| GOLDFIELD CORP Item 1A Risk Factors |
| Our business involves various risks associated with the operations of our Company |
| To provide a framework to understand our operating environment, we are providing a brief explanation of the significant risks associated with our business |
| Although we have tried to identify and discuss key risk factors, others could emerge in the future |
| Each of the following risks could affect our performance |
| Risks related to our electrical construction operations We derive a significant portion of our revenue from a small group of customers |
| The loss of one or more of these customers could negatively impact our revenues |
| A significant portion of our electrical construction revenue is derived from a small group of customers, with two or three different customers accounting for a substantial portion of our revenue in any given year |
| For example, in the year ended December 31, 2005, two of our customers accounted for greater than 50prca of our consolidated revenue, as discussed in note 15 to our consolidated financial statements herein |
| The loss of one or more of these customers would, if not replaced by other business, result in a decrease in revenues, margins and profits which could be material |
| 6 ______________________________________________________________________ The electrical construction industry is highly competitive, and if we are unable to compete effectively, our financial performance could be harmed |
| The electrical construction business is highly competitive and fragmented |
| We compete with other independent contractors, including larger regional and national firms that may have financial, operational, technical and marketing resources that exceed our own |
| We also face competition from existing and prospective customers establishing or augmenting in-house service organizations that employ personnel who perform some of the same types of service as those provided by us |
| There are relatively few barriers to entry into the markets in which we operate and, as a result, any organization that has adequate financial resources and access to technical expertise and skilled personnel may become one of our competitors |
| If we fail to compete favorably with new or existing competitors, our results of operations and financial condition could be adversely affected |
| Our business is affected by the spending patterns of our customers and adverse weather conditions, exposing us to variable quarterly results |
| Most of our work is performed outdoors and as a result, our results of operations can be adversely impacted by extended periods of inclement weather, including inclement weather due to tropical storms and hurricanes, which are most likely to occur in the third and fourth quarters of the year |
| Any weather related delays in the completion of, or which increase the cost of, our projects could adversely affect our revenues and results of operations in any one or more of our reporting periods |
| An adverse change in economic conditions in the electric utility industry could reduce the demand for our services |
| Because a substantial portion of our electrical construction work is performed for customers in the electric utility industry, an adverse change in economic conditions in the electric utility industry could impair the financial condition of many of our customers, which could cause them to reduce their capital expenditures and demand for our services, which could have an adverse effect on our results of operations and financial condition |
| Skilled labor shortages and increased labor costs could negatively affect our ability to compete for new projects |
| In our electrical construction business, we have from time-to-time experienced shortages of certain types of qualified personnel |
| For example, currently there is a shortage of linemen capable of working on and supervising the construction of high-voltage lines |
| Linemen are frequently recruited across geographic regions to satisfy demand, including for storm restoration work, which can exacerbate this shortage |
| The commencement of new, large-scale infrastructure projects or increased demand for infrastructure improvements as well as the aging utility workforce further depletes the pool of skilled labor available to us, even if we are not awarded such projects |
| As a result of these factors, the supply of experienced linemen and supervisors may not be sufficient to meet our expected demand and we may not be able to allocate or hire sufficient project managers for new electrical construction projects |
| If we were unable to retain sufficient qualified personnel at a reasonable cost, or at all, we would be unable to staff new and existing projects, which would reduce our revenues |
| Our use of percentage-of-completion accounting could result in a reduction or elimination of previously reported profits |
| As discussed in “Critical Accounting Policies” and in the notes to our consolidated financial statements included herein, a significant portion of our revenues in our electrical construction operations is recognized on a percentage-of-completion method of accounting, using the cost-to-cost method, which is standard for fixed price contracts |
| The percentage-of-completion accounting practice we use results in our recognizing contract revenues and earnings ratably over the contract term in proportion to our incurrence of contract costs |
| The earnings or losses recognized on individual contracts are based on estimates of contract revenues, costs and profitability |
| The cost of labor and materials, however, may vary from the costs we originally estimated |
