1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 0-17124 GRANITE CONSTRUCTION INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 77-0239383 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 585 WEST BEACH STREET, WATSONVILLE, CALIFORNIA 95076 (Address of principal executive offices) Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 724-1011 Securities registered pursuant to Section 12(b) of the Act: <TABLE> <CAPTION> Title of each class Name of each exchange on which registered <S> <C> Common Stock, $0.01 par value New York Stock Exchange </TABLE> Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant was approximately $343,429,000 as of March 20, 1998 based upon the average of the high and low sales prices per share of the registrant's Common Stock as reported on the New York Stock Exchange on such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliates status is not necessarily a conclusive determination for other purposes. At March 20, 1998, 18,255,266 shares of Common Stock, par value $0.01 of the registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Stockholders of the Company to be held May 18, 1998, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1997. This report, including all exhibits and attachments, contains 462 pages. The exhibit index is on pages 24-25. 1
2 TABLE OF CONTENTS <TABLE> <CAPTION> Page No. ---- <S> <C> PART I.......................................................................................................... 3 Item 1. BUSINESS........................................................................................ 3 Item 2. PROPERTIES ..................................................................................... 9 Item 3. LEGAL PROCEEDINGS .............................................................................. 9 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. 9 PART II......................................................................................................... 11 Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.............................................................................. 11 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA............................................................ 11 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................................ 13 Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................ 18 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES....................................................................... 19 PART III........................................................................................................ 20 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................. 20 Item 11. EXECUTIVE COMPENSATION.......................................................................... 20 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................................................... 20 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................. 20 PART IV......................................................................................................... 21 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................. 21 </TABLE> 2
3 PART I ITEM 1. BUSINESS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the changes in the composition of applicable federal and state legislation appropriation committees; federal and state appropriation changes for infrastructure spending; the general state of the economy; competition and pricing pressures; state referendums and initiatives; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. INTRODUCTION Granite Construction Incorporated, the "Company", is one of the largest heavy civil construction contractors and is the largest transportation contractor in the United States as ranked by Engineering News-Record magazine, May 1997. Granite operates throughout the United States, focusing primarily in the west, southwest and southeast and serves both public and private sector clients. Within the public sector, the Company concentrates on infrastructure projects, including the construction of roads, highways, bridges, dams, tunnels, canals, mass transit facilities and airports. Within the private sector, the Company performs site preparation services for buildings, plants, subdivisions and other facilities. Granite's participation in both the public and private sectors and its diverse mix of project types and sizes have contributed to the Company's revenue growth and profitability in various economic environments. Granite also owns and leases substantial aggregate reserves and owns 108 construction materials processing plants and one of the largest heavy construction contractor equipment fleets in the United States. The Company believes that the ownership of these assets enables it to compete more effectively by ensuring availability of these resources at a favorable cost. Granite Construction Incorporated was incorporated in Delaware in January 1990 as the holding company for Granite Construction Company, which was incorporated in California in 1922. Granite operates primarily through its wholly owned subsidiary, Granite Construction Company and has ten less significant wholly-owned subsidiaries. RECENT DEVELOPMENT During 1997, the Company completed the purchase of a 30% minority interest in T.I.C. Holdings Inc. ("TIC") as part of its diversification strategy (See Business Strategy). The transaction included a 10% ownership interest acquired in 1996. TIC, founded in 1974, is one of the leading merit shop, general heavy industrial contractors in the U.S., and is ranked in the Top 20 in both the industrial and power marketplaces by Engineering News-Record Magazine. TIC performs all major disciplines including civil, structural steel erection, heavy mechanical, process piping and electrical/instrumentation. TIC has offices in Colorado, Georgia, California, Texas, Louisiana, Kansas, Nevada, Oregon and Wyoming. TIC operates both nationally and internationally. TIC had annual revenues of $420.5 million in 1997. By market sector, 57% of its 1997 revenue came from industrial/petrochemical projects, 24% from water/sewer/wastewater projects, 12% from power-related projects, and the remaining 7% derived from transportation-related and other work. OPERATING STRUCTURE The principal operating company, Granite Construction Company, is organized into two operating divisions. The Branch Division is comprised of branch offices which serve local markets, while the Heavy Construction Division pursues major infrastructure projects throughout the nation. The Heavy Construction Division ("HCD") generally has large heavy civil projects with contract amounts in excess of $15 million and contract durations greater than two years, while the Branch Division projects are typically smaller in size and shorter in duration. The two divisions complement each other in a variety of ways. The Heavy Construction Division is a major user of large construction equipment and employs sophisticated techniques on complex projects. The branches draw on these 3
4 resources which are generally not available to smaller, local competitors. Conversely, the Branch Division has greater knowledge of local markets and provides the Heavy Construction Division with valuable information regarding larger projects in the branches' areas. The two divisions sometimes jointly perform projects when a project in a particular region exceeds the local branch's capabilities. As decentralized profit centers, the branch offices and the Heavy Construction Division independently estimate, bid and complete contracts. Both divisions are supported by centralized functions, including finance, accounting, tax, human resources, labor relations, safety, legal, insurance, surety and management information services. The Company believes that centralized support for decentralized profit centers results in a more market responsive business with effective controls and reduced overhead. In addition to cost and profitability estimates, Granite considers the availability of estimating and project building personnel as key factors when determining whether to bid on a project. Other factors considered include the client, the geographic location, Granite's competitive advantages and disadvantages relative to likely competitors for the project, current and projected workload, and the likelihood of follow-up work. Both operating divisions use a proprietary computer-based project estimating system which reflects Granite's significant accumulated experience. Granite believes that an exhaustive, detailed approach to a project's estimate and bid is important in order to best identify the project's risks and opportunities. The Company's estimates are comprehensive in nature, sometimes totaling hundreds of pages of analysis. Each project is broken into phases and line items, for which separate labor, equipment and material estimates are made. Once a project begins, the estimate provides Granite with a budget against which actual project cost is regularly measured, enabling Granite to manage its projects more effectively. The Branch Division. In 1997, Branch Division contract revenue and sales of aggregate products were $831.9 million (81% of Company revenue) as compared with $715.6 million (77% of Company revenue) in 1996. The Branch Division has both public and private sector clients. Public sector activities include both new construction and improvement of streets, roads, highways and bridges. For example, the branches widen and re-pave roads and modify and replace bridges. Major private sector contracts include site preparation for housing, including excavation, grading and street paving, and installation of curbs, gutters, sidewalks and underground utilities. The Company currently has 11 branch offices with 13 satellite operations. The Company's branch offices in California are located in Bakersfield, Hanford (Central Valley), Monterey Bay Area, Palm Springs (Southern California Region), Sacramento, San Jose, Santa Barbara and Stockton. The Company's branch offices outside of California are located in Arizona, Nevada and Utah. Each branch effectively operates as a local or regional construction company and its management is encouraged to participate actively in the local community. While individual branch revenues vary from year to year, in 1997 these revenues ranged from $33 million to $158 million. As part of the Company's strategy, many of Granite's branches mine aggregates and operate plants which process aggregates into construction materials for internal use and for sale to others. These activities provide both a source of profits and a competitive advantage to the Company's construction business. More than half of the aggregate products are used in the Company's construction projects. The remainder is sold to unaffiliated parties and accounted for $127.1 million of revenue in 1997, representing 12.4% of the Company's total 1997 revenue. The Company has significant aggregate reserves which it has acquired by ownership in fee or through long-term leases. It is the Company's objective to continue to own or lease adequate aggregate reserves. Heavy Construction Division. In 1997, revenue from HCD was $196.3 million (19% of Company revenue) as compared with $213.2 million (23% of Company revenue) in 1996. HCD projects are usually larger and more complex than those performed by the Branch Division. The Division has completed projects throughout the nation, including mass transit projects in the metropolitan areas of Atlanta, Baltimore, Los Angeles, San Francisco and Washington, D.C., and 27 major dam and tunnel projects in eight states. HCD builds infrastructure projects, including major highways, large dams, mass transit facilities, bridges, pipelines, canals, tunnels, waterway locks and dams and airport runways, and has engaged in contract mine stripping and reclamation and large site preparation. It also performs activities such as demolition, clearing, excavation, de-watering, drainage, embankment fill, structural concrete, concrete and asphalt paving, and tunneling. The Division markets, estimates, bids and provides management overview of its projects from its Watsonville headquarters and satellite estimating offices in Texas, Georgia, Florida and Maryland. Project staffs located at job sites have the managerial, technical, and clerical capacity to meet on-site project management requirements. HCD 4
