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2012A Year in REVIEW

COMPANY ADDRESSAnnual

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Dear Filanc Employees and Friends,

I am pleased to once again provide you with this Annual Company Address Booklet. Over the past few years, it has become a tradition at Filanc to review the successes of each year as well as what we have to look forward to in the New Year that is now upon us. While 2012 had its share of challenges, we were fortunate at Filanc to fi nish the year with some very real successes, due to a great extent to the eff orts and dedication of a wonderful team of Filanc employees.

One of the most exciting and rewarding successes was proving that we are “Master Builders” able to provide both design and construction services to our clients. This was only a concept a little more than a year ago, but today it is producing signifi cant rewards for the Company. Through honest and open communication, we have been able to make this transition without adversely aff ecting in any way the long-standing relationships we have with our many design-build partners. This has been a “win-win” for Filanc, especially when you consider it would be almost impossible in today’s construction environment to survive and be successful on “bid-build” work alone. The margins on today’s bid-build work are just not realistic to sustain a healthy business.

How we are perceived by our clients is very diff erent from just a few years ago. Today, we are judged on a number of key factors, not just by being the low bidder. More and more of our clients are looking to contractors who possess total design-build capabilities, and are also utilizing the “Select Bid Lists” to only allow the most qualifi ed companies to bid their work. This is the competitive environment that we prefer. We have the experience and qualifi ed staff to compete with even the largest contractors in the world.

Other Filanc success stories in 2012 included our progress toward becoming a “Lean” contractor. Filanc’s ability to do so is critical for our survival and being able to stay ahead of our competition. The Leadership Edge group has been playing a key role in advancing a number of Lean Practices concepts such as optimized purchasing and inventory management. Our Pacesetters Program led the development of new systems and procedures such as the Productivity

MessageCEO’S

MASTER BUILDERS

We are

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Planning Workbook and the Connect Program, which links Project Engineers from projects across the Company, have made a positive diff erence for us in 2012.

Filanc continues to grow outside of southern California. Our team in Arizona had another year of successes and Filanc is held in very high regard by our clients there. Colorado was a new region for us just a couple of years ago, but today we have completed a number of projects, and our team there has been able to take our business model and adopt it with signifi cant success. Filanc’s reputation is growing in Colorado and we are starting 2013 with some very exciting new work opportunities.

Finally, you may have noticed that there are a few large pipeline projects in our portfolio of new work. Water and wastewater conveyance work represents nearly 80 percent of the work in our industry and we could no longer ignore those opportunities. However, we will be selective and only pursue projects that make strategic sense. We already have a large design-build project at Camp Pendleton that shows great promise and we were awarded the City of San Diego’s fi rst public works CMAR project, the Upas Street pipeline replacement.

The future for Filanc in 2013 looks very promising, and we have a number of exciting things already in motion. We have a good backlog going into the year that is profi table work with good margins, and our joint venture relationships have already produced a signifi cant “win” for the team in the form of a $166 million successful bid for the IRWD Biosolids Project. All this means we have a “tiger by the tail” in that we are always working off our backlog and must continually replace it with new, profi table work. That’s why it is important to remember, as a contractor, you can’t fake your qualifi cations, you need to have the right resume to be successful.

In conclusion, I must mention the passing in December of our founder, and my Father, Jack Filanc. He had a dream 60 years ago that became something very special. Jack was a mentor and friend to countless individuals and his passing is a loss to all of us who knew him. However, he left us with a remarkable legacy of contracting excellence that we certainly will remember as we continue to build upon what he started so long ago.

Mark Filanc, CEOM k Fil CEO

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StatementOur Mission

Filanc provides construction services that result in added value beyond our clients’ expectations, consistently delivering the safest, highest quality product on schedule. We are the contractor that makes our customers say, “WOW!”. For these reasons, Filanc is the trusted contractor-of-choice for owners, teaming partners, and employees.

Filanc is the trustedcontractor-of-choice for

owners, teaming partners,and employees.

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We accomplish our mission by consistently delivering a project experience that is satisfying, not frustrating. Our relationships are friendly, not adversarial. We focus on solving problems, not creating them. We conduct our business with integrity. We work safely. We even have our fair share of fun.

We accomplish our mission by consistently delivering a project experience that

is satisfying.

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No matter how successful a Company is, there are always areas for improvement. Filanc is no exception. Years ago, we made the decision to grow the Company. However, we did not want to let go of the ‘”family atmosphere” tha t was such an integral part of Filanc from its beginning. While we have maintained our culture and work atmosphere, we have learned the hard way that many of our administrative and operational systems are not suffi cient to support stable growth of the Company. We have made some very positive improvements but still have some problem areas that need to be addressed. They include:

What’s in store for

2013 ?