| These variations, along with other risks inherent in performing fixed price contracts, may cause actual revenue and gross profits for a project to differ from those we originally estimated and could result in reduced profitability or losses on projects |
| Depending upon the size of a particular project, variations from the estimated contract costs could have a significant impact on our operating results for any fiscal quarter or year |
| 7 ______________________________________________________________________ Amounts included in our backlog may not result in revenue or translate into profits |
| Our backlog for our electrical construction operations at January 31, 2006 was dlra24cmam041cmam000, which represents the amount of revenue that we expect to realize from work to be performed on uncompleted contracts, including new contractual agreements on which work has not begun |
| This revenue is not guaranteed, however, as many of our customers may cancel their contracts with us on short notice, typically 30-90 days, even if we are not in default under the contract |
| In addition, dlra1cmam500cmam000 of these uncompleted contracts are service agreements that contain multiple year terms which fall into the category of unit price contracts |
| Typically, these service agreements do not require our customers to purchase a minimum amount of services and are cancelable on short notice |
| For these service agreements, we project the backlog amount based on our historical work from each customer |
| To the extent that our customers cancel their contracts with us or reduce their requirements during a particular period for any reason, we will not realize any revenue or profit from the associated backlog |
| Furthermore, contracts included in our backlog may not be profitable |
| We may experience variances in the realization of our backlog because of project delays or cancellations resulting from weather conditions, external market factors and economic factors beyond our control |
| As a result, even if we realize all of the revenue from the projects in our backlog, if our expenses associated with these projects are higher than expected, our results of operations and financial condition would be adversely affected |
| Our projects are subject to numerous hazards |
| If we do not maintain an adequate safety record, we may be ineligible to bid on certain projects, could be terminated from existing projects and could have difficulty procuring adequate insurance |
| Hazards experienced as a result of our electric construction operations include electrocutions, fires, mechanical failure and transportation accidents |
| These hazards can cause and have caused personal injury and loss of life, severe damage to or destruction of property and equipment and other consequential damages, including blackouts, and may result in suspension of our operations on a project, large damage claims, and, in extreme cases, criminal liability |
| At any given time, we are subject to workers’ compensation claims and claims by employees, customers and third parties for property damage and personal injuries resulting from such hazards or other workplace accidents |
| Further, regulatory changes implemented by the Occupational Safety and Health Administration could impose additional costs on us |
| Notwithstanding our investment of substantial resources in occupational health and safety programs, our industry involves a high degree of operational risk and we may be unable to avoid accidents resulting from the hazards described above and the associated liability exposure, which may be significant |
| Furthermore, if serious accidents or fatalities were to occur or if our safety record were to deteriorate, we could become ineligible to bid on certain projects and could be terminated from existing projects, our reputation and our prospects for future projects could be negatively affected, and we could be required to expend additional resources on health and safety programs |
| In addition, if our safety record were to significantly deteriorate, it would become more difficult and expensive for us to procure adequate insurance, if we are able to procure insurance at all |
| An inability to obtain bonding would have a negative impact on our operations and results |
| In certain circumstances, the Company is required to provide performance bonds to secure its contractual commitments |
| Although to date we have not experienced difficulty in obtaining bonding, if we were unable to obtain surety bonds in the future, or were required to post collateral in order to obtain surety bonds, our ability to obtain new contracts would be adversely affected, which could have a material adverse effect on our results of operations and financial condition |
| Risks related to our real estate development operations We engage in real estate activities which are speculative and involve a high degree of risk The real estate industry is highly cyclical by nature and future market conditions are uncertain |
| Factors which adversely affect the real estate and homebuilding industries, many of which are beyond our control, include: • the availability and cost of financing; • unfavorable interest rates and increases in inflation; • overbuilding or decreases in demand; • changes in national, regional and local economic conditions; • cost overruns, inclement weather, and labor and material shortages; • the impact of present or future environmental legislation, zoning laws and other regulations; • availability, delays and costs associated with obtaining permits, approvals or licenses necessary to develop property; and • increases in real estate taxes and other local government fees |
