Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 27, 2008

 

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 001-33076

 

WILLDAN GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

14-195112

(State or other Jurisdiction of
Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

 

2401 East Katella Avenue, Suite 300
Anaheim, California

 


92806

(Address of principal executive offices,
excluding zip code)

 

(Zip code)

 

Registrant’s Telephone Number, Including Area Code: (800) 424-9144

 

Not Applicable

(Former name, former address and former fiscal year, if changed since 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 Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

o

 

Accelerated filer 

o

 

 

 

 

 

Non-accelerated filer

o

 

Smaller reporting company 

x

(Do not check if a smaller reporting company)

 

 

 

 

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

 

As of August 8, 2008, there were 7,163,664 shares of common stock, $0.01 par value per share, of Willdan Group, Inc. issued and outstanding.

 

 

 



Table of Contents

 

WILLDAN GROUP, INC.
FORM 10-Q QUARTERLY REPORT

 

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

3

 

 

Item 1. Financial Statements

3

 

 

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

11

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

19

 

 

Item 4. Controls and Procedures

19

 

 

PART II. OTHER INFORMATION

20

 

 

Item 1. Legal Proceedings

20

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

20

 

 

Item 3. Defaults upon Senior Securities

20

 

 

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

20

 

 

Item 5. Other Information

21

 

 

Item 6. Exhibits

21

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

WILLDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

June 27,

 

December 28,

 

 

 

2008

 

2007

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

6,226,000

 

$

15,511,000

 

Liquid investments

 

1,375,000

 

1,300,000

 

Cash, cash equivalents and liquid investments

 

7,601,000

 

16,811,000

 

Accounts receivable, net of allowance for doubtful accounts of $538,000 and $372,000 at June 27, 2008 and December 28, 2007, respectively

 

16,187,000

 

15,090,000

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

7,573,000

 

7,336,000

 

Other receivables

 

167,000

 

157,000

 

Prepaid expenses and other current assets

 

1,632,000

 

2,067,000

 

Total current assets

 

33,160,000

 

41,461,000

 

 

 

 

 

 

 

Equipment and leasehold improvements, net

 

2,954,000

 

3,354,000

 

Goodwill

 

10,818,000

 

2,911,000

 

Other assets

 

2,172,000

 

500,000

 

Total assets

 

$

49,104,000

 

$

48,226,000

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Excess of outstanding checks over bank balance

 

$

437,000

 

$

633,000

 

Accounts payable

 

2,773,000

 

1,136,000

 

Accrued liabilities

 

4,366,000

 

5,314,000

 

Purchase price payable

 

1,000,000

 

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

832,000

 

941,000

 

Current portion of notes payable

 

373,000

 

1,088,000

 

Current portion of capital lease obligations

 

180,000

 

176,000

 

Current portion of deferred income taxes

 

2,002,000

 

2,002,000

 

Total current liabilities

 

11,963,000

 

11,290,000

 

 

 

 

 

 

 

Notes payable, less current portion

 

43,000

 

 

Capital lease obligations, less current portion

 

217,000

 

283,000

 

Deferred lease obligations

 

578,000

 

606,000

 

Deferred income taxes, net of current portion

 

395,000

 

395,000

 

Total liabilities

 

13,196,000

 

12,574,000

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding

 

 

 

Common stock, $0.01 par value, 40,000,000 shares authorized: 7,156,000 and 7,150,000 shares issued and outstanding at June 27, 2008 and December 28, 2007, respectively

 

71,000

 

71,000

 

Additional paid-in capital

 

32,991,000

 

32,796,000

 

Retained earnings

 

2,846,000

 

2,785,000

 

Total stockholders’ equity

 

35,908,000

 

35,652,000

 

Total liabilities and stockholders’ equity

 

$

49,104,000

 

$

48,226,000

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

WILLDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 27,

 

June 29,

 

June 27,

 

June 29,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

17,807,000

 

$

21,180,000

 

$

35,583,000

 

$

40,448,000

 

 

 

 

 

 

 

 

 

 

 

Direct costs of contract revenue:

 

 

 

 

 

 

 

 

 

Salaries and wages

 

5,538,000

 

6,917,000

 

11,082,000

 

13,401,000

 

Production expenses

 

522,000

 

453,000

 

837,000

 

797,000

 

Subconsultant services

 

1,539,000

 

1,192,000

 

2,814,000

 

2,251,000

 

Total direct costs of contract revenue

 

7,599,000

 

8,562,000

 

14,733,000

 

16,449,000

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses:

 

 

 

 

 

 

 

 

 

Salaries and wages, payroll taxes and employee benefits

 

5,927,000

 

5,906,000

 

12,369,000

 

13,277,000

 

Facilities

 

1,174,000

 

1,158,000

 

2,322,000

 

2,260,000

 

Stock-based compensation

 

61,000

 

51,000

 

154,000

 

67,000

 

Depreciation and amortization

 

440,000

 

449,000

 

834,000

 

896,000

 

Other

 

2,736,000

 

3,366,000

 

5,258,000

 

6,918,000

 

Total general and administrative expenses

 

10,338,000

 

10,930,000

 

20,937,000

 

23,418,000

 

(Loss) income from operations

 

(130,000

)

1,688,000

 

(87,000

)

581,000

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense, net of reversal

 

(22,000

)

(24,000

)

(2,000

)

550,000

 

Interest income and other income, net

 

113,000

 

148,000

 

261,000

 

328,000

 

Total other income, net

 

91,000

 

124,000

 

259,000

 

878,000

 

(Loss) income before income tax expense

 

(39,000

)

1,812,000

 

172,000

 

1,459,000

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

16,000

 

754,000

 

111,000

 

651,000

 

Net (loss) income

 

$

(55,000

)

$

1,058,000

 

$

61,000

 

$

808,000

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.01

)

$

0.15

 

$

0.01

 

$

0.11

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

7,156,000

 

7,148,000

 

7,156,000

 

7,148,000

 

Diluted

 

7,157,000

 

7,151,000

 

7,157,000

 

7,150,000

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 27,
2008

 

June 29,
2007

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

61,000

 

$

808,000

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

834,000

 

896,000

 

Loss on sale of equipment

 

20,000

 

10,000

 

Allowance for doubtful accounts

 

146,000

 

91,000

 

Stock-based compensation

 

154,000

 

67,000

 

Changes in operating assets and liabilities, net of the effects from the purchase of Intergy Corporation in 2008:

 

 

 

 

 

Accounts receivable

 

1,511,000

 

(285,000

)

Costs and estimated earnings in excess of billing on uncompleted contracts

 

(237,000

)

(886,000

)

Other receivables

 

(10,000

)

3,190,000

 

Prepaid expenses and other current assets

 

443,000

 

482,000

 

Other assets

 

(86,000

)

26,000

 

Accounts payable

 

476,000

 

(406,000

)

Accrued liabilities

 

(1,290,000

)

(8,025,000

)

Billings in excess of costs and estimated earnings on uncompleted contracts

 

(109,000

)

44,000

 

Deferred lease obligations

 

(28,000

)

99,000

 

Net cash provided by (used in) operating activities

 

1,885,000

 

(3,889,000

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of equipment and leasehold improvements

 

(369,000

)

(468,000

)

Proceeds from sale of equipment

 

49,000

 

27,000

 

Payments for business acquisition, net of cash acquired

 

(9,760,000

)

 

Purchase of liquid investments

 

(7,100,000

)

(12,600,000

)

Proceeds from sale of liquid investments

 

7,025,000

 

4,900,000

 

Net cash used in investing activities

 

(10,155,000

)

(8,141,000

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Changes in excess of outstanding checks over bank balance

 

(196,000

)

395,000

 

Payments on notes payable

 

(772,000

)

(769,000

)

Principal payments on capital leases

 

(88,000

)

(89,000

)

Proceeds from employee stock purchase plan

 

41,000

 

 

Distributions to holders of redeemable common stock

 

 

(3,150,000

)

Payment of offering costs

 

 

10,000

 

Net cash used in financing activities

 

(1,015,000

)

(3,603,000

)

Net decrease in cash and cash equivalents

 

(9,285,000

)

(15,633,000

)

Cash and cash equivalents at beginning of the period

 

15,511,000

 

20,633,000

 

Cash and cash equivalents at end of the period

 

$

6,226,000

 

$

5,000,000

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

50,000

 

49,000

 

Income taxes

 

636,000

 

424,000

 

 

 

 

 

 

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

Equipment acquired under capital leases

 

29,000

 

29,000

 

Note payable issued in connection with acquisition of assets

 

100,000

 

 

Purchase price payable

 

1,000,000

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



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WILLDAN GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

June 27, 2008
(Unaudited)

 

1.                   BASIS OF PRESENTATION, ORGANIZATION AND OPERATIONS OF THE COMPANY

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments, which consist of only normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the consolidated results for the interim periods presented.  Results for the interim period are not necessarily indicative of results for the full year.  Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  The consolidated financial statements should be read in conjunction with Willdan Group, Inc.’s 2007 Annual Report on Form 10-K.

