10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2005

OR

o 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: 0-19450

STERLING CONSTRUCTION COMPANY, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	25-1655321
(State of Incorporation)	(I.R.S. Employer Identification No.)

20810 FERNBUSH LANE
HOUSTON, TX 77073
(Address of principal executive offices)
(Zip Code)

(281) 821-9091
(Registrant’s telephone number, including area code)

(Former name, former address, and former fiscal year, if changed from last report)

     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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s)) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the Registrant is an accelerated filer (as described in Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of November 1, 2005, 8,161,823 shares of the Registrant’s Common Stock, $0.01 par value per share were issued and outstanding.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2005 (unaudited) and December 31, 2004	3
Condensed Consolidated Statements of Operations for the three and nine Months ended September 30, 2005 (unaudited) and September 30, 2004 (unaudited)	4
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2005 (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 (unaudited) and September 30, 2004 (unaudited)	6
Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3. Quantitative and Qualitative Disclosures about Market Risk	20
Item 4. Controls and Procedures	20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3. Defaults Upon Senior Securities	21
Item 4. Submission of Matters to a Vote of Security Holders	21
Item 5. Other Information	21
Item 6. Exhibits	21
SIGNATURES
Employeement Agreement - Maarten D. Hemsley
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certifications of CEO and CFO Pursuant to Section 906

2

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except share and per share data)

	September 30,			December 31,
	2005			2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	20,138		$	3,449
Contracts receivable		40,762			26,250
Costs and estimated earnings in excess of billings on uncompleted contracts		3,296			5,884
Deferred tax asset		4,824			3,986
Prepaid taxes		80			—
Assets of discontinued operations held for sale		8,823			7,343
Other		847			1,497
Total current assets		78,770			48,409
Property and equipment, net		27,130			21,028
Goodwill		12,735			12,735
Deferred tax asset		3,400			6,493
Other assets		754			879
		16,889			20,107
Total assets	$	122,789		$	89,544
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	29,245		$	14,382
Billings in excess of cost and estimated earnings on uncompleted contracts		12,017			4,477
Short-term debt, related parties		2,112			3,343
Current maturities of long term obligations		123			123
Liabilities of discontinued operations held for sale		8,582			7,786
Other accrued expenses		4,092			2,246
Total current liabilities		56,171			32,357
Long-term obligations:
Long-term debt		15,742			13,329
Long-term debt, related parties		6,865			7,755
Other long-term obligations		809			895
		23,416			21,979
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.01 per share; authorized 1,000,000 shares, none issued
Common stock, par value $0.01 per share; authorized 14,000,000 shares, 8,147,483 and 7,378,681 shares issued		81			74
Additional paid-in capital		83,642			80,688
Deferred compensation expense		(1,136	)		(161	)
Accumulated deficit		(39,385	)		(45,392	)
Treasury stock, at cost, — and 207 common shares		—			(1	)
Total stockholders’ equity		43,202			35,208
	$	122,789		$	89,544

The accompanying notes are an integral part of these condensed consolidated financial statements

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Revenues	$	61,163	$	40,221	$	157,805	$	95,161
Cost of revenues		54,261		36,323		141,541		83,970
Gross profit		6,902		3,898		16,264		11,191
General and administrative expenses, net		2,410		2,239		6,771		5,844
Interest expense, net of interest income		366		425		1,198		1,053
Income from continuing operations before minority interest and income taxes		4,126		1,234		8,295		4,294
Minority interest		—		253		—		862
Income from continuing operations Before income taxes		4,126		981		8,295		3,432
Income taxes		1,403		333		2,820		1,167
Net income from continuing operations		2,723		648		5,475		2,265
Net income from discontinued operations		57		68		532		342
Net income	$	2,780	$	716	$	6,007	$	2,607
Basic net income per share:
Income from continuing operations	$	0.35	$	0.12	$	0.72	$	0.43
Income from discontinued operations	$	0.01	$	0.01	$	0.07	$	0.06
Net income	$	0.36	$	0.13	$	0.79	$	0.49
Weighted average number of shares outstanding Used in computing basic per share amounts		7,801,717		5,343,508		7,638,261		5,274,730
Diluted net income per share:
Income from continuing operations	$	0.28	$	0.09	$	0.58	$	0.32
Income from discontinued operations	$	0.01	$	0.01	$	0.06	$	0.05
Net income	$	0.29	$	0.10	$	0.64	$	0.37
Weighted average number of shares outstanding Used in computing diluted per share amounts		9,704,822		7,127,758		9,467,306		7,158,697

The accompanying notes are an integral part of these condensed consolidated financial statements

4

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Dollar amounts in thousands)

(Unaudited)

			Deferred			Additional
	Common		Compensation			Paid-in		Accumulated			Treasury
	Stock		Expense			Capital		Deficit			Stock			Total
Balance at January 1, 2005	$	74	$	(161	)	$	80,688	$	(45,392	)	$	(1	)	$	35,208
Net income									6,007						6,007
Stock issued upon option and warrant exercise		7					785								792
Stock options granted				(1,331	)		1,331								—
Deferred compensation expense				356											356
Privatization of Steel City Products, Inc.												1			1
Reduction of valuation allowance – deferred tax asset							838								838
Balance at September 30, 2005	$	81	$	(1,136	)	$	83,642	$	(39,385	)		—		$	43,202

The accompanying notes are an integral part of this condensed consolidated financial statement

5

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

	Nine months ended September 30,
	2005			2004
CONTINUING OPERATIONS
Income from continuing operations	$	5,475		$	2,265
Adjustments to reconcile income from operations to net cash provided by (used in) continuing operating activities:
Depreciation and amortization		3,826			3,487
Gain on sale of surplus equipment		(215	)		(18	)
Deferred tax expense		2,820			1,167
Deferred compensation expense		356			314
Minority interest in net earnings of subsidiary		—			862
Accretion of zero coupon notes		—			466
Other changes in operating assets and liabilities:
Increase in contracts receivable		(14,512	)		(6,931	)
Decrease (increase) in costs and estimated earnings in excess of billings on uncompleted contracts		2,588			(3,880	)
Decrease in prepaid expense and other assets		660			1,069
Increase in trade payables		14,863			4,474
Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts		7,540			(4,993	)
Increase in accrued compensation and other liabilities		1,967			738
Net cash provided by (used in) continuing operating activities		25,368			(980	)
Cash flows from investing activities:
Additions to property and equipment		(9,948	)		(2,527	)
Proceeds from sale of surplus equipment		270			153
Net cash used in continuing investing activities		(9,678	)		(2,374	)
Cash flows from financing activities:
Cumulative daily drawdowns of revolvers		112,783			65,576
Cumulative daily reductions of revolvers		(110,370	)		(60,260	)
Repayments under long-term obligations		(2,206	)		(2,155	)
Issuance of common stock, pursuant to options and warrants		792			392
Net cash provided by continuing financing activities:		999			3,553

6

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

(Continued)

	Nine months ended September 30,
	2005			2004
DISCONTINUED OPERATIONS
Cash used in discontinued operating activities		(268	)		(799	)
Cash used for discontinued investing activities		—			(31	)
Cash provided by discontinued financing activities		400			1,217
Net cash provided by discontinued operations		132			387
Net increase in cash and cash equivalents from continuing operations		16,689			199
Cash and cash equivalents at beginning of period		3,449			2,651
Cash and cash equivalents at end of period	$	20,138		$	2,850
Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,591		$	861
Cash paid for income taxes	$	155		$	205
Supplemental disclosure of non-cash financing activities:
Reduction of deferred tax valuation allowance	$	838			—

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

STERLING CONSTRUCTION COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)

1. Basis of Presentation

     The condensed consolidated financial statements included herein have been prepared by Sterling Construction Company, Inc. (“Sterling” or “the Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the Company’s financial position at September 30, 2005 and the results of operations and cash flows for the periods presented.

     The accompanying condensed consolidated financial statements include the accounts of subsidiaries in which the Company has a greater than 50% ownership interest, and all intercompany accounts and transactions have been eliminated in consolidation.

     Interim results may be subject to significant seasonal variations and the results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year.