| 8 ______________________________________________________________________ An adverse change in economic conditions could reduce the demand for condominiums and, as a result, could reduce our earnings |
| Changes in national and regional economic conditions, as well as local economic conditions where we conduct our real estate development operations and where prospective purchasers of our condominiums live, can have a negative impact on our business |
| Adverse changes in employment levels, job growth, consumer confidence, interest rates and population growth may reduce demand and depress prices for our condominiums |
| The multifamily housing industry is highly competitive and, if others are more successful, our business could decline |
| We operate in a very competitive environment, which is characterized by competition from a number of other real estate developers |
| We compete with large national and regional development companies and with smaller local firms for land, financing, raw materials and skilled management and labor resources |
| We also compete with the resale, or “previously owned,” condominium market |
| Increased competition could cause us to increase our selling incentives and/or reduce our prices |
| Increased competition could also result in an oversupply of condominiums or other housing alternatives available for sale, which could depress the prices at which we can sell our condominiums, and increase the length of time it takes us to sell them |
| If a failure to compete effectively resulted in our selling fewer condominiums at lower prices, our results of operations and financial condition would be adversely affected |
| If land is not available at reasonable prices, our sales and earnings could decrease |
| Our real estate development operations depend on our ability to obtain land at reasonable prices for the development of our residential condominiums |
| Changes in the general availability of land, competition for available land, availability of financing to acquire land, zoning regulations that limit housing density and other market conditions may hurt our ability to obtain land for new residential developments |
| If the supply of land appropriate for development of our residential condominiums becomes more limited because of these factors, or for any other reason, the cost of land could increase, which could reduce the profitability of our real estate development operations if we are unable to recover these costs in the sales prices of our condominiums, and the number of condominiums that we build and sell could be reduced, which would reduce our revenues |
| If the market value of our land and developments drops significantly, our profits could decrease |
| The market value of our land and condominium inventories of our real estate development operations depends on market conditions |
| We acquire land for replacement of land inventory and expansion within our current market |
| If housing demand decreases below what we anticipated when we acquired our inventory, we may not be able to make profits similar to what we have made in the past, may experience less than anticipated profits and may not be able to recover our costs when we sell our property or finished product |
| In the face of adverse market conditions, we may have substantial inventory carrying costs or may have to sell land or completed units at a loss, which would have an adverse affect on our results of operations and financial condition |
| Also, if there is a decrease in demand for condominiums such that the market value of a condominium is less than purchase price reduced by the deposit made by a buyer, the buyer may elect to forfeit their deposit to the Company and have no further obligation to purchase the condominium resulting in a loss of revenue, operating income and a possible write down of condominiums in inventory |
| Government regulations and legal challenges may delay the start or completion of our developments, increase our expenses or limit our building activities, which could have a negative impact on our operations |
| We must obtain the approval of numerous governmental authorities in connection with our real estate development operations, and these governmental authorities often have broad discretion in exercising their approval authority |
| We incur substantial costs related to compliance with legal and regulatory requirements |
| Any increase in legal and regulatory requirements may cause us to incur substantial additional costs, as discussed below |
| Various local, state and federal statutes, ordinances, rules and regulations concerning building, zoning, sales and similar matters apply to and/or affect the residential multifamily industry |
| Municipalities may restrict or place moratoriums on the availability of utilities, such as water and sewer taps |
| In some areas, municipalities may enact growth control initiatives, which will restrict the number of building permits available in a given year |
| This governmental regulation affects construction activities as well as sales activities, mortgage lending activities and other dealings with consumers |
| The industry also has experienced an increase in state and local legislation and regulations which limit the availability or use of land |
| We may be required to apply for additional approvals or modify our existing approvals because of changes in local circumstances or applicable law |
| Further, we may experience delays and increased expenses as a result of legal challenges to our proposed developments, whether brought by governmental authorities or private parties |