 

Nature of Business

 

Willdan Group, Inc. and subsidiaries (“Willdan Group” or the “Company”) is a provider of outsourced services to small and mid-sized public agencies in California and other western states.  Outsourcing enables these agencies to provide a wide range of specialized services without having to incur and maintain the overhead necessary to develop staffing in-house.  The Company provides a broad range of services to public agencies and, to a lesser extent, private industry, including civil engineering, building and safety services, geotechnical engineering, financial and economic consulting, energy efficiency, water conservation, renewable energy, disaster preparedness and homeland security.  Clients primarily consist of cities, counties, redevelopment agencies, water districts, school districts and universities, state agencies, federal agencies, a variety of other special districts and agencies, and tribal governments.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Willdan Group Inc. and its wholly owned subsidiaries, Willdan Engineering, Willdan Financial Services, Willdan Geotechnical, Willdan Homeland Solutions, Intergy Corporation, Willdan Resource Solutions and Public Agency Resources.  Intergy Corporation is included as of the date of acquisition.  All significant intercompany balances and transactions have been eliminated in consolidation.

 

Accounting for Contracts

 

The Company enters into contracts with its clients that contain three principal types of pricing provisions:  fixed fee, time-and-materials, and unit-based. Revenue on fixed fee contracts is recognized on the percentage-of-completion method based generally on the ratio of direct costs incurred to date to estimated total direct costs at completion.  Revenue on time-and-materials and unit-based contracts is recognized as the work is performed in accordance with specific terms of the contract.  Revenue for amounts that have been billed but not earned is deferred and such deferred revenue is referred to as billings in excess of costs and estimated earnings on uncompleted contracts in the accompanying consolidated balance sheets.

 

Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known.  When the revised estimate indicates a loss, such loss is provided for currently in its entirety.  Claims revenue is recognized only upon resolution of the claim.  Change orders in dispute are evaluated as claims.  Costs related to unpriced change orders are expensed when incurred and recognition of the related contract revenue is based on an evaluation of the probability of recovery of the costs.  Estimated profit is recognized for unpriced change orders if realization of the expected price of the change order is assured beyond a reasonable doubt.

 

Applying the percentage-of-completion method of recognizing revenue requires the Company to estimate the indicated outcome of its long-term contracts.  The Company forecasts such outcomes to the best of its knowledge and belief of current and expected conditions and its expected course of action.  Differences between the Company’s estimates and actual results often occur resulting in changes to reported revenue and earnings.  Such changes could have a material effect on future consolidated financial statements.

 

Direct costs of contract revenue consist primarily of that portion of technical and nontechnical salaries and wages that has been incurred in connection with revenue producing projects.  Direct costs of contract revenue also include production expenses, subconsultant services and other expenses that are incurred in connection with revenue producing projects.

 

Direct costs of contract revenue exclude that portion of technical and nontechnical salaries and wages related to marketing efforts, vacations, holidays and other time not spent directly generating revenue under existing contracts.  Such costs are included in general and administrative expenses.  Additionally, payroll taxes, bonuses and employee benefit costs for all Company personnel are included in general

 

6



Table of Contents

 

and administrative expenses in the accompanying consolidated statements of operations since no allocation of these costs is made to direct costs of contract revenue.  No allocation of facilities costs is made to direct costs of contract revenue nor is depreciation and amortization allocated to direct costs.  Other companies may classify as direct costs of contract revenue some of the costs that the Company classifies as general and administrative costs.  The Company expenses direct costs of contract revenue when incurred.

 

Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon a review of all outstanding amounts on a monthly basis.  Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts.  Credit risk is minimal with governmental entities.  Accounts receivables are written off when deemed uncollectible.  Recoveries of accounts receivables previously written off are recorded when received.

 

The value of retainage is included in accounts receivable in the accompanying consolidated financial statements.  Retainage represents the billed amount that is retained by the customer, in accordance with the terms of the contract, generally until performance is substantially complete.  At June 27, 2008 and December 28, 2007, the Company had retained accounts receivable of approximately $21,000 and $46,000, respectively.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist primarily of cash and cash equivalents, liquid investments, accounts receivable, accounts payable, accrued liabilities, notes payable and purchase price payable.  Liquid investments are comprised of available-for-sale securities that are reported at fair value with any related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholder’s equity, net of tax.  Pursuant to SFAS No. 157, Fair Value Measurements, or SFAS 157, the fair value of the Company’s cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets.  The fair value of the Company’s liquid investments is determined based on “Level 2” inputs, which consist generally of observable inputs including quoted prices for similar assets or market-corroborated inputs.  We believe that the recorded values of all of our other financial instruments approximate their current values because of their nature and respective durations.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP 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 consolidated financial statements.  Estimates also affect the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

 

2.                 NEW ACCOUNTING PRONOUNCEMENTS

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements” (SFAS 157) which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Company adopted SFAS 157 on the first day of fiscal year 2008 and the adoption did not have a material effect on its financial statements and disclosures.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115”   (SFAS 159).  SFAS 159 provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value.  A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  The provisions of SFAS 159 are elective, and through June 27, 2008, the Company had not elected to adopt SFAS 159 for any of its financial assets and liabilities.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R).  SFAS 141R establishes the principles and requirements for how an acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141R makes significant changes to existing accounting practices for acquisitions.  Under SFAS 141R, adjustments to the acquired entity’s deferred tax assets and uncertain tax position balances occurring outside the measurement period are recorded as a component of the income tax expense, rather than goodwill, which nullifies EITF 93-7, Uncertainties Related to Income Taxes in a Purchase Business Combination, (EITF 93-7). This requirement applies to all business combinations regardless of consummation date. SFAS 141R applies prospectively to business combinations, for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008, except for the transition provisions of EITF 93-7.  The Company is currently evaluating the impact, if any, SFAS 141R will have on future business combinations.

 

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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51” (SFAS 160).  SFAS 160 establishes accounting and reporting standards that require: (i) noncontrolling interests to be reported as a component of equity; (ii) changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and (iii) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value.  The Company does not currently have any less than wholly-owned consolidated subsidiaries.  SFAS 160 is to be applied prospectively at the beginning of the first annual reporting period on or after December 15, 2008.  The Company will implement the new standard, if applicable, effective the first day of fiscal year 2009.

 

In December 2007, the FASB ratified Emerging Issues Task Force (EITF) 07-01, “Accounting for Collaborative Arrangements” (EITF 07-01).  EITF 07-01 was issued to prescribe the accounting for collaborations. It requires certain transactions between collaborators to be recorded in the income statement on either a gross or net basis when certain characteristics exist in the collaboration relationship.  EITF 07-01 is effective for fiscal years beginning after December 15, 2008.  The Company will adopt EITF 07-01 the first day of fiscal year 2009 and is currently evaluating the impact, if any, EITF 07-01 will have on its financial statements.

 

3.                  BUSINESS COMBINATION

 

                On June 9, 2008, the Company acquired all of the outstanding stock of Intergy Corporation, a California–based consulting company that assists companies, institutions and agencies with planning and implementing their energy efficiency, water conservation and renewable energy strategies. The acquisition cost recorded by the Company as June 27, 2008 was $11.2 million, consisting of $9.9 million in cash paid at closing,  a guaranteed payment of $1.0 million in cash due on or before June 24, 2009, and $0.3 million of transaction costs.  The acquisition cost may increase by up to $6.2 million if Intergy achieves certain financial targets in the first three years following the acquisition.  The purchase price includes an estimated net asset value adjustment of $0.6 million, which may be adjusted for the true-up of the estimated amounts included for accounts such as cash, receivables, and payables.  The acquisition cost was allocated as follows:

 

 

 

June 27,
2008

 

Current assets

 

$

3,242,000

 

Equipment

 

49,000

 

Backlog

 

1,264,000

 

Customer relationships

 

272,000

 

Other assets

 

8,000

 

Current liabilities

 

(1,502,000

)

Goodwill

 

7,907,000

 

Total

 

$

11,240,000

 

 

The Company has preliminarily estimated the fair values of the assets acquired and the liabilities assumed.  The Company will finalize the fair value estimates within twelve months of the acquisition date.