     The Company’s primary business consists of the operations of Texas Sterling Construction Company, LP, (“TSC”, or “Construction”), a heavy civil construction company based in Houston, Texas. The Company also operates a smaller business, which consists of the operations of Steel City Products, Inc. (“SCPI” or “Distribution”), a wholesale distributor of automotive accessories, non-food pet supplies and lawn and garden products, based in Pittsburgh, Pennsylvania. Recognizing the strong growth of Construction where management’s efforts and the Company’s resources are likely to be best employed in the future, and following expressions of interest from potential buyers of SCPI, management has identified SCPI as held for sale and accordingly, has reclassified its condensed consolidated financial statements for all periods to separately state Distribution as discontinued operations.

     Certain items in prior years have been reclassified to conform to the current year presentation. These items have no effect on previously reported net income. In addition, the consolidated statement of cash flows for the nine months ended September 30, 2004 has been reclassified to reflect the accretion of zero coupon notes as a non-cash reconciling item. The zero coupon notes were settled in December 2004 through payments of cash, issuance of notes and issuance of common stock.

Company Website

     The Company maintains a website at www.sterlingconstructionco.com. The Company makes available free of charge on or through its website, access to its latest Annual Report on Form 10-K, recent Quarterly Reports on Form 10-Q, proxy statements, current reports on Form 8-K and any amendments to those filings, as soon as reasonably practicable after the Company electronically files those materials with, or furnishes those materials to, the Securities and Exchange Commission. The Company makes its web site content available for informational purposes only. The web site content should not be relied upon for investment purposes.

2. Recent Accounting Pronouncements

     In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43” (“SFAS No. 151”), which is the result of its efforts to conform United States accounting standards for inventories with international accounting standards. SFAS No. 151 will be effective for inventory costs incurred during fiscal

8

years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS No. 151 will have an impact on its consolidated financial statements.

     In December 2004, the FASB issued FASB Statement No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”) which is a revision of FASB Statement No. 123 “Accounting for Stock-Based Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and amends FASB Statement No. 95, “Statement of Cash Flows”. The Company is required to adopt SFAS No. 123(R) beginning January 1, 2006. Pro forma disclosure, as was allowed under APB 25 and SFAS No. 123, will no longer be an alternative. In addition, SFAS No. 123(R) requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123(R) and for all stock options granted thereafter. Because the Company utilizes a fair value based method of accounting for stock-based compensation costs for all employee stock compensation awards granted, modified or settled since January 1, 2003 and will not have significant unvested awards from periods prior to January 1, 2003 outstanding at January 1, 2006, adoption of SFAS No. 123(R) is not expected to have a material impact on its financial statements.

     In March 2005, the FASB issued FASB Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 clarifies that an entity must record a liability for a “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. The provision must be adopted no later than the end of the fiscal year ending December 31, 2005. The Company does not expect the adoption of FIN 47 will have a material impact on its financial statements.

     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 is a replacement of APB 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt this pronouncement beginning in fiscal year 2006.

3. Critical Accounting Policies

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Management’s estimates, judgments and assumptions are continually evaluated based on available information and experience; however actual amounts could differ from those estimates. The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

9

4. Property and Equipment

(dollar amounts in thousands)	September 30, 2005			December 31, 2004
	(Unaudited)
Construction equipment	$	34,931		$	26,550
Transportation equipment		5,287			4,370
Buildings		1,488			1,488
Office furniture and equipment		486			438
Land		182			182
		42,374			33,028
Less accumulated depreciation		(15,244	)		(12,000	)
	$	27,130		$	21,028

5. Income Per Share

     Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed giving effect to all potential dilutive common stock options and warrants using the treasury stock method. The following table reconciles the numerators and denominators of the basic and diluted per common share computations for net income from continuing operations and discontinued operations. In the three and nine months ended September 30, 2005, 28,800 options were excluded from the weighted average calculation as these had an anti-dilutive effect. (Table amounts in thousands, except per share data):

	Three months ended				Nine months ended
	September 30,				September 30,
	2005		2004		2005		2004
Numerator:
Net income from continuing operations, as reported	$	2,723	$	648	$	5,475	$	2,265
Add back interest on convertible debt, net of tax		—		11		—		33
Net income from continuing operations before interest on convertible debt	$	2,723	$	659	$	5,475	$	2,298
Income from discontinued operations, net of taxes	$	57	$	68	$	532	$	342
Net income before interest on convertible debt	$	2,780	$	727	$	6,007	$	2,640
Denominator:
Weighted average common shares outstanding – basic		7,802		5,344		7,638		5,275
Shares for convertible debt		—		224		—		224
Shares for dilutive stock options and warrants		1,903		1,560		1,829		1,660
Weighted average common shares outstanding and assumed conversions – diluted		9,705		7,128		9,467		7,159

10

	Three months ended				Nine months ended
	September 30,				September 30,
	2005		2004		2005		2004
Continuing operations:
Basic net income per common share	$	0.35	$	0.12	$	0.72	$	0.43
Diluted net income per common share	$	0.28	$	0.09	$	0.58	$	0.32
Discontinued operations:
Basic net income per common share	$	0.01	$	0.01	$	0.07	$	0.06
Diluted net income per common share	$	0.01	$	0.01	$	0.06	$	0.05
Total:
Basic net income per common share	$	0.36	$	0.13	$	0.79	$	0.49
Diluted net income per common share	$	0.29	$	0.10	$	0.64	$	0.37

6. Stock-Based Compensation

     The Company accounts for its stock-based compensation under the provisions of SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure”, which amended SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method. The Company adopted SFAS No. 148 effective January 1, 2003 utilizing the prospective method for options granted after that date and uses a Black-Scholes option pricing model for calculations of the fair value of options granted after January 1, 2003.

     The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation prior to January 1, 2003 (dollar amounts in thousands, except per share data).

	Three months ended						Nine months ended
	September 30,						September 30,
	2005			2004			2005			2004
Net income from continuing operations, as reported	$	2,723		$	648		$	5,475		$	2,265
Add: Stock-based employee compensation expense included in reported net income, net of related tax effect		111			56			356			278
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(104	)		(32	)		(331	)		(60	)
Pro forma net income from continuing operations	$	2,730		$	672		$	5,500		$	2,483
Net income from discontinued operations	$	57		$	68		$	532		$	342
Pro forma net income	$	2,787		$	740		$	6,032		$	2,825
Basic and diluted net income per share:
From continuing operations:
Basic, as reported	$	0.35		$	0.12		$	0.72		$	0.43
Diluted, as reported	$	0.28		$	0.09		$	0.58		$	0.32
Pro forma, basic	$	0.35		$	0.13		$	0.72		$	0.47
Pro forma, diluted	$	0.28		$	0.09		$	0.58		$	0.35
From discontinued operations:
Basic, as reported	$	0.01		$	0.01		$	0.07		$	0.06

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	Three months ended				Nine months ended
	September 30,				September 30,
	2005		2004		2005		2004
Diluted, as reported	$	0.01	$	0.01	$	0.06	$	0.05
Pro forma, basic	$	0.01	$	0.01	$	0.07	$	0.06
Pro forma, diluted	$	0.01	$	0.01	$	0.06	$	0.05
Total:
Basic, as reported	$	0.36	$	0.13	$	0.79	$	0.49
Diluted, as reported	$	0.29	$	0.10	$	0.64	$	0.37
Pro forma, basic	$	0.36	$	0.14	$	0.79	$	0.53
Pro forma, diluted	$	0.29	$	0.10	$	0.64	$	0.40

7. Discontinued Operations

     Recognizing the strong growth of Construction’s business, where management’s efforts and the Company’s resources are likely to be best employed in the future, and following expressions of interest from potential buyers of SCPI, management has identified SCPI as held for sale and accordingly, has reclassified its condensed consolidated financial statements for all periods to separately state Distribution as discontinued operations.

     Summarized financial information for discontinued operations is presented below:

	Three months ended				Nine months ended
	September 30,				September 30,
	2005		2004		2005		2004
Net sales	$	4,933	$	5,453	$	17,559	$	17,565
Income before income taxes		94		103		798		543
Income taxes		37		35		266		201
Income from discontinued operations	$	57	$	68	$	532	$	342

     The following is a summary of the assets and liabilities of discontinued operations:

(in thousands)	September 30, 2005		December 31, 2004
Assets
Current assets	$	8,477	$	7,012
Property, plant and equipment, net		213		199
Goodwill		128		128
Other assets		5		4
	$	8,823	$	7,343
Liabilities
Current liabilities	$	8,517	$	7,753
Long-term obligations, net of current portion		65		33
	$	8,582	$	7,786
Net assets (liabilities) of discontinued operations	$	241		($443	)

     The assets and liabilities of discontinued operations have all been classified as current in the consolidated balance sheet as disposal is expected to occur in less than one year.

