, 2004. Due to the disproportionate size of the revenues
in 2004 compared to those in 2003, no meaningful comparison can be made between revenue of the two
years presented in the accompanying consolidated statements of operations. Comparisons will be
made between quarterly revenue and expenses on a consecutive basis in 2004, and also to revenue and
expenses for the fourth quarter of 2003. Sales. Revenue for the fiscal year ended January 1, 2005 was $36,467,000 compared to $10,342,000
for the fiscal year ended January 3, 2004. The revenue amount for the prior fiscal year includes
sales of technology products and electrical construction services in CVI during the three and a
half months from the date of the acquisition to the end of the fiscal year. There were no sales to
any one customer that comprised more than 10% of the Companys total sales for the fiscal year 2004
or 2003. Due to the disproportionate size of the revenues in 2004 compared to those in 2003, no
meaningful comparison can be made between revenue of the two years presented in the accompanying
consolidated statements of operations. Revenues for the first through the fourth quarters of 2004
were $9,191,000, $9,646,000, $9,493,000 and $8,137,000. These compare to revenue of $9,235,000 in
the fourth quarter of 2003. The companys revenue is subject to some seasonal influences, with the
summer months typically producing the largest revenues of the year. Revenue was down in the fourth
quarter of 2004 compared to the previous consecutive quarters, and from the prior year fourth
quarter due primarily to a decision the Company made to forego bidding on larger, less profitable
contracts. This shift was made in the summer of 2004 and affected revenue late in the third
quarter and during the fourth quarter of 2004. 16




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Cost of Sales. Cost of sales totaled $30,335,000 (83%) for the fiscal year ended January 1, 2005,
compared to $8,712,000 (84%) for the same period in the prior year. All of the current fiscal
years cost of sales includes the cost of labor, products, supplies and overhead used in providing
electrical and technology services in CVI. Prior year amounts include those costs from September
16, 2003, the date of acquisition of CTS, to the end of the fiscal year. Cost of sales for the
first through the fourth quarters of 2004 were $7,379,000, $7,975,000, $7,804,000 and $7,177,000.
These compare to cost of sales of $7,851,000 in the fourth quarter of 2003. Gross Profit.Gross profit for the fiscal year ended January 1, 2005 was $6,132,000 (16.8%)
compared to $1,630,000 (or 15.8%) for the fiscal year ended January 3, 2004. Due to the
disproportionate size of the gross profit in 2004 compared to those in 2003, no meaningful
comparison can be made between gross profits of the two years presented in the accompanying
consolidated statements of operations. Gross profit for the first through the fourth quarters of
2004 was $1,812,000, $1,671,000, $1,689,000 and $960,000. These compare to gross profit of
$1,384,000 in the fourth quarter of 2003. Gross profit was down in the fourth quarter of 2004
compared to the previous consecutive quarters due primarily to the move the Company made to not bid
on larger, less profitable work. The margin in the fourth quarter of 2004 (12.7%) was lower than
margins experienced in the first three quarters of 2004 (between 17.3% and 18.9%) due to losses the
Company took on three specific projects in the fourth quarter. Future gross profits and gross margins will depend on the volume and mix of sales of products and
services to the Companys customers, as well as the Companys ability to control costs and
efficiently manage their jobs. It is anticipated that as savings are realized from the
implementation of continuing cost reduction efforts and higher gross margin work projects are
targeted, overall gross profit margins may increase. Sales, General and Administrative Expenses (S, G & A). S, G & A expenses were $9,748,000 (26.7%)
for the fiscal year ended January 1, 2005, compared to $4,104,000 (39.7%) for the fiscal year ended
January 3, 2004. The increase in dollar amounts between years is due to a full year of expenses in
2004 compared to three and a half months from the acquisition of CTS on September 16, 2003. The
decrease in percentage of S, G & A expenses to sales is due to lower relative payroll costs in the
fiscal year ended January 1, 2005 compared to the prior year. S, G & A expenses are comprised
mainly of payroll costs, facilities and equipment rent, outside services, insurance, utilities and
depreciation. Payroll costs, which include salary, payroll taxes and fringe benefits, totaled
$5,533,000 for the fiscal year ended January 1, 2005. These costs totaled $1,476,000, $1,377,000,
$1,271,000, and $1,409,000, for the first through the fourth quarters of 2004, respectively. These
expenses decreased through the first three quarters due to staff reductions and the elimination of
some executive positions. These expenses increased in the fourth quarter due to year end
reconciliations in certain accounts. Total rents for the year ended January 1, 2005 were $490,000, which was primarily comprised of
facilities rent. This is compared to $203,000 of rent incurred in the year ended January 3, 2004. Outside services, professional fees, insurance, utilities and depreciation for the year ended
January 1, 2005 totaled $2,866,000, compared to $842,000 for the year ended January 3, 2004. The
increase in these expenses is due primarily to having a full years expenses in 2004 compared to
three and a half months in 2003. Expenses for the first through the fourth quarter 2004 totaled
$1,008,000, $425,000, $894,000 and $539,000, respectively. The first quarter of 2004 included
$395,000 in legal expense for anticipated costs in defending a lawsuit filed against the Company
(see Legal Proceedings). These expenses decreased through the first two quarters of 2004 due to
lower usage of professionals and outside service providers, and to a 50% reduction in telephone and
utility costs. These third quarter 2004 costs increased significantly compared to the second
quarter due to added investor relations costs. During that quarter, the Company issued 1,600,000
shares of its common stock to an investor relations firm for services to be rendered for the
Company in the public equity markets. This issuance was recorded in shareholders equity at the
fair market value of the stock on the date of issuance, and resulted in an expense of $560,000.
Of this total, $472,000 was charged to expense in the third quarter of 2004, with the remaining
$88,000 charged to expense in the fourth quarter 2004. Due to new sources of expenses from newly acquired CTS, and the disproportionate size of the
expenses in 2004 compared to those in 2003, no meaningful comparison can be made between expenses
of the two years presented in the accompanying consolidated statements of operations. The level of S, G & A expenses for the 2005 fiscal year is expected to remain level or decrease
compared to the level incurred in the year ended January 1, 2005 due to continuing cost reduction
efforts. The Company anticipates these expenses will approximate between 17% and 25% of sales in
2005, compared to 27% in 2004. 17




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Interest Expense. Interest expense was $1,959,000 for the year ended January 1, 2005, compared to
$428,000 for the year ended January 3, 2004. The significant increase in interest expense was
primarily a result of the charges on warrant liabilities and the increasing values caused by the
Companys fluctuating stock price. The Company did not have a sufficient amount of authorized
common shares to issue in the conversion of all common stock equivalents. Several events occurred
during 2004 in which warrants to purchase common stock were issued. In accordance with EITF 00-19,
the fair value of the warrants issued in the private placement must be recorded as a liability in
the financial statements using the Black-Scholes model, and any subsequent changes in the Companys
stock price to be recorded in earnings. These warrant issuances and subsequent increases in value
resulted in non-cash charges to interest expense during the year of $1,087,000. (see non-cash
expense table below) The increase in interest expense between 2003 and 2004 was also a result of the acquisition of CTS
in September 2003. In the eight and a half months of 2003 prior to the acquisition of CTS and
Velagio, the Companys level of interest bearing debt was significantly lower than the debt level
after the acquisition. Therefore, interest was not accruing at the same levels for the full year
in 2003 compared to 2004, in which a significant amount of debt existed for the full year. The
debt assumed in the acquisition of CTS included an accounts receivable based lending facility under
which the Company incurred $495,000 in interest expense in 2004, and $156,000 in interest expense
from September 16, 2003, the date of the acquisition, to the end 2003. Gain / Loss From Discontinued Operation.After the acquisitions of Velagio and CTS, management
discontinued the operations of both Velagio and IST due to a decline in sales and a decision to
focus on the CTS business. Accordingly, the revenue, expenses and other income or losses for both
Velagio and CTS are condensed and reported as discontinued operations in the consolidated statement
of operations. Certain information from those businesses is reported below. The Company recorded miscellaneous income of $149,000 in the year ended January 1, 2005, from the
resolution of certain liabilities that were contained in the balance sheet of Velagio.
Discontinued operations also contain a gain of $63,000 on the sale of the SoftBoard business. (See
Item 1, Description of Business  General) The SoftBoard business was sold in 2000. As part of
the sale price, the Company receives royalties from the purchaser of that business, based on sales
of SoftBoard products. These royalties are listed in the income statement under Gain on sale of
discontinued operations. For the fiscal year ended January 3, 2004, sales of IST and Velagio products and services included
in discontinued operations totaled $496,000. The cost of sales and gross profit included in
discontinued operations for the year ended January 3, 2004 totaled $440,000 and $56,000,
respectively. S, G & A and other expense incurred in IST and Velagio for the year ended January 3, 2004 totaled
$2,987,000. Included in this amount is a write down from the impairment of Goodwill, in both IST
and Velagio, of $1,546,000. Also included in this amount are charges against earnings of $255,000
for the write off of the remaining value of intangibles acquired in the acquisition of IST in 2002. Income Taxes.There was no provision for income taxes in 2004 or 2003 due to losses incurred by
the Company in both years. No tax benefit from loss carryback was recorded in either year as there
was no income tax paid in the open loss carryback periods. The Company has provided a full
valuation allowance on its net deferred tax asset (see Note 16). Non-cash Expense Items Since the acquisition of CTS and Velagio in September of 2003, the Company has entered into several
financings, debt conversions and other transactions where common stock or warrants were issued as a
part of the agreements. Many of the issuances resulted in charges to the Companys statement of
operations over that period. Additionally, other transactions and events occurred in which
significant non-cash expense or income arose due to the nature of those occurrences. The following
table lists these items and the effect on the Companys statements of operations for the fiscal
years ended January 1, 2005 and January 3, 2004. 18




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Year ended
    
    
    Year endedNon-cash expense item description*
    
    January 1, 2005
    
    
    January 3, 2004Stock-based derivative liability re-measurement
    
    $
    16,150
    
    
    $
    140,754Interest expense on warrant issuances and re-measurements
    
    
    912,402
    
    
    
    Common stock issued for services
    
    
    560,000
    
    
    
    Interest expense on amortization of debt discount
    
    
    158,869
    
    
    
    Intangible write-off and amortization
    
    
    110,556
    
    
    
    1,841,189Gain on disposal of assets and lease termination
    
    
    (92,137
    )
    
    
    Write-down
of impaired intangible asset
    
    
    376,000
    
    
    
    Unused reserve for legal fees to contest lawsuit
    
    
    205,568
    
    
    
    Loss on debt extinguishment
    
    
    515,000
    
    
    
    111,000Total transactional non-cash income and expense
    
    $
    2,762,408
    
    
    $
    2,092,943
   *This table does not include recurring non-cash expenses such as depreciation. Liquidity and Capital Resources Since inception, the Company has financed its operations and capital expenditures through public
and private sales of equity securities, cash from operations, and borrowings under bank lines of
credit. At January 1, 2005, the Company had negative working
capital of approximately $3,235,000
and its primary source of liquidity consisted of cash and its operating line of credit. On September 16, 2003, the Company acquired CTS and Velagio in exchange for 8,386,285 restricted
shares of the Companys common stock. Other than for legal and professional expenses, no cash was
paid for the acquisitions of CTS or Velagio. Accounts receivable increased
to $6,241,000 at January 1, 2005 from $5,432,000 at January 3, 2004.
The increase is due to a lengthening of receivable payment periods in general These receivables
are net of allowances for doubtful accounts of $104,000 and $118,000 at January 1, 2005 and January
3, 2004, respectively. Management expects these receivables to remain fairly constant as a
percentage of sales, decreasing slightly as efficiencies in the billing and collection processes
are achieved. Inventory decreased to $239,000 at January 1, 2005 from $430,000 at January 3, 2004. The decrease
is due to the write off of old inventories at its Eugene, Oregon facility. The Company maintains a
fleet of trucks and vans which each maintain a certain level of inventory needed to provide timely
products and services to the Companys customers. The inventory levels should remain within a
narrow range, changing only slightly as revenue fluctuates from period to period. Management
discontinued operations of IST subsidiary during the fourth quarter of 2003. In doing this, it
took a charge against earnings of approximately $55,000 to reflect the potential for obsolescence
of the IST inventory. Of the total $430,000 of inventory listed in the consolidated balance sheet
at January 3, 2004, there was $28,000 of inventory ($109,000 less an $81,000 reserve) from the
discontinued operations of IST. The Company records costs in excess of billings which reflect those costs incurred on construction
and services, which have not yet been billed to customers. These amounts were $823,000 and
$1,517,000 at January 1, 2005 and January 3, 2004, respectively. The Company tries to minimize
this amount and keep its billing as current as possible as costs are incurred. Under terms of
certain contracts, the Company groups its costs on specific projects and bills customers on a
periodic basis instead of as costs are incurred. Property and equipment, net of depreciation decreased to $126,000 at January 1, 2005 compared to
$1,818,000 at January 3, 2004. This decrease was due to the termination of a vehicle capital lease
in the amount of $1,993,233 that the Company assumed in the acquisition of CTS. On September 10,
2004, the Company entered into a Master Vehicle Lease Termination Agreement, under which it was
released from its obligation under the previous Master Vehicle Lease. In exchange for this early
termination, the Company issued the lender 1,000,000 warrants to purchase its common stock. The
value of these shares, in the amount of $515,000, was recorded as an expense in the consolidated
statement of operations in the quarter ended October 2, 2004. The Company entered into an
equipment lease agreement with a related party in 2003, under which it leases furniture and
fixtures, equipment, computer equipment, and job site tools and equipment (See Related Party
Transactions). This lease is classified as
an operating lease with a monthly payment due of $40,000. The Company does not anticipate spending
to acquire fixed assets for the foreseeable future. In the acquisition of CTS, the Company recorded goodwill of $2,299,000 due to the excess of the
purchase price paid over the book value of the net assets of CTS. The Company also recorded
approximately $1.3 million in 19




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goodwill from the acquisition of Velagio. The goodwill recorded on
Velagios balance sheet was subsequently written off in 2003 as management determined that the
goodwill was impaired after the operations of Velagio were discontinued. No cash was paid for the
acquisition of either CTS or Velagio. Accounts payable to all parties decreased to $3,552,000 at January 1, 2005 from $4,321,000 at
January 3, 2004. This change is due to lower revenues in the fourth quarter of 2004 compared to
that in the fourth quarter of 2003. (see Results of Operations  Sales) Payables consist
primarily of the costs of inventory, materials and supplies used in the electrical construction
services and technology infrastructure services provided by the Company. An increase in payables
and accrued expenses increases cash for operations. In 2004 the Company kept payments extended on
much of its current obligations because of cash flow issues. This pattern of payments has allowed
the Company additional time to reduce operating expenses and maintain the flow of inventory,
materials and supplies needed to provide services to the Companys customers. Accrued payroll, payroll taxes and benefits were $1,297,000 at January 1, 2005 compared to
$1,274,000 at January 3, 2004. The amount at January 1, 2005 consists of one week of union payroll
and two weeks of non-union payroll in the amount of $321,000. Additionally, this liability
included Decembers health and welfare benefit, owed to the unions representing the Companys
electricians and technicians, and other payroll related obligations of $976,000. This liability
will vary between reporting periods based on the fact that payroll taxes decrease as the tax
obligation thresholds for some of the taxes are exceeded. The combined payroll, payroll tax and
benefit amounts should fluctuate with the revenues of the Company and as such, represents a main
cash use of the Companys funds. As revenues increase, the amounts due for these types of expenses
will increase as well. These liabilities are primarily short-term in nature with most of them
being paid within one to six weeks of the expense being incurred. At January 1, 2005 the Company
had outstanding a note for $952,907 payable collectively to several union benefits organizations.
This represents amounts due from August 2004. The Company negotiated a payment schedule as part of
a settlement agreement with these entities. (see Note 17) The outstanding bank line of credit was approximately $4,393,000 at January 1, 2005. This is a decrease of
$494,000 from the end of the third quarter amount of $4,887,000, and a $62,000 decrease from the
January 3, 2004 balance of $4,331,000. This lending facility is a prime source of funds for the
Company. Amounts are drawn against it each day based on the amount of eligible revenues that are
billed by the Company. As receivables are collected daily, those funds are used to pay down the
facility. Until the Companys liquidity issues ease, this facility will continue to be used to the
fullest extent possible, daily, for operating capital. The facility has a limit of $5,000,000 and
borrowings are based on 85% of eligible accounts receivable. This debt facility was renewed at the
end of 2004 through January 2006. The Company is in compliance
with its covenants under this loan. During the past two years, the Company has issued shares of both common and preferred shares in
exchange for cash and the conversion of existing debt. In April and May of 2003, the Company sold
1,113,078 shares of common stock in conjunction with a private placement at $.26 per share. The
Company received proceeds of approximately $280,000, net of related costs. On September 26, 2003,
the Company raised an additional $1,515,000 through the issuance of 3,607,000 shares of Series 2
preferred stock at $.42 per share, of which $750,000 was a cash investment and $765,000 was a
conversion of debt assumed by the Company as part of its acquisition of CTS. On November 15, 2003,
the Company issued an additional 3,333,333 shares of Series 2 preferred stock at $.42 per share in
exchange for the conversion of $1,400,000 in debt owed to a related party. In January 2004, the
Company entered into a borrowing arrangement with Destination Capital LLC, under which it borrowed
$600,000 to be used for operating capital by the Company. In April 2004, the Company was party to
an agreement with several of its debt holders, under which it converted $1,529,000 of debt into
3,641 shares of Series 3 preferred stock at $420 per share. Also in April 2004, the Company raised
an additional $1,750,000 through the issuance 4,605 shares of Series 4 preferred stock at $380 per
share, a portion of which was used to pay off the $600,000 borrowed in January 2004, with the
remainder to be used for operating capital by the Company. In August 2004, the Company entered
into a second borrowing agreement with Destination Capital, LLC. Under this loan agreement, the
Company borrowed $1,200,000 to be used for operating capital. (see Notes 17 and 18) As of January 1, 2005, the Company had not made its required September 2004 and December 2004
quarterly interest payments of approximately $4,200 each quarter. As of January 1, 2005 interest
payable on this note totaled approximately $9,800. As of the date of this report, the Company had
not made its required February 28, 2005 annual principal payment of $69,773 and quarterly interest
payments. Total interest due and payable on this note as of April 1, 2005, is approximately
$13,955. The Company is accordingly in default under the terms of the note agreement. The Company and its subsidiary have suffered recurring losses from ongoing operations and have
experienced negative cash flows from continuing operating activities during 2004 and 2003. As of
January 1, 2005 the Company
had negative working capital of $3,235,000, total liabilities of
$12,334,000 and an accumulated
deficit of $29,130,000. While it is anticipated that the losses from continuing operations will
decline as a result of cost reduction efforts, debt conversions and fundraising events, recurring
losses and liquidity issues raise doubt about the Companys ability to continue as a going concern.
The financial statements do not include any adjustments that might result from the outcome of this
uncertainty. The Company may not have sufficient resources to satisfy cash 20




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requirements for the
next twelve months. While the Company may not have sufficient resources to satisfy cash
requirements for the next twelve months, by adjusting its operations to the level of
capitalization, the Company believes it has sufficient capital resources to meet projected
cash flow deficits. However, if during that period or thereafter, it is not successful in
generating sufficient liquidity from operations or in raising sufficient capital resources, on
terms acceptable to it, this could have a material adverse effect on the Companys business,
results of operations liquidity and financial condition. The Company may have to seek additional investment capital or debt facilities. Investment capital
or debt facilities may be difficult to obtain due to, among other issues, the Companys inability
to meet certain SEC reporting requirements relative to historical financial statements of CTS.
There can be no assurance that additional capital will be available or, if available, will be at
terms acceptable to the Company. The Company is focusing on opportunities to increase revenues and
grow margins while continuing to reduce monthly expenses in an attempt to turn cash flow positive
and profitable. The Company had no commitments for capital expenditures in material amounts at January 1, 2005.
________ The independent auditors report on the Companys January 1, 2005 financial statements included in
this Annual Report states that the Companys recurring losses raise substantial doubts about the
Companys ability to continue as a going concern. Inflation In the opinion of management, inflation will not have an impact on the Companys financial
condition and results of its operations. Off-Balance Sheet Arrangements The Company does not maintain off-balance sheet arrangements nor does it participate in any
non-exchange traded contracts requiring fair value accounting treatment. Related Party Transactions The Company has a number of promissory notes, lines of credit and lease obligations owing to
related parties. The following table lists the notes and obligations outstanding at January 1,
2005 by related party. Amount of
    
    
    MonthlyRelated Party
    
    Type of Obligation
    
    Maturity Date
    
    
    Obligation
    
    
    PaymentDestination Capital, LLC(a)
    
    Loan agreement
    
    July 24, 2006
    
    $
    1,200,000
    
    
    $
    (d)14,550CEAC(a)
    
    Bond guarantee fees(c)
    
    open
    
    
    
    
    
    
    (c) (b)2,400CEI(a)
    
    Equipment lease
    
    December 1, 2007
    
    
    
    
    
    
    40,000Destination Microfield, LLC(e)
    
    Vehicle operating lease
    
    August 1, 2006
    
    
    
    
    
    
    (f)29,000CEI(a)
    
    Real property leases
    
    October 31, 2008
    
    
    
    
    
    
    48,842John B. Conroy
    
    Note receivable
    
    September 16, 2005
    
    
    66,250
    
    
    
    
   (a) 
Robert J. Jesenik, a director and significant shareholder of the Company,
also owns a significant interest in these entities. Mr. Jesenik is also President of each of the
entities designated by this footnote. (b) 
This lease payment and bond guarantee fee are approximations, and may
fluctuate based on several factors including the dollar value of jobs under bond at any particular
time. (c)
A. Mark Walter, an officer, participates in the guarantee of these bonds, and
is paid a portion of this fee. (d) 
    This payment represents an interest only monthly payment amount in effect at
January 1, 2005. This payment changes to $83,333 on June 24, 2005 and is for payment of principal
and interest. (e) 
William C. McCormick, a director and former interim CEO, holds a minority ownership
interest in this entity. (f) 
These payments vary over the term of the loan. These amounts represent the monthly
payment in effect on January 1, 2005. Terms and conditions of each of the notes and agreements are listed below. 21




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##### Table of Contents



Notes payable to Destination Capital, LLC On January 22, 2004, the Company entered into a Contract of Sale and Security Agreement with
Destination Capital LLC (Destination) under which the Company agreed to sell up to 15% of its
acceptable, eligible accounts receivable to Destination, in exchange for borrowing up to $600,000
from that entity under the terms of a Promissory Note. Destination is an entity in which Robert J.
Jesenik, a shareholder and director of the Company, holds a significant interest. Under the terms
of the agreement between the Company and Destination, the Company paid interest at the rate of 18%
per annum on the amount of the note outstanding, and also issued warrants in the amount of 1% of
the fully diluted common shares, per month, for each calendar month in which the Note was
outstanding. The warrants have a five-year life and will be issued at the lower of $0.42 or the
price of any other common or preferred equity issued in the six months following the date of the
agreement. During the 6 month agreement period, the Company issued incentive stock options at
$0.31 per share, therefore the price per share used for these warrants was reduced to $0.31. The
Company initially was obligated to issue warrants to purchase 350,387 common shares at the time
this note was issued. The fair value of these warrants was determined to be $155,221 using the
Black Scholes pricing model. The assumptions used included a risk free rate of 3.1%, volatility of
152%, fair market value of the Companys stock of $.48 per share and a remaining life of 5 years.
The calculated fair value amount was recorded as a debt discount and is being amortized over the
six-month term of the debt. This debt was outstanding on February 1, 2004, March 1, 2004 and April
1, 2004 and in accordance with the terms of the note agreement, the Company is further obligated to
issue additional warrants to purchase 1,053,159 shares of the Companys common stock. These
warrants were valued using the Black Scholes pricing model. The assumptions used included risk free
rates ranging from of 3.1% to 3.3%, volatility of 152%, remaining lives of 5 years for each warrant
issuance, and fair market values of the Companys stock on those three dates of $0.46, $0.60 and
$0.62 per share, respectively. The fair value of these warrants in the amount of $625,151 has been
recorded as interest expense in the consolidated statement of operations for the year ended January
1, 2005. At the date of each of those warrant issuances, the Company did not have sufficient
authorized common shares to effect the exercise of these warrants, accordingly, the fair value of
all of these warrants was classified as liability for warrant settlement on the consolidated
balance sheet. On September 1, 2004, the Companys shareholders voted to increase the Companys
authorized common shares from 25,000,000 to 125,000,000. The fair market values of these warrants
were re-measured on that date and reclassified as common stock warrants in the shareholders equity
section on the balance sheet, with the increase or decrease in their values recorded as an increase
or reduction of interest expense in the consolidated statement of operations (Note 13). The Note
was repaid in full during April 2004. On August 24, 2004 the Company entered into a Business Loan Agreement with Destination under which
the Company can borrow up to $2,000,000 based on Destinations discretion and funds availability
(Note 14). Under the terms of the agreement, the Company pays interest at prime plus 10% (prime
plus 12% in the event of a default), with nine monthly interest only payments starting September
24, 2004, and 15 monthly principal payments of $83,333 and accrued interest until maturity. At
loan maturity on August 24, 2006, any remaining principal and accrued interest owed is then due and
payable. This loan is immediately due if there occurs a default, there is a sale or disposal of
all or substantially all of the assets or stock of the Company, or if there is a transfer of
ownership or beneficial interest, by merger or otherwise, of the stock of the Company or its
subsidiary. Additionally, the Company will issue to Destination the number of warrants equal to
12.5% of the value of the loan balance, on the first day of each month the loan is outstanding. If
the loan is initially drawn up to $1,250,000, and paid according to the terms of the agreement,
this will result in the issuance of approximately 2.5 million warrants to Destination. These
warrants have a five year life and will be issued at the lower of $0.38 or the price applicable to
any shares, warrants or options (excluding options granted to employees or directors) issued by the
Company while the loan is outstanding (Note 13). Beginning August 1, 2004, the Company was
obligated to issue the following warrant amounts based on the outstanding loan balances on the
first day of each month. Warrants to beDate
    
    Loan Balance
    
    
    IssuedAugust 1, 2004
    
    $
    300,000
    
    
    
    37,500September 1, 2004
    
    $
    750,000
    
    
    