 

Unaudited proforma consolidated statements of operations for the three months and six months ended June 27, 2008 and June 29, 2007 as though Intergy Corporation had been acquired as of  the first day of each of the respective periods presented is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 27,

 

June 29,

 

June 27,

 

June 29,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

20,353,000

 

$

22,595,000

 

$

40,224,000

 

$

43,163,000

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

368,000

 

2,000,000

 

717,000

 

1,391,000

 

Net income

 

206,000

 

1,172,000

 

440,000

 

1,146,000

 

Basic and diluted earnings per share

 

$

0.03

 

$

0.16

 

$

0.06

 

$

0.16

 

 

8



Table of Contents

 

4.                  EQUIPMENT AND LEASEHOLD IMPROVEMENTS

 

Equipment and leasehold improvements consist of the following:

 

 

 

June 27,
2008

 

December 28,
2007

 

Furniture and fixtures

 

$

 4,903,000

 

$

 4,917,000

 

Computer hardware and software

 

4,687,000

 

4,518,000

 

Leasehold improvements

 

908,000

 

900,000

 

Equipment under capital leases

 

792,000

 

787,000

 

Automobiles, trucks, and field equipment

 

419,000

 

412,000

 

Total

 

11,709,000

 

11,534,000

 

Accumulated depreciation and amortization

 

(8,755,000

)

(8,180,000

)

Equipment and leasehold improvements, net

 

$

2,954,000

 

$

3,354,000

 

 

5.                   ACCRUED LIABILITES

 

Accrued liabilities consist of the following:

 

 

 

June 27,
2008

 

December 28,
2007

 

Accrued bonuses

 

$

 —

 

$

 202,000

 

Paid leave bank

 

1,592,000

 

1,746,000

 

Compensation and payroll taxes

 

1,535,000

 

1,495,000

 

Accrued legal

 

139,000

 

92,000

 

Accrued workers’ compensation insurance

 

3,000

 

19,000

 

Litigation accrual

 

 

235,000

 

Accrued interest

 

4,000

 

52,000

 

Accrued rent

 

120,000

 

113,000

 

Income taxes payable

 

(16,000

)

425,000

 

Employee withholdings

 

248,000

 

225,000

 

Client deposits

 

78,000

 

92,000

 

Other

 

663,000

 

618,000

 

Total accrued liabilities

 

$

4,366,000

 

$

5,314,000

 

 

6.                  COMMITMENTS

 

Leases

 

The Company is obligated under capital leases for certain furniture and office equipment that expire at various dates through the year 2011.

 

The Company also leases certain office facilities under noncancelable operating leases that expire at various dates through the year 2014 and is committed under noncancelable operating leases for the lease of computer equipment and automobiles through the year 2011.

 

Employee Benefit Plans

 

The Company has a qualified profit sharing plan (the Plan) pursuant to Code Section 401(a) and qualified cash or deferred arrangement pursuant to Code Section 401(k) covering substantially all employees.  Employees may elect to contribute up to 50% of compensation limited to the amount allowed by tax laws.  Company contributions are made solely at the discretion of the Company’s Board of Directors.

 

The Company has a discretionary bonus plan for regional managers, division managers and others as determined by the Company president.  Bonuses are awarded if certain financial goals are achieved.  The financial goals are not stated in the plan; rather they are judgmentally determined each year by executive management, contingent on board approval.  In addition, the Board of Directors may declare discretionary bonuses to key employees and all employees are eligible for what the Company refers to as the “hot hand” bonus program, which pays awards for outstanding performance.

 

Post employment health benefits

 

In May 2006, the Company’s board of directors approved providing lifetime health insurance coverage for the Company’s Chairman of its Board of Directors as of that date and his spouse and for the widow of the Company’s former chief executive officer, Mrs. Heil, who is also a Company board member.  Additionally, the board approved health insurance coverage for Mrs. Heil’s two dependents until they reach the maximum age for dependent coverage under the Company’s health insurance policy.

 

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7.                  INCOME TAXES

 

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

8.                  SEGMENT INFORMATION

 

The Company has three segments: Engineering Services, Public Finance Services and Homeland Security Services.  The Engineering Services segment includes Willdan Engineering, Willdan Geotechnical, Intergy Corporation, Public Agency Resources and Willdan Resource Solutions.  The Engineering Services segment performs services for a broad range of public agency clients and to a lesser extent, private industry, and offers a full complement of engineering, building and safety, construction management, energy efficiency, water conservation, renewable energy and municipal planning services to clients throughout the western United States.  The Public Finance Services segment, which consists of Willdan Financial Services, provides expertise and support for the various financing techniques employed by public agencies to finance their operations and infrastructure along with the mandated reporting and other requirements associated with these financings.  The Homeland Security Services segment, which consists of Willdan Homeland Solutions, provides homeland security and public safety consulting services to cities, counties and related municipal service agencies.

 

The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies, included in the Company’s 2007 Annual Report on Form10-K.  There were no intersegment sales during the fiscal three or six months ended June 27, 2008 and June 29, 2007.  Management evaluates the performance of each segment based upon income or loss before year-end performance bonuses and income taxes.  Certain segment asset information including expenditures for long-lived assets has not been presented as it is not reported to or reviewed by the chief operating decision maker.  In addition, enterprise-wide service line contract revenue is not included as it is impracticable to report this information for each group of similar services.

 

Financial information with respect to the reportable segments for the fiscal three and six months ended June 27, 2008 and the fiscal three and six months ended June 29, 2007 follows:

 

 

 

Engineering
Services

 

Public
Finance
Services

 

Homeland
Security
Services

 

Unallocated
Corporate

 

Intersegment

 

Consolidated
Total

 

Three Months Ended June 27, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

13,778,000

 

$

3,476,000

 

$

553,000

 

$

 

$

 

$

17,807,000

 

Segment (loss) profit before bonuses and income taxes

 

(485,000

)

600,000

 

(128,000

)

(26,000

)

 

(39,000

)

Annual performance bonuses

 

 

 

 

 

 

 

Net income (loss)

 

(311,000

)

354,000

 

(78,000

)

(20,000

)

 

(55,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 29, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

17,466,000

 

$

3,290,000

 

$

424,000

 

$

 

$

 

$

21,180,000

 

Segment profit before bonuses and income taxes

 

1,455,000

 

430,000

 

(23,000

)

(50,000

)

 

1,812,000

 

Annual performance bonuses

 

 

 

 

 

 

 

Net income (loss)

 

841,000

 

245,000

 

2,000

 

(30,000

)

 

1,058,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 27, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

28,039,000

 

$

6,685,000

 

$

859,000

 

$

 

$

 

$

35,583,000

 

Segment (loss) profit before bonuses and income taxes

 

(382,000

)

1,050,000

 

(446,000

)

(50,000

)

 

172,000

 

Annual performance bonuses

 

 

 

 

 

 

 

Net income (loss)

 

(256,000

)

623,000

 

(271,000

)

(35,000

)

 

61,000

 

Segment assets

 

50,126,000

 

11,873,000

 

1,401,000

 

28,077,000

 

(42,373,000

)

49,104,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 29, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

33,739,000

 

$

6,060,000

 

$

649,000

 

$

 

$

 

$

40,448,000

 

Segment profit (loss) before bonuses and income taxes

 

1,258,000

 

427,000

 

(176,000

)

(50,000

)

 

1,459,000

 

Annual performance bonuses

 

 

 

 

 

 

 

Net income (loss)

 

702,000

 

243,000

 

(107,000

)

(30,000

)

 

808,000

 

Segment assets

 

33,176,000

 

11,293,000

 

660,000

 

30,543,000

 

(29,552,000

)

46,120,000

 

 

9.            CONTINGENCIES

 

Claims and Lawsuits

 

The Company is subject from time to time to various claims and lawsuits, including those alleging professional errors or omissions that arise in the ordinary course of business against firms that operate in the engineering and consulting professions.  The Company carries

 

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professional liability insurance, subject to certain deductibles and policy limits, for such claims as they arise and may from time to time establish reserves for litigation that is considered probable of loss.

 

County of San Diego v. Willdan, Superior Court of California, Riverside County

 

A complaint was filed against the Company on February 28, 2008 relating to a project for the reconstruction of a portion of Valley Center Road located in an unincorporated area of San Diego County.  The Company completed the design and a contract was awarded to a construction contractor for construction of the improvements.  The construction was originally scheduled for completion in December 2008; however completion has been delayed until fall 2009.  The lawsuit alleges that the delays in construction were caused by errors and omissions in the preparation of reports and in the design and engineering of the project, resulting in additional design and construction costs, in an amount to be determined but believed to be in excess of $5.0 million.  The Company denies the allegations asserted in the lawsuit and will vigorously defend against the claims.  At June 27, 2008, the Company did not have a liability recorded on its balance sheet related to this complaint.

 

Topaz v. City of Laguna Beach, Superior Court of California, Orange County

 

A first amended complaint was filed naming the Company as a defendant on October 17, 2007.  The first amended complaint did not contain a statement of damages.  This suit concerns a project by the City of Laguna Beach to reconstruct a retaining wall supporting a city road.  Subsequent to completion of the project a slope below the retaining wall failed damaging the plaintiffs’ residence.  The retaining wall did not fail.  The construction work was performed from February to March 2005.  The slope failure occurred in June 2005.  The plaintiffs were not injured in the incident.  The plaintiffs allege that the City of Laguna Beach violated its own ordinances by not obtaining appropriate geotechnical data during the design stage and by allowing the work to be constructed during the rainy season.  The lawsuit also names Merit Engineering, the project designer, Peterson-Chase Engineering, the general contractor and the Company, the construction observer as defendants.  The plaintiffs issued a statement of damages on April 25, 2008 indicating damages to real and personal property in the amount of $785,000 and general damages between $1,570,000 and $4,700,000.  A cross-complaint has been filed in the action by Peterson-Chase Engineering seeking equitable apportionment.  The Company denies the allegations asserted in the lawsuit and will vigorously defend against the claims.  At June 27, 2008, the Company did not have a liability recorded on its balance sheet related to this complaint.