     The disposal is expected to result in a gain which has not been recognized in the consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

     This quarterly report on Form 10-Q includes certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These forward-looking statements may be included throughout this report, including in the sections entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We use the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future” and similar terms and phrases to identify forward-looking statements in this report.

     Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.

     Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:

• changes in general economic conditions or reductions in government funding for infrastructure services;

• adverse economic conditions in our core markets in Texas;

• delays or difficulties related to the completion of our projects, including additional costs, reductions in revenues or the payment of liquidated damages;

• actions of suppliers, subcontractors, customers, competitors and others which are beyond our control;

• the effects of estimates inherent in our percentage-of-completion accounting policies;

• possible cost escalations associated with our fixed-price contracts;

• our dependence on a few significant customers;

• adverse weather conditions;

• the presence of competitors with greater financial resources and the impact of competitive services and pricing; and

• our ability to successfully identify, integrate and complete acquisitions;

     Potential investors are urged to consider these factors and the other factors described under “Risk Factors” carefully in evaluating any forward-looking statements and are cautioned not

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to place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements that we make in this report are reasonable, we can provide no assurance that such plans, intentions or expectations will be achieved.

     The forward-looking statements included herein are made only as of the date of this report, and we undertake no obligation to update any information contained in this report or to publicly release the results of any revisions to any forward-looking statements that may be made to reflect events or circumstances that occur, or that we become aware of, after the date of this report, except as may be required by applicable securities laws.

Overview

     We are a leading heavy civil construction company based in Houston that specializes in the building, rebuilding and repair of transportation and water infrastructure in large and growing markets in Texas (“TSC” or “Construction”). Our transportation infrastructure projects include highways, roads, bridges and light rail, and our water infrastructure projects include water, wastewater and storm drainage systems. We provide general contracting services primarily to public sector clients utilizing our own workforce and equipment for excavating, paving, pipe installation and concrete placement. We purchase the necessary materials for our projects and generally engage subcontractors only for ancillary services.

     Our smaller distribution business is conducted in Pittsburgh, Pennsylvania under the name “Steel City Products” (“SCPI”).

     In 2004, the minority interests in TSC and SCPI were acquired by the Company.

     Recognizing the strong growth of Construction’s business, where management’s efforts and the Company’s resources are likely to be best employed in the future, and following expressions of interest from potential buyers of SCPI, we have identified the business of SCPI as held for sale and accordingly, have reclassified the condensed consolidated financial statements for all periods to reflect SCPI as discontinued operations.

Material Changes in Financial Condition

     At September 30, 2005, there had been no material changes in the Company’s financial condition since December 31, 2004, as discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Results of Operations

Three months ended September 30, 2005 compared with three months ended September 30, 2004

(dollar amounts in thousands):	2005			2004			% change
Revenues	$	61,163		$	40,221			52.1	%
Gross profit		6,902			3,898			77.1	%
Gross profit %		11.3	%		9.7	%		16.4	%
General and administrative expenses		2,410			2,239			7.6	%
Operating income		4,492			1,659			170.8	%
Operating income %		7.3	%		4.1	%		78.1	%
Interest expense, net		366			425			(13.9	%)
Income from continuing operations, before minority interest		4,126			1,234			234.4	%

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(dollar amounts in thousands):	2005		2004		% change
Minority interest		—		253		(100	%)
Income taxes		1,403		333		321.3	%
Net income from continuing operations		2,723		648		320.2	%
Net income from discontinued operations		57		68		(16.2	%)
Net income	$	2,780	$	716		288.3	%

     Revenues Our revenues increased $20.9 million or 52%, to $61.2 million in the third quarter of 2005 compared to $40.2 million last year. Revenues from state highway work increased $7.6 million, or 67%, and municipal revenues increased $13.4 million, or 46%, compared with the third quarter of the prior year. These increases were due to several factors, including:

     •      a growing backlog, which enabled us to expand our equipment fleet and to hire more field crews, especially in the San Antonio market;

     •      the continuing expansion of our construction capabilities which has allowed us to bid for and take on more complex work; and

     •      certain water main projects in process in the current year quarter included large diameter pipe, facilitating greater revenues to be generated by our crews.

We did not encounter any significant adverse weather in the third quarter this year or last. Although the evacuations due to Hurricane Rita interrupted work on most contracts for several days in September, the hurricane did not cause damage to any of our equipment or job sites.

     Gross profit Gross profit for the third quarter of 2005 increased $3.0 million, or 77%, to $6.9 million, compared with gross profit in our third quarter of 2004 of $3.9 million. The improvement was due to the substantial revenue increase, combined with better gross margins, which increased to 11.3% of revenues in the third quarter of 2005 from 9.7% in the third quarter of 2004. The margin improvement is attributable principally to a better margin mix in backlog resulting from the improving bidding climate since last year, together with good productivity from large diameter water main work, the achievement of incentives on the early completion of certain contracts, and lower insurance costs. These factors more than offset increases in equipment maintenance due to the high production levels this year, and higher fuel costs.

     Backlog At the end of the third quarter our backlog of construction projects was $288 million, compared with $232 million at the beginning of fiscal 2005. A favorable bidding climate in most of our markets enabled us to add new contracts this year at a greater rate than they have been built.

     General and administrative expenses, net of other income and expense General and administrative expenses, net of other income and expense increased by $171,000 in the third quarter of 2005 due to the hiring of additional staff, increases in option compensation expense and higher legal and accounting fees. These increases were offset in part by gains on the sale of surplus equipment.

     Operating income Our operating income increased $2.8 million, or 171% to $4.5 million in the third quarter of 2005 compared to $1.7 million last year, and our operating margin increased to 7.3% in the third quarter of 2005 compared to 4.1% for the third quarter of 2004. This was largely driven by the 77% increase in gross profits without a corresponding increase in general and administrative expenses.

     Interest expense, net of interest income Interest expense, net of interest income decreased by $59,000 in the third quarter of 2005, due to increases in interest income earned on contracts receivable and to lower revolving credit balances throughout the quarter

15

     Minority interest In December 2004 we purchased the 19.9% of SHH that we did not previously own. Accordingly, there is no minority interest expense recorded in the current quarter.

     Income taxes Federal income tax expense is computed at the expected rate for the year of 34%. Income tax expense increased by $1.1 million in the third quarter of 2005, due to the higher earnings level. The Company’s federal income taxes are largely sheltered by net operating loss carryforwards.

     Net income from continuing operations Our net income from continuing operations increased $2.1 million, or 320% to $2.7 million in the third quarter of 2005 from $0.6 million in our third quarter last year. This growth was due to our strong gross profit and commensurate higher operating income, as well as the absence of minority interest expense this year.

     Discontinued operations SCPI reported sales of $4.9 million, a decrease of $0.5 million from the prior year third quarter, due primarily to decreases in sales of automotive products. Gross margins improved to 14.2 % from 13.6% last year, due to price increases and to the mix of products sold. Operating income was $171,000 compared with $165,000 in the prior year third quarter. Net of interest expense of $78,000 and taxes at a 34% expected rate, SCPI reported income of $57,000 in the current year third quarter, compared with $68,000 last year.

Nine months ended September 30, 2005 compared with nine months ended September 30, 2004

(dollar amounts in thousands):	2005			2004			% change
Revenues	$	157,805		$	95,161			65.8	%
Gross profit		16,264			11,191			45.3	%
Gross profit %		10.3	%		11.8	%		(12.4	%)
General and administrative expenses		6,771			5,844			15.9	%
Operating income		9,493			5,347			77.5	%
Operating income %		6.0	%		5.6	%		7.1	%
Interest expense, net		1,198			1,053			13.8	%
Income from continuing operations, before minority interest		8,295			4,294			93.2	%
Minority interest		—			862			(100	%)
Income taxes		2,820			1,167			141.6	%
Net income from continuing operations		5,475			2,265			141.7	%
Net income from discontinued operations		532			342			55.6	%
Net income	$	6,007		$	2,607			130.4	%

     Revenues Our revenues increased $62.6 million or 66%, to $157.8 million in the first nine months of 2005, compared to $95.2 million in the first nine months last year. Revenues from state highway work increased $23.0 million, or 75%, and municipal revenues increased $39.6 million, or 61%, compared with the prior year. These increases were due to several factors, including:

     •      a growing backlog, which enabled us to expand our equipment fleet and to hire more field crews, especially in the San Antonio market;

     •       the continuing expansion of our construction capabilities which has allowed us to bid for and take on more complex work; and

     •       certain water main projects in process in the third quarter of the current year included large diameter pipe, facilitating greater revenues to be generated by our crews; and

16

     •       better weather in the first half of 2005 provided for continuous work on construction projects, compared with one of the wettest periods on record in the first half of 2004

     Gross profit Gross profit for the first nine months of 2005 increased $5.1 million, or 45%, to $16.3 million, compared with gross profit in our first nine months of 2004 of $11.2 million. The improvement was due to the 66% revenue increase, offset by lower gross margins, which decreased to 10.3% of revenues from 11.8% in the prior year. Although we have seen a gradual improvement in gross margins in our backlog in 2005 compared with 2004, the second quarter of 2004 reported much higher gross margins than usual due to the successful completion of a number of contracts. Also, there were losses in the first half this year on some smaller contracts in the Dallas/Fort Worth market.