5 has the ability, if appropriate, to process locally sourced aggregates into construction materials using its own portable crushing, concrete and asphalt processing plants. HCD participates in joint ventures with other large construction companies from time to time. Joint ventures are used for large, technically complex projects where it is desirable to share risk and resources. Joint ventures provide independently prepared estimates, and shared financing, equipment and expertise. Privatization as a new market sector for the Division emerged in 1995 as the Company pioneered the use of public/private partnerships to fund the construction of public infrastructure projects which are not supported by traditional tax-based revenue sources. Two such projects have been successfully completed in joint venture - in 1995, the SR91 congestion relieving toll lanes project and, in 1996, the San Joaquin Hills Transportation Corridor. As an investor in the SR91 project, the Company participates in the partnership that will operate the toll road under a 35 year franchise agreement with the State of California. Except for these initial significant successes, the pursuit by HCD of additional contracts in this market has been frustrated by a public sector which is not yet ready to mix public and private sources of financing to produce needed transportation facilities. Granite has turned its attention to private sector projects where there appears to be potential to develop, design and build. BUSINESS STRATEGY Granite's fundamental objective is to increase long-term shareholder value by focusing on consistent profitability from carefully managed revenue growth. Shareholder value is measured by the appreciation of the value of Granite stock over a period of years, and to a minor degree, a return from dividends. Further, it is a specific measure of the Company's financial success to achieve a Return on Net Assets ("RONA") greater than the cost of capital, creating "Granite Value Added". To accomplish these objectives, Granite employs the following strategies: Heavy/Highway Construction Focus - Granite concentrates its core competencies on this segment of the construction industry: the building of roads, highways, bridges, dams and tunnels, mass transit facilities and site preparation. This focus emphasizes the Company's specialized strengths which include earth moving, grading, paving and concrete structures. Vertical Integration of Aggregate Materials into Construction - Granite owns aggregate reserves and processing plants and by ensuring availability of these resources at favorable cost believes it has significant bidding advantages in many of its markets. Selective Bidding - Once Granite selects a job that meets our bidding criteria, the project is estimated using a highly detailed method with a proprietary estimating system which applies both contingency cost and margin to achieve the appropriate profit margin for the risk assumed. Diversification - To mitigate the risks inherent in construction and general economic factors, Granite pursues projects (i) in both the public and private sectors; (ii) for a wide range of customers within each sector (from the federal government to small municipalities and from large corporations to individual homeowners); (iii) in diverse geographic markets; (iv) of various sizes, durations and complexity; and (v) in the heavy industrial market segment. Decentralized Profit Centers - Granite addresses each selected market with a highly customer responsive organization through its decentralized structure. Each of Granite's branches and the Heavy Construction Division are individual profit centers. Management Incentives - The Company compensates its profit center managers with lower-than-market fixed salaries coupled with a substantial variable cash and restricted stock incentive element based on the annual profit performance of their respective profit centers. Ownership of Construction Equipment - By owning and carefully maintaining a large fleet of heavy construction equipment Granite effectively operates an internal leasing company, competing more effectively by ensuring availability of these resources at favorable cost. Controlled Expansion - The Company intends to continue its geographic expansion by selectively adding branches in the western United States, by pursuing major infrastructure projects throughout the nation and expanding into other construction market segments through acquisitions. 5
6 Accident Prevention - Granite believes that the prevention of accidents is both a moral obligation and good business. By identifying and preventing potential accidents the Company continues to significantly reduce the costs associated with accidents. Environmental Affairs - Granite believes it benefits all parties to maintain environmentally responsible operations. The Company is committed to effective air quality control measures and reclamation at its plant sites and to waste reduction and recycling of the environmentally sensitive products used in its operations. Quality and High Ethical Standards - Granite emphasizes the importance of performing high quality work and maintaining high ethical standards. CUSTOMERS The Company has customers in both the public and private sectors. The Branch Division's principal customers are state departments of transportation in California, Arizona, Nevada and Utah. In 1997, contracts with the California Department of Transportation represented 13.5% of the Company's revenue. Other Branch Division clients include county and city public works departments and developers and owners of industrial, commercial and residential sites. The principal clients of the Heavy Construction Division are in the public sector and currently include the U.S. Bureau of Reclamation, the State Departments of Highways and Public Transportation in Texas, Georgia, Utah, Florida and New Jersey, and the Metropolitan Water District of Southern California (See Note 2 of Notes to Consolidated Financial Statements). A breakdown of the Company's revenues for the last three years by market sector is as follows (in thousands): <TABLE> <CAPTION> 1997 1996 1995 --------------------------------------------------------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT --------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Contract revenues Federal agencies ............ $ 38,789 3.8% $ 32,825 3.5% $ 53,018 5.9% State agencies .............. 449,727 43.6 345,505 37.2 283,272 31.7 Local public agencies ....... 238,141 23.2 278,917 30.0 338,350 37.8 Private sector .............. 174,479 17.0 178,053 19.2 129,028 14.4 Construction materials sales ... 127,069 12.4 93,499 10.1 91,128 10.2 --------------------------------------------------------------------- Total .................... $1,028,205 100.0% $928,799 100.0% $894,796 100.0% ===================================================================== </TABLE> BACKLOG The Company's backlog (anticipated revenue from uncompleted portions of existing contracts) was $909.8 million at December 31, 1997, up from $597.9 million at December 31, 1996. The Company's backlog was $590.1 million at the end of 1995. Approximately $380 million of the December 31, 1997 backlog will remain at December 31, 1998. The Company includes a construction project in its backlog at such time as a contract is awarded or a firm letter of commitment is obtained and funding is in place. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations".) The Company believes its backlog figures are firm, subject only to the cancellation and modification provisions contained in various contracts. Substantially all of the contracts in the backlog may be canceled or modified at the election of the client. However, the Company has not been materially adversely affected by contract cancellations or modifications in the past. (See "Business-Contract Provisions and Subcontracting.") A substantial percentage of the Company's anticipated revenue in any year is not reflected in its backlog at the start of the year due to the short duration of smaller Branch Division projects that are initiated and completed during such year ("Turn Business"). The following is a breakdown of backlog as of December 31, 1997(in millions): 6
7 <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> By Geographic Area: California............................. $214.4 23.6% $247.5 41.4% $227.9 38.6% West (excluding California)............ 379.5 41.7 72.6 12.1 79.2 13.4 South/East............................. 315.9 34.7 277.8 46.5 283.0 48.0 -------------------------------------------------------------------------- $909.8 100.0% $597.9 100.0% $590.1 100.0% ========================================================================== By Market Sector: Federal agencies....................... $29.7 3.3% $ 28.7 4.8% $ 17.5 3.0% State agencies......................... 674.9 74.2 374.8 62.7 354.3 60.0 Local public agencies.................. 144.9 15.9 123.0 20.6 152.6 25.9 Private sector......................... 60.3 6.6 71.4 11.9 65.7 11.1 -------------------------------------------------------------------------- $909.8 100.0% $597.9 100.0% $590.1 100.0% ========================================================================== </TABLE> EQUIPMENT The Company purchases and maintains many pieces of equipment, including cranes, bulldozers, scrapers, graders, loaders, trucks, pavers, rollers, and construction materials processing plants. In 1997 and 1996, the Company spent approximately $45.4 million and $43.0 million, respectively, for construction equipment, plants and vehicles. The breakdown of the Company's construction equipment, plants and vehicles at December 31, 1997 is as follows: <TABLE> <S> <C> Heavy construction equipment..................................... 2,207 units Trucks, truck-tractors and trailers and vehicles................. 2,876 units Aggregate crushing plants........................................ 38 plants Asphalt concrete plants.......................................... 43 plants Portland cement concrete batch plants............................ 25 plants Thermal Soil Remediation Plants.................................. 2 plants </TABLE> The Company believes that ownership of equipment is preferable to leasing because ownership ensures the equipment is available as needed and normally results in lower equipment costs. The Company attempts to keep its equipment as fully utilized as possible by pooling equipment for use by both the Branch Division and the Heavy Construction Division. From time to time, the Company leases or rents equipment on a short-term basis. EMPLOYEES On December 31, 1997, Granite employed 1,054 salaried employees, who work in management, estimating and clerical capacities, and 2,446 hourly employees. The total number of hourly personnel employed by the Company is subject to the volume of construction in progress. During 1997, the number of hourly employees ranged from 1,803 to 4,052 and averaged approximately 3,309. The Company is a party to craft collective bargaining agreements in many areas in which it is working. The Company believes its employees are its most valuable resource and that its workforce possesses a strong feeling of dedication to and pride in the Company. Among salaried and non-union hourly employees, this dedication is reinforced by 30% equity ownership through the Employee Stock Ownership Plan ("ESOP") and performance-based incentive compensation arrangements. The Company's 367 managerial and supervisory personnel have an average of 11 years of service with Granite. COMPETITION Factors influencing the Company's competitiveness are price, reputation for quality, the availability of aggregate materials, machinery and equipment, financial strength, knowledge of local markets and conditions and estimating abilities. The Company believes that it competes favorably on the basis of the foregoing factors. Branch Division competitors range from small local construction companies to large regional construction companies. While the market areas of these competitors overlap with several of the markets served by the Company's branches, few, if any, compete in all of the Company's market areas. The Heavy Construction Division normally competes with large regional and national construction companies. Although the construction business is highly competitive, particularly for competitively bid projects in the public sector, the Company believes it is well positioned to compete effectively. 7
8 CONTRACT PROVISIONS AND SUBCONTRACTING The Company's revenue is substantially derived from contracts that are "fixed unit price" contracts under which the Company is committed to provide materials or services required by a project at fixed unit prices (for example, dollars per cubic yard of concrete or cubic yards of earth excavated). While the fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in the Company's unit cost over the unit price bid, whether due to inflation, inefficiency, faulty estimates or other factors, is borne by the Company unless otherwise provided in the contract. The Company's contracts are obtained primarily through competitive bidding in response to advertisements by federal, state and local government agencies and private parties. All federal government contracts and many of the Company's other contracts provide for termination of the contract for the convenience of the party contracting with the Company. In addition, many of the Company's contracts are subject to certain completion schedule requirements with liquidated damages in the event schedules are not met. The Company has not been materially adversely affected by these provisions in the past. The Company acts as prime contractor on most of the construction projects it undertakes. The Company accomplishes the majority of its projects with its own resources and subcontracts specialized activities such as electrical and mechanical work. As prime contractor, the Company is responsible for the performance of the entire contract, including subcontract work. Thus, the Company is subject to increased costs associated with the failure of one or more subcontractors to perform as anticipated. The Company generally requires its subcontractors to furnish bonds guaranteeing their performance. Affirmative action regulations require the Company to use its best efforts to employ certain types of subcontractors for a specified portion (historically ranging up to 25%) of contract work done for governmental agencies. Some of these subcontractors may not be able to obtain surety bonds. The Company has not incurred any material loss or liability on work performed by subcontractors to date. INSURANCE AND BONDING The Company maintains general and excess liability, construction equipment, and workers' compensation insurance, all in amounts consistent with industry practices. Management believes its insurance programs are adequate. In connection with its business, the Company generally is required to provide various types of surety bonds guaranteeing its performance under certain public and private sector contracts. The Company's ability to obtain surety bonds depends upon its capitalization, working capital, past performance, management expertise and other factors. Surety companies consider such factors in light of the amount of surety bonds then outstanding for the Company and their current underwriting standards, which may change from time to time. The Company has been bonded by the same surety for more than 60 years and has never been refused a bond. GOVERNMENT REGULATIONS The Company's operations are subject to compliance with regulatory requirements of federal, state and municipal agencies and authorities, including regulations concerning labor relations, affirmative action and the protection of the environment. While compliance with applicable regulatory requirements has not adversely affected the Company's operations in the past relative to its competitive position within its industry sector, there can be no assurance that these requirements will not change and that compliance will not adversely affect the Company's operations. In addition, the aggregate materials operations of the Company require operating permits granted by governmental agencies. The Company believes that tighter regulations for the protection of the environment and other factors will make it increasingly difficult to obtain new permits and renewal of existing permits may be subject to more restrictive conditions than currently exist. 8