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements included elsewhere in this Quarterly Report and the audited financial statements for the year ended December 28, 2007, included in our Annual Report on Form 10-K (File No. 001-33076).  This Quarterly Report contains, in addition to historical information, forward-looking statements, which involve risk and uncertainties.  The words “believe”, “expect”, “estimate”, “may”, “will”, “could”, “plan”, or “continue” and similar expressions are intended to identify forward-looking statements.  Our actual results could differ significantly from the results discussed in such forward-looking statements.

 

Overview

 

We are a leading provider of outsourced services to small and mid-sized public agencies in California and other western states.  Outsourcing enables these agencies to provide a wide range of specialized services, without having to incur and maintain the overhead necessary to develop staffing in-house.  We provide a broad range of services to public agencies and to a lesser extent, private industry, including:

 

·                                Civil Engineering;

 

·                                Building and Safety Services;

 

·                                Geotechnical Engineering;

 

·                                Energy Efficiency Consulting;

 

·                                Financial and Economic Consulting; and

 

·                                Disaster Preparedness and Homeland Security.

 

We operate our business through a network of offices located throughout California and other western states and had a staff of 602 as of June 27, 2008 that includes licensed engineers and other professionals.  Our core clients are public agencies in communities with populations ranging from 10,000 to 300,000 people.  We believe communities of this size are underserved by large outsourcing companies that tend to focus on securing large federal and state projects, as well as projects for the private sector.  We seek to establish close working relationships with our public agency clients and, over time, to expand the breadth and depth of the services we provide to them.

 

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While we currently serve communities throughout the country, our business is concentrated in California and neighboring states.  We provide services to approximately 60% of the 490 cities and over 60% of the 58 counties in California.  We also serve special districts, school districts and other public agencies.

 

We were founded over 40 years ago and Willdan Group, Inc., a Delaware corporation, was formed in 2006 to serve as our holding company.  Today, we consist of a family of wholly owned companies that operate within the following segments for financial reporting purposes:

 

Engineering Services.    Our Engineering Services segment includes the operations of our subsidiaries, Willdan Engineering, Willdan Geotechnical, Intergy Corporation, Willdan Resource Solutions, and Public Agency Resources (PARs). These businesses collectively provide engineering-related services, geotechnical engineering services, environmental engineering and environmental related services and energy efficiency, water conservation, and renewable energy services.  Additionally, PARs primarily provides staffing to Willdan Engineering.  Contract revenue for the Engineering Services segment represented 78.8% and 83.4% of our consolidated contract revenue for the six months ended June 27, 2008 and the six months ended June 29, 2007, respectively.

 

Public Finance Services.    Our Public Finance Services segment consists of the business of our subsidiary, Willdan Financial, which offers financial and economic services to public agencies.  Contract revenue for the Public Finance Services segment represented 18.8% and 15.0% of our consolidated contract revenue for the six months ended June 27, 2008 and the six months ended June 29, 2007, respectively.

 

Homeland Security Services.    Our Homeland Security Services segment consists of the business of our subsidiary, Willdan Homeland Solutions, which offers homeland security, public safety consulting and management consulting services.  We formed this subsidiary in fiscal year 2004 and began operations in the second half of fiscal year 2005.  Contract revenue for our Homeland Security Services segment represented 2.4% and 1.6% of our consolidated contract revenue for the fiscal six months ended June 27, 2008 and the fiscal six months ended June 29, 2007, respectively.

 

Recent Developments

 

On June 9, 2008, we completed the purchase of all of the outstanding stock of Intergy Corporation (“Intergy”) pursuant to a stock purchase agreement, by and among us, Intergy, Mr. Ashish Goel and Mr. Alok (Jay) Bhalla (Messrs. Goel and Bhalla, each a “Seller” and, collectively, the “Sellers”).  Intergy is a California-based consulting firm that assists companies, institutions and agencies with planning and implementing their energy efficiency, water conservation, and renewable energy strategies.

 

We purchased all of Intergy’s outstanding capital stock for an amount equal to $10.9 million in cash, of which $9.9 million was paid at closing and $1.0 million must be paid no later than June 24, 2009, plus up to an additional $6.2 million in earn-out payments if Intergy achieves certain levels of earnings before interest and taxes, in each of the first three years after completion of the acquisition. The aggregate purchase price includes an estimated net asset value adjustment of $0.6 million, which may be increased or decreased based on the net asset value of Intergy as of June 9, 2008.

 

We may elect, at our sole discretion, to pay up to 50% of any earn-out payment in shares of our common stock as long as (a) our market capitalization at the time of any such earn-out payment is between $57.0 million and $86.0 million and (b) the shares of common stock are traded on a United States national securities exchange or reported through NASDAQ as of the end of the applicable period for which the earn-out was achieved.  If the Average Daily Trading Volume (as defined in the stock purchase agreement) of our common stock as of the end of an applicable earn-out period is less than 0.42% of our then-issued and outstanding common stock, we may not pay more than 25% of the applicable earn-out payment in shares of our common stock.

 

The $1.0 million deferred portion of the purchase price and the earn-out payments of up to $6.2 million may be offset by any indemnification obligations owed by Sellers to us in accordance with the stock purchase agreement.

 

In the second quarter of fiscal year 2008, there were also changes to our senior management and our Board of Directors.  On April 20, 2008, Ms. Chell Smith, resigned from her positions as a member of our Board of Directors, Audit, Compensation and Nominating and Corporate Governance Committees, and as chairperson of our Investment, Finance and Strategy Committee.  On April 22, 2008, our Board of Directors announced the appointment of Mr. Wayne Shelton to the Board.  Mr. Shelton was appointed to the Audit and Investment, Finance and Strategy Committees to fill the vacancies created by Ms. Smith’s resignation. Additionally, Ms. Mallory McCamant, our Chief Operating Officer, Senior Vice President and Assistant Secretary, resigned effective May 10, 2008.

 

Components of Income and Expense

 

Contract Revenue

 

We enter into contracts with our clients that contain three principal types of pricing provisions: fixed fee, time-and-materials and unit-based.  Contract revenue on our fixed fee contracts is determined on the percentage-of-completion method based generally on the ratio of direct

 

12



Table of Contents

 

costs incurred to date to estimated total direct costs at completion.  Many of our fixed fee contracts are relatively short in duration, thereby lowering the risks of not properly estimating the percentage completed.  Revenue on our time-and-materials and unit-based contracts are recognized as the work is performed in accordance with specific terms of the contract.  A large percentage of our contracts are based on contractual rates per hour plus costs incurred.  Some of these contracts include maximum contract prices, but the majority of these contracts are not expected to exceed the maximum.

 

Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known. When the revised estimate indicates a loss, such loss is provided for currently in its entirety.  Claims revenue is recognized only upon resolution of the claim.  Change orders in dispute are evaluated as claims. Costs related to unpriced change orders are expensed when incurred and recognition of the related contract revenue is based on an evaluation of the probability of recovery of the costs.  Estimated profit is recognized for unpriced change orders if realization of the expected price of the change order is assured beyond a reasonable doubt.

 

Direct Costs of Contract Revenue

 

Direct costs of contract revenue consist primarily of that portion of technical and nontechnical salaries and wages that has been incurred in connection with revenue producing projects.  Direct costs of contract revenue also include production expenses, subconsultant services and other expenses that are incurred in connection with revenue producing projects.  Direct costs of contract revenue exclude that portion of technical and nontechnical salaries and wages related to marketing efforts, vacations, holidays and other time not spent directly generating revenue under existing contracts.  Such costs are included in general and administrative expenses.  Additionally, payroll taxes, bonuses and employee benefit costs for all of our personnel are included in general and administrative expenses since no allocation of these costs is made to direct costs of contract revenue.  No allocation of facilities costs is made to direct costs of contract revenue nor is depreciation and amortization allocated to direct costs.  We expense direct costs of contract revenue when incurred.

 

As a firm that provides multiple and diverse outsource services, we do not believe gross margin is a consistent or appropriate indicator of our performance and therefore we do not use this measure as construction contractors and other types of consulting firms may.  Other companies may classify as direct costs of contract revenue some of the costs that we classify as general and administrative expenses.  As a result, our direct costs of contract revenue may not be comparable to direct costs for other companies, either as a line item expense or as a percentage of contract revenue.

 

General and Administrative Expenses

 

General and administrative expenses include the costs of the marketing and support staffs, other marketing expenses, management and administrative personnel costs, payroll taxes, bonuses and employee benefits for all of our employees and the portion of salaries and wages not allocated to direct costs of contract revenue for those employees who provide our services.  General and administrative expenses also include facility costs, depreciation and amortization, professional services, legal and accounting fees and administrative operating costs.  Within general and administrative expenses, “Other” includes expenses such as professional services, legal and accounting, computer costs, travel and entertainment and marketing costs.  We expense general and administrative costs when incurred.

 

Until November 2006, we had not operated as a public company.  As a public company, we have and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company.  Our management and other personnel need to devote a substantial amount of time to comply with the requirements of being a public company.  Moreover, changes in rules and regulations for public companies may increase our legal and financial compliance costs and could make some activities more time-consuming and costly.