| 9 ______________________________________________________________________ Increases in taxes or government fees could increase our costs, and adverse changes in tax laws could reduce customer demand for our condominiums |
| Increases in real estate taxes and other local government fees, such as fees imposed on developers to fund schools, open space, road improvements, or to provide low and moderate income housing, could increase our costs and have an adverse effect on our real estate development operations if we are unable to recover these costs in the sales prices of our condominiums |
| In addition, increases in local real estate taxes could adversely affect our potential customers who may consider those costs in determining whether to make a new home purchase and decide, as a result, not to purchase one of our condominiums |
| In addition, any changes in the income tax laws that would reduce or eliminate tax deductions or incentives to homeowners could make housing less affordable or otherwise reduce the demand for housing, which in turn could reduce our sales and adversely affect our revenues |
| Our business is concentrated in Florida, which increases our exposure to local adverse events |
| In our real estate development operations, we currently develop and sell condominiums only on the east coast of the State of Florida |
| As a consequence, our exposure to local adverse events, such as natural disasters or changes in economic conditions, is increased |
| In particular, the State of Florida is affected by tropical storms and hurricanes, which can damage or destroy buildings, including condominiums |
| The occurrence of such a storm or other natural disaster could result in delays in construction and shortages and increased costs of labor and building materials |
| Any such delays or additional costs could adversely affect the profitability of our real estate development operations |
| Additionally, a number of insurance carriers have opted either not to write insurance in Florida at all or to only renew existing policies and not to write new policies |
| These practices have resulted in substantial increases in the cost of insurance, a widespread shortage of available private insurance for property owners in the State of Florida and the creation of a state joint underwriting association |
| The state provided insurance coverages generally afford less protection at greater costs than typically provided by private insurance carriers |
| The inability of property owners to obtain cost effective insurance could have an adverse effect on demand for property in our markets, which could reduce our revenues |
| Furthermore, there are periods of time during which insurance companies will not write policies because of the presence of a named storm that may pass over the areas in which we sell condominiums |
| During these periods, home closings in areas that could be affected by such a storm will be delayed until the risk of the storm has passed and the required insurance can be obtained |
| Adverse weather conditions and conditions in nature beyond our control could significantly impact our quarterly revenues and profitability |
| In our real estate development operations, adverse weather conditions and natural disasters, such as, but not limited to, hurricanes, tornadoes, floods and fires, can have serious effects on our ability to perform work |
| We also may be affected by unforeseen engineering, environmental or geological problems |
| Any of these adverse events or circumstances could cause delays in the completion of, or increase the cost of, our projects and, as a result, could adversely affect our sales, earnings and profitability |
| If we experience shortages of labor and supplies or other circumstances beyond our control, there could be delays or increased costs in developing our condominiums, which could adversely affect our operating results |
| Our ability to develop residential condominiums may be affected by circumstances beyond our control, including: work stoppages, labor disputes and shortages of qualified trades people, such as carpenters, roofers, electricians and plumbers; lack of availability of adequate utility infrastructure and services; our need to rely on local subcontractors who may not be adequately capitalized or insured; and shortages, or delays in availability, or fluctuations in prices of, building materials |
| Any of these circumstances could give rise to delays in the start or completion of, or increase the cost of, developing one or more of our condominium projects |
| If we are not able to recover these increased costs by raising the prices of our condominiums we might decide to postpone or cancel the development of condominium projects on which we have not yet begun construction |
| Additionally, we may be limited in the amount we can raise sales prices by our customers’ unwillingness to pay higher prices |
| 10 ______________________________________________________________________ Product liability litigation and warranty claims that arise in the ordinary course of business may be costly, which could adversely affect our business |
| As a real estate developer, we are subject to construction defect and home warranty claims arising in the ordinary course of business |
| These claims, which can include bodily injury claims and mold-related property damage claims among others, are common in the homebuilding industry and can be costly |
| In addition, the costs of insuring against construction defect and product liability claims are high, and the amount of coverage offered by insurance companies is currently limited |
| There can be no assurance that this coverage will not be further restricted and become more costly |