    93,750October 1, 2004
    
    $
    1,200,000
    
    
    
    150,000November 1, 2004
    
    $
    1,200,000
    
    
    
    150,000December 1, 2004
    
    $
    1,200,000
    
    
    
    150,000January 1, 2005
    
    $
    1,200,000
    
    
    
    150,000Total warrants to be issued as of January 1, 2005
    
    
    
    
    
    
    731,250
 22




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##### Table of Contents



The Company initially was obligated to issue warrants to purchase 37,500 common shares at the time
this note was issued. The fair value of these warrants was determined to be $17,513 using the
Black Scholes pricing model. The assumptions used included a risk free rate of 3.8%, volatility of
155%, fair market value of the Companys stock of $.50 per share and a remaining life of 5 years.
The calculated fair value amount was recorded as a debt discount and is being amortized over the
twenty-four month term of the debt. The warrants issued on September 1, 2004 through January 1,
2005 were also valued using the Black Scholes pricing model. The assumptions used include risk free
rates ranging from 3.39% to 3.71%, volatility of approximately 155%, remaining lives of 5 years for
each warrant issuance, and fair market values of the Companys stock ranging from $0.35, to $0.59
per share. At the time these warrant obligations arose, the Company had sufficient authorized
common shares to effect the exercise of these warrants. Accordingly, the fair values of the
warrants issued from September 1, 2004 through January 1, 2005 of $283,988, were classified as
common stock warrants in the shareholders equity (deficit) section on the consolidated balance
sheet, and expensed as interest expense in the consolidated statement of operations, as they were
issued. Note payable to Steven M. Wright On June 10, 2003, Steven M. Wright, the Companys Chief Executive Officer at that time, advanced
the Company $50,000 under a line of credit promissory note (Note 14) for working capital purposes.
The note carried an interest rate of 10% and was due and payable on September 1, 2003. As of
January 3, 2004, $5,000 of this note had been repaid with the remaining balance still outstanding.
The remaining note balance and accrued interest of $4,480 was converted to 117.81 shares of Series
3 preferred stock on April 2, 2004 (Note 10). Notes payable to entities controlled by Robert J. Jesenik On September 16, 2003, as part of the purchase price for the acquisition of CTS, the Company
assumed various long-term notes payable to several entities in which Robert J. Jesenik, a Director
of the Company and significant shareholder, has significant ownership interests. A portion of
these debts were converted to equity as a part of the Companys Series 2 preferred stock private
placement in 2003. The remaining amounts due plus accrued interest were converted to equity on
April 2, 2004 as listed below. On September 15, 2003, the Company, CTS and JMW Capital Partners, Inc. (JMW) entered into an
Agreement to Satisfy Obligations. JMW is an investment banking company in which Robert J. Jesenik,
a Director and significant Shareholder, owns a significant ownership interest. Under this
agreement CTS acknowledged debt in the amount of $149,000 owed to JMW. This debt arose within CTS
prior to the acquisition by the Company and was used for operating activities. After consummation
of the acquisition of CTS by the Company and upon issuance of preferred shares in conjunction with
the Series 2 preferred stock private placement, the Company converted the note payable to JMW into
357,143 shares of the Companys Series 2 preferred stock. On September 15, 2003, the Company, CTS and Christenson Electric, Inc. (CEI) entered into an
Agreement to Consolidate, Amend and Satisfy Obligations. CEI is an electrical services company in
which Robert J. Jesenik, a Director and significant Shareholder, owns a substantial ownership
interest. Under this agreement CTS acknowledged debts of $1.5 million and $265,000 owed to CEI.
These debts arose within CTS prior to the acquisition by the Company, and relate to the purchase of
Christenson Electrical Services inventory and customer lists by CTS. This was a transaction
between entities under common control. After consummation of the acquisition of CTS by the Company
and upon issuance of preferred shares in conjunction with the Series 2 preferred stock private
placement, the Company converted $365,000 of the two notes payable to CEI into 869,048 shares of
Series 2 preferred stock. On September 15, 2003, CTS executed a new Subordinated Amended and Restated Promissory Note for the
remaining $1,400,000 due to CEI. On November 17, 2003 the Company converted the note payable to
3,333,333 shares of Series 2 preferred stock. There was no interest accrued or paid on this note,
according to its terms. On September 15, 2003, CTS executed an Amended and Restated Promissory Note in the amount of
$825,000 due to Christenson Leasing Company, LLC (CLC). CLC is an equipment leasing company in
which Robert J. Jesenik, a
Director and significant shareholder, holds a substantial ownership interest. This debt arose
within CTS prior to the acquisition by the Company. Under this note, six interest only payments
were due monthly beginning on November 15, 2003. Thereafter, payments of $18,355 were to be due
monthly beginning on June 15, 2004, with a balloon payment of $666,889 due and payable on October
15, 2005. Interest on this note accrued at 12% per annum 23




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##### Table of Contents



beginning on September 15, 2003. This
note and accrued interest was converted to 2,088.924 shares of Series 3 preferred on April 2, 2004
(Note 14). On January 17, 2003, CTS executed separate promissory notes with JMW, CLC, Robert Jesenik dba
Jesenik Enterprises and JW Assurance and Holding Limited for the purchase of the undivided
interests in certain assets previously leased by CTS. Robert J. Jesenik, a Director and
significant shareholder, owns a substantial ownership interest in all of the above named entities.
An interest only payment was due on January 17, 2004. Thereafter, payments totaling $6,337 were
due quarterly beginning on April 17, 2004. Interest on these notes accrues at 12% per annum
beginning on January 17, 2003. As of January 3, 2004, $79,602 was outstanding under these notes.
These notes were converted to 216.571 shares of Series 3 preferred stock on April 2, 2004 (Note
14). On January 17, 2003, CTS executed separate promissory notes with JMW, CLC, Robert Jesenik dba
Jesenik Enterprises and JW Assurance and Holding Limited in payment of certain past due rent
amounts due from CTS under an asset lease. Robert J. Jesenik, a Director and significant
shareholder, owns a substantial ownership interest in all of the above named entities. An
interest only payment was due on January 17, 2004. Thereafter, payments totaling $4,036 were due
quarterly beginning on April 17, 2004. Interest on these notes accrued at 12% per annum beginning
on January 17, 2003. As of January 3, 2004, $50,700 was outstanding under these notes. These
notes and accrued interest were converted to 216.571 shares of Series 3 preferred stock on April 2,
2004 (Note 14). On April 2, 2004, approximately $118,000 of interest, payable to entities in which Mr. Jesenik has
a significant interest under the notes and agreements listed above, was converted to 280.952 shares
of Series 3 preferred stock (Note 10). As of January 1, 2005 no interest is payable to entities in
which Mr. Jesenik has a significant interest. Bond Guarantee Fees A certain number of CTS construction projects require the Company to maintain a surety bond. The
bond surety company requires an additional guarantee for issuance of the bond. The Company has
separate agreements with CEAC, Inc. (CEAC) and A. Mark Walter individually, President of CVI, under
which at quarter end paid CEAC and Mr. Walter each approximately $1,200 per month for their
guarantee of this bond liability. CEAC holds a substantial ownership interest in CEI. Robert J.
Jesenik, a Director and significant Shareholder, owns a substantial ownership interest in CEAC.
The guarantee fee is computed as 15% (annualized) of the open liability under bonds issued for CTS
and indemnified by certain shareholders of CEAC. Equipment Lease Agreement On September 1, 2003, CTS entered into an agreement with CEI for use of certain equipment leased by
CEI from an outside party. Robert J. Jesenik, a Director and significant Shareholder, owns a
substantial ownership interest in CEI. The equipment consists of various construction vehicles,
trailers, miscellaneous construction equipment, office furniture, computer hardware and software.
Under the terms of the lease CTS pays CEI $40,000 monthly beginning on September 1, 2003, with the
final payment due on December 1, 2007. The lease is accounted for as an operating lease and
contains a 10% purchase option at the end of the lease term, December 31, 2007. At January 3,
2004, the Company was past due on payments totaling $125,000. The Company reached agreement on a
payment plan to the lessor, under which $10,000 of the monthly lease obligation was paid to the
lessor in an equivalent amount of the Companys Series 3 preferred stock (Note 10). This
arrangement tendering a portion of the payment with preferred stock in lieu of cash, is for the
thirteen monthly payments beginning with the December 2003 lease payment, through the payment due
in December 2004. Beginning with the payment due in January 2005, the total monthly amount due is
scheduled to be paid entirely in cash. At January 1, 2005, the Company was past due on payments
totaling approximately $25,000. Master Vehicle Lease Agreement On September 1, 2003 CTS entered into a master vehicle lease agreement with Christenson Leasing
Company LLC (CLLLC), for use of certain vehicles used in its construction business. CLLLC is an
equipment leasing company in which Robert J. Jesenik, a Director and significant Shareholder, holds
a substantial ownership interest. Under the terms of the lease, CTS paid CLLLC $84,777 monthly
beginning on September 1, 2003, with the final payment due
August 1, 2006. The lease contained a renewal provision under which it had the option, at the end
of the lease term, to purchase or return the vehicles, or to renew the lease for an additional 12
months. The lease payment was to remain fixed unless the 30-day Commercial Paper Rate as published
in the Wall Street Journal exceeds 2.00%. If that occurs, the lessor has the option to increase
the lease payment. This lease was accounted for as a capital lease. 24




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##### Table of Contents



On September 1, 2003 prior to
the acquisition of CTS, $1,993,233 was recorded as cost of the vehicles leased with the same amount
recorded as debt owed under the lease as of that date (Notes 5 and 14). At January 3, 2004, the
Company was past due on payments totaling $271,720. On January 3, 2004, the Company amended the
agreement with the lessor under which the monthly payments were reduced to approximately $70,000
per month, with $15,250 of the monthly lease obligation being paid to the lessor in an equivalent
amount of the Companys Series 3 preferred stock (Note 10). The Series 3 preferred stock tendered
in conjunction with this payment reduction, was all issued on April 2, 2004. This reduction
resulted in a decrease in interest rate on this lease from 32.22% to 25.04% per annum. This
arrangement tendering a portion of the payment with preferred stock in lieu of cash is for the
twelve monthly payments in 2004. On September 10, 2004, the Company entered into a Master Vehicle Lease Termination Agreement with
CLLLC, under which the Company terminated its previous master vehicle lease agreement with CLLLC.
Under the terms of this termination agreement, the Company was released from its obligation under
the previous master vehicle lease agreement. In consideration for this release the Company issued
1,000,000 warrants to purchase the Companys common shares, which were valued at $515,000 using the
Black Scholes model, a risk free rate of 3.5%, volatility of 154%, fair market value of the stock
of $0.55, and a five year life. This warrant value was recorded in the Companys consolidated
balance sheet as common stock warrants, with a corresponding expense recorded in the Companys
consolidated statement of operations (Note 13). The Company entered into a new Master Vehicle Lease Agreement, effective September 9, 2004, with
Destination Microfield, LLC. Destination Microfield, LLC is partially owned by William C.
McCormick, prior interim CEO and current board member for the Company. In accordance with the terms of the agreement, the
Company will make twelve monthly payments of $29,000 starting October 5, 2004, twelve monthly
payments of $35,000, starting October 5, 2005, and three monthly payments of $45,000 ending on
December 9, 2006. This lease is accounted for as an operating lease with equal monthly amounts
charged to expense in the consolidated statement of operations over the life of the lease. Real Property Leases On September 1, 2003, CTS entered into seven real property subleases with CEI for use of buildings,
offices and storage yards to house the operations and property of CTS. Robert J. Jesenik, a
Director and significant Shareholder, owns a substantial ownership interest in CEI. CTS has
operating activities in Portland and Eugene, Oregon. The monthly sublease payments totaled $58,625
through November 30, 2004. On November 30, 2004, the Company terminated its lease with CEI for
space in the Thurman Building and entered into a lease directly with the building owner for a
smaller space in the building. As of January 1, 2005 the Companys total real property lease
payments totaled $48,842, of which $675 was on a month-to-month basis. The remaining $48,167 is
due on leases with maturity dates between September 2005 and October 2008. The rent per month on
the Thurman Building is $31,025. The annual rent obligations from January 1, 2005, for each
property are listed in the table below. Location
    
    Maturity
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Thurman Building
    
    
    10/31/08
    
    
    $
    372,297
    
    
    $
    372,297
    
    
    $
    372,297
    
    
    $
    310,247
    
    
    
    Swan Island
    
    
    11/30/05
    
    
    
    78,355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Eugene
    
    
    09/30/05
    
    
    
    76,077
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Crown Plaza Office
    
    
    7/31/07
    
    
    
    18,795
    
    
    
    18,795
    
    
    
    12,530
    
    
    
    
    
    
    
    Pope Storage
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Montgomery Park Storage
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    545,524
    
    
    $
    391,092
    
    
    $
    384,827
    
    
    $
    310,247
    
    
    
    
   *

    Month-to-Month Administrative Services Agreement On September 15, 2003, CTS entered into an administrative services agreement with CEI for the
extension of certain administrative and related services by the Company to CEI. Robert J. Jesenik,
a Director and Significant
Shareholder, owns a substantial ownership interest in CEI. Under the terms of the agreement,
certain employees provided administrative and related services to CEI upon reasonable request. The
agreement is subject to a 60-day notice period before termination by either party. The monthly
payment for these services was determined at the 25




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##### Table of Contents



effective date of the agreement to be
approximately $35,000, with a provision to be adjusted as needed based on the level of usage of
these services by CEI. During the first quarter of 2004, the payment by CEI for these services was
renegotiated to $15,000 per month as the cost of services to CEI has been reduced. This amount
remained at $15,000 through July of 2004, at which time the Company discontinued billing CEI for
these services. Charges from CVI to CEI for these services resumed in January 2005. Note Receivable In 1998, John B. Conroy, then the Companys Chairman, CEO and President, entered into a transaction
whereby he purchased 45,000 shares of the Companys common stock at $1.75 per share. Mr. Conroy
issued a promissory note to the Company for $78,750 in payment for the shares. On May 17, 2004 the
Note was replaced with a new non-recourse note for $66,250 under which the original amount of the
note was offset against a $12,500 amount owed by the Company to Mr. Conroy. The note also
acknowledges the outstanding accrued interest due by Mr. Conroy in the amount of $21,937.
Additionally, the interest rate of the new promissory note was established at 3.4% per annum, and
the due date was extended to August 29, 2006. Mr. Conroy resigned as Chairman, CEO and President
on September 16, 2002, and resigned as a director in October 2003. At January 1, 2005, accrued
interest receivable under this note totaled $26,243. The Company has accounted for the $78,750 due
from Mr. Conroy as a reduction in common stock equity in prior years. In May 2004, the Company
accounted for the $12,500 amount due to Mr. Conroy and additional $637 of interest adjustment as an
increase in common stock equity. Unsecured Payable On November 5, 2003, R. Patrick Hanlin, Chairman of the Companys board of directors, advanced
$16,000 to the Company in the form of a payment directly to one of the Companys creditors. The
advance was unsecured and did not carry an interest rate or have any stated due date. On April 2,
2004 this debt was converted to approximately 38 shares of the Companys Series 3 preferred stock
(Note 10). These shares of Series 3 preferred stock are convertible into 38,095 shares of the
Companys common stock at the option of the shareholder. Recent Accounting Pronouncements SFAS 123R. On March 31, 2004 the Financial Accounting Standards Board (FASB) issued its exposure
draft, Share-Based Payments, which is a proposed amendment to SFAS 123. The exposure draft would
require all share-based payments to employees, including grants of employee stock options and
purchases under employee stock purchase plans, to be recognized in the statement of operations
based on their fair value. The FASB issued the final standard in December 2004 that is effective
for small business issuers for annual periods beginning after December 15, 2005. The Company
has not yet assessed the impact of adopting this new standard. SFAS 151.In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS 151,
Inventory Costs an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB
No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
Chapter 4, previously stated that . . . under some 26




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circumstances, items such as idle facility
expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require
treatment as current period charges. . . . This Statement requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of so abnormal. In
addition, this Statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This Statement is
effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company does not anticipate that the implementation of this standard will have a material impact on
its financial position, results of operations or cash flows. SFAS 152.In December 2004, the FASB issued SFAS No.152, Accounting for Real Estate Time-Sharing
Transactionsan amendment of FASB Statements No. 66 and 67 (SFAS 152) The amendments made by
Statement 152 This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to
reference the financial accounting and reporting guidance for real estate time-sharing transactions
that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing
Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2.
This Statement is effective for financial statements for fiscal years beginning after June 15,
2005. with earlier application encouraged. The Company does not anticipate that the implementation
of this standard will have a material impact on its financial position, results of operations or
cash flows. SFAS 153.On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153,
Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions ( SFAS 153). This statement amends APB Opinion 29 to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial substance. Under SFAS 153, if a
non-monetary exchange of similar productive assets meets a commercial-substance criterion and fair
value is determinable, the transaction must be accounted for at fair value resulting in recognition
of any gain or loss. SFAS 153 is effective for non-monetary transactions in fiscal periods that
begin after June 15, 2005. The Company does not anticipate that the implementation of this standard
will have a material impact on its financial position, results of operations or cash flows. TRENDS, RISKS AND UNCERTAINTIES We have sought to identify what we believe to be the most significant risks to our business, but we
cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee
that we have identified all possible risks that might arise. Investors should carefully consider
all of such risk factors before making an investment decision with respect to our Common Stock. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS We provide the following cautionary discussion of risks, uncertainties and possible inaccurate
assumptions relevant to our business and our products. These are factors that we think could cause
our actual results to differ materially from expected results. Other factors besides those listed
here could adversely affect us. Potential Fluctuations in Annual Operating Results Our annual operating results may fluctuate significantly in the future as a result of a variety of
factors, most of which are outside our control, including: the demand for our products and
services; seasonal trends in purchasing, the amount and timing of capital expenditures and other
costs relating to the real estate construction and development; price competition or pricing
changes in the market; technical difficulties or system downtime; general economic conditions and
economic conditions specific to the construction industry. Our annual results may also be significantly impacted by the impact of the accounting treatment of
acquisitions, financing transactions or other matters. Particularly at our early stage of
development, such accounting treatment can have a material impact on the results for any quarter.
Due to the foregoing factors, among others, it is likely that our operating results may fall below
our expectations or those of investors in some future quarter. Dependence Upon Management 27




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Our future performance and success is dependant upon the efforts and abilities of our Management.
To a very significant degree, we are dependent upon the continued services of A Mark Walter, our
President and Chief Executive Officer and member of our Board of Directors. If we lost the
services of either Mr. Walter, or other key employees before we could get qualified replacements,
that loss could materially adversely affect our business. We do not maintain key man life insurance
on any of our Management. Limitation of Liability and Indemnification of Officers and Directors Our officers and directors are required to exercise good faith and high integrity in our Management
affairs. Our Articles of Incorporation provide, however, that our officers and directors shall have
no liability to our shareholders for losses sustained or liabilities incurred which arise from any
transaction in their respective managerial capacities unless they violated their duty of loyalty,
did not act in good faith, engaged in intentional misconduct or knowingly violated the law,
approved an improper dividend or stock repurchase, or derived an improper benefit from the
transaction. Our Articles and By-Laws also provide for the indemnification by us of the officers
and directors against any losses or liabilities they may incur as a result of the manner in which
they operate our business or conduct the internal affairs, provided that in connection with these
activities they act in good faith and in a manner that they reasonably believe to be in, or not
opposed to, the best interests of Surge, and their conduct does not constitute gross negligence,
misconduct or breach of fiduciary obligations. Continued Control of Current Officers and Directors The present officers and directors own approximately 58% of the outstanding shares of Common Stock,
and therefore are in a position to elect all of our Directors and otherwise control the Company,
including, without limitation, authorizing the sale of equity or debt securities of Microfield, the
appointment of officers, and the determination of officers salaries. Shareholders have no
cumulative voting rights. (See Security Ownership of Certain Beneficial Owners and Management) Management of Growth We may experience growth, which will place a strain on our managerial, operational and financial
systems resources. To accommodate our current size and manage growth if it occurs, we must devote
management attention and resources to improve our financial strength and our operational systems.
Further, we will need to expand, train and manage our sales and distribution base. There is no
guarantee that we will be able to effectively manage our existing operations or the growth of our
operations, or that our facilities, systems, procedures or controls will be adequate to support any
future growth. Our ability to manage our operations and any future growth will have a material
effect on our stockholders. If we fail to remain current on our reporting requirements, we could be removed from the OTC
Bulletin Board which would limit the ability of broker-dealers to sell our securities and the
ability of stockholders to sell their securities in the secondary market. Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports
under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we
fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin
Board. As a result, the market liquidity for our securities could be severely adversely affected by
limiting the ability of broker-dealers to sell our securities and the ability of stockholders to
sell their securities in the secondary market. Our common stock is subject to the Penny Stock rules of the SEC and the trading market in our
securities is limited, which makes transactions in our stock cumbersome and may reduce the value of
an investment in our stock. The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition
of a penny stock, for the purposes relevant to us, as any equity security that has a market price
of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require: 28




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##### Table of Contents




    that a broker or dealer approve a persons account for transactions in penny stocks; and
    the broker or dealer receive from the investor a written agreement to the transaction,
setting forth the identity and quantity of the penny stock to be purchased. In order to approve a persons account for transactions in penny stocks, the broker or dealer
must:  
    obtain financial information and investment experience objectives of the person; and
    make a reasonable determination that the transactions in penny stocks are suitable for
that person and the person has sufficient knowledge and experience in financial matters to
be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock market, which, in
highlight form:  
    sets forth the basis on which the broker or dealer made the suitability determination; and
    that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the
penny stock rules. This may make it more difficult for investors to dispose of our common stock
and cause a decline in the market value of our stock. Disclosure also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the broker-dealer and
the registered representative, current quotations for the securities and the rights and remedies
available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements
have to be sent disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. 29




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##### Table of Contents



Report of Independent Accountants RUSSELL BEDFORD STEFANOU MIRCHANDANI LLPCertified Public Accountants REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM Board of Directors
Microfield Group, Inc.
Portland, Oregon We have audited the accompanying consolidated balance sheet of Microfield Group, Inc. and its
wholly-owned subsidiary (the Company) as of January 1, 2005 and the related consolidated
statements of operations, deficiency in stockholders equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based upon our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight
Board (United States of America). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Microfield Group, Inc. and its wholly-owned subsidiary
as of January 1, 2005, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in the Note 2 to the accompanying consolidated
financial statements, the Company has suffered recurring losses and is experiencing difficulty in
generating sufficient cash flow to meet it obligations and sustain its operations, which raises
substantial doubt about its ability to continue as a going concern. Managements plans in regard
to this matter are described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. /s/RUSSELL BEDFORD STEFANOU MIRCHANDANI LLPRussell Bedford Stefanou Mirchandani LLPCertified
Public Accountants
 McLean, Virginia
April 22, 2005 30




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of
Microfield Group, Inc. In our opinion, the consolidated balance sheet as of January 3, 2004 and the related consolidated
statements of operations, of changes in shareholders equity (deficit) and of cash flows for the year ended January 3, 2004 present fairly, in all material
respects, the financial position, results of operations and cash flows of Microfield Group, Inc.
and its subsidiaries (the Company) at January 3,
2004 and for the year then ended in
conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Companys management; our responsibility is to
express an opinion on these financial statements based on our audit. We conducted our audit of
these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 2 to the financial statements, the Company has suffered
recurring losses from continuing operations and has experienced negative cash flows from
continuing operating activities. In addition, the Company may not have sufficient cash resources
to meet short-term cash requirements. These matters raise substantial doubt about the Companys
ability to continue as a going concern. Managements plans in regard to these matters are also
discussed in Note 2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty. As more fully described in Note 18, the Company has entered into debt agreements, lease agreements
and an administrative services agreement with entities owned or controlled by a significant
shareholder and director. /s/PRICEWATERHOUSECOOPERS, LLP
Portland, Oregon
May 19, 2004 31




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##### Table of Contents



Item 7. Financial Statements MICROFIELD GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 1, 2005 AND JANUARY 3, 2004 January 1, 2005
    
    
    January 3, 2004Current assets:Cash and cash equivalents
    
    $
    10,992
    
    
    $
    130,533Accounts receivable, net of allowances of $103,969 and $117,650
    
    
    6,241,001
    
    
    
    5,432,046Accounts receivable  related parties
    
    
    178,900
    
    
    
    385,122Inventory, net of allowances (Note 4)
    
    
    239,328
    
    
    
    429,529Costs in excess of billings (Note 6)
    
    
    822,656
    
    
    
    1,517,226Other current assets
    
    
    450,602
    
    
    
    125,243Total current assets
    
    
    7,943,479
    
    
    
    8,019,699Property and equipment, net (Note 5)
    
    
    125,777
    
    
    
    1,818,415Intangible assets, net (Note 7 & 8)
    
    
    1,393,281
    
    
    
    1,879,832Goodwill (Note 7 & 8)
    
    
    2,276,243
    
    
    
    2,299,084Other assets
    
    
    36,243
    
    
    
    24,480Total Assets
    
    $
    11,775,023
    
    
    $
    14,041,510Current liabilities:Cash disbursed in excess of available funds
    
    $
    26,125
    
    
    $
    217,781Accounts payable
    
    
    3,451,991
    
    
    
    3,895,873Accounts payable  related parties
    
    
    99,932
    
    
    
    424,905Accrued payroll taxes and benefits
    
    
    1,297,379
    
    
    
    1,274,423Bank line of credit (Note 14)
    
    
    4,392,975
    
    
    
    4,331,098Current portion of notes payable (Note 14)
    
    
    673,968
    
    
    
    69,773Current portion of notes payable  related parties (Notes 14 & 18)
    
    
    485,500
    
    
    
    898,224Billings in excess of costs (Note 6)
    
    
    523,919
    
    
    
    354,544Other current liabilities
    
    
    226,788
    
    
    
    175,395Total current liabilities
    
    
    11,178,577
    
    
    
    11,642,016Long-term liabilities:Long term notes payable (Note 14)
    
    
    412,922
    
    
    
    129,211Long term notes payable  related parties (Notes 14 & 18)
    
    
    700,635
    
    
    
    2,043,923Derivative liability  notes (Note 12)
    
    
    41,863
    
    
    
    35,599Liability for warrant settlement (Note 13)
    
    
    
    
    