Cost Controls

Purchasing Controls

Change Order

Management

Schedule Management

and Time Impact Analysis

Offi ce Construction

Engineering Support

Bid “Hand Off ”

Coaching

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We have already begun to “Map out” the necessary systems and procedures needed, and we have put in motion exactly what needs to be done in order to properly control the improvement processes. The nationally known construction industry consultant Fails Management Institute [FMI] was recently hired. They have already begun their review of our systems and procedures, and will also conduct employee interviews to determine what is missing and where we need to improve. Their recommendations should be ready sometime in March and we will be aggressively implementing our improvement plans thereafter.

Once our go-forward plan is fi nalized, we will conduct training and internal outreach to ensure that everyone is on the same page. It is critical that each Filanc team member embrace the changes we need to make. Anything we do to support our eff orts must be done with consistency and integrity. Roadblocks that are identifi ed must be removed, and there will be no excuses for not doing what needs be done. Where additional staffi ng is required, it will be provided to support our plan. Everyone must follow through on their commitments if we are to be successful. If we don’t build excellence into our systems and procedures, we will not only fail to grow, we will simply fail. In 2013, we want to hear all about the successes that will occur throughout the Company, and we will celebrate the “wins”!

Our expectations are very high as they must be. For example, we will expect those who have an expertise and knowledge in certain areas to pass it along intentionally to those who do not. If we do this, we can deliver work faster, better and in the most cost eff ective manner. To do so we need excellent systems and procedures. We know it can be done. Today, we are regarded by our peers in the industry as one of the best water/wastewater contractors in the Country. We owe it to ourselves to always be “the best of the best” - to be true Master Builders. It’s up to each Filanc team member to make a real diff erence in 2013!

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As with previous years, our October 2012 Strategic Planning Session was excellent. We came away from the event reaffi rming the importance of the Objectives that were established the year before, and to the long-term role they play in ensuring a strong future for the Company. It was agreed that our 2011 Objective “Creating a Communication Driven Culture” is an ongoing practice that is essential when implementing any and all changes and improvements to our systems. During the planning session, Five Strategic Objectives were agreed upon. They are as follows:

StrategicObjectivesOur 2013

Establish Filanc as a “Master Builder of Water Works” (for 2015).

Filanc will be a Rocky Mountain Region contractor generating

15% of its revenues by 2015.

Expand R&M throughout the Western US to generate 10% of

total Company revenue.

Create a communication driven culture.

Lean Construction

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AN EXCELLENT PROJECT DELIVERY SYSTEMFilanc is a self-performing contractor performing all aspects of project delivery from inception to design, planning, execution, and the fi nal hand-off to our client. There are several key elements of this system that must be executed to a defi ned standard, in order for Filanc to claim that our “Project Delivery System” is not only excellent, but the “best of the best”.

Those key elements include:

Opportunity Creation

Quality Estimating

Complete and thorough transfer of information from the estimating team to the project management team

Project management that delivers profi ts – safely, with quality, with predictability, with client satisfaction

Informed Executive Team

Risk Management Strategy

High Performance Personnel system

Resource management system, i.e. equipment, forms, people

Business fi nance system that is accurate, appropriate and timely

Communications protocol that captures the essence of an informed and collaborative workforce

IT that provides all the tools to effi ciently manage all aspects of the “Project Delivery System”

Engineering department that supports our Master Builder Objective through systems that promote quality, Value, Creativity, that is timely

Client feedback system that provides information that will continue to support our “Improvement Feedback Loop”

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FeedbackAnnual Address

Requesting employee feedback at the end of each Annual Employee Address Meeting has become a tradition. The comments you have off ered have been extremely helpful in identifying issues most important to you and how they might be best addressed. As in past years, small breakout groups were given specifi c assignments. They were then asked to report back to the entire group. This year, the following questions were posed to the groups. While it would be impossible to list all the responses in this Booklet, here are the questions along with selected responses.

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“Yes, benefi cial but…...”

“Current process is frustrating and needs to be specifi c by department and not so generic.”

“Proper follow through by supervisors and employees i s an obstacle.”

“Goals need to be achievable and measurable. Set a cap on tangible goals.”

“Need competencies for each position.”

“Need rewards for accomplishing goals.”

“Process needs to be focused on “end goals” and how to get there.”

“Disconnect salary discussion from coaching session.”

ANSWER

ANSWER

Quality estimating.Opportunity creation.

What “Top 5 Key Elements” of an Excellent Project Delivery System would

you select from the Key Project Delivery Elements?