 

Critical Accounting Policies

 

This discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP).  To prepare these financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses in the reporting period.  Our actual results may differ from these estimates.  We have provided a summary of our significant accounting policies in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 28, 2007.  We describe below those accounting policies that require material subjective or complex judgments and that have the most significant impact on our financial condition and results of operations.  Our management evaluates these estimates on an ongoing basis, based upon information currently available and on various assumptions management believes are reasonable as of the date of this report.

 

Contract Accounting

 

We enter into contracts with our clients that contain three principal types of pricing provisions:  fixed fee, time-and-materials, and unit-based. Revenue on fixed fee contracts is recognized on the percentage-of-completion method based generally on the ratio of direct costs incurred to date to estimated total direct costs at completion.  Revenue on time-and-materials and unit-based contracts are recognized as the work is performed in accordance with specific terms of the contract.  Revenue for amounts that have been billed but not earned is deferred and such deferred revenue is referred to as billings in excess of costs and estimated earnings on uncompleted contracts in the accompanying consolidated balance sheets.

 

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Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known.  When the revised estimate indicates a loss, such loss is provided for currently in its entirety. Claims revenue is recognized only upon resolution of the claim.  Change orders in dispute are evaluated as claims.  Costs related to unpriced change orders are expensed when incurred and recognition of the related contract revenue is based on an evaluation of the probability of recovery of the costs.  Estimated profit is recognized for unpriced change orders if realization of the expected price of the change order is assured beyond a reasonable doubt.

 

Applying the percentage-of-completion method of recognizing revenue requires us to estimate the indicated outcome of our long-term contracts.  We forecast such outcomes to the best of our knowledge and belief of current and expected conditions and our expected course of action.  Differences between our estimates and actual results often occur resulting in changes to reported revenue and earnings.  Such changes could have a material effect on our future consolidated financial statements.

 

Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon our review of all outstanding amounts on a monthly basis.  We determine the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Our credit risk is minimal with governmental entities.  Account receivables are written off when deemed uncollectible.  Recoveries of accounts receivable previously written off are recorded when received.

 

For further information on the types of contracts under which we perform our services, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Income and Expense—Contract Revenue” elsewhere in this report.

 

Goodwill Impairment Valuation

 

Goodwill primarily represents the excess of the purchase price paid for our Public Finance Services reporting unit (Willdan Financial Services) and Intergy Corporation, over the estimated fair value of the net identified tangible and intangible assets acquired.  We perform an annual review in the fourth quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired.  We compare the fair value of the reporting unit to its carrying value, including goodwill.  To estimate the fair value, we use a valuation approach based on a multiple of historical cash flows, management’s estimates of future cash flows, and other market data.  This estimate of fair value is highly subjective and is based in part on assumptions that could differ materially from actual results.  If our evaluation indicates that goodwill is impaired, we perform an additional assessment to determine the extent of the impairment based on the implied fair value of goodwill compared with the carrying amount of the goodwill. No such impairment loss has been recognized to date related to Public Finance Services. We have not yet performed an annual review for Intergy Corporation. We have however estimated a fair value based on a multiple of historical cash flows, management’s estimates of future cash flows, and other market data.

 

Accounting for Claims against the Company

 

We record liabilities to claimants, if applicable, for probable and estimable claims on our consolidated balance sheet, which is included in accrued liabilities, and record a corresponding receivable from our insurance company, if applicable, for the portion of the claim that will likely be covered by insurance, which is included in other receivables.  The estimated claim amount net of the amount estimated to be recoverable from the insurance company is included in our general and administrative expenses.  Determining probability and estimating claim amounts is highly judgmental. Initial accruals and any subsequent changes in our estimates could have a material effect on our consolidated financial statements.

 

Results of Operations

 

The following table sets forth, for the periods indicated, certain information derived from our consolidated statements of operations expressed as a percentage of contract revenue.

 

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Table of Contents

 

 

 

Fiscal Three Months Ended

 

Fiscal Six Months Ended

 

Statement of Operations Data

 

June 27,
2008

 

June 29,
2007

 

June 27,
2008

 

June 29,
2007

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

100.0

%

100.0

%

100.0

%

100.0

%

Direct costs of contract revenue:

 

 

 

 

 

 

 

 

 

Salaries and wages

 

31.1

 

32.7

 

31.1

 

33.1

 

Production expenses

 

2.9

 

2.1

 

2.4

 

2.0

 

Subconsultant services

 

8.6

 

5.6

 

7.9

 

5.6

 

Total direct costs of contract revenue.

 

42.6

 

40.4

 

41.4

 

40.7

 

General and administrative expenses:

 

 

 

 

 

 

 

 

 

Salaries and wages, payroll taxes, employee benefits

 

33.3

 

27.9

 

34.8

 

32.8

 

Facilities

 

6.6

 

5.5

 

6.5

 

5.6

 

Stock-based compensation

 

0.3

 

0.2

 

0.4

 

0.2

 

Depreciation and amortization

 

2.5

 

2.1

 

2.3

 

2.2

 

Other

 

15.4

 

15.9

 

14.8

 

17.1

 

Total general and administrative expenses.

 

58.1

 

51.6

 

58.8

 

57.9

 

Income (loss) from operations

 

(0.7

)

8.0

 

(0.2

)

1.4

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense, net of reversal

 

(0.1

)

(0.1

)

 

1.4

 

Interest income and other income, net

 

0.6

 

0.7

 

0.7

 

0.8

 

Total other income, net

 

0.5

 

0.6

 

0.7

 

2.2

 

(Loss) income before income tax expense

 

(0.2

)

8.6

 

0.5

 

3.6

 

Income tax expense

 

0.1

 

3.6

 

0.3

 

1.6

 

Net (loss) income

 

(0.3

)%

5.0

%

0.2

%

2.0

%

 

Three Months Ended June 27, 2008 Compared to Three Months Ended June 29, 2007

 

Contract revenue.    Our contract revenue was $17.8 million for the three months ended June 27, 2008, with $13.8 million attributable to the Engineering Services segment and $3.5 million attributable to the Public Finance Services segment.  Our Homeland Security Services segment generated $0.5 million during this period.  Consolidated contract revenue decreased $3.4 million, or 16.0%, to $17.8 million for the three months ended June 27, 2008 from $21.2 million in the three months ended June 29, 2007.  This was due primarily to a decrease of $3.7 million, or 21.1%, in contract revenue for the Engineering Services segment primarily as a result of the continuing decline in our building and safety projects which continues to be affected by the residential housing market.  The $3.7 million decrease in contract revenue for the Engineering Services segment is net of an increase of $0.7 million resulting from our acquisition of Intergy Corporation.  Contract revenue in the Public Finance Services and Homeland Security Services segments increased $0.2 million, or 6.1%, from $3.3 million to $3.5 million, and $0.1 million, or 25.0% from $0.4 million to $0.5 million, respectively, in the three months ended June 27, 2008 as compared to the three months ended June 29, 2007.  Our Public Finance Services business, specifically district administration projects, tends to run counter-cyclical to the residential housing market. Additionally, our Homeland Security Services segment has expanded its service offerings beyond its traditional training services to include training exercises and management services.

 

Our Engineering Services segment decline was due in part to the continuing slowdown in residential housing construction in the western United States. A source of revenue in our Engineering Services segment is fees assessed for building permits. Since the second half of fiscal year 2007, we have continued to experience a reduction in revenue from these fees because of the downturn in the housing market.  Revenue in the Public Finance Services segment increased primarily due to increased district formation services to fund infrastructure projects as well as increased delinquency management services in our district administration services.  Revenue in Homeland Security Services has increased due to an increase in our emergency response training courses and exercises, particularly in Southern California.

 

Direct costs of contract revenue.    Direct costs of contract revenue were $7.6 million for the three months ended June 27, 2008, with $6.4 million attributable to the Engineering Services segment and $1.0 million attributable to the Public Finance Services segment.  The additional $0.2 million is attributable to direct costs of contract revenue for our Homeland Security Services segment.  Overall, direct costs decreased by $1.0 million, or 11.6%, from $8.6 million for the three months ended June 29, 2007.  This decrease is attributable to our Engineering Services segment, while direct costs within the Public Finance Services and Homeland Security Services segments remained essentially flat.  Direct costs decreased primarily as a result of the reduction in our headcount to 602 as of June 27, 2008 from 645 as of June 29, 2007, a decrease of 6.7%, partially offset by an increase in subconsultant services of $0.3 million, or 25.0%, from $1.2 million for the three months ended June 29, 2007 to $1.5 million for the three months ended June 27, 2008. Direct costs of contract revenue as a percentage of contract revenue for the three months ended June 27, 2008 increased to 42.6% from 40.4% for the three months ended June 29, 2007.

 

Within direct costs of contract revenue, salaries and wages decreased from 32.7% of contract revenue for the three months ended June 29, 2007 to 31.1% for the three months ended June 27, 2008.  Comparing those same periods, subconsultant services increased from 5.6% of contract revenue to 8.6% of contract revenue.