     General and administrative expenses, net of other income and expense General and administrative expenses increased by $927,000, or 16%, for the first nine months of 2005, due principally to the hiring of additional personnel to support our enlarged backlog, to increases in variable compensation accruals reflecting our improved profit levels, and to increased accounting and legal fees.

     Operating income Our operating income increased $4.1 million, or 78% to $9.5 million in the first nine months of 2005 from $5.3 million in the same period of 2004. This increase is due primarily to our increased gross profit levels. Our operating margin increased to 6.0% for the first nine months of 2005 compared to 5.6% for the same period of 2004. This was also due to our increased gross profits and the efficiencies associated with scale in our operations.

     Interest expense, net of interest income Interest expense, net of interest income increased $0.1 million from the prior year, due primarily to the issuance of debt in December 2004 in connection with the purchase of the minority interest in SHH.

     Minority interest In December 2004 we purchased the 19.9% of SHH that we did not previously own. Accordingly, there was no minority interest expense recorded in the current year.

     Income taxes Federal income tax expense is computed at the expected rate of 34%. Income tax expense increased by $1.7 million for the first nine months of 2005 due to the higher earnings level. Our federal income taxes are largely sheltered by net operating loss carryforwards.

     Net income from continuing operations Our net income from continuing operations increased by $3.2 million or 142% to $5.5 million for the first nine months of 2005 compared to $2.3 million in the first nine months of 2004. This increase was due to the higher operating income and the absence of minority interest expense this year.

     Discontinued operations SCPI reported sales of $17.6 million, essentially unchanged from the prior year. Gross profit increased by approximately $200,000, reflecting an improvement in gross margins to 15.6% of sales compared with 14.5% in the first nine months of the prior year, due to changes in product mix and certain price increases. Operating income was $1.0 million compared with $715,000 in the prior year. Net of interest expense of $202,000 and taxes at an expected rate of 34%, SCPI reported income of $532,000 in the current year, compared with $342,000 in the first nine months of 2004.

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Liquidity and Capital Resources

Cash Flows

     The following table sets forth our cash flows for the nine months ended September 30, 2005 and 2004.

	Nine months ended
	September 30,
(in thousands) (unaudited)	2005			2004
Cash and cash equivalents	$	20,138		$	2,850
Net cash provided by (used in) continuing operations:
Operating activities		25,368			(980	)
Investing activities		(9,678	)		(2,374	)
Financing activities		999			3,553
Cash from discontinued operations		132			387
Capital expenditures	$	9,948		$	2,527
Working capital	$	22,599		$	18,167

Operating activities

     Significant non-cash items included in operating activities are:

     •       depreciation and amortization, which for the nine months totaled $3.8 million, an increase of $0.3 million from last year, as a result of the increase in the size of our construction fleet in 2005;

     •       deferred tax expense increased by $1.6 million due to the increase in operating income.

     Despite the significant increase in revenues this year, there was a reduction in total working capital requirements of $13.1 million, whereas there was an increase in working capital requirements last year of $9.5 million. The significant components of the changes in working capital are as follows:

     •       there was a decrease of $2.6 million in costs in excess of billings on uncompleted contracts this year, compared with an increase of $3.9 million last year. These changes reflect the resolution of timing differences as contracts progress;

     •       billings in excess of costs on uncompleted contracts increased by $7.5 million this year, whereas last year there was a decrease of $5.0 million. These changes principally reflect fluctuations in the timing and amount of mobilization payments to assist in the start-up on certain contracts;

     •       trade payables increased by $14.9 million this year, compared with an increase of $4.5 million last year, principally reflecting the increased level of revenues this year;

     •       contracts receivable increased $14.5 million this year, compared with an increase of $6.9 million last year, principally reflecting the revenue increase and related level of customer retentions.

Financing activities

     Expenditures to expand our construction fleet were $9.9 million in the first nine months of 2005, compared with $2.5 million last year. The much enlarged contract backlog required a significant expansion in our fleet this year.

Investing activities

     Cash provided by operations, combined with the reduced level of working capital, more than offset the high level of capital expenditures this year, funding long-term debt repayments of

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$2.2 million and resulting in a substantial increase in our cash position. For the first nine months of 2005 cash increased by $16.7 million, of which $2.4 million was derived from an increase in our revolving line of credit. Last year there was an increase in the line of credit of $5.3 million because capital expenditures, long-term debt repayments and working capital requirements exceeded cash provided by operations.

     Funds received from the exercise of warrants by NASCIT and options by employees and directors increased by $400,000 compared with last year.

Liquidity

     The level of working capital for our construction business varies due to fluctuations in the levels of cost and estimated earnings in excess of billings, and of billings in excess of cost and estimated earnings, based in part on revenue levels; the size and status of contract mobilization payments, of customer receivables and of contract retentions; and the level of amounts owed to suppliers and sub-contractors. Some of these fluctuations can be significant.

Sources of Capital

     In addition to cash provided from operations, we use our revolving line of credit to finance working capital needs and capital expenditures.

     We have three-year revolving line of credit, maturing in May 2007, with Comerica Bank providing for a maximum line of $17.0 million, subject to a borrowing base. The line of credit carries interest at the lender’s prime rate, subject to achievement of certain financial targets and is secured by the equipment and real estate owned by TSC. At September 30, 2005, the interest rate payable under the line of credit was 6.75%. At September 30, 2005, we had cash and cash equivalents of $20.1 million and availability under the line of credit of $1.3 million. By the terms of the revolver, we are required to maintain financial covenants of debt, current and cash flow coverage ratios and at September 30, 2005, we were in compliance with all of these covenants.

Risk Factors

     The Company is subject to various risks and uncertainties. Many factors affect the bidding climate, including, but not limited to, fluctuations in the Texas economy, the amount of local, state and federal government funds available for infrastructure upgrade and new construction, as well as the number of bidders in the market and the prices at which they are prepared to bid, which are in turn affected by such bidders’ profitability, financial viability and contract backlogs. Factors outside the bidding climate include, but are not limited to: (a) weather conditions, such as precipitation and temperature, which can result in significant variability in quarterly revenues and earnings, particularly in the first and fourth quarters; (b) the availability of bonding, the absence of which would adversely affect our ability to obtain new contracts; (c) the extent to which our self-insurance plans experience abnormal losses; (d) our dependence upon subcontractors and third party suppliers of materials; (e) the price and availability of petroleum products, steel, cement and other construction materials (including, for example, recent market shortages of aggregates and cement), which can significantly fluctuate and impact operating expense; (f) the availability of heavy construction equipment, and (g) the availability of qualified management, supervisory and field personnel.

Inflation

     We do not believe that inflation has had a material negative impact on our operations or financial results during recent years, although increases in oil prices have recently affected the costs of operating our construction fleet and will affect transportation costs and some material costs.

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Item 3. Qualitative and Quantitative Disclosure about Market Risk

     We are exposed to certain market risks from transactions that are entered into during the normal course of business. Our primary market risk exposure is related to changes in interest rates. We manage our interest rate risk by balancing in part our exposure to fixed and variable interest rates while attempting to minimize interest costs.

     Financial derivatives are used as part of our overall risk management strategy. These instruments are used to manage risk related to changes in interest rates. The Company’s portfolio of derivative financial instruments consists of interest rate swap agreements, which are used to convert variable interest rate obligations to fixed interest rate obligations, thereby reducing the exposure to increases in interest rates. Amounts paid or received under interest rate swap agreements are accrued as interest rates fluctuate, with the offset recorded in interest expense.