Project Management that

delivers profi ts….safely with

quality, with predictability,

with client satisfaction.

A business fi nancial system

that is accurate, appropriate

and timely.

Complete and thorough

transfer of information from

the estimating team to the

project management team.

KEYELEMENTS5TO

PDo you believe the Coaching process is valuable and benefi cial? What

are the obstacles that need to be removed to make it successful?

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FEEDBACK SUMMARY

All the responses were very helpful and will be referred to as we address each item further in the months to come. The issues are real and it is very clear everyone understands what is important and where there is overlap. Here are some specifi c comments that will address each issue:

QUALITY ESTIMATINGIt is very clear we need a system that ensures a complete and accurate estimating. We will continually work on defi ning and evaluating our estimating process and the needed resources to maintain the quality of our bids. Even more focus will be placed on this evaluation during 2013.

PROJECT MANAGEMENTAs the size and complexity of our projects have increased, improving our scheduling capabilities has become a high priority. We now have a professional scheduler to work with our project management staff . Our ability to provide accurate and timely schedules is a critical management tool. Also, we need to do a much better job at managing our change order process. Our goal must be to have the necessary change order resources on staff to ensure the process is managed properly. Finally, in order to secure future work, we must have an excellent safety record, and dedicate appropriate resources to safety. This is critical to the Company’s future.

Annual Address Feedback continued

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OPPORTUNITY CREATIONWe are doing a good job at it now, but we always can do more. We will make sure we have the right resources available to provide support where it is most needed.

THE “BID HANDOFF”If we don’t do this right, it is a major loss of information that can get a project off to a poor start. Leadership Edge has created a detailed procedure to ensure all the right areas are addressed by the proper department personnel. We will be implementing this process on each and every project going forward.

BUSINESS FINANCIAL SYSTEMThis area ties directly to our cost control system. The right steps are now being taken to produce accurate and timely Cost to Complete reports. This is essential and we will do whatever it takes to make it happen. Project managers can’t do their job without this management tool.

HIGH PERFORMANCE PERSONNEL SYSTEMPersonnel performance is a result of the eff ectiveness of our Coaching process. It is clear we need to “re-tool” and simplify the process in order to make it more eff ective and meaningful. Each position should have a list of competencies so employees can move along with their careers knowing how their progress will be measured. In addition, the competencies provide an end goal so that the mystery is removed from the process. Proper training also needs to be provided since Coaching is a continuous process. We need to be clear about our expectations when it comes to the Coaching process. We are good at hiring the right employees. Now, we need to make sure they are provided with the tools they need to succeed and a meaningful Coaching experience, year after year.

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SummaryIn

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FINANCIAL RESOURCESFilanc continues to hold a very strong fi nancial position and the condition of our Balance Sheet is excellent.

FUTURE WORKWe are fortunate to have a very good backlog with reasonable margins going into 2013, and our prospects for new work continues to be very promising. We are looking to expand our pursuit in 2013 of large pipeline projects which will perfectly complement our other project delivery capabilities.

MASTER BUILDEROur transition to the Master Builder concept has been very successful for the Company. It further enhances our ability to respond according to our client needs, both from a design and a construction standpoint.

BECOMING A “LEAN” CONTRACTORThis concept is critical for our future success. Our Leadership Edge Group is providing valuable input on how we can best advance the Lean Practices concept, and we will be working hard this year to follow through with their recommendations.

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EXPANDING MARKET AREASThe Filanc teams in Arizona and Colorado continue to succeed and have been able to create a very favorable reputation for the Company. The result has been an ever-increasing list of satisfi ed clients.

EXCELLENCE IN WHATEVER WE DOIn today’s world, being “really good” at what we do is not enough. We need to look at all our processes and set “excellent” levels of expectations. Our processes and systems will be on a path of constant and continuous improvement so they always point us to our desired goals. At the same time, we need to look at the behaviors that lead to excellent results and then capitalize on them, over and over again. The systems we commit to must be implemented without failure, be accurate, be timely and shared with all involved intentionally.

OUR PEOPLEOur success over the years would not have been possible without the dedication and commitment of our employees. Their accomplishments have been remarkable, especially when you consider the many challenges we face together each and every day.

In Summary continued

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J.R. Filanc Construction Company, Inc.

www.fi lanc.com

CORPORATE HEADQUARTERS

740 North Andreasen Drive Escondido, California 92029 760.941.7130

ARIZONA

2928 North 35th Avenue, Suite 2 Phoenix, AZ 85017 602.544.3600

ROCKY MOUNTAIN

2727 W. 92nd Avenue, Suite 10 Federal Heights, CO 80260 303-513-2559