9 ITEM 2. PROPERTIES The Company owns and leases real property for use in its construction and aggregate mining and processing activities. The Company owns approximately 355,600 square feet of office and shop space and leases, pursuant to leases expiring in the year 2000, an additional 55,600 square feet of office and shop space. The Company owns approximately 10,200 acres of land of which 1,300 acres are un-permitted reserves available for future use and leases approximately 4,500 additional acres of land at sites in California, Nevada, Arizona and Utah. A majority of the land owned or leased by the Company is intended to serve as aggregate reserves. There are no encumbrances against owned property. The Company's leases for aggregate reserves generally limit the Company's interest in the reserves to the right to mine the reserves. These leases range from month-to-month leases to leases with expiration dates ranging from January 1998 to January 2038. The Company considers its available and future aggregate reserves adequate to meet operating needs. The Company pursues a plan of acquiring new sources of aggregate reserves to replenish those depleted and to assure future growth. ITEM 3. LEGAL PROCEEDINGS The Company is a party to a number of legal proceedings. The Company believes that the nature and number of these proceedings are typical for a construction firm of its size and scope and that none of these proceedings is material to the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company has not submitted any matters to a vote of security holders during the fourth quarter of the year ended December 31, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers of the Company are as follows: <TABLE> <CAPTION> Age Position --- -------- <S> <C> <C> David H. Watts 59 President, Chief Executive Officer and Director William E. Barton 53 Vice President, Chief Financial Officer Patrick M. Costanzo 59 Senior Vice President and Manager, Heavy Construction Division William G. Dorey 53 Senior Vice President and Manager, Branch Division </TABLE> Granite Construction Incorporated was incorporated in Delaware in January 1990 as the holding company for Granite Construction Company, which was incorporated in California in 1922. All dates of service for the executive officers of the registrant include the periods in which they served for Granite Construction Company. Mr. Watts joined the Company in 1987 as President and Chief Executive Officer and has served as a director since 1988. In 1997, Mr. Watts became a director of TIC Holdings, Inc., in which Granite Construction Incorporated owns a 30% interest. From 1984 until 1987, Mr. Watts served as President, Chief Executive Officer and a director of Ford, Bacon & Davis, Inc., an industrial engineering and construction firm. From 1965 until 1984, Mr. Watts was employed by an underwater services and construction firm in various capacities, including as President and Chief Operating Officer. He received a B.A. degree in economics from Cornell University in 1960. Mr. Barton has been an employee of the Company since 1980 and has served in various capacities, including Vice President and Chief Financial Officer since 1990, Controller in 1989, Treasurer in 1988 and Cash Manager from 1980 until 1988. In 1997, Mr. Barton became a director of TIC Holdings, Inc., in which Granite Construction Incorporated owns a 30% interest. He received a B.S. degree in accounting and finance from San Jose State University in 1967 and an M.B.A. degree from the University of Santa Clara in 1973. 9
10 Mr. Costanzo has been an employee of the Company since 1970 and has served in various capacities, including Senior Vice President and Manager, Heavy Construction Division, since 1990, Vice President and Assistant Manager, Heavy Construction Division, from 1988 to 1989, and an Area or Project Manager with the Heavy Construction Division from 1972 to 1987. In 1997, Mr. Costanzo became a director of TIC Holdings, Inc., in which Granite Construction Incorporated owns a 30% interest. He received a B.S. degree in civil engineering from the University of Connecticut in 1960 and a M.S. degree in civil engineering from Stanford University in 1961. Mr. Dorey has been an employee of the Company since 1968 and has served in various capacities, including Senior Vice President and Manager, Branch Division since 1987, and as Vice President and Assistant Manager, Branch Division from 1983 to 1987. In 1997, Mr. Dorey became a director of TIC Holdings, Inc., in which Granite Construction Incorporated owns a 30% interest. He received a B.S. degree in construction engineering from Arizona State University in 1967. 10
11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS On April 25, 1997, the Company commenced trading its common stock on the New York Stock Exchange under the ticker symbol GVA. The Company's move from NASDAQ Stock Market to the New York Stock Exchange is intended to improve trading efficiencies and liquidity, in an effort to promote enhanced shareholder value. See Quarterly Results in Item 7 for a two-year summary of quarterly dividends and high and low sales prices of the Company's stock. The Company expects to pay a quarterly cash dividend of $0.075 plus a special dividend of $0.12 per share of Common Stock to stockholders of record as of March 31, 1998 payable on April 17, 1998 (See Note 13 of Notes to Consolidated Financial Statements). Declaration and payment of dividends is within the sole discretion of the Company's Board of Directors, subject to limitations imposed by Delaware law, and will depend on the Company's earnings, capital requirements and financial conditions and such other factors as the Board of Directors deems relevant. As of March 20, 1998 there were 18,255,266 shares of Common Stock outstanding held by approximately 313 stockholders of record of the Company. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected Operations and Balance Sheet data set forth below have been derived from Consolidated Financial Statements of the Company, which have been audited by Coopers & Lybrand L.L.P., independent accountants. 11
12 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> ================================================================================================================================== YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> OPERATING SUMMARY Revenue $1,028,205 $928,799 $894,796 $693,388 $570,379 $518,312 Gross profit 111,730 110,655 111,963 89,988 50,743 50,578 As a percent of revenue 10.9% 11.9% 12.5% 13.0% 8.9% 9.8% General and administrative expenses 73,593 71,587 69,610 62,795 47,107 46,906 As a percent of revenue 7.2% 7.7% 7.8% 9.1% 8.3% 9.0% Income before cumulative effect of change in accounting principle * 27,832 27,348 28,542 19,488 3,492 3,924 Net income 27,832 27,348 28,542 19,488 4,492 3,924 As a percent of revenue 2.7% 2.9% 3.2% 2.8% 0.8% 0.8% Income per share before cumulative effect of change in accounting principle: * Basic $ 1.58 $ 1.57 $ 1.65 $ 1.13 $ 0.20 $ 0.23 Diluted 1.55 1.53 1.62 1.11 0.20 0.23 Net income per share:** Basic 1.58 1.57 1.65 1.13 0.26 0.23 Diluted 1.55 1.53 1.62 1.11 0.26 0.23 Weighted average shares of common and common stock equivalents outstanding: Basic 17,598 17,471 17,277 17,256 17,250 17,250 Diluted 17,961 17,832 17,649 17,526 17,422 17,409 - ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION SUMMARY Total assets $ 551,809 $473,045 $454,744 $349,098 $319,416 $316,978 Cash, cash equivalents and short-term investments 72,769 72,230 66,992 48,638 48,810 54,139 Working capital 103,910 92,542 77,179 65,537 64,619 66,329 Current maturities of long-term debt 12,921 10,186 13,948 10,070 10,060 15,469 Long-term debt 58,396 43,602 39,494 17,237 28,585 38,618 Stockholders' equity 257,434 233,605 209,905 182,692 164,338 158,594 Book value per share 14.09 12.89 11.74 10.37 9.37 9.07 Dividends per share $ 0.36 $ 0.37 $ 0.29 $ 0.13 $ 0.13 $ 0.13 Common shares outstanding 18,266 18,126 17,885 17,622 17,534 17,477 - ---------------------------------------------------------------------------------------------------------------------------------- BACKLOG $ 909,793 $597,876 $590,075 $550,166 $659,738 $245,234 - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> ============================================================================================================== YEARS ENDED DECEMBER 31, 1991 1990 1989 1988 1987 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> OPERATING SUMMARY Revenue $564,060 $557,996 $504,084 $437,230 $380,519 Gross profit 69,502 70,646 60,837 55,614 46,621 As a percent of revenue 12.3% 12.7% 12.1% 12.7% 12.3% General and administrative expenses 46,541 44,466 41,915 33,702 32,381 As a percent of revenue 8.3% 8.0% 8.3% 7.7% 8.5% Income before cumulative effect of change in accounting principle * 17,622 18,811 14,211 15,009 8,594 Net income 17,622 18,811 14,211 15,009 8,594 As a percent of revenue 3.1% 3.4% 2.8% 3.4% 2.3% Income per share before cumulative effect of change in accounting principle: * Basic $ 1.02 $ 1.13 $ 0.95 $ 1.00 $ 0.57 Diluted 1.01 1.13 0.95 1.00 0.57 Net income per share:** Basic 1.02 1.13 0.95 1.00 0.57 Diluted 1.01 1.13 0.95 1.00 0.57 Weighted average shares of common and common stock equivalents outstanding: Basic 17,250 16,575 15,000 15,000 15,000 Diluted 17,415 16,622 15,000 15,000 15,000 - -------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION SUMMARY Total assets $277,426 $260,426 $245,880 $205,847 $178,846 Cash, cash equivalents and short-term investments 54,973 50,451 46,306 44,911 41,959 Working capital 55,186 52,352 34,902 39,656 31,036 Current maturities of long-term debt 7,669 7,887 14,228 12,497 10,806 Long-term debt 14,816 19,084 39,707 44,328 49,542 Stockholders' equity 153,159 131,026 86,552 69,033 50,756 Book value per share 8.81 7.60 5.77 4.60 3.38 Dividends per share $ 0.13 $ 0.10 $ -- $ -- $ -- Common shares outstanding 17,385 17,250 15,000 15,000 15,000 - -------------------------------------------------------------------------------------------------------------- BACKLOG $292,017 $368,384 $377,529 $231,338 $255,858 - -------------------------------------------------------------------------------------------------------------- </TABLE> * Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes". ** Effective December 31, 1997, the Company adopted Financial Accounting Standard No. 128 "Earnings Per Share." All prior period earnings per share amounts have been restated to reflect this adoption. 12
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" section contains forward-looking statements which are made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, without limitation, changes in the composition of applicable federal and state legislation appropriation committees; federal and state appropriation changes for infrastructure spending; the general state of the economy; competition and pricing pressures; state referendums and initiatives; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. GENERAL Granite is one of the largest heavy civil contractors in the United States and is engaged in the construction of highways, dams, airports, mass transit facilities and other infrastructure-related projects. The Company has offices in California, Texas, Georgia, Nevada, Arizona, Florida, Oregon, Maryland and Utah. The Company's contracts are obtained primarily through competitive bidding in response to advertisements by federal, state and local agencies and private parties. The Company's bidding activity is affected by such factors as backlog, current utilization of equipment and other resources, ability to obtain necessary surety bonds and competitive considerations. Bidding activity, backlog and revenue resulting from the award of new contracts to the Company may vary significantly from period to period. Revenue from construction contracts including construction joint ventures is recognized using the percentage-of-completion method of accounting, based upon costs incurred and projected costs. Revenue in an amount equal to cost incurred is recognized prior to contracts reaching 25% completion. The related earnings are not recognized until the period in which such percentage completion is attained. Cost of revenue consists of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs, equipment expense (primarily depreciation, maintenance and repairs) and insurance costs. Depreciation is provided using accelerated methods for construction equipment. Contracts frequently extend over a period of more than one year and revisions in cost and profit estimates during construction are reflected in the accounting period in which the facts that require the revision become known. Losses on contracts, if any, are provided in total when determined, regardless of the degree of project completion. Claims for additional contract revenue are recognized in the period when it is probable that the claim will result in additional revenue and the amount can be reliably estimated. The foregoing as well as weather, stage of completion, and mix of contracts at different margins may cause fluctuations in gross profit between periods. The Company's compensation strategy for selected management personnel is to rely heavily on a variable cash and restricted stock performance-based incentive element. Thus, the Company may experience an increase in general and administrative expenses in a very profitable year and a decrease in less profitable years. The Company's pension contribution in excess of the 401K matching contributions is at the discretion of the Board of Directors based on the Company reaching certain levels of profitability each year. CURRENT YEAR REVENUE AND BACKLOG. During the year ended December 31, 1997, revenue increased $99.4 million (10.7%) to $1.028 billion. The increase in revenue is associated with higher levels of bidding opportunities and awards in our Branch Division. The Branch Division revenue increased $116.3 million to $831.9 million in 1997, from $715.6 million in 1996. Heavy Construction Division (HCD) revenue decreased $16.9 million to $196.3 million in 1997, from $213.2 million in 1996. The Company's revenue from public sector contracts increased to $726.6 million, or 70.6% of the Company's revenue in 1997, from $657.2 million, or 70.7% in 1996. Revenue from private sector contracts decreased $3.6 million to $174.5 million in 1997, and decreased from 19.2% of total revenue in 1996 to 17.0% of total revenue in 1997. The Company's backlog at December 31, 1997 was $909.8 million, up $311.9 million, or 52.2% over the same period in 1996. Backlog at December 31, 1997 includes the Company's 23% share of the I-15 Corridor Reconstruction project in Salt Lake City, Utah which was awarded in the first quarter of 1997. Work on our $320 13