| If we are not able to obtain adequate insurance against these claims, we may experience losses that could have an adverse affect on our results of operations and financial condition, which could be material |
| If we are not able to obtain suitable financing, our business may decline |
| Our real estate development operations depend substantially on our ability to obtain financing for the development of our projects |
| If we are not able to obtain suitable financing, our costs would increase and our revenues would decrease, or we could be precluded from continuing our operations at current levels |
| Increases in interest rates can make it more difficult and expensive for us to obtain the funds we need to operate our business, which would have an adverse affect on our profitability |
| If our potential customers are not able to obtain suitable financing, our business may decline |
| Our real estate development operations also depend on the ability of our potential customers to obtain mortgages for the purchase of our condominiums |
| Increases in the cost of home mortgage financing could prevent our potential customers from purchasing our condominiums |
| In addition, where our potential customers must sell their existing homes in order to buy a condominium from us, increases in mortgage costs could prevent the buyers of our customers’ existing homes from obtaining the mortgages they need to complete the purchase, which could result in our potential customers’ inability to buy a condominium from us |
| If our potential customers or the buyers of our customers’ current homes are not able to obtain suitable financing, our sales and revenues could decline |
| We depend upon the availability and skill of general contractors and subcontractors |
| Substantially all of our construction work is done by subcontractors working for a general contractor we select for a particular project |
| Accordingly, the timing and quality of our construction depends on the availability and skill of those subcontractors |
| We do not have long-term contractual commitments with any particular general contractor, subcontractors or suppliers |
| Although we believe that our relationships with our general contractors, subcontractors and suppliers are good, we cannot assure you that skilled subcontractors will continue to be available to us at reasonable rates |
| The inability to contract with skilled subcontractors or general contractors at reasonable costs on a timely basis could limit our ability to build and deliver condominiums and could have a material adverse effect on the operating results of our real estate development operations |
| Additionally, if there is an impairment, bankruptcy or default by the general contractor or subcontractors our production, revenue and operating income may be adversely affected |
| We often collaborate with numerous professionals such as architects, engineers and general contractors in the development of our real estate projects |
| In the course of our business, we rely on the work of these professionals to help design and build the condominiums that we develop, and errors in their work can create significant increases in cost and delays in construction |
| Our revenues and operating results from real estate development operations are subject to fluctuations |
| Because we typically have only one or two projects under development at any time, factors such as the timing of the start of construction of new projects, the timing of receipt of regulatory approvals for development and construction and others can cause our revenues and operating results to vary from period to period and from year to year |
| Accordingly, the historical financial performance of our real estate development operations is not necessarily a meaningful indicator of future results for any particular period, and quarter-to-quarter comparisons should not be relied upon as an indicator of future performance |
| 11 ______________________________________________________________________ We may be subject to environmental liabilities that could adversely affect our results of operations or the value of our properties |
| The development and sale of real property creates a potential for environmental liability on our part as owner and developer, for our own acts as well as the acts of prior owners or owners or past owners of adjacent parcels |
| If hazardous substances are discovered on or emanating from any of our properties, we may be held liable for costs and liabilities relating to those hazardous substances |
| Should a substantial environmental hazard be found on any of our properties, our results of operations and the value of the contaminated property could be adversely affected |
| Risks related to our business We could be adversely affected by the loss of key management personnel |
| Our future success depends, to a significant degree, on the efforts of our senior management, including those of our subsidiaries |
| We believe that key members of our senior management possess valuable industry knowledge, relationships and experience that are important to the successful operation of our business |
| The loss of such members of our senior management could adversely affect our financial condition and results of operations |
| We could be adversely affected by liabilities associated with our former mining business |
| The Company completed the sale of the capital stock of its mining subsidiaries effective November 30, 2002 |
| However, we could still be liable for previous activities at sites we once owned |
| We have been identified as a potentially responsible party (“PRP”) for investigation and removal |