     An increase of 1% in the market rate of interest would have increased our interest expense for the three and nine months ended September 30, 2005 by approximately $39,000 and $195,000, respectively.

     We apply SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, pursuant to which our interest rate swaps have not been designated as hedging instruments; therefore changes in fair value are recognized in current earnings.

     Because we derive no revenues from foreign countries and have no obligations in foreign currency, we experience no direct foreign currency exchange rate risk. However, prices of certain raw materials and consumables, such as oil, steel and cement, may be affected by currency fluctuations.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     We maintain “disclosure controls and procedures”, as that phrase is defined in Rules 13a-14 and 15d-14 of the Exchange Act, that are designed to ensure that information required to be disclosed in our reports, filed pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer, President and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost/benefit relationship of possible controls and procedures.

     Our Chief Executive Officer and Chief Financial Officer (the principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our “disclosure controls and procedures” as of September 30, 2005. Based on their evaluation, they concluded that our controls and procedures are effective.

     During the period July 1 through September 30, 2005, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

     There are no material legal proceedings outstanding against the Company.

Item 2. Unregistered Sales of Equity and Use of Proceeds

     None

Item 3. Defaults upon Senior Securities

     None

Item 4. Submission of Matters to a Vote of Security Holders

     None

Item 5. Other Information

     None

Item 6. Exhibits

(a) Exhibits

     #*10.1 Employment Agreement dated as of July 13, 2005, by and between Maarten D. Hemsley and Sterling Construction Company, Inc.,

     *31.1 Certification of Patrick T. Manning, Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)

     *31.2 Certification of Maarten D. Hemsley, Chief Financial Officer, pursuant to Exchange Act Rule 13a-14(a)

     *32.0 Certification of Patrick T. Manning, Chief Executive Officer and Maarten D. Hemsley, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

#	Management contract or compensatory plan or arrangement
*	filed herewith

21

SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

STERLING CONSTRUCTION COMPANY, INC.

Date: November 7, 2005	By:	/s/ Patrick T. Manning.
	Patrick T. Manning.
	Chairman and Chief Executive Officer
Date: November 7, 2005	By:	/s/ Maarten D. Hemsley
	Maarten D. Hemsley
	Chief Financial Officer

22

EX-10.1

Maarten D. Hemsley
Executive Employment Agreement

This Executive Employment Agreement (this “Agreement”) is made and entered into as of the 13th day of July, 2005 to become effective except as noted below on July 18, 2005 (the “Effective Date”) by and between Sterling Construction Company, Inc. with a place of business in Harris County, Texas, (the “Company”) and Maarten D. Hemsley (“Mr. Hemsley”).

In consideration of the following covenants and conditions and for other good and valuable consideration, the parties agree as follows:

1. Prior Agreements. The term of Mr. Hemsley’s employment agreement that terminated on the date hereof is hereby extended to the Effective Date. Upon the Effective Date, this Agreement supersedes that agreement and any and all other employment agreements, written or oral between the Company and Mr. Hemsley.

2.	Employment. The Company hereby employs Mr. Hemsley, and Mr. Hemsley hereby accepts employment for the term, at the salary, with the benefits and for the other consideration set forth herein and on the conditions specified herein.
3.	Duties and Responsibilities.

(a)	Mr. Hemsley agrees to perform to the best of his ability the duties of Chief Financial Officer of a publicly traded company with such other duties relating to that position as the Chief Executive Officer and the Board of Directors of the Company (the “Board”) may assign from time to time.
(b)	Mr. Hemsley agrees (i) to devote such portion of his productive time, ability and attention to the diligent prosecution of the business and affairs of the Company as is necessary for the discharge of his duties hereunder; and (ii) to conform to, and/or comply with, all lawful rules, regulations, instructions, personnel practices and policies of the Company that are not inconsistent with this Agreement, whether now in force or hereafter adopted.
(c)	The foregoing provisions shall not prevent or restrict Mr. Hemsley from undertaking other employment, provided such other employment does not interfere with the carrying out of his duties hereunder.

4. Term and Place of Employment.

(a) Term.

(i)

The original term of this Agreement shall commence on the Effective Date and shall expire (unless renewed) at the close of business on the second anniversary of the Effective Date (the “Original Term”) unless sooner terminated in accordance with the terms and provisions hereinafter set forth.

(ii)

This Agreement shall be renewed and extended for a period of twelve (12) months on the second anniversary of the Effective Date and on each successive anniversary thereafter if not less than ninety (90) days prior to the second anniversary (or, if previously renewed and extended, any succeeding anniversary) of the Effective Date (the “Renewal Notice Date”) (A) the Company pursuant to a resolution of the Board shall have given Mr. Hemsley written notice that it has determined to renew this Agreement; and (B) Mr. Hemsley shall not have exercised any right herein to terminate his employment and this Agreement.

(b) Place of Employment. Although Mr. Hemsley will not be based at the Company’s offices in Houston, Texas, he shall travel to the Company’s offices at such time and with such frequency as is reasonably required to fulfill his duties.

5. Compensation and Benefits. The compensation and benefits payable hereunder shall be in consideration of the performance by Mr. Hemsley of his responsibilities, duties and obligations described in this Agreement for the Company.

(a)	Base Salary. The Company shall pay Mr. Hemsley an annual base salary of $135,000 (“Base Salary”) in bi-weekly installments, subject to pro-ration as to any partial period and to withholding and other deductions as provided in this Agreement.
(b)	Incentive Compensation.

(i)

Bonus. In addition to his Base Salary, the Company shall pay Mr. Hemsley a bonus of $50,000 in respect of any fiscal year during which the Company on a consolidated basis achieves 75% or greater of the EBITDA projected in the budget for the fiscal year in question after adjusting the same by adding to such EBITDA any bonuses paid to employees of the Company and its Affiliates that are directly based on the profitability of the Company or of any Affiliate. For purposes of this Section 5(b)(i), the budget for a given fiscal year shall mean the budget that has been approved by the Board. If the Board fails to approve a budget for a fiscal year, the “EBITDA projected in the budget” shall be the actual EBITDA for the preceding fiscal year. For purposes of this Agreement, EBITDA shall have the meaning assigned to such term in Schedule A hereto. In calculating EBITDA for a given year, appropriate adjustments shall be made for any material changes in the Company’s business that occur during such year, such as the sale of a part of the business. In the case of such a change, the budgeted results for that part of the Company for the period following the sale would be excluded from the budget.

(ii)

Additional Bonus. In addition to any amounts payable pursuant to Section 5(b)(i), above, the Company shall pay Mr. Hemsley such additional incentive bonus, if any, with respect to each fiscal year as the Compensation Committee of the Board deems appropriate after taking into consideration the Company’s consolidated financial results, the number of non-routine business transactions to which Mr. Hemsley devoted substantial time and such other matters as the Compensation Committee deems relevant. In no event shall such additional incentive bonus exceed $75,000.

(c)	Equity Compensation. On or as of each anniversary of the Effective Date, the Company shall grant Mr. Hemsley an option to purchase 2,800 shares of the Company’s common stock at an exercise price per share equal to the fair market value of a share of the Company’s common stock on the date of grant. Each such option shall be an incentive stock option to the extent permitted by applicable tax laws, shall expire five (5) years from the date of grant, and shall become exercisable in full on July 18, 2007. Each such option shall continue in full force and effect notwithstanding the termination of Mr. Hemsley’s employment hereunder unless such termination is pursuant to Section 6(c) (“The Company’s Right to Terminate for Good Cause”), below, in which event each such option shall terminate on the date that Mr. Hemsley’s employment terminates.
(d)	Benefits; Other Compensation. Mr. Hemsley shall be entitled to participate in those fringe benefits, benefit plans, bonus plans or programs and other compensation of the Company and the Affiliates (“Benefit Plans”) at any time made available generally to its employees or senior employees.
(e)	Payroll Taxes and Other Deductions. The Company shall withhold from Base Salary and any other compensation paid to Mr. Hemsley all applicable withholding and other payroll taxes due with respect thereto and such other deductions as shall be related to Mr. Hemsley’s participation in the insurance or other Benefit Plans, if any, from time to time established and maintained by the Company or the Affiliates for salaried employees.
(f)	The Company shall provide a minimum of $100,000 of term life insurance for Mr. Hemsley’s benefit and shall continue to provide for his benefit the long-term disability policy which is has provided heretofore.
(g)	Business Expenses. The Company shall reimburse to Mr. Hemsley his reasonable and necessary business expenses incurred by him in the performance of his duties and responsibilities