14 million portion of the contract began during the second quarter of 1997 with 25% completion for profit recognition not expected until mid 1998. Management expects that approximately 58% of the work in the backlog at December 31, 1997 will be recognized as revenue during 1998. The Company believes its bidding opportunities in its major marketplaces remain strong (see "Outlook"). GROSS PROFIT. For the year ended December 31, 1997, gross profit reached $111.7 million, a $1.0 million increase from 1996. As a percentage of revenue, gross profit decreased in 1997 to 10.9% from 11.9% in 1996, due in part to an increase in revenue recognized for contracts that had not reached the 25% completion threshold. Additionally, gross profit in 1997 reflects the absence of the San Joaquin Hills Toll Road Project completed in late 1996 which carried a higher than average gross profit margin. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses include salaries, incentive compensation, retirement plans, costs associated with the Company's estimating and bidding activities, and other administrative costs. General and administrative expenses increased from $71.6 million, or 7.7% of revenue in 1996, to $73.6 million, or 7.2% of revenue in 1997. The increase reflects a higher level of costs to support the Company's increased revenue and bidding activities and increased personnel to support the Company's expansion into the South/East marketplace. OTHER INCOME (EXPENSES). Other income increased $1.7 million to $6.0 million in 1997. The increase was due an increase in the Company's equity in the earnings of its affiliates partially offset by higher interest expense associated with higher debt levels and a decrease in gains on sales of property and equipment. NEW ACCOUNTING PRONOUNCEMENTS. In June 1997 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. SFAS 130 is effective for the Company in 1998 and its impact on adoption is not expected to be significant. In June 1997 the FASB issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operations decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. SFAS 131 is effective for the Company in 1998 and the impact of adoption has not been determined. OUTLOOK. This "Outlook" section contains forward-looking statements which are made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, without limitation, changes in the composition of applicable federal and state legislation appropriation committees; federal and state appropriation changes for infrastructure spending; the general state of the economy; competition and pricing pressures; state referendums and initiatives; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. Looking ahead, re-authorization of the federal transportation bill, often referred to as the "ISTEA" bill, is one of the most important issues facing Granite and its industry in 1998. Federal funding for needed repair and improvement of the nation's highway system expires May 1, 1998. If Congress fails to take action by then, new federal funding for roads, bridges and transit programs will cease. Some states, such as California, are currently enjoying the fruits of a healthy state economy, and have surplus highway building funds that could potentially be used to bridge any gap created by the lack of a federal program, at least for the next fiscal year. In most states, however, that is not the case, and the absence of federal highway funding could jeopardize many state highway projects in the short-term. We are very encouraged, however, by the action taken most recently by the U.S. Senate. In previous communications with our shareholders, we had indicated that it appeared unlikely that any action on the highway bill would occur before the federal budget had been approved. Surprisingly, the Senate passed a six-year, $214 billion ISTEA re-authorization bill in March 1998, a 38% increase over the previous authorization. The leadership in the House has indicated that a companion bill will reach the floor by April 1. The House version calls for increases in funding to $217 billion and taking the Highway Trust Funds off-budget. A vote on the increase is expected to take place during the week of March 30, 14
15 1998. Taking the trust funds off-budget provides a mechanism to ensure that the authorized funding is actually spent. In previous years Congress didn't always appropriate funds to the same level as authorized under the earlier ISTEA. If the House could pass its bill by April 1, it would greatly increase the chances of a final bill being passed and signed by President Clinton near the May 1 deadline. At the state level, our attention remains focused on the June primary election and Proposition 224, the so-called contracting-out initiative. The measure seeks to codify and expand a legal decision that precludes the California Department of Transportation from contracting out to private companies for design services at times when the agency does not have the capacity internally to design highway projects. If this initiative passes, it would decrease the throughput in the design process and offer contractors like Granite fewer projects on which to bid. We are pleased by the recent upswing in the private sector, especially in California. According to the Construction Industry Research Board (CIRB) private nonresidential building was the strongest construction sector in 1997. Moreover, residential building, as measured by new units in building permits, was up 27.2% at year-end compared to the totals at December, 1996. Another indicator of economic strength is job growth, and according to the CIRB, non-farm job growth increased an estimated 3.3% in 1997, up from a 2.2% increase in 1996. Despite a still growing economy and the limited number of construction workers, the labor market has been stable and labor costs have not accelerated. We continue to expand our training and development efforts across the country to attract and retain talented employees at both engineer and craft levels. We were very pleased with the 1997 return on our investment in TIC Holdings, Inc.. The company had a very good year, and it enters 1998 with a strong backlog and some excellent bidding opportunities. We were successful in teaming with TIC and its subsidiary, Western Summit, on a large sewage treatment plant in Atlanta and we continue to look for ways in which our two companies can pursue joint venture opportunities. The size and the quality of the backlog that we take into 1998 provide Granite with the opportunity to achieve continued success in the coming year. We have some excellent bidding prospects this year to add to that backlog, including the $1.8 billion Alameda Corridor Project in Southern California, several large highway projects in the Southeastern U.S., and the San Francisco Bay Area bridge retrofit projects. We are pleased with the progress of the Interstate 15 project that we are building in joint venture in Salt Lake City, Utah. The project is somewhat ahead of schedule, and we now expect it will reach the 25% completion threshold, at which Granite recognizes earnings on a job, in the third, perhaps even the second quarter of 1998, instead of the fourth quarter, as previously estimated. Based on strong economics in most of the regions in which it operates, our Branch Division, coming off the best year in its history, is expecting more of the same in 1998. The division is off to a good start, due largely to the boost it is getting from El Nino-related emergency storm repair projects. In summary, we enter 1998 with a record backlog and have a number of exciting bidding opportunities in front of us. We still have to execute the work, but based on the strength of our backlog, increased public works expenditures, and the emergence of the private sector, we feel very confident that we can continue to grow our revenue and our earnings at the pace we expect of ourselves and which our investors and other stakeholders have come to expect. PRIOR YEARS REVENUE AND BACKLOG. During the year ended December 31, 1996, revenue increased $34.0 million (3.8%) to $928.8 million due to higher levels of bidding opportunities and awards in our Branch Division and a full year of Utah Branch activity in 1996. The Branch Division revenue increased $39.6 million to $715.6 million in 1996, from $676.0 million in 1995. Heavy Construction Division revenue decreased $5.6 million to $213.2 million in 1996, from $218.8 million in 1995. The Company's revenue from private sector contracts increased $49.1 million to $178.1 million, and went from 14.4% of total revenue in 1995 to 19.2% of total revenue in 1996. Revenue from public sector contracts decreased to $657.2 million, or 70.7% of the Company's revenue in 1996, from $674.7 million, or 75.4% in 1995. During the year ended December 31, 1995, revenue increased $201.4 million (29.0%) to $894.8 million. The increase in revenue reflected a strong quality backlog, healthy Turn Business and the addition of the Company's new branch in Utah. The Company's backlog at December 31, 1996 was $597.9 million, up $7.8 million, or 1.3% over the same period in 1995. 15
16 GROSS PROFIT. For the year ended December 31, 1996, gross profit reached $110.7 million, a $1.3 million decrease from 1995. As a percentage of revenue, gross profit decreased in 1996 to 11.9% from 12.5% in 1995. Gross profit as a percentage of revenue in 1995 decreased to 12.5% from 13.0% in 1994. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased from $69.6 million, or 7.8% of revenue in 1995, to $71.6 million, or 7.7% of revenue in 1996. The increase reflects a full year of Utah Branch activity as well as an approximately $3.0 million increase to bad debt expense relating to one project. General and administrative expenses increased $8.8 million from 1994 primarily due to the addition of the Utah Branch and higher incentive compensation and retirement plan contributions. OTHER INCOME (EXPENSES). Other income increased $1.4 million to $4.3 million in 1996. The increase was influenced by $2.0 million of gain on sales of joint venture owned equipment which cannot be expected to be repeated in future years. Other income decreased $0.3 million to $3.0 million in 1995. LIQUIDITY AND CAPITAL RESOURCES <TABLE> <CAPTION> ------------------------------------------------------------------- Dollars in thousands 1997 1996 1995 ------------------------------------------------------------------- <S> <C> <C> <C> Cash and cash equivalents $ 54,359 $ 38,663 $ 22,410 Net cash provided (used) by: Operating activities 63,798 61,424 69,622 Investing activities (49,207) (37,548) (48,977) Financing activities 1,105 (7,623) (15,884) Capital expenditures 48,448 46,139 36,006 Working Capital 103,910 92,542 77,179 ------------------------------------------------------------------- </TABLE> During 1997, cash provided from operations of $63.8 million was primarily used to purchase $48.4 million of property and equipment, to repay $16.5 million of long-term debt, to pay dividends of $6.6 million and repurchase $3.1 million of common stock. Changes in cash provided by operating activities primarily reflect normal variations in the cash flow on contracts and payables. The Company's practice has been to replace and replenish its equipment fleet with cash generated from operations. Cash purchases of property, plants and equipment increased $2.3 million from 1996 to 1997 and $10.1 million from 1995 to 1996. The increase in 1996 primarily reflected the Company's purchase of the Utah Branch in 1995. During 1997, the Company increased its investment in T.I.C. Holdings, Inc. by $12.2 million to approximately 30% from the 10% investment in 1996. The investment was financed by borrowings under the Company's revolving line of credit. In March of 1997, the Board of Directors authorized the Company to repurchase at management's discretion up to 500,000 shares of its own common stock on the open market. Future purchases are expected to be made using the Company's own cash resources. Shares repurchased will be held in the corporate treasury and will be used to cover contributions to the current Employee Stock Ownership Plan or for other corporate purposes. The Company has budgeted $66.0 million for capital expenditures in 1998, which includes amounts for construction equipment, aggregate and asphalt plants, buildings, leasehold improvements and the purchase of land and aggregate reserves. The Company anticipates that cash generated internally and amounts available under its existing credit facilities will be sufficient to meet its capital and other requirements, including contributions to employee benefit plans, for the foreseeable future. The Company currently has access to funds under its revolving credit agreement which allow it to borrow up to $75.0 million, of which $32.4 million was available at December 31, 1997. IMPACT OF THE YEAR 2000 ISSUE. The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. The issue arises if date-sensitive software recognizes a date 16