 

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General and administrative expenses.    General and administrative expenses decreased by $0.6 million, or 5.5%, to $10.3 million for the three months ended June 27, 2008 from $10.9 million for the three months ended June 29, 2007.  This was due primarily to a decrease of $0.6 million in general and administrative expenses of the Engineering Services segment. General and administrative expenses within our Homeland Security Services segment increased by $0.2 million but was offset by a decrease of $0.2 million in unallocated corporate expenses. Within our Public Finance Services segment, general and administrative costs remained flat.  General and administrative expenses as a percentage of contract revenue increased to 58.1% in the three months ended June 27, 2008 from 51.6% for the three months ended June 29, 2007.

 

The decreases in general and administrative expenses in the Engineering Services and Homeland Security Services segments were due primarily to (i) a decrease of approximately $0.6 million in other general and administrative expenses, which include decreased legal and accounting fees and other costs related to the settlement of the West Hollywood litigation in the 2007 period and (ii) a decrease of approximately $0.2 million in marketing expenses and (iii) a decrease of approximately $0.1 million in the costs of professional services.

 

Income (loss) from operations.    As a result of the above factors, we had an operating loss of $0.1 million for the three months ended June 27, 2008 as compared to operating income of $1.7 million for the three months ended June 29, 2007.  Income (loss) from operations as a percentage of contract revenue was (0.7)% for the three months ended June 27, 2008, a decrease from 8.0% for the three months ended June 29, 2007.

 

Other income (expense).    Other income (expense), net essentially remained flat in the three months ended June 27, 2008, as compared to the three months ended June 29, 2007.  Other income (expense), net as a percentage of contract revenue was 0.5% for the three months ended June 27, 2008, a decrease from 0.6% for the three months ended June 29, 2007.

 

Net income (loss).   As a result of the above factors, we had a net loss of $0.1 million for the three months ended June 27, 2008 compared to net income of $1.1 million for the three months ended June 29, 2007.

 

Six Months Ended June 27, 2008 Compared to Six Months Ended June 29, 2007

 

Contract revenue.    Our contract revenue was $35.6 million for the six months ended June 27, 2008, with $28.0 million attributable to the Engineering Services segment and $6.7 million attributable to the Public Finance Services segment.  Our Homeland Security Services segment generated $0.9 million during this period.  Consolidated contract revenue decreased $4.8 million, 11.9%, from $40.4 million for the six months ended June 29, 2007.  The decrease in contract revenue was primarily due to a decrease of $5.7 million, or 16.9%, in contract revenue of the Engineering Services segment which has been significantly impacted by the decline in the California residential housing market and state and local government budget cuts.  The $5.7 million decrease in contract revenue for the Engineering Services segment is net of an increase of $0.7 million resulting from our acquisition of Intergy Corporation.  Contract revenue in the Public Finance Services and Homeland Security Services segments, respectively, increased by $0.6 million, or 9.8% to $6.7 million from $6.1 million and $0.3 million, or 50.0%, to $0.9 million from $0.6 million in the six months ended June 27, 2008.

 

Direct costs of contract revenue.    Direct costs of contract revenue were $14.7 million for the six months ended June 27, 2008, with $12.5 million attributable to the Engineering Services segment and $1.8 million attributable to the Public Finance Services segment.  The additional $0.4 million is attributable to direct costs of contract revenue for our Homeland Security Services segment.  Our direct costs of contract revenue for the six months ended June 27, 2008 decreased $1.7 million, or 10.4%, from $16.4 million for the six months ended June 29, 2007.  Of this total decrease, direct costs of contract revenue decreased $2.0 million, or 12.2%, in the Engineering Services segment and increased $0.2 million in the Public Finance Services segment.  The remaining $0.1 million increase is attributable to the Homeland Security Services segment.  The decrease in direct costs of contract revenue for our Engineering Services segment is primarily due to the decreased headcount in this segment. Increases in direct costs of contract revenue for our Public Finance Services and Homeland Security Services segments were primarily the result of the increased volume of activity that generated the increased contract revenue previously discussed for these operating segments. Direct costs of contract revenue as a percentage of contract revenue for the six months ended June 27, 2008 increased to 41.4% from 40.7% for the six months ended June 29, 2007.

 

Within direct costs of contract revenue, salaries and wages decreased from 33.1% of contract revenue in the six months ended June 29, 2007 to 31.1% in the six months ended June 27, 2008.  Comparing those same periods, subconsultant services increased from 5.6% of contract revenue to 7.9% of contract revenue.

 

General and administrative expenses.    General and administrative expenses decreased by $2.5 million, or 10.7%, to $20.9 million for the six months ended June 27, 2008 from $23.4 million for the six months ended June 29, 2007.  This included decreases of $2.5 million and $0.1 million in general and administrative expenses of the Engineering Services and Public Finance Services segments, respectively.  Additionally, a decrease of $0.3 million is attributed to unallocated corporate expenses. These decreases were offset by an increase of $0.4 million in general and administrative expenses related to our Homeland Security Services segment. General and administrative expenses as a percentage of contract revenue increased to 58.8% in the six months ended June 27, 2008 from 57.9% in the prior year period.

 

The decreases in general and administrative expenses were due primarily to (i) a decrease of approximately $1.7 million, or 24.6%, in other general and administrative expenses, which include decreased costs in marketing expenses, professional services and legal fees related to

 

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the settlement of the West Hollywood litigation in March 2007 and (ii) a decrease of approximately $1.0 million, net, or 7.5%, in employee related costs primarily due to our reduced headcount.  As discussed above under “—Components of Income and Expense—Direct Costs of Contract Revenue,” we do not allocate that portion of salaries and wages not related to time spent directly generating revenue to direct costs of contract revenue.  Included in general and administrative expenses in 2007 were costs associated with management changes in the six months ended June 29, 2007 that resulted in an increase of approximately $0.6 million in expenses for the payment of severance and other employee benefits.

 

 (Loss) income from operations.    As a result of the above factors, operating loss was $87,000 for the six months ended June 27, 2008 as compared to a $0.6 million of operating income for the six months ended June 29, 2007.  Operating income as a percentage of contract revenue decreased to (0.2)% in the six months ended June 27, 2008 from 1.4% in the prior year period.

 

Other income (expense).    Other income (expense), net decreased by $0.6 million, or 66.7%, to $0.3 million of income for the six months ended June 27, 2008 from $0.9 million of income for the six months ended June 29, 2007.  This was due primarily to the reversal of $0.6 million in accrued interest payable associated with the West Hollywood litigation settlement in the six months ended June 29, 2007.

 

Net Income.  As a result of the above factors, our net income was $0.1 million for the six months ended June 27, 2008 compared to $0.8 million for the six months ended June 29, 2007.

 

Liquidity and Capital Resources

 

As of June 27, 2008, we had $6.2 million of cash and cash equivalents and $1.4 million of liquid investments in the form of California tax-exempt auction-rate securities.  Our primary sources of liquidity are cash generated from operations and borrowings under our revolving line of credit.  We believe that our cash and cash equivalents on hand, cash generated by operating activities, cash held in liquid investments and funds available under our credit facility will be sufficient to finance our operating activities for the foreseeable future.

 

Cash flows from operating activities

 

Cash flows provided by operating activities were $1.9 million for the six months ended June 27, 2008 compared to cash flows used in operating activities of $3.9 million for the six months ended June 29, 2007.  The cash flows provided by operating activities in the six months ended June 27, 2008 were comparatively higher than in the six months ended June 29, 2007 due primarily to increased collections of accounts receivables and increased accounts payable primarily attributable to the timing of expenses accrued but not paid for certain insurance and independent contractors in the six months ended June 27, 2008, combined with our payments in the first quarter of 2007 related to the settlement in the West Hollywood litigation.

 

Cash flows from investing activities

 

Cash flows used in investing activities were $10.2 million for the six months ended June 27, 2008 compared to $8.1 million for the six months ended June 29, 2007.  Cash flows used in investing activities for the six months ended June 27, 2008 were comparatively higher than in the six months ended June 29, 2007 primarily due to $9.8 million in payments, net of cash acquired, related to the acquisition of Intergy Corporation in the six months ended June 27, 2008, partially offset by a decrease of $7.6 million in net purchases of liquid investments.

 

Cash flows from financing activities

 

Cash flows used in financing activities were $1.0 million for the six months ended June 27, 2008 compared to $3.6 million used in financing activities for the six months ended June 29, 2007.  Cash flows used in financing activities for the six months ended June 27, 2008 decreased from the six months ended June 29, 2007 primarily because we paid our final S Corporation distribution of $3.2 million to our shareholders in the first fiscal quarter of 2007.

 

Outstanding indebtedness

 

We currently have a revolving line of credit with Wells Fargo Bank. We also finance insurance premiums by entering into unsecured notes payable with insurance companies.