    
    182,862Total long-term liabilities
    
    
    1,155,420
    
    
    
    2,391,595Commitments and contingencies (Note 19)
    
    
    
    
    
    
    Shareholders equity(deficit):Convertible Series 2 preferred stock, no par value, 10,000,000
shares authorized, 6,821,436 and 6,940,484 shares issued and
outstanding (Note 10)
    
    
    2,765,101
    
    
    
    2,815,101Convertible Series 3 preferred stock, no par value, 10,000,000
shares authorized, 3,641 and 0 shares issued and outstanding,
respectively (Note 10)
    
    
    1,273,667
    
    
    
    Convertible Series 4 preferred stock, no par value, 10,000,000
shares authorized, 4,605 and 0 shares issued and outstanding,
respectively (Note 10)
    
    
    1,568,834
    
    
    
    Common stock, no par value, 125,000,000 shares authorized,
18,491,618 and 16,772,570 shares issued and outstanding,
respectively
    
    
    20,707,192
    
    
    
    18,502,354Common stock warrants (Note 13)
    
    
    2,256,112
    
    
    
    468,000Accumulated deficit
    
    
    (29,129,880
    )
    
    
    (21,777,556
    )Total shareholders equity(deficit)
    
    
    (558,974
    )
    
    
    7,899Total liabilities and shareholders equity (deficit)
    
    $
    11,775,023
    
    
    $
    14,041,510
 The accompanying notes are an integral part of these consolidated financial statements 32




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##### Table of Contents



MICROFIELD GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 1, 2005 AND JANUARY 3, 2004 January 1,
    
    
    January 3,2005
    
    
    2004Sales
    
    $
    36,466,618
    
    
    $
    10,342,045Cost of goods sold
    
    
    30,334,987
    
    
    
    8,712,117Gross profit
    
    
    6,131,631
    
    
    
    1,629,928Operating expensesSales, general and administrative
    
    
    (9,748,188
    )
    
    
    (4,104,098
    )Write-off of impaired intangible assets (Note 7)
    
    
    (376,000
    )
    
    
    Loss on lease termination (Notes 13 and 15)
    
    
    (515,000
    )
    
    
    Loss from operations
    
    
    (4,507,557
    )
    
    
    (2,474,170
    )Other income (expense)Interest income
    
    
    1,126
    
    
    
    3,298Interest expense
    
    
    (1,959,104
    )
    
    
    (427,623
    )Loss on debt extinguishment (Note 13)
    
    
    
    
    
    
    (111,000
    )Derivative expense
    
    
    (16,150
    )
    
    
    (123,393
    )Gain (loss)
on disposal of assets
    
    
    87,795
    
    
    
    Other income (expense), net
    
    
    
    
    
    
    (10,299
    )Total other income (expense)
    
    
    (1,886,333
    )
    
    
    (669,017
    )Loss before provision for income taxes
    
    
    (6,393,890
    )
    
    
    (3,143,187
    )Provision for income taxes
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (6,393,890
    )
    
    
    (3,143,187
    )Discontinued operations:Gain
(loss) on discontinued operations - Velagio and IST (Note 9)
    
    
    149,380
    
    
    
    (2,939,803
    )Gain on sale of discontinued operations  SoftBoard (Note 9)
    
    
    62,827
    
    
    
    36,758Net loss
    
    $
    (6,181,683
    )
    
    $
    (6,046,232
    )Deemed preferred stock dividend (note 10)
    
    
    (1,170,641
    )
    
    
    Net loss attributable to common shareholders
    
    $
    (7,352,324
    )
    
    $
    (6,046,232
    )Basic and diluted net loss per share from continuing operations
(Note 17)
    
    $
    (0.37
    )
    
    $
    (0.31
    )Basic and diluted net income (loss) per share from discontinued
Operations (Note 17)
    
    $
    0.01
    
    
    $
    (0.28
    )Basic and diluted net loss per share (Note 17)
    
    $
    (0.36
    )
    
    $
    (0.59
    )Net loss per
share attributable to common shareholders
    
    $
    (0.42
    )
    
    $
    (0.59
    )Weighted average shares used in per share calculations:Basic and diluted
    
    
    17,340,152
    
    
    
    10,308,815
 The accompanying notes are an integral part of these consolidated financial statements. 33




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##### Table of Contents



Microfield Group, Inc.
Statement of Changes in Shareholders Equity (Deficit)
Fiscal Years Ended January 1, 2005 and January 3, 2004 TotalConvertible Series 2
    
    
    Convertible Series 3
    
    
    Convertible Series 4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    ShareholdersPreferred Stock
    
    
    Preferred Stock
    
    
    Preferred Stock
    
    
    Common Stock
    
    
    Common Stock Warrants
    
    
    Deficit
    
    
    Equity (Deficit)Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Warrants
    
    
    AmountBalance, December 28,
2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,224,652
    
    
    $
    16,149,034
    
    
    
    2,066,000
    
    
    $
    357,000
    
    
    $
    (15,731,324
    )
    
    $
    774,710Common shares
repurchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (951,445
    )
    
    
    (209,318
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (209,318
    )Common shares issued in
private placement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,113,078
    
    
    
    269,549
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    269,549Common shares issued
upon acquisition of CTS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,193,142
    
    
    
    1,090,217
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,090,217Common shares and
employee stock options
issued upon acquisition
of Velagio
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,193,143
    
    
    
    1,202,872
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,202,872Re-measurement of
warrant value originally
issued with debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,000
    
    
    
    
    
    
    
    111,000Convertible preferred
shares issued in private
placement, net of
issuance costs and
liability for warrant
settlement
    
    
    1,785,714
    
    
    $
    667,636
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    667,636Convertible preferred
shares issued for
retirement of related
party debt, net of
issuance costs
    
    
    1,821,437
    
    
    
    747,465
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    747,465Convertible preferred
shares issued for
retirement of related
party debt, net of
issuance costs
    
    
    3,333,333
    
    
    
    1,400,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,400,000Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,046,232
    )
    
    
    (6,046,232
    )
 34




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##### Table of Contents



TotalConvertible Series 2
    
    
    Convertible Series 3
    
    
    Convertible Series 4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    ShareholdersPreferred Stock
    
    
    Preferred Stock
    
    
    Preferred Stock
    
    
    Common Stock
    
    
    Common Stock Warrants
    
    
    Deficit
    
    
    Equity (Deficit)Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Warrants
    
    
    AmountBalance, January 3, 2004
    
    
    6,940,484
    
    
    $
    2,815,101
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    16,772,570
    
    
    $
    18,502,354
    
    
    
    2,066,000
    
    
    $
    468,000
    
    
    $
    (21,777,556
    )
    
    $
    7,899Convertible Series 3
preferred shares issued
for retirement of
related party debt
    
    
    
    
    
    
    
    
    
    
    3,640.803
    
    
    $
    546,121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    983,017
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,529,138Partial satisfaction of
note receivable
through reduction of
account payable
(see Note 15)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,137
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,137Convertible Series 4
preferred shares issued
in private placement,
net of issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,605.265
    
    
    $
    1,125,739
    
    
    
    
    
    
    
    598,684
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,724,423Conversion of preferred
Series 2 shares to
common shares
    
    
    (119,048
    )
    
    
    (50,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,048
    
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrant values
recognized upon
warrant issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,693,750
    
    
    
    798,988
    
    
    
    
    
    
    
    798,988Warrant reclassification
recorded upon expansion of
authorized common
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,885,689
    
    
    
    989,124
    
    
    
    
    
    
    
    989,124Common stock issued
for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,600,000
    
    
    
    560,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    560,000Amortization of
beneficial conversion
features (See Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    727,546
    
    
    
    
    
    
    
    443,095
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,170,641
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,181,683
    )
    
    
    (6,181,683
    )Balance January 1, 2005
    
    
    6,821,436
    
    
    $
    2,765,101
    
    
    
    3,640.803
    
    
    $
    1,273,667
    
    
    
    4,605.265
    
    
    $
    1,568,834
    
    
    
    18,491,618
    
    
    $
    20,707,192
    
    
    
    5,645,439
    
    
    $
    2,256,112
    
    
    $
    (29,129,880
    )
    
    
    (558,974
    )
 Each share of Series 3 and Series 4 preferred stock is convertible into one thousand shares of
the Companys common stock. The accompanying notes are an integral part of these consolidated financial statements 35




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##### Table of Contents



MICROFIELD GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 1, 2005 AND JANUARY 3, 2004 January 1, 2005
    
    
    January 3, 2004Cash Flows From Operating Activities:Net loss
    
    $
    (6,181,683
    )
    
    $
    (6,046,232
    )Add (deduct):(Gain) loss on discontinued operations (Note 9)
    
    
    (149,380
    )
    
    
    2,939,803(Gain) on sale of discontinued operations (Note 9)
    
    
    (62,827
    )
    
    
    (36,758
    )Loss from continuing operations
    
    
    (6,393,890
    )
    
    
    (3,143,187
    )Depreciation on equipment (Note 5)
    
    
    409,081
    
    
    
    215,413Amortization on intangible assets (Note 8)
    
    
    110,552
    
    
    
    32,244Amortization of debt discount
    
    
    158,869
    
    
    
    Noncash interest expense recorded on warrant issuance
    
    
    882,522
    
    
    
    Gain on disposal of fixed assets
    
    
    (85,795
    )
    
    
    Warrants
issued with lease termination
    
    
    515,000
    
    
    
    Warrants
issued for services
    
    
    560,000
    
    
    
    Re-measurement of warrants on term extension
    
    
    
    
    
    
    111,000Re-measurement of warrant liability
    
    
    43,409
    
    
    
    117,960Re-measurement of derivative associated with Steelcase note
    
    
    6,264
    
    
    
    35,599Write down of intangible asset
    
    
    376,000
    
    
    
    Changes in
current assets and liabilities, net of effect of acquisitions:Accounts receivable
    
    
    (808,955
    )
    
    
    (280,582
    )Accounts receivable  related party
    
    
    206,222
    
    
    
    (183,553
    )Inventory
    
    
    190,201
    
    
    
    178,403Other current assets
    
    
    (56,359
    )
    
    
    (46,266
    )Costs in excess of billings
    
    
    694,570
    
    
    
    525,721Other long term assets
    
    
    52,057
    
    
    
    (24,480
    )Cash
disbursed in excess of available funds
    
    
    (191,656
    )
    
    
    Accounts payable
    
    
    (443,882
    )
    
    
    182,451Accounts payable  related party
    
    
    (101,618
    )
    
    
    410,636Billings in excess of cost
    
    
    169,375
    
    
    
    (133,010
    )Other current liabilities
    
    
    52,632
    
    
    
    690,211Net cash used by continuing operations
    
    
    (3,655,401
    )
    
    
    (1,311,440
    )Net cash provided (used) by discontinued operations
    
    
    149,380
    
    
    
    (2,939,803
    )Net cash provided (used) by sale of discontinued operations
    
    
    62,827
    
    
    
    36,758Assets disposed in discontinued operations
    
    
    
    
    
    
    2,016,492Net cash used by operating activities
    
    
    (3,443,194
    )
    
    
    (2,197,993
    )Cash flows from investing activitiesPurchases of fixed assets
    
    
    (117,713
    )
    
    
    (2,000
    )Loan to non-related company
    
    
    (200,000
    )
    
    
    Net cash acquired in mergers with IST, CTS and Velagio
    
    
    
    
    
    
    621,391Net cash provided (used) by investing activities
    
    
    (317,713
    )
    
    
    619,391Cash flows from financing activities:Borrowings on line of credit
    
    
    36,149,231
    
    
    
    10,832,886Repayments on line of credit
    
    
    (36,087,355
    )
    
    
    (10,185,200
    )Borrowing on Union note payable
    
    
    958,572
    
    
    
    Repayments on notes payable
    
    
    (69,773
    )
    
    
    (11,527
    )Repayments on notes payable  related party
    
    
    (600,000
    )
    
    
    (97,389
    )Borrowings on note payable  related party
    
    
    1,800,000
    
    
    
    90,000Repayments on lease obligation
    
    
    (233,732
    )
    
    
    Proceeds from issuance of preferred stock
    
    
    1,724,423
    
    
    
    750,003Proceeds from issuance of common stock
    
    
    
    
    
    
    239,381Net cash
provided by financing activities
    
    
    3,641,366
    
    
    
    1,618,154Net increase (decrease) in cash and cash equivalents
    
    
    (119,541
    )
    
    
    39,552Cash and cash equivalents, beginning of period
    
    
    130,533
    
    
    
    90,981Cash and cash equivalents, end of period
    
    $
    10,992
    
    
    $
    130,533Supplemental schedule of non-cash financing and investing activities:Common stock issued upon acquisitions
    
    $
    
    
    
    $
    2,293,089Costs of acquisitions
    
    $
    
    
    
    $
    139,800Net tangible liabilities acquired from mergers
    
    $
    
    
    
    $
    13,910,104Net intangible assets acquired in mergers
    
    $
    
    
    
    $
    5,704,548Common stock issued to settle related party debts  Steven M. Wright
    
    $
    
    
    
    $
    40,000Repurchase of common stock with issuance of note payable  Steelcase
    
    $
    
    
    
    $
    209,318Beneficial conversion feature of Series 3 and Series 4 preferred stock
    
    $
    1,581,701
    
    
    $
    Amortization of beneficial conversion feature
    
    $
    1,170,641
    
    
    $
    Series 3 preferred stock issued for related party operating lease obligations
    
    $
    130,000
    
    
    $
    Conversion of account payable-related party to preferred stock
    
    $
    210,219
    
    
    $
    
 36




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##### Table of Contents



January 1, 2005
    
    
    January 3, 2004Issuance of preferred stock in exchange for conversion of related party debt (See Note 18)
    
    $
    1,188,919
    
    
    $
    2,165,000Valuation of warrants issued with related party debt
    
    $
    172,734
    
    
    $
    Conversion of derivative liabilities to shareholders equity
    
    $
    989,124
    
    
    $
    Preferred stock private placement placement costs
    
    $
    
    
    
    $
    35,000Valuation of warrants issued with preferred stock
    
    $
    
    
    
    $
    64,902Reduction of note receivable secured by common stock
    
    $
    13,137
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. 37




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##### Table of Contents



MICROFIELD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2005 AND JANUARY 3, 2004 1. Description of the Business Microfield Group, Inc. (the Company) specializes in the installation of electrical products and
services. The Companys objective is to leverage its assets and value to successfully build a
viable, profitable electrical services and technology infrastructure business. In September 2003, the Company acquired privately held Velagio, Inc. (Velagio) and Christenson
Technology Services, Inc. (CTS). In December, 2003 the service and technology teams of Velagio and
CTS were consolidated into one subsidiary under the name Christenson Velagio, Inc. (CVI) in order
to take full advantage of inherent synergies within the subsidiaries, as well as capture
competitive advantage. The organization conducts business in the electrical services and
technology infrastructure sectors. The Company was incorporated in October 1986 as an Oregon Corporation, succeeding operations that
began in October 1984. The Companys headquarters are located in Portland, Oregon. 2. Liquidity Matters The accompanying consolidated
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business. As shown in the consolidated financial statements during the years ended January 1, 2005
and January 3, 2004, the Company incurred net losses of
$6,182,000 and $6,046,000, respectively.
The Companys current liabilities exceeded its current assets by
$3,235,000 as of January 1, 2005.
These factors among others may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time. The Companys existence is dependent upon managements ability to develop profitable operations and
resolve its liquidity problems. The Company has raised approximately $985,000 in cash through
issuances of Common Stock and Series 2 Preferred Stock during the year ended January 3, 2004 and
$1,750,000 in cash through issuance of Series 4 Preferred Stock during the year ended January 1,
2005. Debt to related parties, in the aggregate amount of approximately $3,695,000 has been
converted to equity during the year ended January 1, 2005 and January 3, 2004. Management has been
focused on cutting certain expenses, both to improve gross margins and to reduce the monthly
overhead costs. While the Company anticipates these losses will
continue to decline as a result of cost reduction efforts and fundraising events, recurring losses
and liquidity issues raise doubt about the Companys ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the outcome of this
uncertainty. By adjusting the
Companys operations and development to the level of capitalization, management believes it
has sufficient capital resources to meet projected cash flow deficits. However, if during that
period or thereafter, the Company is not successful in generating sufficient liquidity from operations or
in raising sufficient capital resources, on terms acceptable to them, this could have a material
adverse effect on the Companys business, results of operations liquidity and financial condition.
Investment capital or debt facilities may be difficult to obtain due, among other issues, to the
Companys inability to meet certain SEC reporting requirements relative to historical financial
statements of CTS. There can be no assurance that additional capital will be available or, if
available, will be at terms acceptable to the Company. The Company is focusing on opportunities to
increase revenues and grow margins while continuing to reduce monthly expenses in an attempt to
turn cash flow positive and profitable. 3. Summary of Significant Accounting Policies Fiscal Year The Companys fiscal year is the 52- or 53-week period ending on the Saturday closest to the last
day of December. 38




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##### Table of Contents



The Companys current fiscal year is the 52-week period ending January 1, 2005. The Companys last
fiscal year was the 53-week period ended January 3, 2004. Principles of Consolidation The Consolidated Statements of Operations presented above, contain revenue and expense data of
Microfield Group, Inc. for the years ended January 1, 2005 and January 3, 2004. On September 16,
2003, the Company acquired two wholly-owned subsidiaries, Christenson Technology Services, Inc.
(CTS) and Velagio, Inc. (Velagio) (see Note 7). The revenue and expense data of CTS is included in
the Consolidated Statement of Operations from the acquisition date, September 16, 2003, to the end
of the period presented. Revenue and expense data of its subsidiaries, Velagio and Innovative
Safety Technologies are included in discontinued operations in the Consolidated Statement of
Operations. All significant inter-company accounts and transactions between the Company and its
subsidiaries have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity or remaining maturity
of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents
are primarily maintained at two financial institutions. Fair Value of Financial Instruments The carrying value of the Companys financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at cost, which
approximates fair value due to the relative short maturities of these instruments. The carrying
value of debt, derivatives and the liability for warrant settlement are recorded at the estimated
fair value of these instruments. Inventories Inventories are stated at the lower of cost or market, using the first-in, first-out method.
Inventory is comprised almost entirely of the cost of material. The Company provides inventory
allowances based on estimates of excess and obsolete inventories. Advertising Costs Advertising costs of $40,000 and $27,000 were expensed as incurred in the years ended January 1,
2005 and January 3, 2004, respectively. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation of computer equipment and software is computed using straight line or accelerated
declining balance method over the estimated useful lives of the assets. Estimated lives of three
to five years are used for computer equipment and software. Depreciation of vehicles is computed
using the straight-line method over the estimated useful lives of the assets. Estimated lives of
three years are used for vehicles. Depreciation of furniture and fixtures is computed using
straight line or accelerated declining balance method over the estimated useful lives of the
assets. Estimated lives of five to seven years are used for furniture and fixtures. Concentrations Financial instruments that potentially subject the Company to concentrations of credit risk consist
primarily of accounts receivable. At January 1, 2005 and January 3, 2004 there were no customers
whose accounts receivable accounted for more than 10% of total outstanding trade accounts
receivable. The Company performs limited credit evaluations of its customers, does not require
collateral on accounts receivable balances, but does often retain lien rights to reduce its risk.
The Company has not experienced material credit losses for the periods presented. The level of
sales to any single customer may vary and the loss of any one of these customers, or a decrease in
the level of sales to any one of these customers, could have a material adverse impact on the
Companys financial condition and results of operations. 39




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##### Table of Contents



The Company currently relies on various sources for key components used in the installation and
sales of its products and services. None of the Companys products or supplies used in the
performance of its services is from a single source. The inability of any limited source suppliers
to fulfill supply and production requirements, could materially impact future operating results. The Companys business is concentrated in the electrical services and technology services industry.
Its future success depends on the buying patterns of its customers and continued demand by
customers for the Companys products and services. The Companys success will depend on its
ability to maintain its history of first rate quality in designing customer solutions and
performing its services, enhancing its existing products and services and to develop and introduce,
on a timely basis, successful new products or services. Revenue and Cost Recognition Significant portions of the Companys revenues are derived from construction and service projects.
Revenues from fixed-price, cost-plus-fee, time and material and unit-price contracts are recognized
using the percentage-of-completion method of accounting which recognizes income as work on a
contract progresses. Recognition of revenues and profits generally are related to costs incurred
in providing the services required under the contract. Earned revenue is the amount of cost
incurred on the contract in the period plus the amount of gross profit earned during the same
period. This method is used because management considers total cost to be the best available
measure of completion of construction contracts in progress. Provisions for estimated losses on
construction contracts in progress are made in their entirety in the period in which such losses
are determined without reference to the percentage complete. Changes in job performance, job
conditions and estimated profitability, including those arising from contract penalty provisions
and final contract settlements, may result in revisions to revenue and costs, and are recognized in
the period in which the revisions are determined. Claims for additional revenue are not recognized
until the period in which such claims are allowed. Direct contract costs include all direct labor,
direct materials and some estimating costs and shop and equipment costs. General and administrative
costs are charged to expense as incurred. As of January 1, 2005, accounts receivable does not
include any retainage that is over one year old. Revenue from discontinued operations was
recognized when persuasive evidence of an arrangement existed, the price was fixed, title had
transferred, collection of resulting receivables was probable, no customer acceptance requirements
existed and there were no remaining significant obligations. A small portion of the Companys revenue in for the year ended January 3, 2004 was derived from
software consulting and services. Consulting and service revenue consists of strategic advisory,
business process re-engineering, design, engineering, software development, systems integration,
systems testing and implementation, end user training and post-implementation support activities.
Consulting services are generally billed under time and material contracts. Revenue earned from
these services is recognized as services are performed. Prior to its acquisition by the Company,
Velagio also earned revenue from sales of a software license and the related professional services.
During the period since its acquisition by the Company, no revenue from sales of software products
has been recognized. Certain consulting services only contracts included post contract consumer
support (PCS) to assist customers with post-implementation issues. PCS services are generally
offered under renewable, fee-based contracts or as part of multiple element arrangements. PCS
revenue is deferred and recognized ratably over the contract period.
This part of the Companys
business was acquired in the acquisition of Velagio. There were no revenues from software
consulting and services for the year ended January 1, 2005. Currently, there are no warranties
provided with the purchase of the Companys constructions and services. In the future, when the
company deems warranty reserves are appropriate that such costs will be accrued to reflect
anticipated warranty costs. Impairment of Long-lived Assets Long-lived assets to be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of such assets may not be recoverable.
Determination of recoverability is based on an estimate of discounted future cash flows resulting
from the use of the asset and its eventual disposition. Measurement of an impairment loss for
long-lived assets that management expects to hold and use is based on the fair value of the asset
as estimated using a discounted cash flow model. (See Note 8) The Company measures the carrying value of goodwill recorded in connection with the acquisitions
for potential impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.
To apply SFAS 142, a company is divided into separate reporting units, each representing groups
of products that are separately managed. For this purpose, the Company has one reporting unit. To
determine whether or not goodwill may be 40




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impaired, a test is required at least annually, and more often when there is a change in
circumstances that could result in an impairment of goodwill. If the trading of our common stock is
below book value for a sustained period, or if other negative trends occur in our results of
operations, a goodwill impairment test will be performed by comparing book value to estimated
market value. To the extent goodwill is determined to be impaired, an impairment charge is recorded
in accordance with SFAS 142. Income Taxes The Company accounts for income taxes using the asset and liability approach in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The asset
and liability approach requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying amounts and the tax
basis of assets and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in operations in the period that includes the enactment date. Due to recurring losses,
there has been no provision for income taxes in the periods presented. Computation of Net Income(Loss) per Share Basic earnings (loss) per common share is computed using the weighted-average number of common
shares outstanding during the period. Diluted earnings per common share is computed using the
combination of dilutive common share equivalents, which include convertible preferred shares,
options and warrants and the weighted-average number of common shares outstanding during the
period. During the year ended January 1, 2005 and January 3, 2004, common stock equivalents are
not considered in the calculation of the weighted average number of common shares outstanding
because they would be anti-dilutive, thereby decreasing the net loss per common share. Pension Plan Contributions The Company contributes to several Multi-Employer Pension Benefit Plans on behalf of its employees
covered by a collective bargaining agreement. During the years ended January 1, 2005 and January
3, 2004, the Company contributed $1,895,000 and $630,000 to these plans, respectively, which was
expensed as incurred. Stock Based Compensation The Company accounts for its employee and director stock options in accordance with provisions of
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees.
Pro forma disclosures are required under SFAS 123, Accounting for Stock-Based Compensation and as
amended by SFAS 148, Accounting for Stock-Based Compensation  Transition and Disclosure, are
presented below. Under this method, no stock based compensation expense has been recognized for
stock options issued to employees because the exercise prices of options issued were equal to or
greater than the fair value of the underlying shares at the date of grant . Had compensation cost for the Companys plan been determined based on the fair value at the grant
dates consistent with the method of SFAS No. 123, the total value of options granted would have
been $716,224 for the year ended January 1, 2005 and $141,530 for the year ended January 3, 2004.
Such amounts would be amortized over the vesting period of the options. The total compensation
expense that would have been recognized if the Company had determined such costs based on the fair
value method would have been $244,354 and $19,174 for the years ended January 1, 2005 and January
3, 2004, respectively. Accordingly, under SFAS No. 123, the Companys net loss and loss per share for the years ended
January 1, 2005 and January 3, 2004, would have been changed to the pro forma amounts indicated
below: January 1,
    
    
    January 3,2005
    
    
    2004Net loss
    
    As reported
    
    $
    (6,181,683
    )
    
    $
    (6,046,232
    )Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects
    
    
    
    
    (244,354
    )
    
    
    (19,174
    )Net loss
    
    Pro forma
    
    $
    (6,426,037
    )
    
    $
    (6,065,406
    )
 41




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January 1,
    
    
    January 3,2005
    
    
    2004Net loss attributable to common
shareholders
    
    Pro forma
    
    
    (7,596,678
    )
    
    
    (6,065,406
    )Basic and diluted net loss per share
    
    As reported
    
    $
    (0.36
    )
    
    $
    (0.59
    )Pro forma
    
    $
    (0.37
    )
    
    $
    (0.59
    )Basic and
diluted net loss per share attributable to common shareholders
    
    Pro forma
    
    $
    (0.44
    )
    