17 using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on a recent assessment, the Company determined that it will not be required to materially modify or replace its software in response to the Year 2000 Issue. The Company has begun communications with its significant suppliers and large public and private sector customers to determine the extent to which the Company is vulnerable to those third parties' failure to solve their own Year 2000 Issue. However, there can be no guarantee that the systems of other companies or public agencies with which the Company does business will be timely converted, or that failure to convert by another company or public agency would not have a material adverse effect on the Company. The Company does not believe that the cost of addressing the impact on its computer systems of the Year 2000 Issue will be material to its business, results of operations, financial condition, liquidity or capital resources. SUBSEQUENT EVENTS. On January 23, 1998, the Board of Directors declared a special dividend of $0.12 per share of common stock in addition to a $0.075 per share quarterly dividend, payable on April 17, 1998 to stockholders of record as of March 31, 1998. The quarterly dividend represents a $0.015 per share increase over the quarterly dividends paid in 1997 of $0.06 per share. On March 19, 1998 the Company issued long-term debt in the amount of $60 million to a group of institutional holders. The notes are due in nine equal annual installments beginning in 2002 and bear interest at 6.54% per annum. Proceeds of the notes will be used to retire a portion of existing debt and for general corporate purposes. 17
18 QUARTERLY RESULTS The following table sets forth selected unaudited financial information for the Company for the eight quarters in the period ended December 31, 1997. This information has been prepared on the same basis as the audited financial statements and, in the opinion of management, contains all adjustments necessary for a fair presentation thereof. QUARTERLY FINANCIAL DATA (Unaudited - In Thousands, Except for Per Share Data) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------- 1997 QUARTERS ENDED DEC. 31 SEPT. 30 JUNE 30 MARCH 31 - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue $ 309,820 $ 328,988 $ 242,576 $ 146,821 Gross profit 26,008 38,882 30,990 15,850 As a percent of revenue 8.4% 11.8% 12.8% 10.8% Net income 5,631 13,651 8,307 243 As a percent of revenue 1.8% 4.1% 3.4% 0.2% Net income per share: Basic $ 0.32 $ 0.77 $ 0.47 $ 0.01 Diluted $ 0.31 $ 0.76 $ 0.46 $ 0.01 - ----------------------------------------------------------------------------------------- Dividends per share $ 0.06 $ 0.06 $ 0.06 $ 0.18 Market price High $ 24.00 $ 24.06 $ 21.25 $ 24.75 Low $ 20.31 $ 19.25 $ 17.75 $ 17.25 - ----------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------- 1996 QUARTERS ENDED DEC. 31 SEPT. 30 JUNE 30 MARCH 31 - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue $ 223,905 $ 302,646 $ 248,499 $ 153,749 Gross profit 25,979 40,816 29,218 14,642 As a percent of revenue 11.6% 13.5% 11.8% 9.5% Net income 2,798 15,053 9,131 366 As a percent of revenue 1.2% 5.0% 3.7% 0.2% Net income per share: Basic $ 0.16 $ 0.86 $ 0.52 $ 0.02 Diluted $ 0.16 $ 0.84 $ 0.51 $ 0.02 - ----------------------------------------------------------------------------------------- Dividends per share $ 0.06 $ 0.06 $ 0.06 $ 0.19 Market price High $ 21.25 $ 23.50 $ 27.25 $ 21.83 Low $ 18.00 $ 18.25 $ 19.00 $ 18.00 - ----------------------------------------------------------------------------------------- </TABLE> ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Registrant and auditor's report are included in Item 8 and appear following Item 14: Report of Independent Accountants Consolidated Balance Sheets - At December 31, 1997 and 1996 Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Additionally, a two-year Summary of Quarterly Results is included in Item 7 under "Quarterly Results". 18
19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. 19
20 PART III Certain information required by Part III is omitted from this Report in that the Company will file its definitive proxy statement (the "Proxy Statement") pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certain information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to the directors of the Company is set forth under the caption "Information about Granite - Management, Directors" in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held May 18, 1998. Such information is incorporated herein by reference. Information relating to the executive officers of the Company is set forth in Part I of this report under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is set forth under the caption "Information about Granite - Compensation of Directors and Executive Officers" in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held May 18, 1998. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to ownership of equity securities of the Company by certain beneficial owners and Management is set forth under the caption "Information about Granite - Stock Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held May 18, 1998. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to certain relationships and related transactions is set forth under the caption "Information about Granite - Management, Certain Transactions with Management" in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held May 18, 1998. Such information is incorporated herein by reference. 20
21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this Report: (a) 1. FINANCIAL STATEMENTS. The following consolidated financial statements are filed as part of this Report: <TABLE> <CAPTION> Form 10-K Pages --------- <S> <C> Report of Independent Accountants................................................ F-1 Consolidated Balance Sheets at December 31, 1997 and 1996........................ F-2 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995.............................................. F-3 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.................................. F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.............................................. F-5 Notes to the Consolidated Financial Statements................................... F-6 to F-15 </TABLE> 2. FINANCIAL STATEMENT SCHEDULES. The following financial statement schedule of Granite Construction Incorporated for the years ended December 31, 1997, 1996 and 1995 is filed as part of this Report and should be read in conjunction with the consolidated financial statements of Granite Construction Incorporated. <TABLE> <CAPTION> Form 10-K Pages --------- <S> <C> Report of Independent Accountants on Financial Statement Schedules.................... S-1 Schedule -------- Schedule II - Schedule of Valuation and Qualifying Accounts.................. S-2 </TABLE> Schedules not listed above have been omitted because the required information is not applicable or is shown in the financial statements or notes. 3. EXHIBITS. The Exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Report. (b) REPORTS ON FORM 8-K. The registrant was not required to file any reports on Form 8-K during the fourth quarter of fiscal 1997. 21
22 INDEPENDENT ACCOUNTANTS' REPORT To the Stockholders and Board of Directors Granite Construction Incorporated Watsonville, California We have audited the accompanying consolidated balance sheets of Granite Construction Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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. 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 that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Granite Construction Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. - ---------------------------------- Coopers & Lybrand L.L.P. San Jose, California February 13, 1998, except Note 13, as to which the date is March 19, 1998 F-1
23 GRANITE CONSTRUCTION INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> ================================================================================================ DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------ <S> <C> <C> ASSETS Current assets Cash and cash equivalents $ 54,359 $ 38,663 Short-term investments 18,410 33,567 Accounts receivable 168,968 124,124 Costs and estimated earnings in excess of billings 22,585 29,494 Inventories 12,251 13,493 Deferred income taxes 13,365 13,060 Equity in construction joint ventures 12,951 5,371 Other current assets 11,394 6,033 ----------------------- Total current assets 314,283 263,805 - ------------------------------------------------------------------------------------------------ Property and equipment 194,339 178,515 - ------------------------------------------------------------------------------------------------ Other assets 43,187 30,725 - ------------------------------------------------------------------------------------------------ $ 551,809 $ 473,045 ================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 12,921 $ 10,186 Accounts payable 80,809 64,058 Billings in excess of costs and estimated earnings 51,573 45,352 Accrued expenses and other current liabilities 65,070 51,667 ----------------------- Total current liabilities 210,373 171,263 - ------------------------------------------------------------------------------------------------ Long-term debt 58,396 43,602 - ------------------------------------------------------------------------------------------------ Deferred income taxes 25,606 24,575 - ------------------------------------------------------------------------------------------------ Commitments and contingencies -- -- - ------------------------------------------------------------------------------------------------ Stockholders' equity Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding -- -- Common stock, $0.01 par value, authorized 27,000,000 shares; 1997- issued and outstanding 18,266,375 shares; 1996- issued 18,166,011 shares, outstanding 18,125,653 shares 183 182 Additional paid-in capital 39,836 36,901 Retained earnings 223,498 201,663 ----------------------- 263,517 238,746 Unearned compensation (6,083) (5,141) ----------------------- 257,434 233,605 - ------------------------------------------------------------------------------------------------ $ 551,809 $ 473,045 ================================================================================================ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-2
24 GRANITE CONSTRUCTION INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> ================================================================================================= YEARS ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Revenue $ 1,028,205 $ 928,799 $ 894,796 Cost of revenue 916,475 818,144 782,833 --------------------------------------- GROSS PROFIT 111,730 110,655 111,963 General and administrative expenses 73,593 71,587 69,610 --------------------------------------- OPERATING INCOME 38,137 39,068 42,353 - ------------------------------------------------------------------------------------------------- Other income (expense) Interest income 7,941 6,330 6,395 Interest expense (7,515) (4,367) (3,443) Gain on sales of property and equipment 2,463 3,458 31 Other, net 3,152 (1,080) (32) --------------------------------------- 6,041 4,341 2,951 - ------------------------------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES 44,178 43,409 45,304 Provision for income taxes 16,346 16,061 16,762 - ------------------------------------------------------------------------------------------------- NET INCOME $ 27,832 $ 27,348 $ 28,542 ================================================================================================= - ------------------------------------------------------------------------------------------------- Net income per share Basic $ 1.58 $ 1.57 $ 1.65 Diluted $ 1.55 $ 1.53 $ 1.62 Weighted average shares of common and common stock equivalents outstanding Basic 17,598 17,471 17,277 Diluted 17,961 17,832 17,649 Dividends per share $ 0.36 $ 0.37 $ 0.29 ================================================================================================= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-3
25 GRANITE CONSTRUCTION INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> ================================================================================================================================== ADDITIONAL COMMON PAID-IN RETAINED UNEARNED YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 STOCK CAPITAL EARNINGS COMPENSATION TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> BALANCES, DECEMBER 31, 1994 $178 $ 29,021 $ 156,022 $(2,529) $ 182,692 Net income -- -- 28,542 -- 28,542 Restricted stock issued - 163,611 shares 1 2,134 -- (2,135) -- Amortized restricted stock -- -- -- 1,549 1,549 Employee stock options exercised and related tax benefit - 98,517 shares -- 1,345 -- -- 1,345 Repurchase of common stock - 40,000 shares -- (762) -- -- (762) Common stock contributed to ESOP - 40,000 shares -- 762 -- -- 762 Cash dividends on common stock -- -- (5,049) -- (5,049) Tax benefit from ESOP dividends -- -- 826 -- 826 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1995 179 32,500 180,341 (3,115) 209,905 Net income -- -- 27,348 -- 27,348 Restricted stock issued - 182,089 shares, net 1 3,993 -- (3,994) -- Amortized restricted stock -- -- -- 1,968 1,968 Employee stock options exercised and related tax benefit- 59,350 shares 2 934 -- -- 936 Repurchase of common stock - 107,608 shares -- (2,076) -- -- (2,076) Common stock contributed to ESOP - 80,000 shares -- 1,550 -- -- 1,550 Cash dividends on common stock -- -- (6,760) -- (6,760) Tax benefit from ESOP dividends -- -- 734 -- 734 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1996 182 36,901 201,663 (5,141) 233,605 Net income -- -- 27,832 -- 27,832 Restricted stock issued - 156,264 shares, net 1 3,240 -- (3,241) -- Amortized restricted stock -- -- -- 2,299 2,299 Employee stock options exercised and related tax benefit- 21,900 shares -- 350 -- -- 350 Repurchase of common stock - 167,442 shares -- (3,011) (126) -- (3,137) Common stock contributed to ESOP - 130,000 shares -- 2,356 -- -- 2,356 Cash dividends on common stock -- -- (6,578) -- (6,578) Tax benefit from ESOP dividends -- -- 707 -- 707 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 $183 $ 39,836 $ 223,498 $(6,083) $ 257,434 ================================================================================================================================== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-4