 

Under the terms of the credit agreement, we can borrow up to $10.0 million from time to time up to and until January 1, 2010.  Loans made under the revolving line of credit will accrue interest at either (i) the floating rate of 0.50% below the prime rate in effect from time to time or (ii) the fixed rate of 1.25% above LIBOR, at our election.  For prime rate loans, the interest rate will be adjusted when each prime rate change by the bank is announced and becomes effective.  The interest rate is subject to adjustment based on changes in our ratio of total funded debt to EBITDA (as defined in the credit agreement).  Upon a default, the interest rate will be increased by a default rate margin of 4.00%.  Upon the occurrence of an event of default under the credit agreement, the bank has the option to make all indebtedness then owed by us under the credit agreement immediately due and payable.  The revolving line of credit matures on January 31, 2010.

 

Borrowings under the credit agreement are secured by all accounts receivable and other rights to payment, general intangibles, inventory and equipment including those of our subsidiaries.  Each subsidiary (except Public Agency Resources and Willdan Resource Solutions) has signed an unconditional guaranty of our obligations under the agreements.  The credit agreement also contains customary

 

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representations and affirmative covenants, including covenants to maintain a minimum tangible net worth, a minimum net income, a minimum asset coverage ratio and a maximum ratio of total funded debt to EBITDA (each ratio as specifically defined in the credit agreement).  The credit agreement also includes customary negative covenants, including a covenant that prohibits the incurrence of additional indebtedness by us or our subsidiaries other than purchase money indebtedness not to exceed $2.0 million and indebtedness existing on the date of the credit agreement, and a covenant that prohibits payment of dividends on our stock.  In addition, the credit agreement includes customary defaults for a credit facility. There were no outstanding borrowings under this agreement as of June 27, 2008.

 

Contractual obligations

 

We had no material changes in commitments for long-term debt obligations, operating lease obligations or capital lease obligations as of June 27, 2008, as compared to those disclosed in our table of contractual obligations included in our Annual Report on Form 10-K for the year ended December 28, 2007.

 

New Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements” (SFAS 157) which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  We adopted SFAS 157 on the first day of fiscal year 2008 and the adoption did not have a material effect on our financial statements and disclosures.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”   (SFAS 159).  SFAS 159 provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value.  A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  The provisions of SFAS 159 are elective, and through June 27, 2008, we did not elect to adopt SFAS 159 for any of our financial assets and liabilities.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R).  SFAS 141R establishes the principles and requirements for how an acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141R makes significant changes to existing accounting practices for acquisitions.  Under SFAS 141R, adjustments to the acquired entity’s deferred tax assets and uncertain tax position balances occurring outside the measurement period are recorded as a component of the income tax expense, rather than goodwill, which nullifies EITF 93-7, Uncertainties Related to Income Taxes in a Purchase Business Combination, (EITF 93-7). This requirement applies to all business combinations regardless of consummation date. SFAS 141R applies prospectively to business combinations, for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008, except for the transition provisions of EITF 93-7.  We will implement the new standard effective the first day of fiscal year 2009.  We are currently evaluating the impact, if any, SFAS 141R will have on future business combinations.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51” (SFAS 160).  SFAS 160 establishes accounting and reporting standards that require: (i) noncontrolling interests to be reported as a component of equity; (ii) changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and (iii) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value.  We do not currently have any less than wholly-owned consolidated subsidiaries.  SFAS 160 is to be applied prospectively at the beginning of the first annual reporting period on or after December 15, 2008.  We will implement the new standard effective the first day of fiscal year 2009.

 

In December 2007, the FASB ratified Emerging Issues Task Force (EITF) 07-01, “Accounting for Collaborative Arrangements” (EITF 07-01).  EITF 07-01 was issued to prescribe the accounting for collaborations. It requires certain transactions between collaborators to be recorded in the income statement on either a gross or net basis when certain characteristics exist in the collaboration relationship.  EITF 07-01 is effective for fiscal years beginning after December 15, 2008.  We will adopt EITF 07-01 effective the first day of fiscal year 2009 and we are currently evaluating the impact, if any, EITF 07-01 will have on our financial statements.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

In addition to current and historical information, this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to our future operations, prospects, potential products, services, developments and business strategies.  These statements can, in some cases, be identified by the use of words like “may,” “will,” “should,”

 

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“could,” “would,” “intend,” “expect,”  “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” or “continue” or the negative of such terms or other comparable terminology.  This report includes, among others, forward-looking statements regarding our:

 

·                                          expectations about future customers;

 

·                                          expectations about expanded service offerings;

 

·                                          expectations about our ability to cross-sell additional services to existing clients;

 

·                                          expectations about our intended geographical expansion;

 

·                                          expectations about our ability to attract executive officers and key employees;

 

·                                          evaluation of the materiality of our current legal proceedings; and

 

·                                          expectations about positive cash flow generation and existing cash and investments being sufficient to meet normal operating requirements.

 

These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements.  The forward-looking statements in this report, as well as subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf, are hereby expressly qualified in their entirety by the cautionary statements in this report, including the risk factors in our Form 10-K for the year ended December 28, 2007.  We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument.  The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes.  Market risk is attributed to all market risk sensitive financial instruments, including long-term debt.

 

We had cash and cash equivalents of $6.2 million as of June 27, 2008. Of this amount, $0.3 million was invested in the Orange County Business Bank Money Market Fund and Passbook savings, $2.4 million in the Wells Fargo Stage Coach Sweep Investment Account, $0.2 million in the Citi Business Tiered IMMA account, respectively, and $2.3 million was invested in the Lehman Brothers National Muni Money Fund.  Although these investments are subject to variable interest rates, we do not believe we are subject to significant market risk for these short-term investments. Liquid investments at June 27, 2008 were $1.4 million in the form of California tax-exempt auction rate securities.  We believe we will be able to liquidate the $1.4 million at its full par value in the next twelve months.

 

We do not engage in trading activities and do not participate in foreign currency transactions or utilize derivative financial instruments.  Additionally, as of June 27, 2008, we did not have any outstanding debt under our revolving credit facility.

 

Item 4.  Controls and Procedures

 

We maintain disclosure controls and procedures defined in Rule 13a-15(e) under the Exchange Act, as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our President and Chief Executive Officer, Tom Brisbin, and our Chief Financial Officer, Kimberly Gant, as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this report, our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 27, 2008.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 27, 2008.  No change in our internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

We are subject from time to time to claims and lawsuits, including those alleging professional errors or omissions, that arise in the ordinary course of business against firms, like ours, that operate in the engineering and consulting professions.  We carry professional liability insurance, subject to certain deductibles and policy limits, for such claims as they arise and may from time to time establish reserves for litigation that is considered probable of a loss.

 

Other than as described below, we are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against us, other than routine litigation arising in the ordinary course of business, most of which is expected to be covered by liability insurance.

 

County of San Diego v. Willdan, Superior Court of California, Riverside County

 

A complaint was filed against us on February 28, 2008 relating to a project for the reconstruction of a portion of Valley Center Road located in an unincorporated area of San Diego County.  The design was completed by the Company and a contract was awarded to a construction contractor for construction of the improvements.  The construction was originally scheduled for completion in December 2008; however completion has been delayed until fall 2009.  The lawsuit alleges that the delays in construction were caused by errors and omissions in the preparation of reports and in the design and engineering of the project, resulting in additional design and construction costs, in an amount to be determined but believed to be in excess of $5.0 million.  We deny the allegations asserted in the lawsuit and will vigorously defend against the claims.

 

Topaz v. City of Laguna Beach, Superior Court of California, Orange County.

 

A first amended complaint was filed naming us as a defendant on October 17, 2007.  The first amended complaint did not contain a statement of damages.  This suit concerns a project by the City of Laguna Beach to reconstruct a retaining wall supporting a city road.  Subsequent to completion of the project a slope below the retaining wall failed damaging the plaintiffs’ residence.  The retaining wall did not fail.  The construction work was performed from February to March 2005.  The slope failure occurred in June 2005.  The plaintiffs were not injured in the incident.  The plaintiffs allege that the City of Laguna Beach violated its own ordinances by not obtaining appropriate geotechnical data during the design stage and by allowing the work to be constructed during the rainy season.  The lawsuit also names Merit Engineering, the project designer, Peterson-Chase Engineering, the general contractor and the Company, the construction observer as defendants.  The plaintiffs issued a statement of damages on April 25, 2008 indicating damages to real and personal property in the amount of $785,000 and general damages between $1,570,000 and $4,700,000.  A cross-complaint has been filed in the action by Peterson-Chase seeking equitable apportionment. We deny the allegations asserted in the lawsuit and will vigorously defend against the claims.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults upon Senior Securities

 

None.

 

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

 

Our annual meeting of stockholders (the “Annual Meeting”) was held on June 9, 2008.  Of the total number of common shares outstanding on April 11, 2008, a total of 5,349,052 were represented in person or by proxy at the Annual Meeting.  Results of votes with respect to proposals submitted at the Annual Meeting are set forth below.