    $
    (0.59
    )
 On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
123R (revised 2004), Share-Based Payment which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123R supersedes APB opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach in Statement 123R is similar to the approach described in
Statement 123. However, Statement 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their fair
values. Pro-forma disclosure is no longer an alternative. On April 14, 2005, the SEC amended the
effective date of the provisions of this statement. The effect of this amendment by the SEC is
that the Company will have to comply with Statement 123R and use the Fair Value based method of
accounting no later than the first quarter of 2006. Management has not determined the impact that
this statement will have on Companys consolidated financial statements. Comprehensive Income The Company has no items of other comprehensive income or expense. Accordingly, the Companys
comprehensive loss and net loss are the same for all periods presented. Use of Estimates The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. The Company evaluates, on an on-going
basis, its estimates and judgments, including those related to revenue recognition, sales returns,
bad debts, excess inventory, impairment of goodwill and intangible
assets, income taxes, contingencies and litigation. Its estimates are based on
historical experience and assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Recent Accounting Pronouncements SFAS 123R. On March 31, 2004 the Financial Accounting Standards Board (FASB) issued its exposure
draft, Share-Based Payments, which is a proposed amendment to SFAS 123. The exposure draft would
require all share-based payments to employees, including grants of employee stock options and
purchases under employee stock purchase plans, to be recognized in the statement of operations
based on their fair value. The FASB issued the final standard in December 2004 that is effective
for small business issuers for annual periods beginning after December 15, 2005. The Company
has not yet assessed the impact of adopting this new standard. 42




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SFAS 151.In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS 151,
Inventory Costs an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB
No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
Chapter 4, previously stated that . . . under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . . This Statement requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of so abnormal. In
addition, this Statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This Statement is
effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company does not anticipate that the implementation of this standard will have a material impact on
its financial position, results of operations or cash flows. SFAS 152.In December 2004, the FASB issued SFAS No.152, Accounting for Real Estate Time-Sharing
Transactionsan amendment of FASB Statements No. 66 and 67 (SFAS 152) The amendments made by
Statement 152 This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to
reference the financial accounting and reporting guidance for real estate time-sharing transactions
that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing
Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2.
This Statement is effective for financial statements for fiscal years beginning after June 15,
2005. with earlier application encouraged. The Company does not anticipate that the implementation
of this standard will have a material impact on its financial position, results of operations or
cash flows. SFAS 153.On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153,
Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions ( SFAS 153). This statement amends APB Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, if a
nonmonetary exchange of similar productive assets meets a commercial-substance criterion and fair
value is determinable, the transaction must be accounted for at fair value resulting in recognition
of any gain or loss. SFAS 153 is effective for nonmonetary transactions in fiscal periods that
begin after June 15, 2005. The Company does not anticipate that the implementation of this standard
will have a material impact on its financial position, results of operations or cash flows. 4. Inventories Inventories are stated at the lower of first-in, first-out, cost or market value, and consist of
the following: January 1,
    
    
    January 3,2005
    
    
    2004Raw materials
    
    $
    47,794
    
    
    $
    73,455Finished Goods
    
    
    334,554
    
    
    
    513,727382,348
    
    
    
    587,182Less allowance for obsolete inventory
    
    
    (143,020
    )
    
    
    (157,653
    )$
    239,328
    
    
    $
    429,529
 5. Property and Equipment Property and equipment consist of the following: 43




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January 1,
    
    
    January 3,2005
    
    
    2004Tools and equipment
    
    $
    365,323
    
    
    $
    376,027Software
    
    
    109,118
    
    
    
    Furniture
    
    
    15,500
    
    
    
    Leasehold Improvements
    
    
    
    
    
    
    76,716Vehicles under capital lease (Note 18)
    
    
    
    
    
    
    1,993,233489,941
    
    
    
    2,445,976Less accumulated depreciation and amortization
    
    
    (364,164
    )
    
    
    (627,561
    )$
    125,777
    
    
    $
    1,818,415
 Depreciation expense included
as a charge to income was $409,081 and $215,413 for the years ended
January 1, 2005 and January 3, 2004, respectively. On September 10, 2004, the Company entered into a Master Vehicle Lease Termination Agreement with
CLLLC, under which the Company was released from its obligation under the master vehicles lease
agreement (Note 18) and vehicles under the capital lease were accordingly excluded from the
Companys property and equipment. 6. Construction Contracts in Progress Revenues and costs recognized on construction contracts in progress contrast the related billings
as follows: January 1,
    
    
    January 3,2005
    
    
    2004Direct costs to date
    
    $
    6,839,044
    
    
    $
    8,712,117Gross profit to date
    
    
    1,345,213
    
    
    
    1,629,928Earned contract revenue
    
    
    8,184,257
    
    
    
    10,342,045Net underbillings within CTS prior to acquisition
    
    
    
    
    
    
    1,522,569Contract billings to date
    
    
    (7,885,520
    )
    
    
    (10,701,932
    )Net under billings
    
    $
    298,737
    
    
    $
    1,162,682
 Included in the accompanying consolidated balance sheets under the following captions are: January 1,
    
    
    January 3,2005
    
    
    2004Costs and estimated earnings in excess of billings
    
    $
    822,656
    
    
    $
    1,517,226Billings in excess of costs and estimated earnings
    
    
    (523,919
    )
    
    
    (354,544
    )Net under billings
    
    $
    298,737
    
    
    $
    1,162,682
 7. Acquisitions Acquisition of Christenson Technology Services, Inc. On September 16, 2003, the Company acquired Christenson Technology Services, Inc. (CTS) in exchange
for 4,193,142 shares of the Companys common stock. The shares of common stock issued in
conjunction with the merger were not registered under the Securities Act of 1933. The acquisition
of CTS was accounted for using the purchase method in accordance with SFAS 141, Business
Combinations. The results of operations for CTS have been included in the Consolidated Statements
of Operations since the date of acquisition. CTS is a combination of Christenson Technology Services, Inc. and Christenson Electrical Services,
(CES). These two lines of business sell different products and services, but often support the
same customer. CTS provides complete structured voice, video and data cabling solutions, local and
wide area network design, enterprise computing services, security solutions and wireless LAN
applications. 44




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CES core businesses include electrical contracting and support for commercial and high-tech
construction of high-rise office towers, hospitals, clean rooms or production areas, custom design
and manufacture of energy management systems and industrial control panels, and maintenance of
commercial lighting for retail, office, warehouse and industrial work environments. The value of the Companys common stock issued as a part of the acquisition was determined based on
the average price of the Companys common stock for several days before the acquisition of CTS. The
components of the purchase price were as follows: Common stock
    
    $
    1,090,217Direct acquisition costs
    
    
    59,984Total purchase price
    
    $
    1,150,201
 In accordance with Financial Accounting Standard (SFAS) No. 141, Business Combinations, the total
purchase price was allocated to the estimated fair value of assets acquired and liabilities
assumed. The estimate of fair value of the assets acquired was based on managements and an
independent appraisers estimates. The total purchase price was allocated to the assets and
liabilities acquired as follows: Cash and other current assets
    
    $
    8,221,945Equipment and other assets
    
    
    2,003,977Intangible assets  Trade name
    
    
    1,248,771Intangible assets  Customer lists
    
    
    663,305Goodwill
    
    
    2,299,084Current liabilities
    
    
    (8,303,952
    )Notes payable
    
    
    (4,982,929
    )Total
    
    $
    1,150,201
 The intangible assets of $1,912,076 consist of a trade name and customer lists. These intangible
assets acquired have estimated useful lives as follows: Christenson trade name  indeterminate
life; customer lists relative to the CTS base of customers  six years. Goodwill of $2,299,084 at
the acquisition date represents the excess of the purchase price over the fair value of the net
tangible and intangible assets acquired. In accordance with SFAS 142, goodwill is not amortized and
will be tested for impairment at least annually. The goodwill value was tested for impairment in
the fourth quarter of 2004 using both the market value approach and the discounted cash flow
approach. In both cases, the goodwill was determined to not be impaired. The Company tested the trade name value
for impairment as of the end 2004, and the result indicated
that the recorded book value of trade name exceeded its fair value, as determined
by discounted cash flows. Upon completion of the assessment, the Company recorded
a non-cash impairment charge of $376,000, net of tax, or $0.02 per share at
January 1, 2005 to reduce the carrying value of trade name to its estimated
value of $872,771 (Note 8). Acquisition of Velagio, Inc. On September 16, 2003, the Company acquired Velagio, Inc. (Velagio) in exchange for 4,193,143
shares of the Companys common stock and 473,907 employee stock options to purchase the Companys
common shares, of which 412,027 options were fully vested. The shares of common stock issued in
conjunction with the merger were not registered under the Securities Act of 1933. The acquisition
of Velagio was accounted for using the purchase method in accordance with SFAS 141, Business
Combinations. The results of operations for Velagio have been included in the Consolidated
Statements of Operations since the date of acquisition. Velagio, Inc. was a business solutions provider that offered a blend of business consulting and
information technology integration services. Specifically, Velagio had professional service
capabilities in strategic business consulting; business process re-engineering; enterprise
application software selections and implementations; commercial software development; and
technology infrastructure integration and support services. Velagio had licensed proprietary
customer relationship management (CRM) software in the area of sales force automation. The value of the Companys common stock issued as a part of the acquisition was determined based on
the average price of the Companys common stock for several days before the acquisition of Velagio.
The fair value of employee stock options issued in conjunction with this acquisition has been
included in the determination of the purchase price. The fair value of such options was determined
using the Black-Scholes model. The Company used the following 45




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assumptions in calculating the value of these options: Risk free rate  1.94%; Volatility index 
118%; Divivdend yield: 0%. The components of the purchase price were as follows: Common stock
    
    $
    1,090,217Option issuance value
    
    
    112,655Direct acquisition costs
    
    
    59,984Total purchase price
    
    
    1,262,856
 In accordance with Financial Accounting Standard (SFAS) No. 141, Business Combinations, the total
purchase price was allocated to the estimated fair value of assets acquired and liabilities
assumed. The estimate of fair value of the assets acquired was based on managements and an
independent appraisers estimates. The total purchase price was allocated to the assets and
liabilities acquired as follows: Cash and other current assets
    
    $
    224,166Equipment and other assets
    
    
    53,298Goodwill
    
    
    1,295,366Current liabilities
    
    
    (309,974
    )Total
    
    $
    1,262,856
 Goodwill of $1,295,366 represented the excess of the purchase price over the fair value of the net
tangible and intangible assets acquired. At January 3, 2004, it was the Companys view that the
goodwill generated in this transaction was impaired. The Company decided to write off this
goodwill due to the fact that separations of nearly all of the former Velagio employees have left
few intangible assets from the acquisition and no further identifiable Velagio product or market.
New Microfield management, who joined in February, further concentrated on improving the electrical
businesses with no intention of re-establishing the enterprise software development business. The
write-off of the goodwill, and the financial results of Velagio since its acquisition are included
discontinued operations in the consolidated statement of operations. The following unaudited proforma information presents a summary of the consolidated results of
operations of the Company assuming the acquisitions of CTS, Velagio and IST occurred on the first
day of 2004. In the course of trying to complete the audit of GAAP compliant financial statements
related to its Form 8-K/A filing, the Companys independent
registered public accounting firm and management indentified certain material internal control weaknesses within the operations of CTS in the areas of: revenue
recognition; cash disbursements; inventory accounting; and document control. The Companys
management concluded that fully compliant GAAP financial statements of CTS for FY 2002 and FY 2001
could not be prepared. In addition, the Companys independent registered public accounting firm concluded that they
could not complete an audit nor render an audit opinion on the FY 2002 and FY 2001 historical
financial statements of CTS. Given the significance of CTS, and for the purpose of informing
shareholders and prospective investors, the Company has prepared the following summary proforma
with the best information available, which management believes fairly represents the unaudited
proforma results of operations of the combined Company for the periods presented. The following
information is unaudited. Year EndedJanuary 3,2004(unaudited)Sales
    
    $
    45,788,658Net loss
    
    $
    (8,798,364
    )Basic and diluted net loss per share
    
    $
    (.85
    )
 Prior to the end of the year 2003, the Companys management decided to discontinue the operations
of IST and Velagio, and concentrate on the operations of the newly merged subsidiary CVI. 46




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8. Intangible Assets and Goodwill The Company amortizes its intangible assets on a straight-line basis. The Companys acquisition of
CTS resulted in the valuation of CTS Christenson name and customer lists as intangible assets.
The Companys trade name is considered to have an undeterminable life, and as such will not be
amortized. Instead, the trade name is tested annually for impairment, with any impairment charged
against earnings in the Companys consolidated statement of earnings. It was determined that the
value of the trade name on the balance sheet of the Company as of
January 1, 2005 was partially impaired. An
expense of $376,000 was charged against earnings for the year ended
January 1, 2005 (see Note 7). The customer lists were determined to have a six-year life. Shortly after the acquisition of IST,
the Company elected to eliminate further investment in its IOS product line. As of the end of the
quarter ended September 27, 2003, the intangible value of the IOS product line was written off.
Due to managements decision to discontinue the operations of Velagio and IST at January 3, 2004,
it was determined by the Company that the intangibles of Velagio and
IST were impaired. The write-off of the intangible assets was
included as part of discontinued operations in the consolidated
statement of operations. Intangible assets consist of the following: January 1,
    
    
    January 3,2005
    
    
    2004Christenson trade name
    
    $
    872,771
    
    
    
    1,248,771Christenson customer lists
    
    
    663,305
    
    
    
    663,3051,536,076
    
    
    
    1,912,076Less accumulated depreciation and amortization
    
    
    (142,795
    )
    
    
    (32,244
    )$
    1,393,281
    
    
    $
    1,879,832
 Amortization of intangible assets included as a charge to income was $110,552 and $32,244 for the
years ended January 1, 2005 and January 3, 2004, respectively.Based on the Companys current
intangible assets, amortization expense for the five succeeding years will be as follows: AmortizationYear
    
    
    
    Expense2005
    
    
    
    $
    110,5512006
    
    
    
    
    110,5512007
    
    
    
    
    110,5512008
    
    
    
    
    110,5512009
    
    
    
    
    78,306Total
    
    
    
    
    520,510
 The Company does not amortize goodwill. As a result of the acquisitions of CTS, Velagio and IST,
the Company recorded goodwill in the amount of $3,792,472 during fiscal year 2003. Due to
managements decision to discontinue the operations of Velagio and IST prior to January 3, 2004, it
was determined by the Company that the goodwill of Velagio and IST were impaired. The write-off of the intangible assets was
included as part of discontinued operations in the consolidated
statement of operations. The changes in the carrying amount of
goodwill for the years ended January 1, 2005 and January 3, 2004 are recorded below. January 1,
    
    
    January 3,2005
    
    
    2004Beginning goodwill balance
    
    $
    2,299,084
    
    
    $
    250,490Goodwill recorded upon acquisition of Velagio
    
    
    
    
    
    
    1,295,366Goodwill recorded upon acquisition of CTS
    
    
    
    
    
    
    2,497,106Adjustments
to goodwill for reduction of pre-acquisition expenses
    
    
    (22,841
    )
    
    
    (198,022
    )Goodwill write off due to impairment
    
    
    
    
    
    
    (1,545,856
    )Ending goodwill balance
    
    $
    2,276,243
    
    
    $
    2,299,084
 47




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Considerable management judgment is necessary to estimate fair value. Accordingly, actual results
could vary significantly from managements estimates. 9. Discontinued Operations Velagio and IST During the fourth quarter of 2003, management determined that the previous operations of Velagio
and IST should be discontinued. After the acquisition of Velagio and CTS on September 16, 2003,
management decided to focus on the electrical construction services and technology infrastructure
products and services business acquired with CTS. As a result of expense cuts made after the
acquisitions, all of the previous employees of Velagio and IST were either refocused in areas
within the Company that supported the electrical and technology side of the business, or separated
from the Company. The only items listed as discontinued operations in the statement of operations
in 2004 related to prior operations of Velagio and IST were the reversal of previously unresolved
liability reserves. Sales of Velagio from September 16, 2003, the date of the acquisition, to January 3, 2004, were
approximately $154,000. The net loss of Velagio for this period was $1,794,000, of which
$1,295,000 was from the write-off of goodwill recorded upon its acquisition. Sales of IST for the
years ended January 3, 2004 were approximately $458,000. The net loss of IST for the period ended
January 3, 2004 was approximately $1,146,000. Discontinued operations accounting treatment has been applied to the Velagio and IST operations.
The revenues, operating expenses and other income and losses of both Velagio and IST are reported
as loss from discontinued operations for all periods presented to reflect the reclassification of
these operations as discontinued. Also, cash flows from the Velagio and IST operations are
reported as net cash provided by (used in) discontinued operations whether associated with
operating, investing or financing activities. SoftBoard On September 7, 2000, the Company entered into a definitive agreement with Greensteel, Inc.
(Greensteel), a wholly-owned subsidiary of Polyvision Corporation, for the sale of substantially
all of the Companys assets used in the SoftBoard operations. The terms of the asset sale called
for Greensteel to pay the Company up to $3,500,000, with $2,000,000 payable at the closing of the
transaction and up to an additional $1,500,000 in contingent earn-out payments based on net sales
of the Companys SoftBoard products over a five-year period. Shareholders approved the agreement
and the transaction was finalized on October 24, 2000 and resulted in a gain of $1,221,852. A total of $62,827 and $36,758 in contingent earn-out payments were received by the Company during
the year ended January 1, 2005 and January 3, 2004, respectively. These amounts were recorded as
gain on the sale of discontinued operations in the Consolidated Statements of Operations. As a result of shareholder approval of the Greensteel agreement, discontinued operations accounting
treatment has been applied to the SoftBoard operation. Accordingly, the net gain incurred from the
Softboard operations is reported in gain from discontinued operations for all periods presented to
reflect the reclassification of these operations as discontinued. Also, cash flows from the
Softboard operations are reported as net cash provided by (used in) discontinued operations
whether associated with operating, investing or financing activities. 10. Capital Stock The Company has authorized 10,000,000 shares of Series 2 Preferred stock, no par value. As of
January 1, 2005 and January 3, 2004, the Company has 6,821,436 and 6,940,484 shares of Series 2
preferred stock issued and outstanding. The Company has authorized 10,000,000 shares of Series 3
Preferred stock, no par value. As of January 1, 2005, the Company has 3,641 shares of Series 3
preferred stock issued and outstanding. The Company had no Series 3 preferred stock issued and
outstanding at January 3, 2004. The Company has authorized 10,000,000 shares of Series 4 Preferred
stock, no par value. As of January 1, 2005, the Company has 4,065 shares of Series 4 preferred
stock issued and outstanding. The Company had no Series 4 preferred stock issued and outstanding
at January 3, 48




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2004. The Company has
authorized 125,000,000 shares of Common Stock, no par value. As of January 1,
2005 and January 3, 2004, the Company has 18,491,618 and 16,772,570 shares of common stock issued
and outstanding. This number does not include 951,455 shares
registered in Issuers name and pledged to secure a liability. Series 2 Preferred Stock On September 26, 2003 the Company issued 3,607,151 shares of Series 2 preferred stock in
conjunction with a private placement at $.42 per share (Note 11). On November 17, 2003, the
Company issued 3,333,334 shares of Series 2 preferred stock in exchange for the conversion of debt.
During the year ended January 1, 2005, one of the Series 2 preferred stockholders converted
119,048 shares of Series 2 preferred stock into 119,048 shares of common stock. The terms of the
Series 2 preferred stock are as follows. Dividends.Series 2 preferred stock issued and outstanding shall be entitled to receive a cash
dividend in the amount of 6.5% of the Issue Price per annum. The Series 2 preferred stock
dividends shall be payable in cash, quarterly, subject to the declaration of the dividend by the
board of directors, if and when the board of directors deems advisable. Any declared but unpaid
dividend will not bear interest and will be payable out of net profits; if net profits are not
sufficient to pay this dividend, either in whole or in part, then any unpaid portion of the
dividend will be paid in full out of net profits of the Corporation in subsequent quarters before
any dividends are paid upon shares of Junior Stock. Thus far, no dividends have been declared. As
of January 1, 2005 there were dividends of approximately $227,000 in arrears. Liquidation Preference. In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, except in certain circumstances, the holders of each
share of Series 2 preferred stock shall be entitled to be paid out of the assets of the Corporation
available for distribution to its shareholders, before any declaration and payment or setting apart
for payment of any amount shall be made in respect of Junior Stock, an amount equal to the Issue
Price and all accrued but unpaid dividends. Conversion.Each holder of any share(s) of Series 2 preferred stock may, at the holders option,
convert all or any part of such share(s) from time to time held by the holder into shares of common
stock at any time after the date of issuance. Each such share of Series 2 preferred stock shall be
converted into one share of fully-paid and non-assessable shares of common stock. Each share of
Series 2 preferred stock shall automatically be converted into shares of common stock on a
one-for-one basis immediately upon the consummation of the Companys sale of its common stock in a
bona fide, firm commitment, underwritten public offering under the Securities Act of 1933, as
amended, which results in aggregate cash proceeds (before underwriters commissions and offering
expenses) to the Company of $5,000,000 or more. In any event, if not converted to common stock,
each share of Series 2 preferred stock shall automatically be converted into shares of common stock
on a one-for-one basis immediately upon the third anniversary of the date of issuance of the Series
2 preferred stock. Voting Rights.Each holder of Series 2 preferred stock shall have the right to one vote for each
share of Common Stock into which such Series 2 preferred stock could then be converted. Series 3 Preferred Stock On April 3, 2004 the Company issued 3,640.803 shares of Series 3 preferred stock at $420 per share
in exchange for conversion of $1,529,000 of outstanding debt. The terms of the Series 3 preferred
stock are as follows. Dividends. Series 3 preferred stock issued and outstanding shall be entitled to receive a cash
dividend in the amount of 6.5% of the Issue Price per annum. The Series 3 preferred stock
dividends are cumulative and shall be payable in cash, quarterly, subject to the declaration of the
dividend by the board of directors, if and when the board of directors deems advisable. Any
declared but unpaid dividend will not bear interest and will be payable out of net profits; if net
profits are not sufficient to pay this dividend, either in whole or in part, then any unpaid
portion of the dividend will be paid in full out of net profits of the Corporation in subsequent
quarters before any dividends are paid upon shares of Junior Stock. If this preferred stock is
converted into the Companys common stock, and there exist undeclared dividends on the conversion
date, the dividends will remain an obligation of the Company, and will be paid when declared and
when there are legally available funds to make that payment. Thus far, no dividends have been
declared. As of January 1, 2005 there were $74,614 of undeclared dividends in arrears. Liquidation Preference. In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, except in certain circumstances, the holders of each
share of Series 3 preferred stock shall 49




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be entitled to be paid out of the assets of the Corporation available for distribution to its
shareholders, before any declaration and payment or setting apart for payment of any amount shall
be made in respect of Junior Stock, an amount equal to the Issue Price and all accrued but unpaid
dividends. Conversion. Each holder of any share(s) of Series 3 preferred stock may, at the holders option,
convert all or any part of such share(s) from time to time held by the holder into shares of common
stock at any time after one year from the date of issuance. Each such share of Series 3 preferred
stock shall be converted into one thousand shares of fully-paid and non-assessable shares of common
stock. Each share of Series 3 preferred stock shall automatically be converted into shares of
common stock on a one-for-one thousand basis immediately upon the consummation of the Companys
sale of its common stock in a bona fide, firm commitment, underwritten public offering under the
Securities Act of 1933, as amended, which results in aggregate cash proceeds (before underwriters
commissions and offering expenses) to the Company of $5,000,000 or more. In any event, if not
converted to common stock, each share of Series 3 preferred stock shall automatically be converted
into shares of common stock on a one-for-one thousand basis immediately upon the third anniversary
of the date of issuance of the Series 3 preferred stock. The Company has recorded a beneficial
conversion feature of $983,017, which represents the difference between the conversion price and
the fair value of the Companys common stock on the commitment date, which was also the issuance
date. This beneficial conversion feature is being amortized over the conversion period of one
year. At January 1, 2005, there remains $255,471 of unamortized beneficial conversion feature
associated with the Series 3 preferred stock. Voting Rights.Each holder of Series 3 preferred stock shall have the right to one vote for each
share of Common Stock into which such Series 3 preferred stock could then be converted. Series 4 Preferred Stock In April and May 2004, the Company issued 4,605.265 shares of Series 4 preferred stock at $380
per share in exchange for $1,750,000 in a private placement (Note 11) from investors, some of
which include certain related parties. The terms of the Series 4 preferred stock are as
follows. Dividends.Series 4 preferred stock issued and outstanding shall be entitled to receive a cash
dividend in the amount of 6.5% of the Issue Price per annum. The Series 4 preferred stock
dividends are cumulative shall be payable in cash, quarterly, subject to the declaration of the
dividend by the board of directors, if and when the board of directors deems advisable. Any
declared but unpaid dividend will not bear interest and will be payable out of net profits; if
net profits are not sufficient to pay this dividend, either in whole or in part, then any
unpaid portion of the dividend will be paid in full out of net profits of the Corporation in
subsequent quarters before any dividends are paid upon shares of Junior Stock. If this
preferred stock is converted into the Companys common stock, and there exist undeclared
dividends on the conversion date, the dividends will remain an obligation of the Company, and
will be paid when declared and when there are legally available funds to make that payment.
Thus far, no dividends have been declared. As of January 1, 2005 there were $83,521 of
undeclared dividends in arrears. Liquidation Preference.In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, except in certain circumstances, the holders of
each share of Series 4 preferred stock shall be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders, before any declaration and payment
or setting apart for payment of any amount shall be made in respect of Junior Stock, an amount
equal to the Issue Price and all accrued but unpaid dividends. Conversion.Each holder of any share(s) of Series 4 preferred stock may, at the holders
option, convert all or any part of such share(s) from time to time held by the holder into
shares of common stock at any time after one year from the date of issuance. Each such share
of Series 4 preferred stock shall be converted into one thousand shares of fully-paid and
non-assessable shares of common stock. Each share of Series 4 preferred stock shall
automatically be converted into shares of common stock on a one-for-one thousand basis
immediately upon the consummation of the Companys sale of its common stock in a bona fide,
firm commitment, underwritten public offering under the Securities Act of 1933, as amended,
which results in aggregate cash proceeds (before underwriters commissions and offering
expenses) to the Company of $5,000,000 or more. In any event, if not converted to common
stock, each share of Series 4 preferred stock shall automatically be converted into shares of
common stock on a one-for-one thousand basis immediately upon the third anniversary 50