26 GRANITE CONSTRUCTION INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) <TABLE> <CAPTION> ============================================================================================================ YEARS ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Operating Activities Net income $ 27,832 $ 27,348 $ 28,542 Add (deduct) noncash items included in net income: Depreciation, depletion and amortization 38,219 37,775 32,481 Gain on sales of property and equipment (2,463) (3,458) (31) Deferred income taxes 726 3,962 (5,825) Decrease in unearned compensation 2,299 1,968 1,549 Common stock contributed to ESOP 2,356 1,550 762 Equity in (earnings) loss of affiliates (733) 1,648 -- Cash provided by (used in): Accounts and notes receivable (43,072) 15,990 (24,092) Inventories 1,242 (3,313) 1,541 Equity in construction joint ventures (7,580) (5,161) 3,225 Other assets 864 (277) (1,239) Accounts payable 16,751 (3,998) 17,483 Billings in excess of costs and estimated earnings, net 13,130 (9,739) 11,684 Accrued expenses 14,227 (2,871) 3,542 ---------------------------------- Net cash provided by operating activities 63,798 61,424 69,622 - ------------------------------------------------------------------------------------------------------------ Investing Activities Additions to property and equipment (48,448) (46,139) (36,006) Proceeds from sales of property and equipment 4,688 8,027 3,364 Acquisition, net of cash acquired -- -- (1,280) Investment in affiliates (13,689) (8,566) -- Additions to notes receivable (203) (874) (1,083) Repayments of notes receivable 720 618 1,588 Additions to investments and other assets (7,432) (1,629) (1,967) Purchases of short-term investments (27,351) (45,639) (56,324) Maturities of short-term investments 42,508 56,654 42,731 ---------------------------------- Net cash used by investing activities (49,207) (37,548) (48,977) - ------------------------------------------------------------------------------------------------------------ Financing Activities Additions to long-term debt 27,046 15,000 -- Repayments of long-term debt (16,480) (14,654) (11,497) Employee stock options exercised 246 673 1,117 Repurchase of common stock (3,137) (2,076) (762) Dividends paid (6,570) (6,566) (4,742) ---------------------------------- Net cash provided (used) by financing activities 1,105 (7,623) (15,884) - ------------------------------------------------------------------------------------------------------------ Increase in cash and cash equivalents 15,696 16,253 4,761 Cash and cash equivalents at beginning of year 38,663 22,410 17,649 ---------------------------------- Cash and cash equivalents at end of year $ 54,359 $ 38,663 $ 22,410 ============================================================================================================ Supplementary Information Cash paid during the year for: Interest $ 7,516 $ 4,367 $ 3,445 Income taxes 10,172 10,258 20,040 Noncash investing and financing activity: Restricted stock issued for services $ 3,241 $ 3,994 $ 2,135 Financed acquisition of property and equipment 6,963 -- -- Financed acquisition of Gibbons Company -- -- 31,750 ============================================================================================================ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-5
27 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS: The Company is a heavy civil contractor engaged in the construction of highways, dams, airports, mass transit facilities, real estate site developments and other infrastructure related projects. The Company has offices in California, Texas, Georgia, Nevada, Arizona, Utah, Maryland and Florida. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. The Company uses the equity method of accounting for companies where its ownership is between 20% and 50% and for other ventures and partnerships in which less than a controlling interest is held. The Company's proportionate share of construction joint venture revenue, cost of revenue and other income is included in the consolidated statements of income. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONSTRUCTION CONTRACTS: Earnings on construction contracts including construction joint ventures are recognized on the percentage of completion method in the ratio of costs incurred to estimated final costs. Revenue in an amount equal to cost incurred is recognized prior to contracts reaching 25% completion. The related earnings are not recognized until the period in which such percentage completion is attained. Revisions in contract revenue and cost estimates are reflected in the accounting period when known. Provision for the entire amount of estimated losses on uncompleted contracts is made in the period such losses are determined. Claims for additional contract revenue are recognized if it is probable that the claim will result in additional revenue and the amount can be reliably estimated. BALANCE SHEET CLASSIFICATIONS: The Company includes in current assets and liabilities amounts receivable and payable under construction contracts which may extend beyond one year. A one-year time period is used as the basis for classifying all other current assets and liabilities. CASH AND CASH EQUIVALENTS: Cash equivalents are securities held for cash management purposes having maturities of three months or less from the date of purchase. SHORT-TERM INVESTMENTS: Short-term investments that are deemed by management to be held-to-maturity are reported at amortized cost. Short-term investments that are considered available-for-sale are carried at market value. Unrealized gains and losses, if material, are reported net of tax as a separate component of stockholders' equity until realized. Realized gains and losses, if any, are determined using the specific identification method. FINANCIAL INSTRUMENTS: The carrying value of short-term investments approximates their fair value as determined by market quotes. All significant debt obligations carry variable interest rates or market interest rates and their carrying value is considered to approximate fair value. The carrying value of receivables and other amounts arising out of normal contract activities, including retentions which may be settled beyond one year, is estimated to approximate fair value. INVENTORIES: Inventories consist primarily of quarry products valued at the lower of average cost or market. F-6
28 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation is provided using accelerated methods over lives ranging from four to ten years for construction equipment and the straight-line method over lives from three to twenty years for the remaining depreciable assets. Depletion of quarry property is based on the usage of depletable reserves. The cost and accumulated depreciation and depletion of property sold or retired are removed from the accounts and gains or losses, if any, are reflected in earnings for the period. INTANGIBLE ASSETS: Intangible assets consist primarily of covenants not to compete amortized on a straight-line basis over five years. INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. COMPUTATION OF EARNINGS PER SHARE: The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), effective December 31, 1997. SFAS 128 requires the presentation of basic and diluted earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding, excluding restricted common stock. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of stock options and upon the vesting of restricted common stock. All prior period earnings per share amounts have been restated to reflect the adoption of SFAS 128. RECLASSIFICATIONS: Certain financial statement items have been reclassified to conform to the current year's format. NEW ACCOUNTING PRONOUNCEMENTS: In June 1997 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. SFAS 130 is effective for the Company in 1998 and the impact of its adoption is not expected to be significant. In June 1997 the FASB issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operations decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. SFAS 131 is effective for the Company in 1998 and the impact of adoption has not been determined. 2. DISCLOSURE OF SIGNIFICANT RISKS AND UNCERTAINTIES DISCLOSURE OF SIGNIFICANT ESTIMATES - REVENUE RECOGNITION: As outlined in the Summary of Significant Accounting Policies, the Company's construction revenue is recognized on the percentage of completion basis. Consequently, construction revenue and gross margin for each reporting period is determined on a contract by contract basis by reference to estimates by the Company's engineers of expected costs to be incurred to complete each project. These estimates include provisions for known and anticipated cost overruns, if any exist or are expected to occur. These estimates may be subject to revision in the normal course of business. F-7
29 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 2. DISCLOSURE OF SIGNIFICANT RISKS AND UNCERTAINTIES, CONTINUED DISCLOSURE OF SIGNIFICANT ESTIMATES - LITIGATION: The Company has been named as a defendant in legal proceedings wherein substantial damages are claimed. Such proceedings are not uncommon in the Company's business and usually involve claims against multiple defendants who were involved in the project which is the subject of the proceeding. Historically, the Company has been successful in defending such actions or has settled them within insured limits. CONCENTRATIONS: The Company maintains the majority of cash balances and all of its short-term investments with twelve financial institutions. The Company invests with high credit quality financial institutions, and, by policy, limits the amount of credit exposure to any financial institution. Substantially all of the Company's labor force is subject to collective bargaining agreements. Collective bargaining agreements covering 27.5% of the Company's unionized labor force at December 31, 1997 will expire during 1998. The Company operates in a single industry segment encompassing the construction of infrastructure assets and has no foreign operations. Revenue received from federal, state and local government agencies amounted to $726,657 (70.6%) in 1997, $657,247 (70.7%) in 1996, and $674,640 (75.4%) in 1995. One customer, California Department of Transportation, represented $139,300 (13.5%) in 1997, $104,171 (11.2%) in 1996, and $88,970 (9.9%) in 1995 of total revenue. At December 31, 1997, 1996 and 1995 the Company had significant amounts receivable from these agencies and customer. The Company performs ongoing credit evaluations of its customers and generally does not require collateral, although the law provides the Company the ability to file mechanics liens on real property improved for private customers in the event of non-payment by such customers. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. 3. SHORT-TERM INVESTMENTS The carrying and market values of short-term investments are as follows at December 31, 1997 and 1996: <TABLE> <CAPTION> Held-To-Maturity Held-To-Maturity December 31, 1997 December 31, 1996 Carrying Unrealized Unrealized Fair Carrying Unrealized Unrealized Fair Value Gains Losses Value Value Gains Losses Value ----------------------------------------------- ---------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> U.S. Government and Agency Obligations $ 1,998 $ -- $ -- $ 1,998 $ 2,993 $ -- $ -- $ 2,993 Commercial Paper -- -- -- -- 3,977 -- -- 3,977 Municipal Bonds 5,019 -- -- 5,019 6,011 6 -- 6,017 Foreign Banker's Acceptances -- -- -- -- 7,420 1 -- 7,421 Domestic Banker's Acceptances 3,450 -- -- 3,450 -- -- -- -- ----------------------------------------------- ---------------------------------------------- 10,467 -- -- 10,467 20,401 7 -- 20,408 ----------------------------------------------- ---------------------------------------------- </TABLE> <TABLE> <CAPTION> Available-For-Sale Available-For-Sale December 31, 1997 December 31, 1996 Carrying Unrealized Unrealized Fair Carrying Unrealized Unrealized Fair Value Gains Losses Value Value Gains Losses Value ----------------------------------------------- ---------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> U.S. Government and Agency Obligations 2,984 -- -- 2,984 9,146 3 (14) 9,135 Municipal Bonds 4,959 44 -- 5,003 4,020 23 -- 4,043 ----------------------------------------------- ---------------------------------------------- 7,943 44 -- 7,987 13,166 26 (14) 13,178 ----------------------------------------------- ---------------------------------------------- Total Short-Term Investments $18,410 $ 44 $ -- $18,454 $33,567 $ 33 $ (14) $33,586 =============================================== ============================================== </TABLE> F-8