 

(a)  To elect seven members of the Board of Directors, each to serve for a one-year term and until his or her successor is duly elected and qualified.  Votes recorded, by nominee, were as follows:

 

Nominee

 

For

 

Withheld

 

Win Westfall

 

5,288,312

 

60,740

 

Linda L. Heil

 

5,288,247

 

60,805

 

Keith Renken

 

5,283,312

 

65,740

 

Wayne Shelton

 

5,283,247

 

65,805

 

W. Tracy Lenocker

 

5,210,145

 

138,907

 

Thomas D. Brisbin

 

5,269,395

 

79,657

 

John M. Toups

 

5,283,312

 

65,740

 

 

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(b)  To consider and vote upon the ratification of the appointment of KPMG LLP as the independent registered public accounting firm for our Company for the year ending January 2, 2009:

 

For

 

Against

 

Abstain

 

5,340,644

 

3,500

 

4,908

 

 

(c)  To consider and vote upon approval of our company’s 2008 Stock Incentive Plan:

 

For

 

Against

 

Abstain

 

Broker Non-Votes

 

3,532,205

 

67,060

 

400,736

 

1,349,051

 

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits

 

Exhibit
Number

 

Exhibit Description

2.1

 

Stock Purchase Agreement, dated as of June 9, 2008, by and among Willdan Group, Inc., Intergy Corporation and the Stockholders of Intergy Corporation (1)

3.1

 

Articles of Incorporation of Willdan Group, Inc., including amendments thereto(2)

3.2

 

Bylaws of Willdan Group, Inc.(2)

4.1

 

Specimen Stock Certificate for shares of the Registrant’s Common Stock(2)

10.1

 

First Amendment to Credit Agreement, dated May 8, 2008, between Willdan Group, Inc. and Wells Fargo Bank, National Association.*

10.2

 

Second Amendment to Credit Agreement, dated June 9, 2008, between Willdan Group, Inc. and Wells Fargo Bank, National Association.*

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002*

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002*

32.1

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002*

 


*Filed herewith.

 

(1)         Incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 9, 2008.

 

(2)         Incorporated by reference to Willdan Group, Inc.’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 9, 2006, as amended (File No. 333-136444).

 

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SIGNATURE

 

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

 

WILLDAN GROUP, INC.

 

 

 

 

 

By:

/s/ Kimberly D. Gant

 

 

Date:  August 10, 2008

 

 

Kimberly D. Gant

 

 

Chief Financial Officer, Senior Vice President

 

22


Exhibit 10.1

 

FIRST AMENDMENT TO CREDIT AGREEMENT

 

THIS AMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is entered into as of May 8, 2008, by and between WILLDAN GROUP, INC., a Delaware corporation (“Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”).

 

RECITALS

 

WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of December 28, 2007, as amended from time to time (“Credit Agreement”).

 

WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes.

 

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows:

 

1.             The second paragraph under Section 1.4. is hereby deleted in its entirety, and the following substituted therefor:

 

“As security for all indebtedness and other obligations of Borrower to Bank subject hereto, Borrower shall cause Willdan Financial Services, Willdan Geotechnical; Willdan Engineering, Willdan Homeland Solutions and any other Subsidiary (as defined below) to grant to Bank security interests of first priority in all accounts receivable and other rights to payment, general intangibles, inventory and equipment.”

 

2.             Section 1.5. is hereby deleted in its entirety, and the following substituted therefore:

 

“SECTION 1.5.                 GUARANTIES. The payment and performance of all indebtedness and other obligations of Borrower to Bank shall be guaranteed jointly and severally by Willdan Financial Services, Willdan Geotechnical; Willdan Engineering, Willdan Homeland Solutions and any other Subsidiary in the principal amount of Ten Million Dollars ($10,000,000.00) each, as evidenced by and subject to the terms of guaranties in form and substance satisfactory to Bank.”

 

3.             Section 2.1. is hereby deleted in its entirety, and the following substituted therefor:

 

“SECTION 2.1.                 LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of Delaware, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower.

 

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Willdan Financial Services is a corporation, duly organized and existing and in good standing under the laws of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on it. Borrower owns one hundred percent (100%) of Willdan Financial Services.

 

Willdan Geotechnical is a corporation, duly organized and existing and in good standing under the laws of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on it. Borrower owns one hundred percent (100%) of Willdan Geotechnical.

 

Willdan Engineering is a corporation, duly organized and existing and in good standing under the laws of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on it. Borrower owns one hundred percent (100%) of Willdan Engineering.

 

Willdan Homeland Solutions is a corporation, duly organized and existing and in good standing under the laws of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on it. Borrower owns one hundred percent (100%) of Willdan Homeland Solutions.

 

As used herein the term “Subsidiary” shall mean any corporation or other entity of which at least a majority of the securities or other ownership interests having ordinary voting power for the election of directors or other persons performing similar functions are owned directly or indirectly by Borrower. As of the date hereof, Willdan Financial Services, Willdan Geotechnical, Willdan Engineering and Willdan Homeland Solutions are the only Subsidiaries of Borrower.”

 

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4.             Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document.

 

5.             Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default.

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above.

 

 

WELLS FARGO BANK,

WILLDAN GROUP, INC.

NATIONAL ASSOCIATION

 

 

By:

/s/ Kimberly D. Grant

 

By:

/s/ Jared A. Myres

 

Title:

Chief Financial Officer

 

 

Jared A. Myres

 

 

Vice President

 

3


Exhibit 10.2

 

SECOND AMENDMENT TO CREDIT AGREEMENT

 

THIS AMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is entered into as of June 9, 2008, by and between WILLDAN GROUP, INC., a Delaware corporation (“Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”).

 

RECITALS

 

WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of December 28, 2007, as amended from time to time (“Credit Agreement”).

 

WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes.

 

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows:

 

1.             Sections 4.9.(a) and (d) are hereby deleted in their entirety, and the following substituted therefor:

 

“(a) Tangible Net Worth not less than $15,000,000.00 at any time, with “Tangible Net Worth” defined as the aggregate of total stockholders’ equity less any intangible assets and less any loans or advances to, or investments in, any related entities or individuals.

 

(d) Total Funded Debt to EBITDA not greater than 2.5 to 1.0 as of each fiscal quarter end, determined on a rolling 4-quarter basis, with “Funded Debt” defined as the sum of all obligations for borrowed money (including subordinated debt, any contingent liabilities, the undrawn amount of any outstanding Letters of Credit, earn out or seller notes resulting from acquisitions, and all capital lease obligations), and with “EBITDA” defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense.”

 

2.             Section 5.3.(vii) is hereby deleted in its entirety, and the following substituted therefor:

 

“(vii) The aggregate consideration (valuing any non-cash consideration at its fair market value, and including without limitation the amount of all liabilities assumed or acquired) does not exceed Five Million Dollars ($5,000,000.00) for any individual acquisition (excluding the Intergy acquisition in fiscal year 2008), Twenty Million Dollars ($20,000,000.00) for all such acquisitions in the aggregate during fiscal year 2008, and Ten Million Dollars ($10,000,000.00) for all such acquisitions in the aggregate during each fiscal year thereafter.”

 

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3.             Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document.

 

4.             Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default.

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above.

 

 

WELLS FARGO BANK,

WILLDAN GROUP, INC.

NATIONAL ASSOCIATION

 

 

By:

/s/ Kimberly D. Grant

 

By:

/s/ Jared A. Myres

 

Title:

Chief Financial Officer

 

 

Jared A. Myres

 

 

Vice President

 

2


Exhibit 31.1

 

SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

 

I, Thomas D. Brisbin, Chief Executive Officer of Willdan Group, Inc., certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of Willdan Group, Inc.;

 

2.                                       Based on my knowledge, this quarterly 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 quarterly report;

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 quarterly report is being prepared;

 

                                                b)                                     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

                                                c)                                      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

                                                d)                                     Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.                                       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

                                                a)                                      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

                                                b)                                     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:  August 10, 2008

 

 

By:

/s/ Thomas D. Brisbin

 

Thomas D. Brisbin

 

President and Chief Executive Officer

 


Exhibit 31.2

 

SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER

 

I, Kimberly D. Gant, Chief Financial Officer of Willdan Group, Inc., certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of Willdan Group, Inc.;

 

2.                                       Based on my knowledge, this quarterly 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 quarterly report;

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 quarterly report is being prepared;

 

                                                b)                                     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

                                                c)                                      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

                                                d)                                     Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.                                       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

                                                a)                                      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

                                                b)                                     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date:  August 10, 2008

 

 

By:

/s/ Kimberly D. Gant

 

Kimberly D. Gant

 

Chief Financial Officer and Senior Vice President

 


Exhibit 32.1

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350,

as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the Quarterly Report on Form 10-Q of Willdan Group, Inc. (the “Company”) for the quarterly period ended June 27, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Thomas D. Brisbin, as President and Chief Executive Officer of the Company, and Kimberly D. Gant, as Chief Financial Officer and Senior Vice President of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his or her knowledge:

 

(1)                                  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)                                  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

By:

/s/ Thomas D. Brisbin

 

Thomas D. Brisbin

 

President and Chief Executive Officer

 

August 10, 2008

 

 

 

 

 

By:

/s/ Kimberly D. Gant

 

Kimberly D. Gant

 

Chief Financial Officer and Senior Vice President

 

August 10, 2008

 

This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.  A signed original of this written statement required by § 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.