Willdan Group
Annual Report 2009

Plain-text annual report

Use these links to rapidly review the document TABLE OF CONTENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PART IVTable of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KCommission File Number 001-33076WILLDAN GROUP, INC.(Exact name of registrant as specified in its charter)Delaware(State or other jurisdiction ofincorporation ororganization) 14-1951112(I.R.S. EmployerIdentification No.)2401 East Katella Avenue, Suite 300, Anaheim, California 92806(Address of principal executive offices) (Zip Code)(800) 424-9144(Registrant's telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Common Stock, $0.01 par value(Title of class) NASDAQ Global Market(Name of exchange)Securities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934. Yes o No ý 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 1934during 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 filingrequirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes o No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, tothe best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. o(Mark One) ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the Fiscal Year Ended January 1, 2010.Oro TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the Transition Period from to . Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which thecommon equity was last sold, as reported on the NASDAQ Global Market, as of the last business day of the registrant's most recently completed second fiscalquarter was $10.5 million. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý On March 29, 2010, 7,228,683 shares of the registrant's common stock were issued and outstanding.DOCUMENTS INCORPORATED BY REFERENCE Part III of this Form 10-K incorporates information by reference from the registrant's definitive proxy statement for the 2010 Annual Meeting to be filedon or prior to April 21, 2010.Large accelerated filer o Accelerated filer o Non-accelerated filer o(Do not check if asmaller reporting company) Smaller reporting company ýTable of Contents TABLE OF CONTENTS ii Page PART I ITEM 1. BUSINESS 1ITEM 1A. RISK FACTORS 17ITEM 1B. UNRESOLVED STAFF COMMENTS 24ITEM 2. PROPERTIES 25ITEM 3. LEGAL PROCEEDINGS 25ITEM 4. [RESERVED] 25 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES 26ITEM 6. SELECTED FINANCIAL DATA 28ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS 31ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 42ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 43ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE 43ITEM 9A(T). CONTROLS AND PROCEDURES 43ITEM 9B. OTHER INFORMATION 44 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 45ITEM 11. EXECUTIVE COMPENSATION 45ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED SHAREHOLDER MATTERS 45ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 45 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 46Table of Contents PART I ITEM 1. BUSINESS Overview We are a provider of outsourced services to small and mid-sized public agencies and large public utilities in California, New York and, to a lesser extent,other states throughout the United States. Outsourcing enables these agencies to provide a wide range of specialized services, without having to incur andmaintain 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 primarily in California and New York. We also have operations in Arizona and, to a lesserextent, other states throughout the United States. As of January 1, 2010, we had a staff of 466 which includes licensed engineers and other professionals.Based on our 2008 revenue, we ranked 164 out of 500 top design firms in Engineering News-Record's 2009 Design Survey. Our traditional clients have beenpublic agencies in communities with populations ranging from 10,000 to 300,000 people. We believe communities of this size are underserved by largeoutsourcing companies that tend to focus on securing large federal and state projects, as well as projects for the private sector. We also serve large publicutilities which serve major metropolitan communities. We strive to establish close working relationships with our public agency clients and, over time, toexpand the breadth and depth of the services we provide to them. While we currently serve communities throughout the country, our business with public agencies is concentrated in California and neighboring states.We provide services to approximately 60% of the 480 incorporated cities and over 60% of the 58 counties in California. We also serve special districts,school districts, a range of public agencies, and to a lesser extent, private industry. Our business with large public utilities is concentrated in California andNew York. General economic conditions have continued to decline due to a number of factors including slower economic activity, a lack of available credit,decreased consumer confidence and reduced corporate profits and capital spending. These conditions have led to a slowdown in construction, particularlyresidential housing construction, in the western United States. As a result of this slowdown, both our engineering services segment and public financeservices segment have suffered declines in revenue and operating margin compression. As a result, we have made several reductions in workforce and facilityleases in order to align resources to workload and reduce costs. Should the economic slowdown continue for longer than expected or worsen, we will need toevaluate further reductions in headcount and facilities in business lines that are underperforming. We will also continue to focus on reducing discretionaryexpenditures and the efficient procurement of necessary services. See "Management's Discussion and Analysis of Financial Condition and Results ofOperation."1Table of Contents 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, weconsist of a family of wholly-owned companies that operate within the following segments: Engineering Services. Our Engineering Services segment includes the operations of our subsidiaries, Willdan Engineering, Willdan Geotechnical,Willdan Energy Solutions, Willdan Resource Solutions, and Public Agency Resources (PARs). These businesses collectively provide engineering-relatedservices, geotechnical engineering services, environmental engineering and environmental related services and energy efficiency, water conservation,sustainability and renewable energy services. Additionally, PARs primarily provides staffing to Willdan Engineering. For fiscal years 2009 and 2008,revenue for the Engineering Services segment represented approximately 75% and 78%, respectively, of our overall contract revenue. Public Finance Services. Our Public Finance Services segment consists of the operations of our subsidiary, Willdan Financial Services (WFS), whichoffers financial and economic consulting services to public agencies. For fiscal years 2009 and 2008, contract revenue for the Public Finance Servicessegment represented approximately 19% of our overall contract revenue. Homeland Security Services. Our Homeland Security Services segment consists of the operations 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 beganoperations in the second half of fiscal year 2005. For fiscal years 2009 and 2008, contract