30 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 3. SHORT-TERM INVESTMENTS, CONTINUED There were no sales of investments classified as available-for-sale for the years ended December 31, 1997 and 1996. At December 31, 1997, scheduled maturities of investments are as follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------ Held-To- Available- Maturity For-Sale Total - ------------------------------------------------------------------------------------------ <S> <C> <C> <C> Within one year $10,467 $5,959 $16,426 After one year through five years -- 1,984 1,984 - ------------------------------------------------------------------------------------------ $10,467 $7,943 $18,410 ========================================================================================== </TABLE> For the years ended December 31, 1997 and 1996, purchases and maturities were as follows: <TABLE> <CAPTION> ------------------------------------- --------------------------------------- December 31, 1997 December 31, 1996 Held-To- Available Total Held-To- Available Total Maturity For Sale Maturity For Sale ------------------------------------- --------------------------------------- <S> <C> <C> <C> <C> <C> <C> Purchases $ 15,566 $11,785 $ 27,351 $ 35,315 $ 10,324 $ 45,639 Maturities 31,536 10,972 42,508 43,300 13,354 56,654 ------------------------------------- --------------------------------------- Net change $(15,970) $ 813 $(15,157) $ (7,985) $ (3,030) $(11,015) ===================================== ======================================= </TABLE> 4. ACCOUNTS RECEIVABLE <TABLE> <CAPTION> ------------------------------------------------------------------------- DECEMBER 31, 1997 1996 ------------------------------------------------------------------------- <S> <C> <C> Construction Contracts Completed and in progress $ 94,482 $ 59,764 Retentions 55,041 47,956 ------------------------------------------------------------------------- 149,523 107,720 Construction material sales 17,383 12,651 Other 2,753 4,446 ------------------------------------------------------------------------- 169,659 124,817 Less allowance for doubtful accounts 691 693 ------------------------------------------------------------------------- $168,968 $124,124 ========================================================================= </TABLE> The balances billed but not paid by customers pursuant to retainage provisions in construction contracts generally become due upon completion of the contracts and acceptance by the owners. Retainage amounts at December 31, 1997 are expected to be collected as follows: $49,801 in 1998; $1,511 in 1999 and $3,729 in 2000. 5. EQUITY METHOD INVESTMENTS The Company participates in various construction joint venture partnerships. Generally, each construction joint venture is formed to accomplish a specific project and is dissolved upon completion of the project. The combined assets, liabilities and net assets of these ventures are as follows: F-9
31 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 5. EQUITY METHOD INVESTMENTS, CONTINUED <TABLE> <CAPTION> ------------------------------------------------------------ DECEMBER 31, 1997 1996 ------------------------------------------------------------ <S> <C> <C> Assets Total $276,038 $96,760 Less other venturers' interest 208,830 69,175 ------------------------------------------------------------ Company's interest 67,208 27,585 ------------------------------------------------------------ Liabilities Total 223,711 75,408 Less other venturers' interest 169,454 53,194 ------------------------------------------------------------ Company's interest 54,257 22,214 ------------------------------------------------------------ Company's interest in net assets $ 12,951 $ 5,371 ============================================================ </TABLE> The revenue and costs of revenue of construction joint ventures are as follows: <TABLE> <CAPTION> ----------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1997 1996 1995 ----------------------------------------------------------------------------------------- <S> <C> <C> <C> Revenue Total $326,895 $234,824 $321,388 Less other venturers' interest 248,028 164,676 224,972 ----------------------------------------------------------------------------------------- Company's interest 78,867 70,148 96,416 ----------------------------------------------------------------------------------------- Cost of Revenue Total 287,705 160,056 267,650 Less other venturers' interest 220,497 112,313 187,355 ----------------------------------------------------------------------------------------- Company's interest 67,208 47,743 80,295 ----------------------------------------------------------------------------------------- $ 11,659 $ 22,405 $ 16,121 ========================================================================================= </TABLE> Additionally, the Company has investments in affiliates that are accounted for on the equity method. The most significant of these investments is a 30% interest in T.I.C. Holdings, Inc. and a 22.2% limited partnership interest in a partnership which constructed and operates a private toll road. At December 31, 1997 the Company had a commitment supported by a letter of credit of $2,400 related to its limited partnership interest. The summarized unaudited financial information below represents an aggregation of the Company's nonsubsidiary affiliates: <TABLE> <CAPTION> ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1997 1996 ----------------------------------------------------------------------- <S> <C> <C> Balance sheet data Assets $275,685 $130,897 Liabilities 216,512 119,363 Net assets 59,173 11,534 ----------------------------------------------------------------------- Company's equity in net assets 25,008 2,564 ----------------------------------------------------------------------- Earnings data Revenue 434,389 6,719 Gross profit (loss) 41,137 (3,104) Earnings (loss) before taxes 1,891 (7,446) ----------------------------------------------------------------------- Company's equity in earnings (loss) $ 733 $ (1,648) ======================================================================= </TABLE> F-10
32 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 6. PROPERTY AND EQUIPMENT <TABLE> <CAPTION> ------------------------------------------------------------------- DECEMBER 31, 1997 1996 ------------------------------------------------------------------- <S> <C> <C> Land $ 20,654 $ 15,328 Quarry property 35,862 34,408 Buildings and leasehold improvements 17,175 12,973 Equipment and vehicles 416,073 388,697 Office furniture and equipment 5,467 5,485 ------------------------------------------------------------------- 495,231 456,891 Less accumulated depreciation, depletion and amortization 300,892 278,376 ------------------------------------------------------------------- $194,339 $178,515 =================================================================== </TABLE> 7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES <TABLE> <CAPTION> ------------------------------------------------------------------- DECEMBER 31, 1997 1996 ------------------------------------------------------------------- <S> <C> <C> Payroll and related employee benefits $24,374 $21,627 Accrued insurance 25,882 19,997 Income taxes 3,129 53 Other 11,685 9,990 ------------------------------------------------------------------- $65,070 $51,667 =================================================================== </TABLE> 8. LONG-TERM DEBT AND CREDIT ARRANGEMENTS <TABLE> <CAPTION> --------------------------------------------------------------------- DECEMBER 31, 1997 1996 --------------------------------------------------------------------- <S> <C> <C> Bank revolving credit notes $39,000 $18,000 Notes payable to bank 25,000 35,000 Other notes payable 7,317 788 --------------------------------------------------------------------- 71,317 53,788 Less current maturities 12,921 10,186 --------------------------------------------------------------------- $58,396 $43,602 ===================================================================== </TABLE> The aggregate minimum principal maturities of long-term debt for each of the five years following December 31, 1997 are as follows: 1998 - $12,921; 1999 - $14,843; 2000 - $13,997; 2001 - $8,748; 2002 - $7,984 and beyond 2002 - $12,824. The Company has a bank revolving line of credit of $75,000 which allows for unsecured borrowings for up to five years through June 30, 1999, with interest rate options. Outstanding borrowings under the revolving line of credit at December 31, 1997 are at the IBOR interest rate plus margin (6.44% at December 31, 1997) with principal payable semiannually beginning December 1999 through June 2004 and interest payable quarterly. The Company has standby letters of credit totaling approximately $6,100 outstanding at December 31, 1997 of which $3,600 reduces the amount available under the line of credit and $2,400 supports the commitment by the Company related to its investment in a limited partnership. The unused and available portion of the line of credit at December 31, 1997 was $32,400. Notes payable to bank are unsecured with principal payable semiannually and interest payable quarterly at primarily the IBOR rate plus margin (6.54% at December 31, 1997) through June 2000. F-11
33 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 8. LONG-TERM DEBT AND CREDIT ARRANGEMENTS, CONTINUED Restrictive covenants under the terms of the debt agreements include the maintenance of certain levels of working capital and cash flow. Other covenants prohibit capital expenditures in excess of specified limits and require the maintenance of tangible net worth (as defined) of approximately $188,000. Other notes payable are comprised primarily of notes incurred in connection with the purchase of property and equipment and other assets. The notes are collateralized by the assets purchased, bear interest at 6.5% per annum and are payable in installments through 2007. 9. EMPLOYEE BENEFIT AND COMPENSATION PLANS EMPLOYEE STOCK OWNERSHIP PLAN: The Company's Employee Stock Ownership Plan ("ESOP") covers all employees not included in collective bargaining agreements. As of December 31, 1997, the ESOP owned 5,530,686 shares of the Company's common stock. Dividends on shares held by the ESOP are charged to retained earnings and all shares held by the ESOP are treated as outstanding in computing the Company's earnings per share. Contributions to the ESOP are at the discretion of the Board of Directors. Contributions for the years ended December 31, 1997, 1996 and 1995 were approximately $1,812, $2,094 and $762, respectively. PROFIT SHARING AND 401K PLAN: The Profit Sharing Plan is a defined contribution plan covering all employees not included in collective bargaining agreements. The plan receives annual contributions at the discretion of the Board of Directors. On January 1, 1995, the Company amended the Profit Sharing Plan to create the Granite Construction Profit Sharing and 401K Plan, beginning for the year ended December 31, 1995. The amended plan is also a defined contribution plan covering all employees not included in collective bargaining agreements. Each employee can elect to have up to 3% of gross pay contributed to the plan on a before-tax basis. The plan allows for Company matching and additional contributions at the discretion of the Board of Directors. Contributions to the Profit Sharing and 401K Plan for the years ended December 31, 1997, 1996 and 1995 were $4,706, $4,064 and $5,681, respectively. Included in the contributions were 401K matching contributions of $1,807, $1,647 and none in 1997, 1996 and 1995, respectively. 1990 OMNIBUS STOCK AND INCENTIVE PLAN: Under the Company's 1990 Omnibus Stock and Incentive Plan (the "Stock Plan") a total of 1,000,000 shares of the Company's common stock are reserved to grant key employees of the Company restricted common stock, incentive and nonqualified stock options, performance units and performance shares. Restricted common stock is issued for services to be rendered and may not be sold, transferred or pledged for such period as determined by the compensation committee. Restricted shares outstanding under the Plan at December 31, 1997 were 651,546 shares. Unearned compensation is amortized over the restriction periods of generally five years. Compensation expense related to restricted shares for the years ended December 31, 1997, 1996 and 1995 was $2,299, $1,968 and $1,549, respectively. F-12
34 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 9. EMPLOYEE BENEFIT AND COMPENSATION PLANS, CONTINUED The exercise price for incentive and nonqualified stock options granted under the Stock Plan may not be less than 100% and 85%, respectively, of the fair market value at the date of the grant. Options granted will be exercisable at such times and be subject to such restrictions and conditions as determined by the compensation committee, but no option shall be exercisable later than ten years from the date of grant. Options generally vest one third after 3 years of service from the date of grant and one third during each of the following two years. Stock option transactions during 1997, 1996 and 1995 are summarized as follows: <TABLE> <CAPTION> ------------------------------------------------------------------------------- December 31, 1997 1996 1995 ------------------------------------------------------------------------------- <S> <C> <C> <C> Options outstanding, beginning of year 126,650 186,000 284,517 Options exercised (21,900) (59,350) (98,517) ------------------------------------------------------------------------------- Options outstanding, end of year 104,750 126,650 186,000 ------------------------------------------------------------------------------- </TABLE> At December 31, 1997, all options are 100% vested. All shares have been granted, exercised and canceled at $11.00 per share. OTHER: The Company also contributes to various multi-employer pension plans on behalf of union employees. Contributions to these plans for the years ended December 31, 1997, 1996 and 1995 were approximately $11,972, $10,406 and $10,705, respectively. 10. EARNINGS PER SHARE In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted earnings per share is provided as follows: <TABLE> <CAPTION> --------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1997 1996 1995 --------------------------------------------------------------------------------- <S> <C> <C> <C> NUMERATOR - BASIC AND DILUTED EARNINGS PER SHARE Net income $27,832 $27,348 $28,542 ================================================================================= DENOMINATOR - BASIC EARNINGS PER SHARE Common stock outstanding 18,250 18,066 17,802 Less restricted stock outstanding 652 595 525 ----------------------------- TOTAL 17,598 17,471 17,277 ----------------------------- Basic earnings per share $ 1.58 $ 1.57 $ 1.65 ================================================================================= DENOMINATOR - DILUTED EARNINGS PER SHARE Denominator - Basic Earnings per Share 17,598 17,471 17,277 Effect of Dilutive Securities: Common stock options 49 66 50 Restricted stock 314 295 322 ----------------------------- TOTAL 17,961 17,832 17,649 ----------------------------- Diluted earnings per share $ 1.55 $ 1.53 $ 1.62 ================================================================================= </TABLE> F-13