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of the date
of issuance of the Series 4 preferred stock. The Company has recorded a beneficial conversion
feature of $598,684, which represents the difference between the conversion price and the fair
value of the Companys common stock on the commitment date, which was also
the issuance date. This beneficial conversion feature is being amortized over the conversion
period of one year. At January 1, 2005, there remains $155,589 of unamortized beneficial
conversion feature associated with the Series 4 preferred stock. Voting Rights.Each holder of Series 4 preferred stock shall have the right to one vote for
each share of Common Stock into which such Series 4 preferred stock could then be converted. Common Stock On February 28, 2003, the Company entered into a Stock Purchase and Pledge Agreement (the
Agreement) with Steelcase, Inc. (Steelcase) to repurchase 951,445 of the Companys common
shares held by Steelcase. Pursuant to the terms of the Agreement, the Company repurchased these
shares for a base amount of approximately $209,318, or $0.22 per share, subject to adjustment (Note
12). During April and May 2003 the Company issued 1,113,078 shares of restricted common stock in
conjunction with a private placement at $.26 per share (Note 11). Net proceeds received amounted
to $269,549. On September 16, 2003, the Company acquired Christenson Technology Services, Inc.
(CTS) in exchange for 4,193,142 shares of the Companys common stock, valued at $1,090,217 (Note
7). On September 16, 2003, the Company acquired Velagio, Inc. (Velagio) in exchange for 4,193,143
shares of the Companys common stock, valued at $1,202,872 (Note 7). On July 28, 2004, The Company
issued an aggregate of 1,600,000 shares of common stock to a consultant in exchange for $560,000 of
services rendered, which approximated the fair value of the shares issued during the period
services were completed and rendered. Compensation costs of $560,000 were charged to operations
during the year ended January 1, 2005. In October 2004, one of the Series 2 preferred stockholders
converted 119,048 shares of Series 2 preferred stock into 119,048 shares of common stock. 11. Private Placements During April and May 2003 the Company issued 1,113,078 shares of restricted common stock in
conjunction with a private placement at $.26 per share. The private placement included an issuance
of 111,308 warrants for the purchase of common stock which are exercisable at a purchase price of
$.40 per share with a 3-year term. Of the total capital raised, $50,000 was converted from a
$40,000 note payable and a $10,000 miscellaneous payable, both owed to Steven M. Wright, a Director
of the Company and a member of senior management. These payables arose from cash that had been
previously advanced by him to the Company. The shares issued in the private placement were issued
at a discount, were not registered and are restricted from sale for at least one year pursuant to
federal securities laws. R. Patrick Hanlin, Chairman of the Board and Steven M. Wright, President
& CEO at that time, both purchased additional shares in the private placement. Prior to the Companys acquisitions of CTS and Velagio on September 16, 2003, the Company entered
into subscription agreements to issue 3,607,151 shares of restricted, Series 2 preferred stock at
$0.42 per share (Note 10). The subscription agreements were contingent upon the closing of the
Companys acquisitions of CTS and Velagio. The funding of the subscriptions occurred on or near
October 3, 2003. In total, the Company received net proceeds from the private placement of
approximately $715,000 in cash and $765,000 in debt conversion. Issuance costs relative to the
private placement were approximately $35,000. These shares of stock are not registered under the
Securities Act of 1933 and must be held for the time required by Rule 144 promulgated under the
Securities Act. The private placement included an issuance of 333,335 warrants for the purchase of
common stock, which are exercisable at a purchase price of $.42 per share with a 5-year term. Each
investor was awarded one warrant for every $3 invested in the private placement. The proceeds from
the offering were allocated between the Series 2 preferred stock and the warrants issued in the
transaction. The Black Scholes valuation method was used to determine the value of the warrants
(Note 13). The Company used the following assumptions in calculating the value of these warrants
at issuance: Risk free rate  1.94%; Volatility index  118%; Stock price on September 30, 2003:
$0.30 per share. In April 2004, 4,605.265 shares of Series 4 preferred stock were issued at $380 per share in
conjunction with a $1,750,000 private placement. Each of these shares of preferred stock is
convertible into 1,000 shares of the 51




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Companys common stock (Note 10). 12. Repurchase of Common Stock On February 28, 2003, the Company entered into a Stock Purchase and Pledge Agreement (the
Agreement) with Steelcase, Inc. (Steelcase) to repurchase 951,445 of the Companys common
shares held by Steelcase. Pursuant to the terms of the Agreement, the Company repurchased these
shares for a base amount of approximately $209,318, or $0.22 per share, subject to adjustment. The
Company issued a three-year Promissory Note (the Note) for payment of this amount. Payments of
principal under the Note will be made in three equal annual installments of approximately $69,773,
on the first, second and third anniversaries of the date of the Note. The Note carries an interest
rate of 12%, payable quarterly, starting on June 1, 2003 until the principal amount of the Note is
paid in full. If the Note and accrued interest are paid according to the terms of the Note, on the third
anniversary date of the Note the parties shall calculate a new purchase price based on the average
market closing price of the Companys common stock for the 180 days prior to the third anniversary
date. If the average market closing price per common share over this 180 day period is less than
$0.22 per common share, then the purchase price payable under the Agreement will remain at $209,318
or $0.22 per common share. If the average market closing price per share over this 180 day period
is greater than $0.22 per common share, then the purchase price payable under the Agreement will be
increased by an amount equal to the excess of this 180 day average market closing price per common
share over $0.22 per common share, times 951,445 shares. However, under this purchase price
adjustment, the maximum purchase price paid will not exceed approximately $333,006, or $0.35 per
common share. This feature is considered to be an embedded derivative option under the provisions
of Financial Accounting Standards No. 133. Under these provisions a derivative liability was
established at inception in the amount of $14,310 using the Black-Scholes valuation model. Changes
based on fluctuations in the Companys stock price are reflected in the other expense section of
the Statement of Operations. From the date of inception of this note to the end of the fiscal
year, January 1, 2005 this liability increased by $27,553, and the value of this liability as of
January 1, 2005 was $41,863, and is reflected as a long term liability on the Consolidated Balance
Sheet. For purposes of all purchase price adjustments under the Agreement, the number of common shares and
per share amounts are subject to adjustments to give effect to stock splits, dividends,
reorganizations, recapitalizations and other similar transactions occurring after the date of the
Agreement. As of January 1, 2005, the Company had not made its required September 2004 and December 2004
quarterly interest payments of approximately $4,200 each quarter. As of January 1, 2005 interest
payable on this note totaled approximately $9,800. As of the date of this report, the Company had
not made its required February 28, 2005 annual principal payment of $69,773 and quarterly interest
payments. Total interest due and payable on this note as of April 1, 2005, is approximately
$13,955. The Company is accordingly in default under the terms of the note agreement. 13. Stock Options and Warrants Stock Incentive Plan The Company has a Stock
Incentive Plan (the Plan). At January 1, 2005 and January 3, 2004,
2,163,049 and 688,936 shares of common stock were reserved, respectively, for issuance to
employees, officers, directors and outside advisors. Under the Plan, the options may be granted to
purchase shares of the Companys common stock at fair market value, as determined by the Companys
Board of Directors, at the date of grant. The options are exercisable over a period of up to five
years from the date of grant or such shorter term as provided for in the Plan. The options become
exercisable over periods ranging between zero and four years. The following table summarizes the changes in stock options outstanding and the related prices for
the shares of the Companys common stock issued to employees, officers and directors of the Company
under the Plan. 52




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Options Outstanding
    
    
    
    
    
    
    Options ExercisableWeighted Average
    
    
    Weighted
    
    
    
    
    
    
    WeightedExercise
    
    Number
    
    
    Remaining Contractual
    
    
    Average
    
    
    Number
    
    
    AveragePrices
    
    Outstanding
    
    
    Life (Years)
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$0.04-$0.05
    
    
    16,000
    
    
    
    1.9
    
    
    $
    0.04
    
    
    
    16,000
    
    
    $
    0.04$0.31-$0.60
    
    
    2,120,661
    
    
    
    4.9
    
    
    $
    0.44
    
    
    
    809,322
    
    
    $
    0.47$1.76-$2.70
    
    
    26,388
    
    
    
    6.1
    
    
    $
    2.27
    
    
    
    25,457
    
    
    $
    2.282,163,049
    
    
    
    4.9
    
    
    $
    0.46
    
    
    
    850,779
    
    
    $
    0.52
 A summary of the status of
the Companys Stock Incentive Plan as of January 1, 2005 and January 3,
2004 and for the years then ended is presented below: January 1, 2005
    
    
    January 3, 2004Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exerciseShares
    
    
    price
    
    
    Shares
    
    
    priceOutstanding at beginning of year
    
    
    688,936
    
    
    $
    .84
    
    
    
    261,188
    
    
    $
    .39Granted at market price
    
    
    1,869,188
    
    
    
    .43
    
    
    
    95,000
    
    
    
    .42Granted at greater than market price
    
    
    
    
    
    
    
    
    
    
    473,907
    
    
    
    1.05Exercised
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    (395,075
    )
    
    
    .96
    
    
    
    (141,159
    )Outstanding at end of year
    
    
    2,163,049
    
    
    $
    .46
    
    
    
    688,936
    
    
    $
    .84Options exercisable at year end
    
    
    850,779
    
    
    $
    .52
    
    
    
    474,719
    
    
    $
    1.02
 The Company granted 1,869,188
and 95,000 options to purchase shares of the Companys common stock
to employees and directors of the Company, during the years ended January 1, 2005 and January 3,
2004, respectively. These options are forfeited if not exercised within periods of five to ten
years, and vest over periods ranging from immediately to forty-eight months starting with the month
of grant. These totals do not include options granted to Velagio
employees and other parties in connection with the acquisition of
Velagio in the year ended January 3, 2004. On September 16, 2003, in conjunction with the acquisition of Velagio, the Company granted 473,907
options to prior holders of options in the Velagio, Inc. Incentive Stock Option Plan. The number
of options granted was calculated based on a conversion rate that gave the holders of 10,000
options to purchase Velagio common stock, options to purchase 851 shares of Microfield Group, Inc.
common stock. These options were granted with credit for 25%, 50%, 75% or 100% vesting based on
the grant date of their original Velagio options. These options have a ten-year expiration
starting on the date of their original Velagio option grant, and vest at 25% per year. The weighted average per share value of options granted during the years ended January 1, 2005 and
January 3, 2004 was $0.43 and $0.94, respectively. The Company has computed for pro forma disclosure purposes the value of all options granted during
fiscal years 2004 and 2003 using the Black-Scholes pricing model as prescribed by SFAS No. 123 (see
note 3). The following ranges of assumptions were used to calculate the values of options granted
during 2004 and 2003: For the year endedJanuary 1,
    
    January 3,2005
    
    2004Risk-free interest rate
    
    3.10% - 3.97%
    
    2.12%Expected dividend yield
    
    
    
    Expected lives
    
    5-10 years
    
    5-10 yearsExpected volatility
    
    151% - 155%
    
    123%
 Common StockWarrants In connection with debt financing entered into during fiscal year 2000, the Company issued two
stock warrants each to purchase individually 1,033,000 common shares at a price of $0.50 per share
and $0.38722 per share, 53




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respectively. The warrants had an initial term of 3 years and were to
expire in June 30, 2005. Proceeds from the debt were allocated between the debt and warrants based
on the fair value of the warrants issued using the Black-Scholes model. The combined value
assigned to the warrants when they were issued was approximately $357,000
and was initially recorded as debt discount and recognized as interest expense over the life of the
debt. On September 15, 2003, the Company extended the life of these warrants until June 30, 2007
as partial consideration to satisfy a $150,000 promissory note between CTS and JMW Capital
Partners, Inc. (now known as Aequitas Capital Management). In accordance with FIN 44, the fair
value of the warrants on the date of the settlement of the $150,000 promissory note between CTS and
JMW Capital Partners, Inc. was determined to be $468,000. The difference of $111,000 between the
initial fair value and the fair value at the date of the extension was recorded as equity and a
loss on debt extinguishment. In connection with an April 2003 common stock private placement, the Company issued 111,308
warrants to purchase common stock. Each warrant is exercisable into one share of common stock at
$0.40 per share and will expire in 2008. Subsequent to this private placement, the Company
exercised an option to convert $1,400,000 of outstanding debt into preferred stock that is
convertible into shares of common stock. This exercise, when aggregated with all other outstanding
equity arrangements, resulted in the total number of common shares that could be required to be
delivered to exceed the number of authorized common shares. In accordance with EITF 00-19, the
fair value of the warrants issued in the private placement must be recorded as a liability in the
financial statements using the Black-Scholes model, and any subsequent changes in the Companys
stock price to be recorded in earnings. Accordingly, the fair value of these warrants at the date
of issuance was determined to be $19,832. At September 1, 2004, the Companys shareholders voted
to increase the authorized shares available for issuance or conversion, which cured the situation
described above. Accordingly, the fair value of the warrants on September 1, 2004 was determined
to be $48,976. The warrant liability was reclassified to shareholders equity and the increase
from the initial warrant value was recorded in earnings. In September 2003, in connection with a preferred stock private placement, the Company issued
333,334 warrants to purchase common stock. Each warrant is exercisable into one share of common
stock at $0.42 per share and will expire in 2008. Subsequent to this private placement, the
Company exercised an option to convert $1,400,000 of outstanding debt into preferred stock that is
convertible into shares of common stock. This exercise, when aggregated with all other outstanding
equity arrangements, resulted in the total number of common shares that could be required to be
delivered to exceed the number of authorized common shares. In accordance with EITF 00-19, the
fair value of the warrants issued in the private placement must be recorded as a liability in the
financial statements using the Black-Scholes model, and any subsequent changes in the Companys
stock price to be recorded in earnings. Accordingly, the fair value of these warrants at the date
of issuance was determined to be $64,902 (Note 10). At September 1, 2004, the Companys
shareholders voted to increase the authorized shares available for issuance or conversion, which
cured the situation described above. Accordingly, the fair value of the warrants on September 1,
2004 was determined to be $139,000. The warrant liability was reclassified to shareholders equity
and the increase from the initial warrant value was recorded in earnings. In connection with the January 22, 2004 debt issuance by Destination Capital, LLC (see Notes 14 and
18), the Company is obligated to issue warrants to purchase the Companys common stock. According
to the terms of the debt issuance, warrants in the amount of one percent of the Companys fully
diluted common stock will be issued to the debt holders on the first day of each calendar month
that the debt is outstanding. The Company repaid this debt in April 2004, and accordingly is
obligated to issue 1,403,547 warrants, which is equivalent to 4% of the fully diluted common stock
outstanding under the terms outlined in that agreement. Each warrant is exercisable into one share
of common stock at $0.31 per share, subject to changes specified in the debt agreement, and will
expire in 2008. Prior to this debt issuance, the Company exercised an option to convert $1,400,000
of outstanding debt into preferred stock that is convertible into shares of common stock. This
exercise, when aggregated with all other outstanding equity arrangements, resulted in the total
number of common shares that could be required to be delivered to exceed the number of authorized
common shares. In accordance with EITF 00-19, the fair value of the warrants issued in connection
with the debt issuance must be recorded as a liability for warrant settlement in the financial
statements using the Black-Scholes model, and any subsequent changes in the Companys stock price
to be recorded in earnings. Accordingly, the aggregate fair value of these warrants, on the date
each of the obligations to issue warrants arose, was determined to be $701,824. At September 1,
2004, the Companys shareholders voted to increase the authorized shares available for issuance or
conversion, which cured the situation described above. Accordingly, the fair value of the warrants
on September 1, 2004 was determined to be $780,373. The warrant liability was reclassified to
shareholders equity and the increase from the initial warrant value was recorded in earnings. 54




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In connection with the August 24, 2004 debt issuance by Destination Capital, LLC (see Notes 14 and
18), the Company is obligated to issue warrants to purchase the Companys common stock. According
to the terms of the debt issuance, warrants in the amount of 12.5% percent of the loan balance,
month, will be issued to the debt holders for each calendar month that the debt is outstanding.
Each warrant is exercisable into one share of common stock at the lesser of $0.38 per share or the
price applicable to any shares, warrants or options issued (other than options issued to employees
or directors) while the loan is outstanding, and will expire in 2009. Prior to this debt issuance,
the Company exercised an option to convert $1,400,000 of outstanding debt into preferred stock that
is convertible into shares of common stock. This exercise, when aggregated with all other
outstanding equity arrangements, resulted in the total number of common shares that could be
required to be delivered to exceed the number of authorized common shares. In accordance with EITF
00-19, the fair value of the 37,500 warrants initially issued in connection with the debt issuance
must be recorded as a liability for warrant settlement in the financial statements using the
Black-Scholes model, and any subsequent changes in the Companys stock price to be recorded in
earnings. Accordingly, the aggregate fair value of these warrants, issued prior to September 1,
2004, was determined to be $17,513. At September 1, 2004, the Companys shareholders voted to
increase the authorized shares available for issuance or conversion, which cured the situation
described above. Accordingly, the fair value of the warrants on September 1, 2004 was determined
to be $20,776. The warrant liability was reclassified to shareholders equity and the increase
from the initial warrant value was recorded in earnings. For the months from September 1, to January 1, 2005, according to the terms of the warrant
provision of the August 24, 2004 debt agreement, the Company is obligated to issue 693,750
additional warrants. The value of these warrants of $283,988 was added to shareholders equity on
the consolidated balance sheet, with a corresponding expense charged to interest expense in the
consolidated statement of operations. On September 10, 2004, the Company entered into a Master Vehicle Lease Termination Agreement with
CLLLC (see Note 18), under which the Company terminated its previous master vehicle lease agreement
with CLLLC. Under the terms of this termination agreement, the Company was released from its
obligation under the previous master vehicle lease agreement. In consideration for this release
the Company issued 1,000,000 warrants to purchase the Companys common shares. Each warrant is
exercisable into one share of common stock at $0.38 per share and will expire in 2009. These
warrants were valued at $515,000 using the Black Scholes model. This warrant value was recorded in
the Companys consolidated balance sheet as common stock warrants, with a corresponding expense
recorded in the Companys consolidated statement of operations. 14. Debt Operating Line of Credit As of January 1, 2005, the Company has a $5,000,000 credit facility, which expires in January 2006.
Borrowings under the line of credit are due on demand, bear interest payable weekly at prime plus
6 1/2% and are collateralized by accounts receivable. The borrowing base is limited by certain
factors such as length of collection cycle, subordination of collateral position on bonded work and
other credit related factors. Subject to these limitations, the Company had $607,025 available
borrowing capacity at January 1, 2005. As of January 1, 2005, borrowings of $4,392,975 were
outstanding under the facility. The Company was in compliance with the terms of the borrowing
facility at January 1, 2005. Long Term Debt The Company had several notes payable outstanding at January 1, 2005. The total amount of the
notes and their terms are summarized below. 55




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January 1,
    
    
    January 3,2005
    
    
    2004Steven M. Wright unsecured promissory note,
interest at 10%, due September 1, 2003. This
note and accrued interest of $4,480 was
converted to 117.81 shares of Series 3
preferred stock on April 2, 2004. (See Note
10)
    
    $
    
    
    
    $
    45,000R. Patrick Hanlin, unsecured advance paid to
a creditor of the Company on November 5,
2003. No terms were negotiated. This debt
was converted to 38.095 shares of Series 3
preferred stock on April 2, 2004. (See Note
10)
    
    
    
    
    
    
    16,000Christenson Leasing Company, LLC (CLLLC)
subordinated promissory note, six monthly
interest only payments beginning November
15, 2003, payments of $18,355 including
interest at 12% beginning June 15, 2004,
amortized over five years, due and payable
in full on October 15, 2005. This debt and
accrued interest of $52,350 was converted to
2,088.924 shares of Series 3 preferred stock
on April 2, 2004. (See Note 10)
    
    
    
    
    
    
    825,000Various subordinated notes payable to Robert
Jesenik dba Jesenik Enterprises ($23,217),
Christenson Leasing Company, LLC ($23,217),
JW Assurance and Holding Limited ($33,168),
interest only payments due January 17, 2004,
sixteen quarterly payments totaling $6,337
beginning April 15, 2004 including interest
at 12% until paid in full. This debt and
accrued interest of $11,358 was converted to
216.571 shares of Series 3 preferred stock
on April 2, 2004. (See Note 10)
    
    
    
    
    
    
    79,602Steelcase, Inc. promissory note, quarterly
interest only payments at 12% per annum
beginning June 1, 2003. Annual principal
payments of $69,773, second payment due and
payable February 28, 2005, collateralized by
951,445 shares of the Companys common stock
(reduced by derivative allocation of
$5,562). (See Note 12) The Company is in
default under the terms of the note
agreement.
    
    
    133,984
    
    
    
    198,984Various subordinated notes payable to Robert
Jesenik dba Jesenik Enterprises, Christenson
Leasing Company LLC, JW Assurance and
Holding Limited, JMW Capital Partners,
Inc. (now known as Aequitas
Capital Management),, interest only payment
due January 17, 2004, sixteen quarterly
payments of $4,036 beginning April 15, 2004
including interest at 12% until paid in
full. This debt and accrued interest of
$7,105 was converted to 137.630 shares of
Series 3 preferred stock on April 2, 2004.
(See Note 10)
    
    
    
    
    
    
    50,700Christenson Leasing Company, LLC capital
equipment lease, thirty six monthly payments
of approximately $70,000 including interest
at 25.04% beginning September 1, 2003,
amortized over three years, due and payable
in full on August 1, 2006. This lease
obligation was terminated on September 10,
2004. (See Note 18)
    
    
    
    
    
    
    1,925,845Oregon-SW Washington Electrical Trust Funds
(comprised of several union benefits funds
and pension trusts) promissory note in the
amount of $952,907 payable monthly in
payment amounts ranging from $25,000 per
month to $75,000 per month including
interest at 7% per annum, due and payable in
full by September 1, 2006.
    
    
    952,907
    
    
    
    Destination Capital, LLC business loan
agreement, net of debt discount of $16,054,
nine monthly payments of interest only,
starting September 24, 2004, with fifteen
monthly payments of principal and interest
of $83,333, thereafter. Interest accrued at
prime plus 10%. (See Note 18)
    
    
    1,186,135
    
    
    
    Total debt
    
    
    2,273,026
    
    
    
    3,141,131Less current portion
    
    
    (1,159,469
    )
    
    
    (967,997
    )Long term debt
    
    $
    1,113,557
    
    
    $
    2,173,134
 56




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Aggregate maturities of long-term debt as of January 1, 2005 are as follows: Fiscal Year
    
    Amount2005
    
    
    1,159,4692006
    
    
    1,113,5572007
    
    
    2008
    
    
    2009 and after
    
    
    $
    2,273,026
 15. Segment Information During the fiscal years ended January 1, 2005 and January 3, 2004, the Companys operations
comprised of electrical construction services and information technology in the areas of voice,
data, video, and life safety. The Company is managed as one specific line of business including electrical construction services.
The Companys management makes financial decisions and allocates resources based on the
information it receives from its internal management system. The Companys management relies on
the internal management system to provide sales, cost and asset information for the business as a
whole. All of the Companys assets as of January 1, 2005 and January 3, 2004, were attributable to U.S.
operations. For both years, no single customer accounted for 10% or more of the Companys net
sales. 16. Income Taxes The provision for income taxes for the years ended January 1, 2005 and January 3, 2004 differs from
the amount which would be expected as a result of applying the statutory tax rates to the losses
before income taxes due primarily to changes in the valuation allowance to fully reserve net
deferred tax assets. As of January 1, 2005 and January 3, 2004, Microfield had deferred tax assets primarily consisting
of its net operating loss carryforwards. However, because of cumulative losses in several
consecutive years, the Company has recorded a full valuation allowance such that its net deferred
tax asset is zero. The tax benefit recorded at the statutory rate in Microfields pre-tax loss in
fiscal years 2004 and 2003 would have been approximately $2,138,842 and $2,192,457, respectively.
However, because of recognition of a full valuation allowance the effective tax rate for the
Company was zero in both 2004 and 2003. Deferred tax assets are comprised of the following components: January 1, 2005
    
    
    January 3, 2004Current:Allowance for doubtful accounts
    
    $
    40,028
    
    
    $
    45,295Employee benefits
    
    
    65,396
    
    
    
    57,826Start-up costs
    
    
    31,486
    
    
    
    31,486Inventory allowance
    
    
    55,063
    
    
    
    60,696Other allowances
    
    
    41,840
    
    
    
    9,299233,813
    
    
    
    204,602Non-current:Net operating loss carryforwards
    
    
    10,066,451
    
    
    
    7,916,244Start-up costs
    
    
    31,486
    
    
    
    62,972Research and development credits
    
    
    143,245
    
    
    
    145,04510,241,182
    
    
    
    8,124,261Total deferred tax asset
    
    
    10,474,995
    
    
    
    8,328,863Deferred tax asset valuation allowance
    
    
    (10,474,995
    )
    
    
    (8,328,863
    )Net deferred tax assets
    
    $
    
    
    
    $
    
 57




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At January 1, 2005, the Company had available net operating loss carryforwards of approximately
$26,000,000 for federal income tax purposes. Such carryforwards may be used to reduce consolidated
taxable income, if any, in future years through their expiration in 2005 to 2024 subject to
limitations of Section 382 of the Internal Revenue Code, as amended. Utilization of net operating
loss carryforwards may be limited due to the ownership changes resulting from the Companys initial
public offering in 1995 and the Companys acquisition of CTS, Velagio and IST. In addition, the
Company has research and development credits aggregating $143,245 for income tax purposes at
January 1, 2005. Such credits may be used to reduce taxes payable, if any, in future years through
their expiration in 2005 to 2013. 17. Net Income (Loss) Per Share Net income per share is computed based on the weighted average number of shares of common stock and
potentially dilutive securities assumed to be outstanding during the period using the treasury
stock method. Potentially dilutive securities consist of stock options, convertible preferred stock
and warrants to purchase common stock. The most significant difference between basic and diluted net income per share is that basic net
income per share does not treat potentially dilutive securities such
as preferred stock, stock options and warrants
as outstanding. For all periods presented, the computation of net loss per share excludes the
effect of stock options and warrants as they were antidilutive. There were 2,163,049 options and
5,645,439 warrants outstanding at January 1, 2005, and 688,936 options and 2,510,643 warrants
outstanding at January 3, 2004. The following table presents the computation of basic and diluted losses per share: Year ended
    