Maarten D. Hemsley Executive Employment Agreement Page 2 of 10

	hereunder, including, without limitation, travel to the Company’s facilities, all in accordance with applicable policies, as such may exist from time to time.
(h)	Directors and Officers Liability Insurance. The Company shall obtain and maintain, at its sole expense, a policy or contract of insurance to insure its directors and officers and the directors and officers of its subsidiaries against personal liability for acts or omissions in connection with service as a director or officer of the Company or of any Affiliate (as defined below) or service in other capacities at the request of the Company. The insurance coverage provided to Mr. Hemsley shall be at the same limits and of the same scope and on the same terms and conditions as the coverage provided to the other directors and officers of the Company. The scope, terms and conditions of such coverage shall be reasonably comparable to the directors and officers insurance coverage provided by public companies of comparable size.
(i)	Indemnification. The Company shall defend and indemnify Mr. Hemsley against, and hold him harmless from, any and all costs, liabilities, losses, claims and exposures for his services as an employee, officer or director of the Company or any Affiliate to the maximum extent permitted under applicable laws or under the Company’s charter or bylaws.

6. Termination.

(a) Mr. Hemsley’s Right to Terminate for Good Reason.

(i)

Mr. Hemsley may terminate this Agreement and his employment with the Company for Good Reason, as defined below. In the event of Mr. Hemsley’s termination of this Agreement and his employment with the Company for Good Reason, the Company shall continue to pay Mr. Hemsley his Base Salary through the expiration of the then remaining term of this Agreement, but in no event for less than twelve (12) additional months, and all stock options held by Mr. Hemsley shall thereupon become exercisable in full.

(ii)

For purposes of Section 6(a)(i), above, “Good Reason” shall be deemed to exist if (A) the Company fails to comply with any material provision of this Agreement and such failure has not been cured within ten (10) days after notice of such noncompliance has been given by Mr. Hemsley to the Board pursuant to the notice provisions of this Agreement specifying the nature of such noncompliance in reasonable detail; or (B) Mr. Hemsley is removed from, or is not elected to, the Board after the Effective Date; or (C) Mr. Hemsley is assigned any duties materially inconsistent with Mr. Hemsley’s authority, duties or responsibilities on the Effective Date, including without limitation any action of the Company that results in Mr. Hemsley no longer having the titles and responsibilities specified in Section 3(a), above; or (D) the Company fails to renew the Original Term or any extended term of this Agreement in the manner provided in Section 4(a)(ii), above, by the Renewal Notice Date.

(b)

Mr. Hemsley’s Right to Terminate Without Good Reason. At any time, Mr. Hemsley may terminate this Agreement and his employment with the Company for any reason not described in Section 6(a), above, but only after at least one hundred eighty (180) days’ advance written notice is given to the Board by Mr. Hemsley pursuant to the notice provisions hereof; provided, however, that Mr. Hemsley shall terminate his employment on any earlier date after giving such notice if so required by the Board. If Mr. Hemsley terminates his employment in accordance with the preceding sentence, the Company shall not be obligated to make any further payments hereunder, except for (i) the amount of any accrued Base Salary through the effective date of termination in the manner set forth in Section 5(a), above; and (ii) any vested benefits, amounts or payments due Mr. Hemsley or his beneficiaries under any Benefit Plan in which he is a participant. The Company may deem such notice as notice of resignation by Mr. Hemsley of all offices and directorships then held by him in the Company and in any entity controlling, controlled by, or under common control with, the Company (each an “Affiliate”) such resignation to be effective upon Mr. Hemsley’s termination of employment.

(c)

The Company’s Right to Terminate for Good Cause. The Company may terminate this Agreement and Mr. Hemsley’s employment for good cause, as defined below, at any time

Maarten D. Hemsley Executive Employment Agreement Page 3 of 10

effective immediately upon giving written notice of termination to Mr. Hemsley. For the purposes of this Section 6(c) “good cause” for termination shall mean any of the following:

(i)	Mr. Hemsley’s gross neglect of his duties, gross negligence in the performance of his duties, refusal to perform his duties, or willful disobedience of a lawful order or directive given to Mr. Hemsley by the Board and within the scope of Mr. Hemsley’s duties.
(ii)	Mr. Hemsley’s unsatisfactory performance of his duties that is not cured within twenty (20) working days after written notice is given to Mr. Hemsley pursuant to a duly adopted resolution of the Board specifically identifying each reason why the Board, in its judgment, believes that Mr. Hemsley’s performance is unsatisfactory and what Mr. Hemsley can do to cure such unsatisfactory performance to the full satisfaction of the Board.
(iii)	Any act of theft or other dishonesty on the part of Mr. Hemsley, including, but not limited to any intentional misapplication of the Company’s funds or other property that the Board has found pursuant to a duly adopted resolution, with Mr. Hemsley not participating in such action, that Mr. Hemsley has committed.
(iv)	Mr. Hemsley’s conviction of any criminal activity not described in Section 6(c)(iii), above, or participation in an activity involving moral turpitude that the Board has found pursuant to a duly adopted resolution, with Mr. Hemsley not participating in such action, is or could reasonably be expected to be injurious to the business or reputation of the Company.
(v)	Mr. Hemsley’s immoderate use of alcohol and/or the use of non-prescribed narcotics that the Board has found pursuant to a duly adopted resolution, with Mr. Hemsley not participating in such action, adversely affects the performance of his duties.

(d)	Consequences of Termination for Good Cause. If the Company terminates this Agreement and Mr. Hemsley’s employment for good cause, the Company shall not be obligated to make any further payments hereunder except for (i) the amount of any accrued Base Salary due at the time of termination in the manner set forth in Section 5(a), above; and (ii) any vested benefits, amounts or payments due Mr. Hemsley or his beneficiaries under any Benefit Plan in which he is a participant.
(e)	The Company’s Right to Terminate Without Good Cause. The Company may terminate this Agreement and Mr. Hemsley’s employment at any time for any reason not described in Section 6(c), above, but only after at least one hundred eighty (180) days’ advance written notice is given to Mr. Hemsley pursuant to the notice provisions hereof. If Mr. Hemsley’s employment is terminated in accordance with the preceding sentence, the Company shall continue to be obligated to make all payments of Base Salary that would have been payable under Section 5(a), above, during the period commencing on the date of such termination and ending on the earlier of (i) the end of the Original Term (or, if applicable, any renewal term) hereof; or (ii) the date Mr. Hemsley breaches or ceases to be subject to the provisions of Section 7 (“Proprietary and Confidential Information of the Company”) or Section 8 (“Covenant Not to Solicit or Compete”), below.
(f)	Mr. Hemsley’s Right to Terminate in the Event of a Change in Control of the Company. For purposes of this Section 6(f), the word “Company” shall mean and include any one or more of the Company, Sterling Houston Holdings, Inc., Sterling General, Inc. and Texas Sterling Construction, L.P. so long as they are Affiliates.

(i) A “Change in Control of the Company” shall occur or be deemed to have occurred only if one of the following events occurs.

(A) Any “person” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) (other than (1) the Company; (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company; or (3) any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company) becomes

Maarten D. Hemsley Executive Employment Agreement Page 4 of 10

	the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities;
(B)	During any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company together with any new director (other than a new director designated by a person who has entered into an agreement with the Company to effect any transaction described in Section 6(f)(i)(A), 6(f)(i)(C) or 6(f)(i)(D)) whose election by the Board of Directors or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who were either directors at the beginning of the period or whose election or whose nomination for election was previously so approved, cease for any reason to constitute a majority of the Board of Directors;
(C)	the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (1) a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (as defined in Section 6(f)(i)(A), above) acquires more than 50% of the combined voting power of the Company’s then outstanding securities; or
(D)	the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.

(1) For purposes of the application of the provisions of this Section 6(f) to Texas Sterling Construction, L.P., stockholders shall mean the general partner or partners; securities and voting power shall refer to general partnership interests; election shall refer to selection as a general partner; and directors and the board shall refer to the general partner or partners all as the context requires in order to achieve the intent of such provisions.