35 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 11. INCOME TAXES Provision for income taxes: <TABLE> <CAPTION> ----------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 ----------------------------------------------------------------------------- <S> <C> <C> <C> Federal Current $12,964 $ 9,727 $18,785 Deferred 646 3,470 (5,108) ----------------------------------------------------------------------------- 13,610 13,197 13,677 ----------------------------------------------------------------------------- State Current 2,656 2,372 3,802 Deferred 80 492 (717) ----------------------------------------------------------------------------- 2,736 2,864 3,085 ----------------------------------------------------------------------------- $16,346 $16,061 $16,762 ============================================================================= </TABLE> Reconciliation of statutory to effective tax rate: <TABLE> <CAPTION> ---------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 ---------------------------------------------------------------------------- <S> <C> <C> <C> Federal statutory tax rate 35.0% 35.0% 35.0% State taxes, net of federal tax benefit 4.0 4.3 4.4 Percentage depletion deduction (2.0) (1.3) (1.3) Other -- (1.0) (1.1) ---------------------------------------------------------------------------- 37.0% 37.0% 37.0% ============================================================================ </TABLE> Deferred tax assets and liabilities: <TABLE> <CAPTION> ------------------------------------------------------------- DECEMBER 31, 1997 1996 ------------------------------------------------------------- <S> <C> <C> DEFERRED TAX ASSETS: Accounts receivable $ 2,280 $ 2,041 Inventory 1,520 1,050 Property and equipment 2,508 2,319 Insurance accruals 8,301 7,529 Deferred compensation 2,144 1,879 Other accrued liabilities 3,113 3,012 Other 621 613 Valuation allowance -- -- ------------------------------------------------------------- 20,487 18,443 ------------------------------------------------------------- DEFERRED TAX LIABILITIES: Property and equipment 28,837 28,553 Contract recognition 1,207 199 TIC basis difference 1,355 -- Other 1,329 1,206 ------------------------------------------------------------- 32,728 29,958 ------------------------------------------------------------- $ (12,241) $ (11,515) ============================================================= </TABLE> F-14
36 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 12. LEASES Minimum rental commitments under all noncancellable operating leases, primarily quarry property and construction equipment, in effect at December 31, 1997 were: <TABLE> <CAPTION> Years Ending December 31, <S> <C> 1998 $ 4,923 1999 3,767 2000 3,047 2001 1,321 2002 1,165 Later years (through 2038) 7,190 --------------------------------------------------- Total minimum rental commitment $21,413 =================================================== </TABLE> Operating lease rental expense was $4,414 in 1997, $3,593 in 1996, and $4,261 in 1995. 13. SUBSEQUENT EVENTS On January 23, 1998 the Board of Directors declared a cash dividend of $0.075 per common share plus a special cash dividend of $0.12 per share of common stock to stockholders of record as of March 31, 1998, payable on April 17, 1998. On March 19, 1998 the Company issued long-term debt in the amount of $60 million to a group of institutional holders. The notes are due in nine equal annual installments beginning in 2002 and bear interest at 6.54% per annum. Proceeds of the notes will be used to retire a portion of existing debt and for general corporate purposes. F-15
37 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors Granite Construction Incorporated Watsonville, California Our report on the consolidated financial statements of Granite Construction Incorporated is included on page F-1 of this 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 22 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ COOPERS & LYBRAND L.L.P. - ---------------------------- Coopers & Lybrand L.L.P. San Jose, California February 13, 1998, except Note 13, as to which the date is March 19, 1998 S-1
38 SCHEDULE II GRANITE CONSTRUCTION INCORPORATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS) <TABLE> <CAPTION> ADDITIONS ------------------------- BALANCE AT ADJUSTMENTS BALANCE AT BEGINNING BAD DEBT AND END OF DESCRIPTION OF YEAR EXPENSE COLLECTIONS DEDUCTIONS(1) PERIOD - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts ....... $693 $ 759 $ 1,162 $(1,923) $691 ======================================================================= Allowance for notes receivable ........ $ 68 $ -- $ -- $ -- $ 68 ======================================================================= YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts ....... $898 $3,614 $ 1,576 $(5,395) $693 ======================================================================= Allowance for notes receivable ........ $ 68 $ -- $ -- $ -- $ 68 ======================================================================= YEAR ENDED DECEMBER 31, 1995 Allowance for doubtful accounts (2) ... $655 $ 743 $ 531 $(1,031) $898 ======================================================================= Allowance for notes receivable ......... $309 $ 68 $ (309) $ -- $ 68 ======================================================================= </TABLE> (1) Accounts deemed to be uncollectible and (2) $542 of adjustments related to the acquisition of Gibbons and Reed. S-2
39 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Granite Construction Incorporated on Form S-8 (File No. 33-36482 and 33-36485) of our report dated February 13, 1998 (except Note 13, as to which the date is March 19, 1998) on our audits of the consolidated financial statements and the financial statement schedule of Granite Construction Incorporated, as of December 31, 1997 and 1996, and the years ended December 31, 1997, 1996 and 1995, which report is included in the Annual Report on Form 10-K on Page F-1. San Jose, California March 27, 1998 22
40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 20, 1998 GRANITE CONSTRUCTION INCORPORATED By: /s/ William E. Barton ----------------------------------------- [William E. Barton, Vice President and Chief Financial Officer] Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 20, 1998, by the following persons in the capacities indicated. <TABLE> <S> <C> /s/ Richard C. Solari Chairman of the Board - ------------------------ and Director [Richard C. Solari] /s/ David H. Watts President, Chief Executive Officer, - ------------------------ and Director [David H. Watts] /s/ William E. Barton Vice President and Chief Financial Officer - ------------------------ Principal Accounting and Financial Officer [William E. Barton] /s/ Joseph J. Barclay Director - ------------------------ [Joseph J. Barclay] /s/ Richard M. Brooks Director - ------------------------ [Richard M. Brooks] /s/ Brian C. Kelly Director - ------------------------ [Brian C. Kelly] /s/ Rebecca A. McDonald Director - ------------------------ [Rebecca A. McDonald] /s/ Denman K. McNear Director - ------------------------ [Denman K. McNear] /s/ Raymond E. Miles Director - ------------------------ [Raymond E. Miles] </TABLE> 23
41 INDEX TO FORM 10-K EXHIBITS <TABLE> <CAPTION> Exhibit Page No. Description No. - --- ----------- --- <S> <C> <C> 3.1 Certificate of Incorporation of Granite Construction Incorporated [a] 3.2 Bylaws of Granite Construction Incorporated (as amended and restated effective February 27, 1991) [b] 10.1 Granite Construction Incorporated Employee Stock Ownership Plan, through amendments and Trust Agreement (**as to Trust Agreements only) [b] 10.1.a Amendment 3 to the Granite Construction Incorporated Employee Stock Ownership Plan, through amendments and Trust Agreement (**as to Trust Agreements only) [c] 10.1.b Amendment 4 to the Granite Construction Incorporated Employee Stock Ownership Plan as of May 21, 1993 [d] 10.1.c Amendment 5 to the Granite Construction Incorporated Employee Stock Ownership Plan adopted December 16, 1993 and effective January 1, 1994 [d] 10.1.d Amendment 6 to the Granite Construction Incorporated Employee Stock Ownership Plan adopted December 15, 1994 and effective January 1, 1995 [e] 10.1.e Amendment 7 to Granite Construction Incorporated Employee Stock Ownership Plan and Amendment 1 to the Trust Agreement adopted December 19, 1995, effective January 1, 1996 [g] 10.2 Amendment to and Restatement of the Granite Construction Company Profit Sharing and 401K Plan adopted December 15, 1994 and effective January 1, 1995 [e] 10.2.a Amendment to and Restatement of Granite Construction Incorporated Profit Sharing and 401K Plan and Trust Agreement adopted and effective as of December 15, 1994 [e] 10.2.b Amendment 2 to the Granite Construction Incorporated Profit Sharing and 401K Plan and Amendment 2 to the Trust Agreement adopted March 20, 1995 and effective January 1, 1996 [g] 10.2.c Amendment 3 to the Granite Construction Incorporated Profit Sharing and 401K Plan adopted August 23, 1996 and effective January 1, 1997 [h] 10.2.d Amendment 4 to the Granite Construction Incorporated Profit Sharing and 401(k) Plan adopted July 24, 1997 and effective January 1, 1995, January 1, 1997, February 3, 1997 and January 1, 1998 28 10.2.e Amendment 5 to the Granite Construction Incorporated Profit Sharing and 401(k) Plan adopted December 29, 1997 and effective January 1, 1997 and January 1, 1998 34 10.5 Credit Agreement dated and effective June 30, 1997 40 10.5.a First Amendment to the Credit Agreement entered into January 16, 1998 297 10.6 Form of Director and Officer Indemnification Agreement [a] 10.7 Form of Executive Officer Employment Agreement [a] </TABLE> 24
42 <TABLE> <S> <C> <C> 10.8 Stock Purchase Agreement among Granite Construction Incorporated, Gibbons Company and all of the Shareholders of Gibbons Company, dated March 17, 1995 [f] 10.9 Restated Gibbons Company Profit Sharing and Retirement Plan adopted December 30, 1994 and effective January 1, 1989 [h] 10.9.a First Amendment to the Restated Gibbons Company Profit Sharing and Retirement Plan adopted March 29, 1995 and effective January 1, 1989 [h] 10.9.b Second Amendment to the Restated Gibbons Company Profit Sharing and Retirement Plan adopted April 27, 1995 and effective May 8, 1995 and May 31, 1995 [h] 10.9.c Third Amendment to the Restated Gibbons Company Profit Sharing and Retirement Plan adopted June 23, 1995 and effective July 1, 1995 [h] 10.9.d Fourth Amendment to the Restated Gibbons Company Profit Sharing and Retirement Plan adopted December 1, 1995 [h] 10.9.e Fifth Amendment to the Restated Gibbons Company Profit Sharing and Retirement Plan adopted July 16, 1996 and effective January 1, 1995 [h] 10.9.f Sixth Amendment to the Restated Gibbons Company Profit Sharing and Retirement Plan adopted May 30, 1997 and effective January 1, 1989 and July 1, 1993 306 10.10 Granite Construction Incorporated Key Management Deferred Compensation Plan adopted and effective January 1, 1996 [h] 10.11 Granite Construction Incorporated Key Management Deferred Incentive Compensation Plan adopted and effective January 1, 1996 [h] 10.12 Stock Purchase Agreement between Granite Construction Incorporated and TIC Holdings, Inc. dated December 23, 1996 314 21.1 List of Subsidiaries of Granite Construction Incorporated [h] 24.1 Consent of Coopers & Lybrand L.L.P. is contained on page 23 of this Report 27.1 Financial Data Schedule - Year Ended December 31, 1997 433 27.2 Financial Data Schedule - Nine Months Ended September 30, 1997 434 27.3 Financial Data Schedule - Six Months Ended June 30, 1997 435 27.4 Financial Data Schedule - Three Months Ended March 31, 1997 436 27.5 Financial Data Schedule - Year Ended December 31, 1996 437 27.6 Financial Data Schedule - Nine Months Ended September 30, 1996 438 27.7 Financial Data Schedule - Six Months Ended June 30, 1996 439 27.8 Financial Data Schedule - Three Months Ended March 31, 1996 440 27.9 Financial Data Schedule - Year Ended December 31, 1995 441 </TABLE> [a] Incorporated by reference to the exhibits filed with the Company's Registration Statement on Form S-1 (No. 33-33795). [b] Incorporated by reference to the exhibits filed with the Company's Form 10-K for the year ended December 31, 1991. [c] Incorporated by reference to the exhibits filed with the Company's Form 10-K for the year ended December 31, 1992. [d] Incorporated by reference to the exhibits filed with the Company's 10-K for the year ended December 31, 1993. [e] Incorporated by reference to the exhibits filed with the Company's 10-K for the year ended December 31, 1994. [f] Incorporated by reference to the exhibits filed with the Company's 8-K dated May 8, 1995. [g] Incorporated by reference to the exhibits filed with the Company's 10-K for the year ended December 31, 1995. [h] Incorporated by reference to the exhibits filed with the Company's 10-K for the year ended December 31, 1996. 25