    
    Year endedJanuary 1, 2005
    
    
    January 3, 2004Net loss available for common shareholders
    
    $
    (7,352,324
    )
    
    $
    (6,046,232
    )Basic and fully diluted loss per share
    
    $
    (0.36
    )
    
    $
    (0.59
    )Continuing operations
    
    $
    (0.37
    )
    
    $
    (0.31
    )Discontinued operations
    
    $
    0.01
    
    
    $
    (0.28
    )Weighted average common shares outstanding
    
    
    17,340,152
    
    
    
    10,308,815
 18. Related Party Transactions The Company has a number of promissory notes, lines of credit and lease obligations owing to
related parties. The following table lists the notes and obligations outstanding at January 1,
2005 by related party. Amount of
    
    
    MonthlyRelated Party
    
    Type of Obligation
    
    Maturity Date
    
    
    Obligation
    
    
    PaymentDestination Capital, LLC(a)
    
    Loan agreement
    
    July 24, 2006
    
    $
    1,200,000
    
    
    $
    (d)14,550CEAC(a)
    
    Bond guarantee fees(c)
    
    open
    
    
    
    
    
    
    (c) (b)2,400CEI(a)
    
    Equipment lease
    
    December 1, 2007
    
    
    
    
    
    
    40,000Destination Microfield,
LLC(e)
    
    Vehicle operating lease
    
    August 1, 2006
    
    
    
    
    
    
    (f)29,000CEI(a)
    
    Real property leases
    
    October 31, 2008
    
    
    
    
    
    
    48,842John B. Conroy
    
    Note receivable
    
    September 16, 2005
    
    
    66,250
    
    
    
    
   (a)
 (b) This lease payment and bond guarantee fee are approximations, and may
fluctuate based on several factors including the dollar value of jobs under bond at any particular
time. (c) A. Mark Walter, an officer, participates in the guarantee of these bonds, and
is paid a portion of this fee. 58




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##### Table of Contents



(d) This payment represents an interest only monthly payment amount in effect at
January 1, 2005. This payment changes to $83,333 on June 24, 2005 and is for payment of principal
and interest. (e) William C. McCormick, a director and former interim CEO, holds a minority ownership
interest in this entity. (f) These payments vary over the term of the loan. These amounts represent the monthly
payment in effect on January 1, 2005. Terms and conditions of each of the notes and agreements are listed below. Notes payable to Destination Capital, LLC On January 22, 2004, the Company entered into a Contract of Sale and Security Agreement with
Destination Capital LLC (Destination) under which the Company agreed to sell up to 15% of its
acceptable, eligible accounts receivable to Destination, in exchange for borrowing up to $600,000
from that entity under the terms of a Promissory Note. Destination is an entity in which Robert J.
Jesenik, a shareholder and director of the Company, holds a significant interest. Under the terms
of the agreement between the Company and Destination, the Company paid interest at the rate of 18%
per annum on the amount of the note outstanding, and also issued warrants in the amount of 1% of
the fully diluted common shares, per month, for each calendar month in which the Note was
outstanding. The warrants have a five-year life and will be issued at the lower of $0.42 or the
price of any other common or preferred equity issued in the six months following the date of the
agreement. During the 6 month agreement period, the Company issued incentive stock options at
$0.31 per share, therefore the price per share used for these warrants was reduced to $0.31. The
Company initially was obligated to issue warrants to purchase 350,387 common shares at the time
this note was issued. The fair value of these warrants was determined to be $155,221 using the
Black Scholes pricing model. The assumptions used included a risk free rate of 3.1%, volatility of
152%, fair market value of the Companys stock of $.48 per share and a remaining life of 5 years.
The calculated fair value amount was recorded as a debt discount and is being amortized over the
six-month term of the debt. This debt was outstanding on February 1, 2004, March 1, 2004 and April
1, 2004 and in accordance with the terms of the note agreement, the Company is further obligated to
issue additional warrants to purchase 1,053,159 shares of the Companys common stock. These
warrants were valued using the Black Scholes pricing model. The assumptions used included risk free
rates ranging from of 3.1% to 3.3%, volatility of 152%, remaining lives of 5 years for each warrant
issuance, and fair market values of the Companys stock on those three dates of $0.46, $0.60 and
$0.62 per share, respectively. The fair value of these warrants in the amount of $780,372 has been
recorded as interest expense in the consolidated statement of operations for the year ended January
1, 2005. At the date of each of those warrant issuances, the Company did not have sufficient
authorized common shares to effect the exercise of these warrants, accordingly, the fair value of
all of these warrants was classified as liability for warrant settlement on the consolidated
balance sheet. On September 1, 2004, the Companys shareholders voted to increase the Companys
authorized common shares from 25,000,000 to 125,000,000. The fair market values of these warrants
were re-measured on that date and reclassified as common stock warrants in the shareholders equity
section on the balance sheet, with the increase or decrease in their values recorded as an increase
or reduction of interest expense in the consolidated statement of operations (Note 13). The Note
was repaid in full during April 2004. On August 24, 2004 the Company entered into a Business Loan Agreement with Destination under which
the Company can borrow up to $2,000,000 based on Destinations discretion and funds availability
(Note 14). Under the terms of the agreement, the Company pays interest at prime plus 10% (prime
plus 12% in the event of a default), with nine monthly interest only payments starting September
24, 2004, and 15 monthly principal payments of $83,333 and accrued interest until maturity. At
loan maturity on August 24, 2006, any remaining principal and accrued interest owed is then due and
payable. This loan is immediately due if there occurs a default, there is a sale or disposal of
all or substantially all of the assets or stock of the Company, or if there is a transfer of
ownership or beneficial interest, by merger or otherwise, of the stock of the Company or its
subsidiary. Additionally, the Company will issue to Destination the number of warrants equal to
12.5% of the value of the loan balance, on the first day of each month the loan is outstanding. If
the loan is initially drawn up to $1,250,000, and paid according to the terms of the agreement,
this will result in the issuance of approximately 2.5 million warrants to Destination. These
warrants have a five year life and will be issued at the lower of $0.38 or the price applicable to
any shares, warrants or options (excluding options granted to employees or directors) issued by the
Company while the loan is outstanding (Note 13). Beginning August 1, 2004, the Company was
obligated to issue the following warrant amounts based on the outstanding loan balances on the
first day of each month. Warrants to beDate
    
    Loan Balance
    
    
    IssuedAugust 1, 2004
    
    $
    300,000
    
    
    
    37,500September 1, 2004
    
    $
    750,000
    
    
    
    93,750October 1, 2004
    
    $
    1,200,000
    
    
    
    150,000November 1, 2004
    
    $
    1,200,000
    
    
    
    150,000December 1, 2004
    
    $
    1,200,000
    
    
    
    150,000January 1, 2005
    
    $
    1,200,000
    
    
    
    150,000Total warrants to be issued as of January 1, 2005
    
    
    
    
    
    
    731,250
 59




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The Company initially was obligated to issue warrants to purchase 37,500 common shares at the time
this note was issued. The fair value of these warrants was determined to be $17,513 using the
Black Scholes pricing model. The assumptions used included a risk free rate of 3.8%, volatility of
155%, fair market value of the Companys stock of $.50 per share and a remaining life of 5 years.
The calculated fair value amount was recorded as a debt discount and is being amortized over the
twenty-four month term of the debt. The warrants issued on September 1, 2004 through January 1,
2005 were also valued using the Black Scholes pricing model. The assumptions used include risk free
rates ranging from 3.39% to 3.71%, volatility of approximately 155%, remaining lives of 5 years for
each warrant issuance, and fair market values of the Companys stock ranging from $0.35, to $0.59
per share. At the time these warrant obligations arose, the Company had sufficient authorized
common shares to effect the exercise of these warrants. Accordingly, the fair values of the
warrants issued from September 1, 2004 through January 1, 2005 of $283,988, were classified as
common stock warrants in the shareholders equity (deficit) section on the consolidated balance
sheet, and expensed as interest expense in the consolidated statement of operations, as they were
issued. Note payable to Steven M. Wright On June 10, 2003, Steven M. Wright, the Companys Chief Executive Officer at that time, advanced
the Company $50,000 under a line of credit promissory note (Note 14) for working capital purposes.
The note carried an interest rate of 10% and was due and payable on September 1, 2003. As of
January 3, 2004, $5,000 of this note had been repaid with the remaining balance still outstanding.
The remaining note balance and accrued interest of $4,480 was converted to 117.81 shares of Series
3 preferred stock on April 2, 2004 (Note 10). Notes payable to entities controlled by Robert J. Jesenik On September 16, 2003, as part of the purchase price for the acquisition of CTS, the Company
assumed various long-term notes payable to several entities in which Robert J. Jesenik, a Director
of the Company and significant shareholder, has significant ownership interests. A portion of
these debts were converted to equity as a part of the Companys Series 2 preferred stock private
placement in 2003. The remaining amounts due plus accrued interest were converted to equity on
April 2, 2004 as listed below. On September 15, 2003, the Company, CTS and JMW Capital Partners, Inc. (JMW) entered into an
Agreement to Satisfy Obligations. JMW is an investment banking company in which Robert J. Jesenik,
a Director and significant Shareholder, owns a significant ownership interest. Under this
agreement CTS acknowledged debt in the amount of $149,000 owed to JMW. This debt arose within CTS
prior to the acquisition by the Company and was used for operating activities. After consummation
of the acquisition of CTS by the Company and upon issuance of preferred shares in conjunction with
the Series 2 preferred stock private placement, the Company converted the note payable to JMW into
357,143 shares of the Companys Series 2 preferred stock. On September 15, 2003, the Company, CTS and Christenson Electric, Inc. (CEI) entered into an
Agreement to Consolidate, Amend and Satisfy Obligations. CEI is an electrical services company in
which Robert J. Jesenik, a Director and significant Shareholder, owns a substantial ownership
interest. Under this agreement CTS acknowledged debts of $1.5 million and $265,000 owed to CEI.
These debts arose within CTS prior to the acquisition by the Company, and relate to the purchase of
Christenson Electrical Services inventory and customer lists by CTS. This was a transaction
between entities under common control. After consummation of the acquisition of CTS by the Company
and upon issuance of preferred shares in conjunction with the Series 2 preferred stock private
placement, the Company converted $365,000 of the two notes payable to CEI into 869,048 shares of
Series 2 preferred stock. On September 15, 2003, CTS executed a new Subordinated Amended and Restated Promissory Note for the
remaining $1,400,000 due to CEI. On November 17, 2003 the Company converted the note payable to
3,333,333 shares of Series 2 preferred stock. There was no interest accrued or paid on this note,
according to its terms. 60




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##### Table of Contents



On September 15, 2003, CTS executed an Amended and Restated Promissory Note in the amount of
$825,000 due to Christenson Leasing Company, LLC (CLC). CLC is an equipment leasing company in
which Robert J. Jesenik, a Director and significant shareholder, holds a substantial ownership
interest. This debt arose within CTS prior to the
acquisition by the Company. Under this note, six interest only payments were due monthly
beginning on November 15, 2003. Thereafter, payments of $18,355 were to be due monthly beginning
on June 15, 2004, with a balloon payment of $666,889 due and payable on October 15, 2005. Interest
on this note accrued at 12% per annum beginning on September 15, 2003. This note and accrued
interest was converted to 2,088.924 shares of Series 3 preferred on April 2, 2004 (Note 14). On January 17, 2003, CTS executed separate promissory notes with JMW, CLC, Robert Jesenik dba
Jesenik Enterprises and JW Assurance and Holding Limited for the purchase of the undivided
interests in certain assets previously leased by CTS. Robert J. Jesenik, a Director and
significant shareholder, owns a substantial ownership interest in all of the above named entities.
An interest only payment was due on January 17, 2004. Thereafter, payments totaling $6,337 were
due quarterly beginning on April 17, 2004. Interest on these notes accrues at 12% per annum
beginning on January 17, 2003. As of January 3, 2004, $79,602 was outstanding under these notes.
These notes were converted to 216.571 shares of Series 3 preferred stock on April 2, 2004 (Note
14). On January 17, 2003, CTS executed separate promissory notes with JMW, CLC, Robert Jesenik dba
Jesenik Enterprises and JW Assurance and Holding Limited in payment of certain past due rent
amounts due from CTS under an asset lease. Robert J. Jesenik, a Director and significant
shareholder, owns a substantial ownership interest in all of the above named entities. An
interest only payment was due on January 17, 2004. Thereafter, payments totaling $4,036 were due
quarterly beginning on April 17, 2004. Interest on these notes accrued at 12% per annum beginning
on January 17, 2003. As of January 3, 2004, $50,700 was outstanding under these notes. These
notes and accrued interest were converted to 216.571 shares of Series 3 preferred stock on April 2,
2004 (Note 14). On April 2, 2004, approximately $118,000 of interest, payable to entities in which Mr. Jesenik has
a significant interest under the notes and agreements listed above, was converted to 280.952 shares
of Series 3 preferred stock (Note 10). As of January 1, 2005 no interest is payable to entities in
which Mr. Jesenik has a significant interest. Bond Guarantee Fees A certain number of CTS construction projects require the Company to maintain a surety bond. The
bond surety company requires an additional guarantee for issuance of the bond. The Company has
separate agreements with CEAC, Inc. (CEAC) and A. Mark Walter individually, President of CVI, under
which at quarter end paid CEAC and Mr. Walter each approximately $1,200 per month for their
guarantee of this bond liability. CEAC holds a substantial ownership interest in CEI. Robert J.
Jesenik, a Director and significant Shareholder, owns a substantial ownership interest in CEAC.
The guarantee fee is computed as 15% (annualized) of the open liability under bonds issued for CTS
and indemnified by certain shareholders of CEAC. Equipment Lease Agreement On September 1, 2003, CTS entered into an agreement with CEI for use of certain equipment leased by
CEI from an outside party. Robert J. Jesenik, a Director and significant Shareholder, owns a
substantial ownership interest in CEI. The equipment consists of various construction vehicles,
trailers, miscellaneous construction equipment, office furniture, computer hardware and software.
Under the terms of the lease CTS pays CEI $40,000 monthly beginning on September 1, 2003, with the
final payment due on December 1, 2007. The lease is accounted for as an operating lease and
contains a 10% purchase option at the end of the lease term, December 31, 2007. At January 3,
2004, the Company was past due on payments totaling $125,000. The Company reached agreement on a
payment plan to the lessor, under which $10,000 of the monthly lease obligation was paid to the
lessor in an equivalent amount of the Companys Series 3 preferred stock (Note 10). This
arrangement tendering a portion of the payment with preferred stock in lieu of cash, is for the
thirteen monthly payments beginning with the December 2003 lease payment, through the payment due
in December 2004. Beginning with the payment due in January 2005, the total monthly amount due is
scheduled to be paid entirely in cash. At January 1, 2005, the Company was past due on payments
totaling approximately $25,000. Master Vehicle Lease Agreement On September 1, 2003 CTS entered into a master vehicle lease agreement with Christenson Leasing
Company LLC (CLLLC), for use of certain vehicles used in its construction business. CLLLC is an
equipment leasing company 61




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##### Table of Contents



in which Robert J. Jesenik, a Director and significant Shareholder, holds
a substantial ownership interest. Under the terms of the lease, CTS paid CLLLC $84,777 monthly
beginning on September 1, 2003, with the final payment due August 1, 2006. The lease contained a
renewal provision under which it had the option, at the end of the lease term,
to purchase or return the vehicles, or to renew the lease for an additional 12 months. The lease
payment was to remain fixed unless the 30-day Commercial Paper Rate as published in the Wall Street
Journal exceeds 2.00%. If that occurs, the lessor has the option to increase the lease payment.
This lease was accounted for as a capital lease. On September 1, 2003 prior to the acquisition of
CTS, $1,993,233 was recorded as cost of the vehicles leased with the same amount recorded as debt
owed under the lease as of that date (Notes 5 and 14). At January 3, 2004, the Company was past
due on payments totaling $271,720. On January 3, 2004, the Company amended the agreement with the
lessor under which the monthly payments were reduced to approximately $70,000 per month, with
$15,250 of the monthly lease obligation being paid to the lessor in an equivalent amount of the
Companys Series 3 preferred stock (Note 10). The Series 3 preferred stock tendered in conjunction
with this payment reduction, was all issued on April 2, 2004. This reduction resulted in a
decrease in interest rate on this lease from 32.22% to 25.04% per annum. This arrangement
tendering a portion of the payment with preferred stock in lieu of cash is for the twelve monthly
payments in 2004. On September 10, 2004, the Company entered into a Master Vehicle Lease Termination Agreement with
CLLLC, under which the Company terminated its previous master vehicle lease agreement with CLLLC.
Under the terms of this termination agreement, the Company was released from its obligation under
the previous master vehicle lease agreement. In consideration for this release the Company issued
1,000,000 warrants to purchase the Companys common shares, which were valued at $515,000 using the
Black Scholes model, a risk free rate of 3.5%, volatility of 154%, fair market value of the stock
of $0.55, and a five year life. This warrant value was recorded in the Companys consolidated
balance sheet as common stock warrants, with a corresponding expense recorded in the Companys
consolidated statement of operations (Note 13). The Company entered into a new Master Vehicle Lease Agreement, effective September 9, 2004, with
Destination Microfield, LLC. Destination Microfield, LLC is partially owned by William C.
McCormick, interim CEO for the Company. In accordance with the terms of the agreement, the
Company will make twelve monthly payments of $29,000 starting October 5, 2004, twelve monthly
payments of $35,000, starting October 5, 2005, and three monthly payments of $45,000 ending on
December 9, 2006. This lease is accounted for as an operating lease with equal monthly amounts
charged to expense in the consolidated statement of operations over the life of the lease. Real Property Leases On September 1, 2003, CTS entered into seven real property subleases with CEI for use of buildings,
offices and storage yards to house the operations and property of CTS. Robert J. Jesenik, a
Director and significant Shareholder, owns a substantial ownership interest in CEI. CTS has
operating activities in Portland and Eugene, Oregon. The monthly sublease payments totaled $58,625
through November 30, 2004. On November 30, 2004, the Company terminated its lease with CEI for
space in the Thurman Building and entered into a lease directly with the building owner for a
smaller space in the building. As of January 1, 2005 the Companys total real property lease
payments totaled $48,842, of which $675 was on a month-to-month basis. The remaining $48,167 is
due on leases with maturity dates between September 2005 and October 2008. The rent per month on
the Thurman Building is $31,025. The annual rent obligations from January 1, 2005, for each
property are listed in the table below. Location
    
    Maturity
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Thurman Building
    
    
    10/31/08
    
    
    $
    372,297
    
    
    $
    372,297
    
    
    $
    372,297
    
    
    $
    310,247
    
    
    
    Swan Island
    
    
    11/30/05
    
    
    
    78,355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Eugene
    
    
    09/30/05
    
    
    
    76,077
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Crown Plaza Office
    
    
    7/31/07
    
    
    
    18,795
    
    
    
    18,795
    
    
    
    12,530
    
    
    
    
    
    
    
    Pope Storage
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Montgomery Park Storage
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    545,524
    
    
    $
    391,092
    
    
    $
    384,827
    
    
    $
    310,247
    
    
    
    
   *

    Month-to-Month Administrative Services Agreement 62




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On September 15, 2003, CTS entered into an administrative services agreement with CEI for the
extension of certain administrative and related services by the Company to CEI. Robert J. Jesenik,
a Director and Significant Shareholder, owns a substantial ownership interest in CEI. Under the
terms of the agreement, certain employees provided administrative and related services to CEI upon
reasonable request. The agreement is subject to a 60-day notice period before termination by
either party. The monthly payment for these services was determined at the effective date of the
agreement to be approximately $35,000, with a provision to be adjusted as needed based on the level
of usage of these services by CEI. During the first quarter of 2004, the payment by CEI for these
services was renegotiated to $15,000 per month as the cost of services to CEI has been reduced.
This amount remained at $15,000 through July of 2004, at which time the Company discontinued
billing CEI for these services. Charges from CVI to CEI for these services resumed in January
2005. Note Receivable In 1998, John B. Conroy, then the Companys Chairman, CEO and President, entered into a transaction
whereby he purchased 45,000 shares of the Companys common stock at $1.75 per share. Mr. Conroy
issued a promissory note to the Company for $78,750 in payment for the shares. On May 17, 2004 the
Note was replaced with a new non-recourse note for $66,250 under which the original amount of the
note was offset against a $12,500 amount owed by the Company to Mr. Conroy. The note also
acknowledges the outstanding accrued interest due by Mr. Conroy in the amount of $21,937.
Additionally, the interest rate of the new promissory note was established at 3.4% per annum, and
the due date was extended to August 29, 2006. Mr. Conroy resigned as Chairman, CEO and President
on September 16, 2002, and resigned as a director in October 2003. At January 1, 2005, accrued
interest receivable under this note totaled $26,243. The Company has accounted for the $78,750 due
from Mr. Conroy as a reduction in common stock equity in prior years. In May 2004, the Company
accounted for the $12,500 amount due to Mr. Conroy and additional $637 of interest adjustment as an
increase in common stock equity. Unsecured Payable On November 5, 2003, R. Patrick Hanlin, Chairman of the Companys board of directors, advanced
$16,000 to the Company in the form of a payment directly to one of the Companys creditors. The
advance was unsecured and did not carry an interest rate or have any stated due date. On April 2,
2004 this debt was converted to approximately 38 shares of the Companys Series 3 preferred stock
(Note 10). These shares of Series 3 preferred stock are convertible into 38,095 shares of the
Companys common stock at the option of the shareholder. 19. Commitments and Contingencies Manufacturing and Purchase Commitments In the acquired CTS business, the Company purchases inventory on an as needed basis. There are no
purchase commitments for products that CTS uses in the performance of its services. Operating lease commitments The Company is party to a number of operating lease agreements, many of which are included in Note
18 above. Following is a schedule of the Companys annual operating lease commitments for the
coming five years. Year
    
    Amount2005
    
    $
    1,391,5242006
    
    
    1,321,0922007
    
    
    864,8272008
    
    
    310,2472009 and beyond
    
    
    
 Rental expenses charged to operations for the year ended January 1, 2005 and January 3, 2004 were
$490,337 and $269,657, respectively. 63




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##### Table of Contents



Employment and Consulting Agreements The Company has an employment agreement with the Companys President. In addition to salary and
benefit provisions, the agreement includes defined commitments should the employee terminate the
employment with or without cause. 20. Subsequent Events Lawsuit settlement In March, 2004, Kurt Underwood (former President/CEO of Microfield Group, Inc.) filed a lawsuit in
Multnomah County Circuit Court, Portland, Oregon under case number 0403-02370 against Robert J.
Jesenik, JMW Capital Partners, Inc., Destination Capital, LLC, Microfield Group, Inc., Christenson
Electric, Inc., Steven M. Wright, Andrew S. Craig, Thomas A. Sidley, R. Patrick Hanlin, Michael
Stansell, Brian A. Oliver, Brian N. Christopher, Kevin D. Robertson, Christenson Group, LLC, and
Christenson Velagio, Inc. The lawsuit alleged that the Defendants violated Oregon securities law
and Oregon common law in connection with the following transactions (which closed simultaneously in
September 2003): (1) the merger of CTS Acquisition Co. (a wholly-owned subsidiary of the Company)
with and into Christenson Technology Services, Inc.; and (2) the merger of VSI Acquisition Co. (A
wholly-owned subsidiary of the Company) with and into Velagio, Inc. In addition, the lawsuit
alleged that Mr. Underwood was terminated as an employee entitling him to severance pay. The
lawsuit sought damages of approximately $1.4 million. On May 27, 2004, the Company, certain executives, board members and related companies filed two
separate answers, affirmative defenses, and counterclaims against Mr. Underwood in Multnomah County
Circuit Court alleging violations of Oregon Securities law and Oregon common law in connection with
the above named transactions. In addition, the countersuit alleged that Mr. Underwood was
terminated by the Company for good cause. The lawsuit sought damages of not less than $2.5 million
and return of the 3.4 million shares of Microfield stock held by Mr. Underwood in exchange for the
return of the shares of Velagio stock held by the Company. On May 11, 2005 the Company and Mr. Underwood entered into a Settlement Agreement under which both
parties agreed to drop their respective lawsuits. The Settlement Agreement provides that the
Company and certain defendants will jointly and severally purchase Mr. Underwoods Microfield Stock
for the aggregate purchase price of $362,500. The purchase price will be allocated as follows:
$50,000 to the purchase of Mr. Underwoods 119,050 Series 2 preferred shares and the balance to the
purchase of Mr. Underwoods 3,404,958 common shares. Additionally, the Settlement Agreement
terminates Mr. Underwoods Microfield Warrant. Payment under the Settlement Agreement must occur
no later than August 1, 2005 at 1:00 p.m. Pacific standard time. 64