(ii)

Upon the occurrence of either a Change in Control of the Company or the execution by the Company of any agreement that will result in a Change in Control that is not consented to in writing by Mr. Hemsley on or before its consummation, Mr. Hemsley shall have a period of thirty (30) days after such consummation in which to elect by written notice to the Board to terminate this Agreement and his employment hereunder. If such notice is timely given, Mr. Hemsley’s employment and this Agreement shall terminate on the date such notice is given. If Mr. Hemsley terminates his employment and this Agreement in accordance with this Section 6(f), no further payments hereunder shall be made to Mr. Hemsley, except for (A) the amount of any accrued Base Salary through the effective date of termination in the manner set forth in Section 5(a), above; and (B) any vested benefits, amounts or payments due Mr. Hemsley or his beneficiaries under any Benefit Plan in which he is a participant. For the avoidance of doubt, any bonus earned but not yet paid shall be paid in the event Mr. Hemsley terminates his employment pursuant to this Section 6(f) and all stock options held by Mr. Hemsley shall become exercisable in full. Such written notice shall be construed as a resignation by Mr. Hemsley of all offices and directorships then held by him in the Company or Company as to which there has been a Change In Control and in any Affiliate.

(iii)

The termination of Mr. Hemsley’s employment under Section 6(f)(ii), above, shall relieve Mr. Hemsley of his obligations set forth in Section 8 (“Covenant Not to Solicit or Compete”), below, but shall not relieve Mr. Hemsley of his obligations set forth in Section 7 (“Proprietary and Confidential Information of the Company”), below.

Maarten D. Hemsley Executive Employment Agreement Page 5 of 10

(g)

In the Event of Death. In the event of Mr. Hemsley’s death during the Original Term or any renewal term of this Agreement, this Agreement shall be terminated automatically as of the date of Mr. Hemsley’s death, and the Company shall have no further or continuing obligation to Mr. Hemsley or his estate under the provisions of Section 5 (“Compensation and Benefits”), above, other than to pay any salary or benefits accrued but not paid for the period ending on the date of Mr. Hemsley’s death. For the avoidance of doubt, any bonus earned but not yet paid shall be paid in the event of Mr. Hemsley’s death.

(h)

In the Event of Permanent Disability. In the event Mr. Hemsley is or becomes permanently disabled, as such term is defined below, during the Original Term or any renewal term of this Agreement, this Agreement and Mr. Hemsley’s employment may at the option of the Company be terminated at any time after the occurrence of such disability. Any such termination shall be exercised by written notice to Mr. Hemsley or his personal representative. Mr. Hemsley shall be deemed to have become permanently disabled if during any consecutive twelve (12) month period, because of ill health, physical or mental disability, or for other causes beyond his control, he shall have been continuously unable or unwilling or shall have failed to have performed his duties under this Agreement, in whole or in substantial part, for one hundred eighty (180) consecutive days.

7. Proprietary and Confidential Information.

(a) Nondisclosure Covenant. During the term of his employment hereunder, Mr. Hemsley shall have access to confidential and/or proprietary information of the Company and its Affiliates including, but not limited to, their books and records, financial information, personnel information, lists of existing or prospective clients and customers (and their special needs and requirements) market research, fee and pricing structures, intellectual property, and other information (hereafter collectively called “Confidential Information.”) Mr. Hemsley recognizes and acknowledges that Confidential Information is a valuable, special and unique asset of the owner thereof (whether such owner is the Company, an Affiliate or a third party) and that the owner’s business is dependent on the same. To insure the continued secrecy of Confidential Information, and in consideration of his employment or continued employment, Mr. Hemsley agrees and covenants, subject to the next succeeding sentence, that during the Original Term and any renewal term of this Agreement and at all times following the termination of this Agreement and/or his employment (whether such termination occurs as a result of the expiration of the Original Term or any renewal term of this Agreement or by the election of either party) Mr. Hemsley will not, except as is reasonably believed by him to be in the best interest of, or necessary to, the conduct of the business of the Company and/or the Affiliates —

(i)	disclose or divulge to any person, firm, corporation, partnership, joint venture or other business entity, or to any local, state or federal governmental agency (collectively referred to as an “Entity”) any Confidential Information or any other proprietary information that is used by, or becomes known to, Mr. Hemsley;
(ii)	use Confidential Information for any purpose other than the performance by Mr. Hemsley of his obligations under this Agreement and/or the performance of his duties as an employee of the Company; or
(iii)	disclose to any Entity any information that is not otherwise known to the public concerning the business, customers, clients or affairs of the Company or the Affiliates that Mr. Hemsley may acquire in the course of, or as an incident to, employment and service hereunder.

(b) Exceptions. Notwithstanding the immediately preceding sentence to the contrary, Mr. Hemsley shall not be considered to have violated the requirements of such sentence if Mr. Hemsley makes a disclosure of Confidential Information in response to a subpoena or is ordered by a court of competent jurisdiction to do so. Confidential Information shall not include information that (i) becomes known to the public through no fault of Mr. Hemsley; (ii) is properly disclosed by the Company to a third party under no obligation of confidentiality; or (iii) becomes available to

Maarten D. Hemsley Executive Employment Agreement Page 6 of 10

	Mr. Hemsley on a non-confidential basis from a third party under no obligation of confidentiality to the Company or to an Affiliate.
(c)	Work Product. Upon the termination of his employment, Mr. Hemsley shall not take from the premises of the Company or an Affiliate or otherwise retain any records, files or other documents, or copies thereof, relating to the business or affairs of the Company or an Affiliate or any Confidential Information. As further consideration for his employment, Mr. Hemsley hereby assigns and agrees to assign jointly to the Company, its successors and assigns, all rights to documents, manuals, notes, computer programs, data bases, research material, prospective customer lists, etc. that Mr. Hemsley may have made, conceived, or received during the term of, and relating to his employment with the Company. Mr. Hemsley will promptly disclose to the Company information relating to said documents, manuals, notes, computer programs, databases, research materials, prospective customer lists, etc. and will execute, acknowledge, and deliver all papers and perform such other acts as may be necessary in the opinion of the Company to vest title to such material in the Company, its successors and assigns. Without limiting the generality of the foregoing, Mr. Hemsley covenants and agrees to assign jointly to the Company, its successors and assigns, at any time and from time to time as may be requested by the Company, its successors and assigns, at any time or times, any and all works, whether constituting derivative works or improvements that he develops, invents or creates from and after the Effective Date and during the term of, and in connection with his employment hereunder, and agrees that the same are and will be works for hire and owned by the Company, its successors and assigns.
(d)	Remedies. In the event of a breach or threatened breach by Mr. Hemsley of the provisions of this Section 7, the Company shall be entitled to seek an injunction restraining Mr. Hemsley from disclosing, in whole or in part, any Confidential Information or mandating the assignment by Mr. Hemsley of any and all such works to the Company. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages from Mr. Hemsley.

8. Covenant Not to Solicit or Compete. Mr. Hemsley hereby agrees, covenants and warrants subject to the terms and conditions of this Section 8 that during the Original Term and any renewal term of this Agreement and —

(a)	For the two (2) year period following the expiration of the Original Term or any renewal term or following the termination of Mr. Hemsley’s employment under Section 6(b) (Mr. Hemsley’s Right to Terminate Without Good Reason”) or Section 6(c) (“The Company’s Right to Terminate for Good Cause”), above; as the case may be, or
(b)	For the one (1) year period following the termination of Mr. Hemsley’s employment under Section 6(a) (“Mr. Hemsley’s Right to Terminate for Good Reason”) or Section 6(e) (“The Company’s Right to Terminate Without Good Cause”), above,
	Mr. Hemsley will not, within the State of Texas or the Commonwealth of Pennsylvania, directly or indirectly:

(i)	compete with the Company in any business in which it or any Affiliate is actively engaged at the termination of Mr. Hemsley’s employment;
(ii)	solicit, contract, contact or consult with any of the Company’s or its Affiliates’ then existing or actively prospective customers or clients for the purpose of providing, either directly or indirectly, goods or services in competition with the Company or any Affiliate;
(iii)	take any action that would tend to divert from the Company or any Affiliate any Entity that was a client or customer thereof on the date of the termination of Mr. Hemsley’s employment or any Entity with respect to which the Company or an Affiliate was actively seeking to establish a client relationship on the date of the termination of Mr. Hemsley’s employment; or
(iv)	solicit for employment or employ as an employee, independent contractor or consultant any person who is a party to an employment, independent contractor or consulting agreement

Maarten D. Hemsley Executive Employment Agreement Page 7 of 10

with the Company or an Affiliate or was an employee, independent contractor or consultant of the Company or an Affiliate on the date of the termination of Mr. Hemsley’s employment to perform or provide (or aid in the providing or performing) on behalf of any Entity any service that is the same as, or similar to, any service performed or provided by such person in the scope of such person’s employment, independent contractor or consulting arrangements with the Company or an Affiliate.