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Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Previous independent registered public accounting firm.On March 17, 2005, the Company notified
PricewaterhouseCoopers LLP (PricewaterhouseCoopers) that it was being dismissed as the Companys independent registered
public accounting firm. The decision to dismiss PricewaterhouseCoopers as the Companys independent
registered public accounting firm was approved by the Companys Board of Directors on March 16,
2005. Except as noted in the paragraph immediately below, the reports of PricewaterhouseCoopers on the
Companys consolidated financial statements for the years ended January 3, 2004 and December 28,
2002 did not contain an adverse opinion or disclaimer of opinion, and such reports were not
qualified or modified as to uncertainty, audit scope, or accounting principle. The reports of PricewaterhouseCoopers on the Companys consolidated financial statements as of and
for the years ended January 3, 2004 and December 28, 2002 contained an explanatory paragraph which
noted that there was substantial doubt as to the Companys ability to continue as a going concern
as the Company has suffered recurring losses from continuing operations and has experienced
negative cash flows from continuing operating activities and also due to significant uncertainty
with respect to Companys ability to meet short-term cash requirements. During the years ended January 3, 2004 and December 28, 2002, and through March 16, 2005, the
Company has not had any disagreements with PricewaterhouseCoopers on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to PricewaterhouseCoopers satisfaction, would have caused them to
make reference thereto in their reports on the Companys consolidated financial statements for such
years. Except as described in the following paragraph, during the years ended January 3, 2004 and December
28, 2002, and through March 16, 2005, there were no reportable events, as defined in Item
304(a)(1)(v) of Regulation S-K. In connection with its audit of the Companys consolidated financial statements for the year ended
January 3, 2004, PricewaterhouseCoopers communicated to the Companys Board of Directors the
existence of certain deficiencies in the area of accounts payable, cash disbursements, inventory
accounting and document retention, which were considered by PricewaterhouseCoopers to be material
weaknesses in the operation of the Companys internal controls. A discussion of such material
weaknesses, together with managements response and remedial actions, may be found in: Item 8A of
the Companys Annual Report on Form 10KSB for the fiscal year ended January 3, 2004, which was
filed with the Securities and Exchange Commission (SEC) on May 20, 2004; Item 3 of the Companys
Quarterly Report on Form 10-QSB for the three month period ended April 3, 2004, which was filed
with the SEC on June 25, 2004; Item 3 of the Companys Quarterly Report on Form 10-QSB for the
three and six-month period ended July 3, 2004, which was filed with the SEC on August 23, 2004; and
Item 3 of the Companys Quarterly Report on Form 10-QSB for the three and nine-month period ended
October 2, 2004, which was filed with the SEC on December 23, 2004. The Company has authorized PricewaterhouseCoopers to respond fully to any inquiries from Russell
Bedford Stefanou Mirchandani LLP (Russell Bedford Stefanou Mirchandani), the Companys recently
engaged independent registered public accounting firm (as discussed below), regarding the material
weaknesses discussed above. The Company has provided PricewaterhouseCoopers with a copy of the above disclosures. The Company
has requested PricewaterhouseCoopers to furnish the Company with a letter addressed to the
Securities and Exchange Commission stating whether or not PricewaterhouseCoopers agrees with the
statements made herein above and, if not, stating in which respects PricewaterhouseCoopers does not
agree. New independent registered public accounting firm.On March 17, 2005, the Company has engaged
Russell Bedford Stefanou Mirchandani as its independent registered public accounting firm for the
Companys fiscal year ended January 1, 2005. The decision to engage Russell Bedford Stefanou
Mirchandani as the Companys independent registered public accounting firm was approved by the
Companys Board of Directors on March 16, 2005. 65




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During the two most recent fiscal years and the period through the date of this disclosure, the
Company did not consult with Russell Bedford Stefanou Mirchandani regarding either (i) the
application of accounting principles to a specified transaction, either completed or proposed; (ii)
the type of audit opinion that might be rendered on the Companys financial statements; or (iii)
any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) and
related instructions of Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of
Regulation S-K). 
 Item 8A. Controls and Procedures Disclosure controls and procedures are 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 and financial officers, as
appropriate to allow timely decisions regarding required disclosure. Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Annual Report, we conducted an evaluation, under the
supervision and with the participation of our President (who currently performs the
functions of the Chief Financial Officer), of our disclosure controls and procedures (as defined in
Rules 13a-15(e) of the Exchange Based on his evaluation, our
President concluded
that our disclosure controls and procedures need improvement and were not adequately effective
as of January 1, 2005 to ensure timely reporting with the Securities and Exchange Commission. Our
management is in the process of identifying deficiencies with respect to our disclosure controls
and procedures and implementing corrective measures, which includes the establishment of new
internal policies related to financial reporting. Changes in Internal Control over Financial Reporting As required by
Rule 13a-15(d), Microfield management, including the President , also
conducted an evaluation of Microfields internal controls over financial reporting to determine
whether any changes occurred during the fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect, Microfields internal control over financial reporting.
During the preparation of the Companys financial statements as of and for the year ended January
1, 2005, the Company has concluded that the current system of disclosure controls and procedures
was not effective because of the internal control weaknesses identified below. As a result of this
conclusion, the Company has initiated the changes in internal control also described below. It
should be noted that any system of controls, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of the system will be met. In addition,
the design of any control system is based in part upon certain assumptions about the likelihood of
future events. Deficiencies and Corrective Actions Relating to the Companys Internal Controls over Financial
Reporting During the course of the audit of the Companys January 1, 2005 financial statements, the Companys
registered independent public accounting firm identified certain material weaknesses relating to
the Companys internal controls and procedures within the areas of revenue recognition, accounts
payable, cash disbursements, inventory accounting and document retention. Certain of these
internal control deficiencies may also constitute deficiencies in the Companys disclosure
controls. In order to review the financial condition and prepare the financial disclosures in this document,
the Companys officers have been responding to recommendations from the Companys auditors to
properly and accurately account for the financial information contained in this Form 10-KSB.
Detailed validation work was done by internal personnel with respect to all consolidated balance
sheet account balances to substantiate the financial information that is contained in this Form
10-KSB. Additional analysis was performed on consolidated income statement amounts and compared to
prior period (both year over year and consecutive period) amounts for reasonableness. Management is
in the process of implementing a more effective system of controls, procedures and other changes in
the areas of revenue recognition, cash disbursements, account reconciliation and document control
to insure that 66




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##### Table of Contents



information required to be disclosed in this annual report on Form 10-KSB has been recorded,
processed, summarized and reported accurately. Our management acknowledges the existence of this
problem, and has developed procedures to address them to the extent possible given limitations in
financial and manpower resources Among the changes being implemented are: Revenue recognition  
    Criteria and procedures established defining approved customer contracts
    Control function established to review and monitor compliance to new procedures
    Improved document control and file check out procedures
    Procedure established defining consistent percentage completion Gross Margin estimation process Cash Disbursements and liability recognition  
    Document control system established and monitored for compliance
    Cut off procedures formalized and consistently applied
    Centralized departmental budgets and accountability established
    Purchasing procedures have been formalized and implementation has begun Account Reconciliations  
    Procedures established and personnel assigned to reconcile key accounts on a timely basis
    Control function added to review reconciliations The Companys officers have been working with the Board of Directors to address recommendations
from the Companys registered independent public accounting firm regarding deficiencies in the
disclosure controls and procedures. The Company is currently engaged in the implementation of a
new internal software system and associated new internal control procedures. Management expects
that this system along with new associated procedures, once implemented, will correct the
deficiencies and will result in disclosure controls and procedures pursuant to Rule 13a-14 of the
Exchange Act, that will timely alert the President to material information relating
to the Company required to be included in the Companys Exchange Act filings. 67




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PART III 
 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act The names, ages and positions of the Companys executive officers and directors are as
follows: Name
    
    Age
    
    Position(s) with CompanyA. Mark Walter
    
    40
    
    President and DirectorGary M. Kapral
    
    49
    
    Chief Financial OfficerSteven M. Wright
    
    42
    
    DirectorR. Patrick Hanlin
    
    44
    
    Chairman of the Board of DirectorsRobert J. Jesenik
    
    45
    
    DirectorMichael W. Stansell
    
    62
    
    DirectorWilliam C. McCormick
    
    71
    
    Interim CEO and Director
 A. Mark Walterjoined the Company in January 2003 and held various management positions
within Microfields wholly owned subsidiary, Christenson Velagio (CVI), before his promotion
to Senior Vice President and Chief Operating Officer of CVI in January 2004. Mr. Walter was
appointed President of CVI in November 2004, and appointed to
the Board of Directors in April 2005. Mr. Walter has 18 years of experience in leading
profitable commercial and industrial electrical services businesses. Prior to joining
Christenson Velagio, Mr. Walter was Operations Director for Power City Electrical, a regional
electrical company. Gary M. Kapraljoined the Company in May, 2004 as Chief Financial Officer after having
served as a full time financial consultant with the Company since February 2004. Mr. Kapral
has been a partner with Tatum CFO Partners LLP since September, 2003. During the three year
period prior to joining Tatum, Mr. Kapral was a Vice President and corporate officer of
Electro Scientific Industries, a manufacturer of semiconductor capital equipment. Prior to
ESI, Mr. Kapral spent 13 years with SGL Carbon, a division of Hoechst, a multinational
German-based conglomerate. Mr. Kaprals career includes CFO, VP Finance, Divisional President
and Group VP responsibilities in a wide variety of industrial businesses. He holds a BS
degree in Accounting from the University of Illinois and is a Certified Public Accountant.
Mr. Kapral left the Company in March 2005. Steven M. Wrightis currently Senior Managing Director of Aequitas Capital Management.
Mr. Wright joined Microfield in September 2002 and was appointed President, Chief Executive
Officer and a Director that same month. He served in that position until August 31, 2003 when

he was appointed Chief Operating Officer. Mr. Wright left the employ of the Company in
December 2003. Mr. Wright remains a director. Prior to joining Microfield, Mr. Wright was
the founder and Managing Partner of Innovative Safety Technologies, LLC from its inception in
July 2001 to September 2002. Mr. Wright was Chief Operating Officer, Director and Co-founder
of Card Capture Services, Inc. an international ATM provider, from March 1992 through May
2000. Mr. Wright holds a BBS in Marketing and Management from the University of Oregon. R. Patrick Hanlinjoined the Company as its Chairman in September 2002. Mr. Hanlin
founded and has been the President and a director of Livebridge, Inc. a multi-channel
communications service provider from February 1988 to the present time. Mr. Hanlin holds a BA
in Business and Communications from the University of Oregon. Mr. Hanlin resigned from the
board in early 2005. Robert J. Jesenikjoined the Company in September 2003 as a director. Mr. Jesenik is the
co-founder and CEO of Aequitas Capital Management, a financial services firm which structures
and invest capital in high potential and socially responsible markets. Since the firms
founding in 1993, he has served on numerous boards of clients and portfolio firms of Aequitas,
including serving as CEO of Christenson Electric since 2002. Prior to 1993, Mr. Jesenik spent
16 years in various operating management positions in technology and distribution firms. Mr.
Jesenik holds a BS in Accounting from the University of Oregon and an MBA from the University
of Portland. 68




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##### Table of Contents



Michael W. Stanselljoined the Company in November 1985 as Director of Manufacturing and
was appointed Vice President, Operations, in January 1987. Mr. Stansell was appointed to the
Companys board of directors in November 1999 and served as the Companys President from
November 1999 until October 2002. Mr. Stansell was a division manufacturing manager, among
other positions, at Tektronix Corporation from August 1965 through October 1985. William C. McCormickjoined the Company in January 2004 as Interim Chief Executive
Officer and resigned that post in November 2004 with the appointment of A. Mark Walter as
President of CVI. Prior to coming to the Company, Mr. McCormick was Chief Executive Officer
of Precision Castparts, Corp., a publicly traded aerospace company, from August 1994 to August
2002. He also served as the Chairman of the board of directors there from October 1994 to
August 2003. Mr. McCormick joined Precision Castparts in April 1985. Prior to Precision
Castparts, Mr. McCormick spent 32 years at General Electric in various businesses, including
GE Aircraft Engines, Carboloy Systems, Distribution Equipment, and Industrial Electronics.
Mr. McCormick serves on the board of directors and is Chair of the Audit Committee of Merix
Corporation, a publicly traded manufacturer of high performance interconnect products. He
serves on the boards of several other for profit and non profit companies. McCormick holds
a BS in Mathematics from the University of Cincinnati. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Companys executive officers
and directors, and persons who own more than ten percent of a registered class of the
Companys equity securities to file reports of ownership and change in ownership with the
Securities and Exchange Commission (SEC). Executive officers, directors and greater than ten
percent shareholders are require by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons, the Company
believes that, during 2004, all executive officers, directors and greater than ten percent
shareholders complied with all applicable filing requirements. During the year, the following officers, directors, and greater than ten percent
shareholders filed late Section 16(a) forms; Robert J. Jesenik
filed one Form 4 late; Steven M. Wright filed one Form 4
late; A. Mark Walter filed one Form 4 late; William C. McCormick
filed one Form 3 late and one Form 4 late; Gary M. Kapral
filed one Form 3 late; Christenson Group, LLC filed one
Form 4 late; and JMW Group, LLC filed one Form 3 late. Audit Committee The Audit Committee charter was discussed, reviewed and adopted February 6, 2003. The Audit
Committee consists of Mr. Hanlin, Mr. Stansell and Mr. Jesenik. The Board of Directors has
determined that Mr. Hanlin and Mr. Jesenik are each an audit committee financial expert as
defined in SEC rules. The audit committee held one formal meeting and several other meetings
during fiscal year 2004. Mr. Hanlin served as Chairman of the
Audit Committee until his resignation in February 2005. The Audit Committee oversees the accounting, financial reporting and audit processes; makes
recommendations to the board of directors regarding the selection of independent auditors;
reviews the results and scope of audit and other services provided by the independent
auditors; reviews the accounting principles and auditing practices and procedures to be used
in preparing the Companys financial statements; and reviews the Companys internal controls. Governance Committee The Company adopted its Code of Ethics in February 2003. The Governance committee members for
2004 included Mr. Wright and Mr. McCormick. The ethics committee met once formally and had
informal meetings and discussions throughout 2004. The current policy requires that the
ethics committee consist of two Board Members. A copy of the Code of Ethics is available from
the Company by contacting Mr. Steven M. Wright, c/o Microfield Group, Inc., 1631 NW Thurman
St., Suite 200, Portland, Oregon 97209. Compensation Committee The Companys compensation committee for 2004 consisted of Mr. Hanlin, and Mr. Jesenik. The
compensation committee had one formal meeting during the year and numerous informal meetings
and discussions throughout 2004. The committee determines the compensation level, option
grants and other compensation for the executive officers of the Company. 69




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Item 10. Executive Compensation Summary of Cash and Certain Other Compensation The following table provides certain summary information concerning compensation awarded
to, earned by or paid to the Companys Chief Executive Officer and other executive officers of
the Company whose total annual salary and bonus exceeded $100,000 (collectively, the named
officers) for fiscal years 2004, 2003 and 2002. SUMMARY COMPENSATION TABLE Long TermCompensationAwardsSecuritiesAnnual Compensation
    
    
    Underlying
    
    
    All OtherFiscal
    
    
    
    
    
    
    
    
    
    
    Options
    
    
    CompensationYear
    
    
    Salary($)
    
    
    Bonus($)
    
    
    (#)
    
    
    ($)A. Mark Walter (1)
    
    
    2004
    
    
    
    117,184
    
    
    
    
    
    
    
    200,000
    
    
    
    7,200President and Director
    
    
    2003
    
    
    
    89,362
    
    
    
    
    
    
    
    
    
    
    
    7,2002002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gary M. Kapral (2)
    
    
    2004
    
    
    
    138,462
    
    
    
    
    
    
    
    150,000
    
    
    
    Chief Financial Officer
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    William C. McCormick (3)
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    1,200,000
    
    
    
    Interim Chief Executive
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Officer and Director
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Kurt A. Underwood (4)
    
    
    2004
    
    
    
    37,130
    
    
    
    11,882
    
    
    
    
    
    
    
    President and Chief
Executive
    
    
    2003
    
    
    
    94,178
    
    
    
    37,242
    
    
    
    
    
    
    
    Officer and Director
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2) Mr. Kapral was appointed the Companys Chief Financial Officer effective May 17, 2004.
He left the Company in March 2005. (3) Mr. McCormick was appointed Interim CEO effective January 21, 2004. He held this
position with no cash compensation. He resigned that position effective November 15, 2004
with the appointment of A. Mark Walter as President. Mr. McCormick remains a director. (4) Mr. Underwood was appointed the Companys Chief Executive Officer effective September
16, 2003. He left the Company on January 21, 2004. Options Granted in Last Fiscal Year During 2004, the Company granted 350,000 incentive stock options to purchase Microfield
Group, Inc. common stock under the Companys Stock Incentive Plan to the named officers. No
other current executive officers received options exercisable for shares of the Companys
Common Stock during fiscal 2004. All other employees who are not currently executive officers
of the Company received options exercisable for a total of 175,000 shares of the Companys
Common Stock during fiscal 2004. There were an additional 1,344,188 nonqualified stock
options awarded to individuals or entities not employed by the Company. These options were
issued to directors of the Company. 70




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Option Exercise and Holdings The following table provides information concerning the exercise of options during fiscal
2004 and unexercised options held as of the end of the fiscal year with respect to the named
officers. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES Number ofSecurities
    
    
    Value ofUnderlying
    
    
    UnexercisedUnexercised
    
    
    In-The-MoneyShares
    
    
    
    
    
    
    Options
    
    
    OptionsAcquired
    
    
    Value
    
    
    At FY-End (#)
    
    
    At FY-End ($) (2)On Exercise
    
    
    Realized
    
    
    exerciseable/
    
    
    Exerciseable/
    
    
    Grant
    
    
    ExpirationName
    
    (#)
    
    
    ($) (1)
    
    
    Unexerciseable
    
    
    Unexerciseable
    
    
    Date
    
    
    DateA. Mark Walter
    
    
    
    
    
    
    
    
    
    
    22,917
    
    
    
    77,083
    
    
    $
    0
    
    
    $
    0
    
    
    
    1/22/04
    
    
    
    1/22/09
    
    
    
    100,000
    
    
    
    
    
    
    $
    5,000
    
    
    
    12/3/04
    
    
    
    12/3/09Gary M. Kapral
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    43,750
    
    
    $
    875
    
    
    $
    6,125
    
    
    
    5/17/04
    
    
    
    5/17/09
    
    
    
    100,000
    
    
    
    
    
    
    $
    5,000
    
    
    
    12/3/04
    
    
    
    12/3/09William C. McCormick
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    1,150,000
    
    
    $
    500
    
    
    $
    11,500
    
    
    
    11/12/04
    
    
    
    11/12/09Kurt A. Underwood
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A
   (1)
    
    Market value of the underlying securities at exercise date, minus exercise price of
the options.(2)
    
    Market value of the underlying securities at January 1, 2005, $.45 per share, minus
exercise price of the unexercised options. 
 Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding the beneficial ownership of
Common Stock of the Company as of April 1, 2005 as to (i) each person who is known by the
Company to own beneficially more than 5% of the outstanding shares of any class of the
Companys common or preferred stock, (ii) each director of the Company, (iii) each of the
executive officers named in the Summary Compensation Table below and (iv) all directors and
executive officers as a group. Except as otherwise noted, the Company believes the persons
listed below have sole investment and voting power with respect to the Common Stock owned by
them. Common Stock andCommon Stock EquivalentsEquivalentCommonShares
    
    
    ApproximateFive Percent Shareholders, Directors, Director
    
    Beneficially
    
    
    VotingNominees and Certain Executive Officers
    
    Owned (1)
    
    
    Percentage(2)
    
    Robert J. Jesenik
    
    
    20,314,080
    
    
    
    53.1
    %805 SW Broadway, Suite 560Portland, OR  97205(3)
    
    JMW Group, LLC
    
    
    19,370,930
    
    
    
    51.8
    %805 SW Broadway, Suite 560Portland, OR  97205(4)
    
    Christenson Group, LLC
    
    
    8,521,159
    
    
    
    25.4
    %805 SW Broadway, Suite 560Portland, OR  97205
 71




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##### Table of Contents



Common Stock andCommon Stock EquivalentsEquivalentCommonShares
    
    
    ApproximateFive Percent Shareholders, Directors, Director

    
    Beneficially
    
    
    VotingNominees and Certain Executive Officers
    
    Owned (1)
    
    
    Percentage(5)
    
    Destination Capital, LLC
    
    
    6,976,718
    
    
    
    18.7
    %805 SW Broadway, Suite 560Portland, OR  97205(6)
    
    Christenson Leasing Company, LLC
    
    
    4,241,922
    
    
    
    12.3
    %805 SW Broadway, Suite 560Portland, OR  97205(7)
    
    Kurt A. Underwood
    
    
    3,540,675
    
    
    
    10.5
    %5125 SW Macadam Ave., Suite 200Portland, OR  97239(8)
    
    Christenson Electric, Inc.
    
    
    3,458,969
    
    
    
    10.3
    %1631 NW Thurman Street, Suite 200Portland, OR  97209Salzwedel Financial Communication, Inc.
    
    
    1,600,000
    
    
    
    4.8
    %1800 SW Blankenship Rd., Suite 275West Linn, OR  97068(9)
    
    Steven M. Wright (1)
    
    
    1,271,935
    
    
    
    3.8
    %805 SW Broadway, Suite 560Portland, OR  97205(10)
    
    Tenley Company
    
    
    1,184,211
    
    
    
    3.5
    %3499 SW Hillsboro HighwayHillsboro, OR  97123(11)
    
    William C. McCormick
    
    
    1,113,158
    
    
    
    3.2
    %805 SW Broadway, Suite 560Portland, OR  97205(12)
    
    Thurman Holdings, Inc.
    
    
    678,571
    
    
    
    2.0
    %805 SW Broadway, Suite 560Portland, OR  97205(13)
    
    Aequitas Capital Management
    
    
    535,557
    
    
    
    1.6
    %805 SW Broadway, Suite 560Portland, OR  97205(14)
    
    Rodney M. Boucher
    
    
    263,158
    
    
    
    *
    %5487 Vicenza WaySan Jose, CA  95138(15)
    
    Michael Stansell
    
    
    226,435
    
    
    
    *
    %1631 NW Thurman Street, Suite 200Portland, OR  97209(16)
    
    A. Mark Walter
    
    
    64,563
    
    
    
    *
    %1631 NW Thurman Street, Suite 200Portland, OR  97209(17)
    
    All directors and executive officers
    
    
    22,990,192
    
    
    
    58.4
    %as a group as of 5/31/05  (5 persons)
   *
    
    Less than 1%(1)
    
    Shares to which the person or group has the right to acquire within 60 days after
April 1, 2005 are deemed to be outstanding in calculating the percentage ownership of
the person or group but are not deemed to be outstanding as to any other person or
group.(2)
    
    Includes 5,160,953 Series 2 preferred shares (3,333,333 owned by CEI, 869,048 owned
by Christenson Group, Inc., 357,143 owned by Aequitas Capital Management and 601,429
owned by JMW Group, Inc.), 6,116 Series 3 and 4 preferred shares (126 owned by CEI,
3,242 owned by CLC, 68 owned by Aequitas Capital Management, 28 owned by JW Assurance
and 2,652 owned by JMW Group, Inc.) outstanding as of April 1, 2005, 910,600 warrants
(84,200 owned by JMW Group, Inc.) and 50,000 stock options, both convertible into
common stock within 60 days after April 1, 2005. Each share of Series 3 and Series 4
preferred is convertible into 1,000 shares of voting common stock.(3)
    
    Includes 5,160,953 Series 2 preferred shares (3,333,333 owned by CEI, 869,048 owned
by Christenson Group, Inc., and 357,143 owned by Aequitas Capital Management), 6,088
Series 3 and 4 preferred shares 72




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##### Table of Contents



(126 owned by CEI, 3,242 owned by CLC and 68 owned by Aequitas Capital Management)
outstanding as of April 1, 2005, and 84,200 warrants convertible into common stock
within 60 days after April 1, 2005. Each share of Series 3 and Series 4 preferred is
convertible into 1,000 shares of voting common stock.(4)
    
    Includes 4,202,381 Series 2 preferred shares (3,333,333 owned by CEI) and 126 Series
3 and 4 preferred shares (owned by CEI) outstanding as of April 1, 2005. Each share
of Series 3 and Series 4 preferred is convertible into 1,000 shares of voting common
stock.(5)
    
    Includes 3,242 Series 3 and 4 preferred shares (owned by Christenson Leasing)
outstanding as of April 1, 2005 and 3,734,796 warrants (1,000,000 owned by Christenson
Leasing) convertible into common stock within 60 days after April 1, 2005. Each
share of Series 3 and Series 4 preferred is convertible into 1,000 shares of voting
common stock.(6)
    
    Includes 3,242 Series 3 and 4 preferred shares outstanding as of April 1, 2005. Each
share of Series 3 and Series 4 preferred is convertible into 1,000 shares of voting
common stock.(7)
    
    Includes 119,050 Series 2 preferred shares outstanding as of April 1, 2005 and 16,667
warrants to purchase common stock within 60 days of April 1, 2005.(8)
    
    Includes 4,202,381 Series 2 preferred shares and 126 Series 3 and 4 preferred shares
outstanding as of April 1, 2005. Each share of Series 3 and Series 4 preferred is
convertible into 1,000 shares of voting common stock.(9)
    
    Includes 118 Series 3 and 4 preferred shares outstanding as of April 1, 2005, 19,231
warrants and 77,035 options convertible into common stock within 60 days after April
1, 2005. Each share of Series 3 and Series 4 preferred is convertible into 1,000
shares of voting common stock.(10)
    
    Includes 1184 Series 4 preferred shares outstanding as of April 1, 2005. Each share
of Series 3 and Series 4 preferred is convertible into 1,000 shares of voting common
stock.(11)
    
    Includes 263 Series 4 preferred shares outstanding as of April 1, 2005, and 850,000
options convertible into common stock within 60 days after April 1, 2005. Each share
of Series 3 and Series 4 preferred is convertible into 1,000 shares of voting common
stock.(12)
    
    Includes 595,238 shares of Series 2 preferred stock outstanding as of April 1, 2005,
and 83,333 warrants convertible into common stock within 60 days after April 1, 2005.(13)
    
    Includes 357,143 Series 2 preferred shares and 68 Series 3 preferred shares
outstanding as of April 1, 2005. Each share of Series 3 preferred is convertible into
1,000 shares of voting common stock.(14)
    
    Includes 263 Series 4 preferred shares outstanding as of April 1, 2005. Each share
of Series 4 preferred is convertible into 1,000 shares of voting common stock.(15)
    
    Includes 86,833 options convertible into common stock within 60 days after April 1,
2005.(16)
    
    Includes 64,583 options convertible into common stock within 60 days after April 1,
2005.(17)
    
    Includes 6,498 Series 3 and 4 preferred shares outstanding as of April 1, 2005,
4,664,627 warrants and 1,128,452 options convertible into common stock within 60 days
after April 1, 2005. Each share of Series 3 and Series 4 preferred is convertible
into 1,000 shares of voting common stock. 
 Item 12. Certain Relationships and Related Transactions The Company has a number of promissory notes, lines of credit and lease obligations owing to
related parties. The following table lists the notes and obligations outstanding at January 1,
2005 by related party. 73




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##### Table of Contents



Amount of
    
    
    MonthlyRelated Party
    
    Type of Obligation
    
    Maturity Date
    
    
    Obligation
    
    
    PaymentDestination Capital, LLC(a)
    
    Loan agreement
    
    July 24, 2006
    
    $
    1,200,000
    
    
    $
    (d)14,550CEAC(a)
    
    Bond guarantee fees(c)
    
    open
    
    
    
    
    
    
    (c) (b)2,400CEI(a)
    
    Equipment lease
    
    December 1, 2007
    
    
    
    
    
    
    40,000Destination Microfield,
LLC(e)
    
    Vehicle operating lease
    
    August 1, 2006
    
    
    
    
    
    
    (f)29,000CEI(a)
    
    Real property leases
    
    October 31, 2008
    
    
    
    
    
    
    48,842John B. Conroy
    
    Note receivable
    
    September 16, 2005
    
    
    66,250
    
    
    
    
   (a)
 (b) This lease payment and bond guarantee fee are approximations, and may
fluctuate based on several factors including the dollar value of jobs under bond at any particular
time . (c) A. Mark Walter, an officer, participates in the guarantee of these bonds, and
is paid a portion of this fee. (d) This payment represents an interest only monthly payment amount in effect at
January 1, 2005. This payment changes to $83,333 on June 24, 2005 and is for payment of principal
and interest. (e) William C. McCormick, a director and former interim CEO, holds a minority ownership
interest in this entity. (f) These payments vary over the term of the loan. These amounts represent the monthly
payment in effect on January 1, 2005. Terms and conditions of each of the notes and agreements are listed below. Notes payable to Destination Capital, LLC On January 22, 2004, the Company entered into a Contract of Sale and Security Agreement with
Destination Capital LLC (Destination) under which the Company agreed to sell up to 15% of its
acceptable, eligible accounts receivable to Destination, in exchange for borrowing up to $600,000
from that entity under the terms of a Promissory Note. Destination is an entity in which Robert J.
Jesenik, a shareholder and director of the Company, holds a significant interest. Under the terms
of the agreement between the Company and Destination, the Company paid interest at the rate of 18%
per annum on the amount of the note outstanding, and also issued warrants in the amount of 1% of
the fully diluted common shares, per month, for each calendar month in which the Note was
outstanding. The warrants have a five-year life and will be issued at the lower of $0.42 or the
price of any other common or preferred equity issued in the six months following the date of the
agreement. During the 6 month agreement period, the Company issued incentive stock options at
$0.31 per share, therefore the price per share used for these warrants was reduced to $0.31. The
Company initially was obligated to issue warrants to purchase 350,387 common shares at the time
this note was issued. The fair value of these warrants was determined to be $155,221 using the
Black Scholes pricing model. The assumptions used included a risk free rate of 3.1%, volatility of
152%, fair market value of the Companys stock of $.48 per share and a remaining life of 5 years.
The calculated fair value amount was recorded as a debt discount and is being amortized over the
six-month term of the debt. This debt was outstanding on February 1, 2004, March 1, 2004 and April
1, 2004 and in accordance with the terms of the note agreement, the Company is further obligated to
issue additional warrants to purchase 1,053,159 shares of the Companys common stock. These
warrants were valued using the Black Scholes pricing model. The assumptions used included risk free
rates ranging from of 3.1% to 3.3%, volatility of 152%, remaining lives of 5 years for each warrant
issuance, and fair market values of the Companys stock on those three dates of $0.46, $0.60 and
$0.62 per share, respectively. The fair value of these warrants in the amount of $625,151 has been
recorded as interest expense in the consolidated statement of operations for the year ended January
1, 2005. At the date of each of those warrant issuances, the Company did not have sufficient
authorized common shares to effect the exercise of these warrants, accordingly, the fair value of
all of these warrants was classified as liability for warrant settlement on the consolidated
balance sheet. On September 1, 2004, the Companys shareholders voted to increase the Companys
authorized common shares from 25,000,000 to 125,000,000. The fair market values of these warrants
were re-measured on that date and reclassified as common stock warrants in the shareholders equity
section on the balance sheet, with the increase or decrease in their values recorded as an increase
or reduction of interest expense in the consolidated statement of operations (Note 13). The Note
was repaid in full during April 2004. On August 24, 2004 the Company entered into a Business Loan Agreement with Destination under which
the Company can borrow up to $2,000,000 based on Destinations discretion and funds availability
(Note 14). Under the terms of the agreement, the Company pays interest at prime plus 10% (prime
plus 12% in the event of a default), with nine monthly interest only payments starting September
24, 2004, and 15 monthly principal payments of $83,333 and accrued interest until maturity. At
loan maturity on August 24, 2006, any remaining principal and accrued interest owed is then due and
payable. This loan is immediately due if there occurs a default, there is a sale or disposal of
all or substantially all of the assets or stock of the Company, or if there is a transfer of
ownership or beneficial interest, by merger or otherwise, of the stock of the Company or its
subsidiary. Additionally, the 74




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Company will issue to Destination the number of warrants equal to 12.5% of the value of the loan
balance, on the first day of each month the loan is outstanding. If the loan is initially drawn up
to $1,250,000, and paid according to the terms of the agreement, this will result in the issuance
of approximately 2.5 million warrants to Destination. These warrants have a five year life and will
be issued at the lower of $0.38 or the price applicable to any shares, warrants or options
(excluding options granted to employees or directors) issued by the Company while the loan is
outstanding (Note 13). Beginning August 1, 2004, the Company was obligated to issue the following
warrant amounts based on the outstanding loan balances on the first day of each month. Warrants to beDate
    
    Loan Balance
    
    
    IssuedAugust 1, 2004
    
    $
    300,000
    
    
    
    37,500September 1, 2004
    
    $
    750,000
    
    
    
    93,750October 1, 2004
    
    $
    1,200,000
    
    
    
    150,000November 1, 2004
    
    $
    1,200,000
    
    
    
    150,000December 1, 2004
    
    $
    1,200,000
    
    
    
    150,000January 1, 2005
    
    $
    1,200,000
    
    
    
    150,000Total warrants to be issued as of January 1, 2005
    
    
    
    
    
    
    731,250
 The Company initially was obligated to issue warrants to purchase 37,500 common shares at the time
this note was issued. The fair value of these warrants was determined to be $17,513 using the
Black Scholes pricing model. The assumptions used included a risk free rate of 3.8%, volatility of
155%, fair market value of the Companys stock of $.50 per share and a remaining life of 5 years.
The calculated fair value amount was recorded as a debt discount and is being amortized over the
twenty-four month term of the debt. The warrants issued on September 1, 2004 through January 1,
2005 were also valued using the Black Scholes pricing model. The assumptions used include risk free
rates ranging from 3.39% to 3.71%, volatility of approximately 155%, remaining lives of 5 years for
each warrant issuance, and fair market values of the Companys stock ranging from $0.35, to $0.59
per share. At the time these warrant obligations arose, the Company had sufficient authorized
common shares to effect the exercise of these warrants. Accordingly, the fair values of the
warrants issued from September 1, 2004 through January 1, 2005 of $283,988, were classified as
common stock warrants in the shareholders equity (deficit) section on the consolidated balance
sheet, and expensed as interest expense in the consolidated statement of operations, as they were
issued. Note payable to Steven M. Wright On June 10, 2003, Steven M. Wright, the Companys Chief Executive Officer at that time, advanced
the Company $50,000 under a line of credit promissory note (Note 14) for working capital purposes.
The note carried an interest rate of 10% and was due and payable on September 1, 2003. As of
January 3, 2004, $5,000 of this note had been repaid with the remaining balance still outstanding.
The remaining note balance and accrued interest of $4,480 was converted to 117.81 shares of Series
3 preferred stock on April 2, 2004 (Note 10). Notes payable to entities controlled by Robert J. Jesenik On September 16, 2003, as part of the purchase price for the acquisition of CTS, the Company
assumed various long-term notes payable to several entities in which Robert J. Jesenik, a Director
of the Company and significant shareholder, has significant ownership interests. A portion of
these debts were converted to equity as a part of the Companys Series 2 preferred stock private
placement in 2003. The remaining amounts due plus accrued interest were converted to equity on
April 2, 2004 as listed below. On September 15, 2003, the Company, CTS and JMW Capital Partners, Inc. (JMW) entered into an
Agreement to Satisfy Obligations. JMW is an investment banking company in which Robert J. Jesenik,
a Director and significant Shareholder, owns a significant ownership interest. Under this
agreement CTS acknowledged debt in the amount of $149,000 owed to JMW. This debt arose within CTS
prior to the acquisition by the Company and was used for operating activities. After consummation
of the acquisition of CTS by the Company and upon issuance of preferred shares in conjunction with
the Series 2 preferred stock private placement, the Company converted the note payable to JMW into
357,143 shares of the Companys Series 2 preferred stock. On September 15, 2003, the Company, CTS and Christenson Electric, Inc. (CEI) entered into an
Agreement to Consolidate, Amend and Satisfy Obligations. CEI is an electrical services company in
which Robert J. Jesenik, a 75




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Director and significant Shareholder, owns a substantial ownership interest. Under this agreement
CTS acknowledged debts of $1.5 million and $265,000 owed to CEI. These debts arose within CTS
prior to the acquisition by the Company, and relate to the purchase of Christenson Electrical
Services inventory and customer lists by CTS. This was a transaction between entities under
common control. After consummation of the acquisition of CTS by the Company and upon issuance of
preferred shares in conjunction with the Series 2 preferred stock private placement, the Company
converted $365,000 of the two notes payable to CEI into 869,048 shares of Series 2 preferred stock. On September 15, 2003, CTS executed a new Subordinated Amended and Restated Promissory Note for the
remaining $1,400,000 due to CEI. On November 17, 2003 the Company converted the note payable to
3,333,333 shares of Series 2 preferred stock. There was no interest accrued or paid on this note,
according to its terms. On September 15, 2003, CTS executed an Amended and Restated Promissory Note in the amount of
$825,000 due to Christenson Leasing Company, LLC (CLC). CLC is an equipment leasing company in
which Robert J. Jesenik, a Director and significant shareholder, holds a substantial ownership
interest. This debt arose within CTS prior to the acquisition by the Company. Under this note,
six interest only payments were due monthly beginning on November 15, 2003. Thereafter, payments
of $18,355 were to be due monthly beginning on June 15, 2004, with a balloon payment of $666,889
due and payable on October 15, 2005. Interest on this note accrued at 12% per annum beginning on
September 15, 2003. This note and accrued interest was converted to 2,088.924 shares of Series 3
preferred on April 2, 2004 (Note 14). On January 17, 2003, CTS executed separate promissory notes with JMW, CLC, Robert Jesenik dba
Jesenik Enterprises and JW Assurance and Holding Limited for the purchase of the undivided
interests in certain assets previously leased by CTS. Robert J. Jesenik, a Director and
significant shareholder, owns a substantial ownership interest in all of the above named entities.
An interest only payment was due on January 17, 2004. Thereafter, payments totaling $6,337 were
due quarterly beginning on April 17, 2004. Interest on these notes accrues at 12% per annum
beginning on January 17, 2003. As of January 3, 2004, $79,602 was outstanding under these notes.
These notes were converted to 216.571 shares of Series 3 preferred stock on April 2, 2004 (Note
14). On January 17, 2003, CTS executed separate promissory notes with JMW, CLC, Robert Jesenik dba
Jesenik Enterprises and JW Assurance and Holding Limited in payment of certain past due rent
amounts due from CTS under an asset lease. Robert J. Jesenik, a Director and significant
shareholder, owns a substantial ownership interest in all of the above named entities. An
interest only payment was due on January 17, 2004. Thereafter, payments totaling $4,036 were due
quarterly beginning on April 17, 2004. Interest on these notes accrued at 12% per annum beginning
on January 17, 2003. As of January 3, 2004, $50,700 was outstanding under these notes. These
notes and accrued interest were converted to 216.571 shares of Series 3 preferred stock on April 2,
2004 (Note 14). On April 2, 2004, approximately $118,000 of interest, payable to entities in which Mr. Jesenik has
a significant interest under the notes and agreements listed above, was converted to 280.952 shares
of Series 3 preferred stock (Note 10). As of January 1, 2005 no interest is payable to entities in
which Mr. Jesenik has a significant interest. Bond Guarantee Fees A certain number of CTS construction projects require the Company to maintain a surety bond. The
bond surety company requires an additional guarantee for issuance of the bond. The Company has
separate agreements with CEAC, Inc. (CEAC) and A. Mark Walter individually, President of CVI, under
which at quarter end paid CEAC and Mr. Walter each approximately $1,200 per month for their
guarantee of this bond liability. CEAC holds a substantial ownership interest in CEI. Robert J.
Jesenik, a Director and significant Shareholder, owns a substantial ownership interest in CEAC.
The guarantee fee is computed as 15% (annualized) of the open liability under bonds issued for CTS
and indemnified by certain shareholders of CEAC. Equipment Lease Agreement On September 1, 2003, CTS entered into an agreement with CEI for use of certain equipment leased by
CEI from an outside party. Robert J. Jesenik, a Director and significant Shareholder, owns a
substantial ownership interest in CEI. The equipment consists of various construction vehicles,
trailers, miscellaneous construction equipment, office furniture, computer hardware and software.
Under the terms of the lease CTS pays CEI $40,000 monthly beginning on September 1, 2003, with the
final payment due on December 1, 2007. The lease is accounted for as an operating lease and
contains a 10% purchase option at the end of the lease term, December 31, 2007. At January 3,
2004, the 76




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Company was past due on payments totaling $125,000. The Company reached agreement on a payment plan
to the lessor, under which $10,000 of the monthly lease obligation was paid to the lessor in an
equivalent amount of the Companys Series 3 preferred stock (Note 10). This arrangement tendering
a portion of the payment with preferred stock in lieu of cash, is for the thirteen monthly payments
beginning with the December 2003 lease payment, through the payment due in December 2004.
Beginning with the payment due in January 2005, the total monthly amount due is scheduled to be
paid entirely in cash. At January 1, 2005, the Company was past due on payments totaling
approximately $25,000. Master Vehicle Lease Agreement On September 1, 2003 CTS entered into a master vehicle lease agreement with Christenson Leasing
Company LLC (CLLLC), for use of certain vehicles used in its construction business. CLLLC is an
equipment leasing company in which Robert J. Jesenik, a Director and significant Shareholder, holds
a substantial ownership interest. Under the terms of the lease, CTS paid CLLLC $84,777 monthly
beginning on September 1, 2003, with the final payment due August 1, 2006. The lease contained a
renewal provision under which it had the option, at the end of the lease term, to purchase or
return the vehicles, or to renew the lease for an additional 12 months. The lease payment was to
remain fixed unless the 30-day Commercial Paper Rate as published in the Wall Street Journal
exceeds 2.00%. If that occurs, the lessor has the option to increase the lease payment. This
lease was accounted for as a capital lease. On September 1, 2003 prior to the acquisition of CTS,
$1,993,233 was recorded as cost of the vehicles leased with the same amount recorded as debt owed
under the lease as of that date (Notes 5 and 14). At January 3, 2004, the Company was past due on
payments totaling $271,720. On January 3, 2004, the Company amended the agreement with the lessor
under which the monthly payments were reduced to approximately $70,000 per month, with $15,250 of
the monthly lease obligation being paid to the lessor in an equivalent amount of the Companys
Series 3 preferred stock (Note 10). The Series 3 preferred stock tendered in conjunction with this
payment reduction, was all issued on April 2, 2004. This reduction resulted in a decrease in
interest rate on this lease from 32.22% to 25.04% per annum. This arrangement tendering a portion
of the payment with preferred stock in lieu of cash is for the twelve monthly payments in 2004. On September 10, 2004, the Company entered into a Master Vehicle Lease Termination Agreement with
CLLLC, under which the Company terminated its previous master vehicle lease agreement with CLLLC.
Under the terms of this termination agreement, the Company was released from its obligation under
the previous master vehicle lease agreement. In consideration for this release the Company issued
1,000,000 warrants to purchase the Companys common shares, which were valued at $515,000 using the
Black Scholes model, a risk free rate of 3.5%, volatility of 154%, fair market value of the stock
of $0.55, and a five year life. This warrant value was recorded in the Companys consolidated
balance sheet as common stock warrants, with a corresponding expense recorded in the Companys
consolidated statement of operations (Note 13). The Company entered into a new Master Vehicle Lease Agreement, effective September 9, 2004, with
Destination Microfield, LLC. Destination Microfield, LLC is partially owned by William C.
McCormick, interim CEO for the Company. In accordance with the terms of the agreement, the
Company will make twelve monthly payments of $29,000 starting October 5, 2004, twelve monthly
payments of $35,000, starting October 5, 2005, and three monthly payments of $45,000 ending on
December 9, 2006. This lease is accounted for as an operating lease with equal monthly amounts
charged to expense in the consolidated statement of operations over the life of the lease. Real Property Leases On September 1, 2003, CTS entered into seven real property subleases with CEI for use of buildings,
offices and storage yards to house the operations and property of CTS. Robert J. Jesenik, a
Director and significant Shareholder, owns a substantial ownership interest in CEI. CTS has
operating activities in Portland and Eugene, Oregon. The monthly sublease payments totaled $58,625
through November 30, 2004. On November 30, 2004, the Company terminated its lease with CEI for
space in the Thurman Building and entered into a lease directly with the building owner for a
smaller space in the building. As of January 1, 2005 the Companys total real property lease
payments totaled $48,842, of which $675 was on a month-to-month basis. The remaining $48,167 is
due on leases with maturity dates between September 2005 and October 2008. The rent per month on
the Thurman Building is $31,025. The annual rent obligations from January 1, 2005, for each
property are listed in the table below. 77




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##### Table of Contents



Location
    
    Maturity
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Thurman Building
    
    
    10/31/08
    
    
    $
    372,297
    
    
    $
    372,297
    
    
    $
    372,297
    
    
    $
    310,247
    
    
    
    Swan Island
    
    
    11/30/05
    
    
    
    78,355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Eugene
    
    
    09/30/05
    
    
    
    76,077
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Crown Plaza Office
    
    
    7/31/07
    
    
    
    18,795
    
    
    
    18,795
    
    
    
    12,530
    
    
    
    
    
    
    
    Pope Storage
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Montgomery Park Storage
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    545,524
    
    
    $
    391,092
    
    
    $
    384,827
    
    
    $
    310,247
    
    
    
    
   *

    Month-to-Month Administrative Services Agreement On September 15, 2003, CTS entered into an administrative services agreement with CEI for the
extension of certain administrative and related services by the Company to CEI. Robert J. Jesenik,
a Director and Significant Shareholder, owns a substantial ownership interest in CEI. Under the
terms of the agreement, certain employees provided administrative and related services to CEI upon
reasonable request. The agreement is subject to a 60-day notice period before termination by
either party. The monthly payment for these services was determined at the effective date of the
agreement to be approximately $35,000, with a provision to be adjusted as needed based on the level
of usage of these services by CEI. During the first quarter of 2004, the payment by CEI for these
services was renegotiated to $15,000 per month as the cost of services to CEI has been reduced.
This amount remained at $15,000 through July of 2004, at which time the Company discontinued
billing CEI for these services. Charges from CVI to CEI for these services resumed in January
2005. Note Receivable In 1998, John B. Conroy, then the Companys Chairman, CEO and President, entered into a transaction
whereby he purchased 45,000 shares of the Companys common stock at $1.75 per share. Mr. Conroy
issued a promissory note to the Company for $78,750 in payment for the shares. On May 17, 2004 the
Note was replaced with a new non-recourse note for $66,250 under which the original amount of the
note was offset against a $12,500 amount owed by the Company to Mr. Conroy. The note also
acknowledges the outstanding accrued interest due by Mr. Conroy in the amount of $21,937.
Additionally, the interest rate of the new promissory note was established at 3.4% per annum, and
the due date was extended to August 29, 2006. Mr. Conroy resigned as Chairman, CEO and President
on September 16, 2002, and resigned as a director in October 2003. At January 1, 2005, accrued
interest receivable under this note totaled $26,243. The Company has accounted for the $78,750 due
from Mr. Conroy as a reduction in common stock equity in prior years. In May 2004, the Company
accounted for the $12,500 amount due to Mr. Conroy and additional $637 of interest adjustment as an
increase in common stock equity. Unsecured Payable On November 5, 2003, R. Patrick Hanlin, Chairman of the Companys board of directors, advanced
$16,000 to the Company in the form of a payment directly to one of the Companys creditors. The
advance was unsecured and did not carry an interest rate or have any stated due date. On April 2,
2004 this debt was converted to approximately 38 shares of the Companys Series 3 preferred stock
(Note 10). These shares of Series 3 preferred stock are convertible into 38,095 shares of the
Companys common stock at the option of the shareholder. 
 Item 13. Exhibits (a) Exhibits included herein: Exhibit No. *3.1 Articles of Incorporation, as amended *3.2 Bylaws, as amended *4.1 See Article III of Exhibit 3.1 and Articles I and VI of Exhibit 3.2 (1) *10.1 1986 Stock Option Plan, as amended *10.3 Form of Incentive Stock Option Agreement *10.7 Form of Representative Warrants 78




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##### Table of Contents



**10.11 Restated 1995 Stock Incentive Plan dated May 11, 1998. ***10.14 Form of $400,000 Subordinated Promissory Note issued to JMW Capital Partners, Inc.,
dated June 30, 2000. ***10.15 Form of Stock Purchase Warrants to Purchase Shares of Common Stock of Microfield
Group, Inc. issued to JMW Capital Partners, Inc., dated June 30, 2000. ***10.16 Form of Registration Rights Agreement between the Company and JMW Capital Partners,
Inc. (now known as Aequitas Capital Management), dated June 30, 2000. ***10.17 Form of Note and Warrant Purchase Agreement between the Company and JMW Capital
Partners, Inc. (now known as Aequitas Capital Management), dated June 30, 2000. ****10.18 Form of Asset Purchase Agreement between Greensteel, Inc., and Microfield Group,
Inc., dated September 7, 2000, incorporated by reference to the Company s Proxy Statement dated
October 3, 2000. *****10.19 Form of Agreement and Plan of Merger between Microfield Group, Inc., and
Innovative Safety Technologies, LLC. dated September 16, 2002 incorporated by reference to the
Registrants Form 8-K dated September 17, 2002. ******10.20 Form of Agreement and Plan of Merger between Microfield Group, Inc., Velagio,
Inc., and Christenson Technology Services, Inc., dated September 16, 2003 incorporated by reference
to the Registrants Form 8-K dated October 1, 2003. ##10.21 Form of Loan Agreement and Promissory Note dated August 24, 2004, incorporated by
reference to the Registrants Form 8-K dated August 30, 2004. 10.22
Microfield Group, Inc. 2004 Stock Incentive Plan, attached. ##10.23
Amended Articles of Incorporation
expanding the authorized common shares,
incorporated by reference to the Registrants Form 8-K dated September 14, 2004. 10.24
Settlement Agreement between the Company, Kurt A. Underwood and
various other parties attached. 23.1
Consent of PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm, filed
herewith. 23.2 Consent of Russell Bedford Stefanou Mirchandani LLP , Registered Independent
Accountants, filed herewith 31.1 Certification of President and Chief Executive Officer pursuant to Section 302, of the
Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302, of the
Sarbanes-Oxley Act of 2002. 32.1 Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    ** Incorporated by reference to Exhibit 10.11 to Registrants Quarterly Report on Form
10-QSB for the three month period ended July 3, 1999. *** Incorporated by reference to Exhibits 10.14, 10.15, 10.16, 10.17, as applicable, to
Registrants Quarterly Report on Form 10-QSB for the three month period ended July 1, 2000. **** Incorporated by reference to Exhibit 10.18 to Registrants Quarterly Report on Form
10-QSB for the three month period ended September 30, 2000. ***** Incorporated by reference to Exhibit 10.19 to Registrants Quarterly Report on Form 10-QSB for
the three month period ended September 28, 2002. ****** Incorporated by reference to Exhibit 10.20 to Registrants Quarterly Report on Form 10-QSB
for the three month period ended September 27, 2003. ## Incorporated by reference to Exhibits 10.21 and 10.22, as applicable, to Registrants Quarterly
Report on Form 10-QSB for the three month period ended October 2, 2004. 79




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##### Table of Contents



(1) This exhibit constitutes a management contract, or compensatory plan or arrangement. 
 Item 14. Principal Accountant Fees and Services The following is a summary of the fees billed to Microfield Group, Inc. by PricewaterhouseCoopers
LLP for professional services rendered in connection with the fiscal years ended, January 1, 2005
and January 3, 2004. January 1,
    
    
    January 3,2005
    
    
    2004Fee TypeAudit fees
    
    $
    222,095
    
    
    $
    196,129Audit related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    5,400All other fees
    
    
    
    
    
    
    Total fees
    
    $
    222,095
    
    
    $
    201,529
 Audit fees consist of billings for professional services rendered for the audit of the Companys
consolidated financial statements and review of the interim consolidated financial statements
included in quarterly reports that are normally provided by independent accounting firms in
connection with regulatory filings, including audit services performed related to mergers and
acquisitions. Audit-related fees consists of fees billed for assurance and related services that are reasonably
related to the performance of the audit or review of the Companys consolidated financial
statements, which are not reported under Audit Fees. Tax fees consist of billings for professional services for tax compliance and tax planning
regarding federal and state tax filings. All other fees consist of fees for products and services other than the services reported above. Prior to the Companys engagement of its independent auditor, such engagement is approved by the
Companys audit committee. The services provided under this engagement may include audit services,
audit-related services, tax services and other services. Pre-approval is generally provided for up
to one year and any pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. Pursuant to the Companys Audit Committee Charter,
the independent auditors and management are required to report to the Companys audit committee at
least quarterly regarding the extent of services provided by the independent auditors in accordance
with this pre-approval, and the fees for the services performed to date. The audit committee may
also pre-approve particular services on a case-by-case basis. All audit-related fees, tax fees and
other fees incurred by the Company for the year ended January 1, 2005, were approved by the
Companys audit committee. 80




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 19, 2005 MICROFIELD GROUP, INC.By:
    
    /s/ A. Mark WalterA. Mark WalterPresident
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated: Signature
    
    Title/s/ A. Mark Walter
    
    President and DirectorDate:  May 19, 2005A. Mark Walter/s/ Steven M. Wright
    
    DirectorDate: May 19, 2005Steven M. Wright/s/ Michael W. Stansell
    
    DirectorDate: May 19, 2005Michael W. Stansell/s/ Robert J. Jesenik
    
    DirectorDate: May 19, 2005Robert J. Jesenik/s/ William C. McCormick
    
    DirectorDate: May 19, 2005William C. McCormick
 81