(c)	As sole consideration for Mr. Hemsley’s agreement not to compete for the period specified above following the termination of his employment, the Company shall pay and hereby agrees to pay Mr. Hemsley one thousand dollars ($1,000) per month in advance for each month in such period.
(d)	Notwithstanding the foregoing provisions of this Section 8, Mr. Hemsley may elect by written notice to the Company after termination of employment by the Company other than for good cause and prior to any breach of (i) Section 7 (“Proprietary and Confidential Information of the Company”), above; (ii) this Section 8; or (iii) of any other provisions hereof by Mr. Hemsley, to cease to be subject to this Section 8. Upon the giving of such notice, Mr. Hemsley shall cease to be subject to the provisions of this Section 8 (but shall continue to be subject to the provisions of Section 7), and the Company shall cease to have any further obligations to make any further payments to Mr. Hemsley pursuant to Section 6(e) (“The Company’s Right to Terminate Without Good Cause”) (if otherwise applicable) or pursuant to Section 8(c), above.
(e)	Mr. Hemsley agrees that the provisions contained in this Section 8 are of vital importance to the Company, and that if any question shall ever arise as to whether any act of Mr. Hemsley is prohibited by this Section 8, then, in all instances in which it is reasonable to interpret any provision of this Section 8 to prohibit such act, such interpretation shall be controlling, notwithstanding that it may also be reasonable to interpret such provision not to prohibit such act.
(f)	Mr. Hemsley further agrees that such limitations as to the period of time, geographic area and types and scopes of restriction on his activities specified herein are reasonable and necessary for the protection of the goodwill and other business interests of the Company and its Affiliates. However, should either the time period or the geographic area provided herein be deemed invalid or unenforceable in any respect by a court of competent jurisdiction, then Mr. Hemsley recognizes and agrees that, upon request of the Company, a modification shall be made to such time period or geographic area to protect the Company with respect to the purpose of this covenant not to compete.
(g)	Mr. Hemsley recognizes and agrees that any violation by him of any of the provisions contained in this Section 8 will cause such damage or injury to the Company as would be irreparable and continuing and that the exact amount of such damage might be difficult or impossible to ascertain and that for such reason, among others, the Company shall be entitled to seek an injunction from any court of competent jurisdiction restraining any further violation by him of this Section 8 in addition to recovering such damages as the Company may have sustained as a result thereof. Such right to damages or an injunction shall be in addition to, and not in limitation of, any other rights and remedies the Company may have under Section 15.50 et seq. of the Texas Business and Commerce Code for breach of this Section 8 or any other provisions of this Agreement.
(h)	The existence of any claim or cause of action of Mr. Hemsley against the Company or an Affiliate, whether predicted on this Agreement or otherwise, shall not constitute a defense to the enforcement of this covenant.

9. Assignment of Agreement. The Company may not assign this Agreement without the prior written consent of Mr. Hemsley. In the event of an assignment, the rights and obligations of the Company under this Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. Any assignment by the Company of its rights hereunder shall not relieve the Company of its financial obligation to Mr. Hemsley. The rights and obligations of Mr. Hemsley under this Agreement are personal to him, and no such rights, benefits or obligations shall be subject to voluntary or involuntary alienation, assignment or transfer by him.

Maarten D. Hemsley Executive Employment Agreement Page 8 of 10

10. Notices.

(a) Any notice given under this Agreement to the other parties shall be given in writing. Any such notice shall be given by personal delivery or by registered or certified mail (return receipt requested) postage prepaid, addressed —

(i)	In the case of the Company to its headquarters address; and
(ii)	In the case of Mr. Hemsley, to his most recent residence address on the books of the Company;

	or to such other address of a party as that party may by written notice hereafter designate.
(b)	Notice given in accordance herewith shall be effective five (5) days after the date of the postmark if mailed via registered or certified mail and the return receipt is received by the sender, or upon actual receipt by the party receiving the notice in the event that (i) such return receipt is not received by the sender; or (ii) notice was given by personal delivery.

11.	Waiver of Breach. The waiver by a party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or any other provision of this Agreement.
12.	Entire Agreement. This Agreement together with Schedule A contains the entire agreement of the parties with respect to the subject matter hereof except as otherwise expressly provided herein.
13.	Amendment. This Agreement may be changed, modified or amended at any time and in any respect by the agreement of the parties hereto without the consent of any other person; provided, however, that no change, modification or amendment shall be binding unless the same shall have been reduced to a writing and signed by the party against whom enforcement of the change, modification or amendment is sought.
14.	Applicable Law and Venue. The parties intend and agree that the terms and provisions of this Agreement and the performance of the parties hereunder shall be governed by the laws of the State of Texas, excluding its conflicts of laws provisions, and all disputes hereunder are subject exclusively to the jurisdiction of courts, state or federal, sitting in Harris County, Texas.
15.	Severability. In the event that any portion of this Agreement is declared to be invalid or illegal by final judgment of any court of competent jurisdiction, the remainder of this Agreement shall remain in full force and effect notwithstanding the invalidity or illegality of such portion.
16.	Headings and References. The headings contained in this Agreement are solely for the convenience of the parties and have no bearing upon the interpretation and/or enforcement of this Agreement. All references in this Agreement to sections shall refer to the sections of this Agreement unless otherwise explicitly stated, and the words “hereof,” “herein,” and “hereunder,” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement.
17.	Number and Gender of Words. Whenever herein the singular number is used, the same shall include the plural where appropriate, and words of any gender shall include each other gender where appropriate.
18.	Counterparts and Execution. This Agreement may be executed in multiple counterparts, each of which may be considered an original, but all of which together shall constitute but one and the same instrument. This Agreement when signed by a party may be delivered by telecopier or other facsimile transmission with the same force and effect as if the same were an executed and delivered original manually signed counterpart.

[The balance of this page is intentionally left blank]

Maarten D. Hemsley Executive Employment Agreement Page 9 of 10

Executed effective as of the Effective Date.
Sterling Construction Company, Inc.

By:	/s/ Robert W. Frickel Robert W. Frickel	/s/ Maarten D. Hemsley           Maarten D. Hemsley
	Chairman of the Compensation Committee

Schedule A

Definition of EBITDA

“EBITDA” shall mean the net income determined in accordance with generally accepted accounting principles of the Company and its consolidated subsidiaries for a given fiscal year —

Plus	Interest expense for the period;
Plus	Depreciation and amortization expense for the period;
Plus	Federal and state income tax expense incurred for the period;
Plus	Extraordinary Items and non-recurring items (to the extent negative) if any, for the period;
Plus	Any fees paid to non-employee directors;
Minus	Extraordinary Items and non-recurring items (to the extent positive) if any; and
Minus	Interest income for the period.

Maarten D. Hemsley Executive Employment Agreement Page 10 of 10

EX-31.1

Exhibit 31.1

Section 302 Certifications

CERTIFICATION FOR QUARTERLY REPORTS ON FORM 10-Q

I, Patrick T. Manning, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Sterling Construction Company, Inc.
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of the end of the period covered by this report and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, and
c.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing similar functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data, and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 7, 2005

By: /s/ Patrick T. Manning   Chairman and Chief Executive Officer

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EX-31.2

Exhibit 31.2

CERTIFICATION FOR QUARTERLY REPORTS ON FORM 10-Q

I, Maarten D. Hemsley, certify that

1.	I have reviewed this quarterly report on Form 10-Q of Sterling Construction Company, Inc.
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of the end of the period covered by this report and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, and
c.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing similar functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data, and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 7, 2005

By: /s/ Maarten D. Hemsley   Chief Financial Officer

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EX-32

Exhibit 32.0

CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Sterling Construction Company, Inc., a Delaware corporation (the “Company”), does hereby certify that:

     The Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly represents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 7, 2005	/s/ Patrick T. Manning Patrick T. Manning
	Chief Executive Officer
Dated: November 7, 2005	/s/ Maarten D. Hemsley Maarten D. Hemsley
	Chief Financial Officer

25