revenue for our Homeland Security Services segment representedapproximately 6% and 3%, respectively, of our overall contract revenue.Our Markets We provide engineering, public finance and homeland security services primarily to mid-size government agencies and large public utilities. We believethe market for these privatized governmental services is, and will be, driven by a number of factors, including:•Population growth, which leads to a need for increased capacity in government services and infrastructure; •Demand by constituents for a wider variety of services; •Increased demand for services and solutions that provide energy efficiency, sustainability, water conservation and renewable energy; •The creation of new municipalities and the growth of smaller communities, which creates the need to obtain highly specialized serviceswithout incurring the costs of hiring permanent staffing and the associated support structure; •The deterioration of local infrastructures, especially in aging areas; and •Government funding programs, such as federal homeland security grants and various state legislation, that provide funds for localcommunities to provide services to their constituents.Engineering Services Engineering services encompass a variety of disciplines associated with the design and construction of public infrastructure improvements. We expectcontinued population growth in California and other western states to place a significant strain on the infrastructure in those areas, driving the need for bothnew infrastructure and the rehabilitation of aging structures. Federal, state and local governments have responded to this need by proposing an increase intheir funding of infrastructure related activities, and voters in California and Arizona have, in recent years, passed sales tax increases to fund transportationimprovements.2Table of Contents Private industry and public agencies, in response to an increased awareness of global warming and climate change issues among their constituents, areincreasingly seeking out cost-effective solutions, turn-key solutions that provide innovative resource management, energy efficiency, resource conservationand sustainability services. State and local governments are frequently turning to specialized resource conservation firms to strike the balance betweenenvironmental responsibility and economic competitiveness. Consultants have the expertise to develop efficient and cost effective solutions. The use ofenergy efficiency services, including audits, program design, benchmark analysis, metering and partnerships with local governments and utilities, providescity, local and state governments with the ability to realize long-term savings.Public Finance Services Public agencies face an increasing burden to raise the necessary funding to build, improve and maintain infrastructure and to provide services to theirlocal communities. While tax revenues are a primary source of funding, in California there are property tax and spending limits that curtail the generation ofthese funds. Alternatives include the issuance of tax-exempt securities; the formation of special financing districts to assess property owners on a parcel basisfor infrastructure and public improvements, such as assessment districts and community facilities districts (known as Mello-Roos districts in California); theimplementation of development impact fee programs that require developers to bear the cost of the impact of development on local infrastructure; user feeprograms that pass costs along to the actual users of services; optimization of utility rates; and special taxes enacted by voters for specific purposes. Public agencies frequently contract with private consultants to provide the advance studies, manage the processes and provide the administrationnecessary to support these methods. Consultants have the expertise necessary to form the special financing districts and produce an impact fee study used todevelop a schedule of developer fees. Privatized services are also utilized to implement the programs or revised rate schedules, and in the case of specialfinancing districts, administer the districts through the life of the bonds. Consultants also frequently provide the services necessary to comply with federalrequirements for tax-exempt debt, such as arbitrage rebate calculations and continuing disclosure reports. Use of such services allows public agencies tocapitalize on innovative public finance techniques without incurring the cost of developing in-house expertise.Homeland Security Services After September 11, 2001, the need to protect civil infrastructure and implement additional security measures became a priority at all levels ofgovernment. In addition to the threat of terrorism, Hurricanes Katrina and Rita highlighted the vulnerability of our country's infrastructure to natural disasters.These events placed an increased burden on local and regional public agencies to be prepared to respond. In addition to fire and safety personnel, agenciesresponsible for the physical safety of infrastructure elements, such as water and wastewater systems, ports and airports, roads and highways, bridges and dams,are under increased pressure to prepare for natural and man-made disasters. Accordingly, the federal government now considers public works staff members tobe "first responders" to such incidents and we believe that agencies are allocating resources accordingly. For fiscal year 2010, under the Department of Homeland Security Grant Program, (HSGP), the federal government will provide approximately$1.8 billion to the states, which in turn will disburse these funds to local law enforcement and other agencies. The federal Department of Homeland Security,or DHS, has designated 64 metropolitan areas throughout the country to receive almost half of the HSGP funds through a program called the DHS UrbanAreas Security Initiative, or UASI. Designated UASI metropolitan areas include eight metropolitan areas in California and the Phoenix, Arizona; Tucson,Arizona; Denver, Colorado; and Las Vegas, Nevada metropolitan areas. Homeland security funding has remained constant over the last three fiscal years andwe do not anticipate a change in funding levels at the federal or state levels in the foreseeable future.3Table of ContentsOur Services We specialize in providing privatized services to public agencies. Our core client base is composed of cities, counties, special districts, other local andstate agencies, tribal governments, large utilities and to a lesser extent, private industry. We are organized to profitably manage numerous small to mid-size contracts at the same time. With our focus on local and regional agencies, typicalcontracts can range from $1,000 to over $1,000,000 in contract revenue. Our typical project contracts have a duration of less than 12 months, although wehave city services contracts that have been in effect for over 27 years. At January 1, 2010, we had approximately 2,200 open projects. We offer services in three segments: Engineering Services, Public Finance Services, and Homeland Security Services. The interfaces and synergies amongthese segments are key elements of our strategy. Management established these segments based upon the services provided, the different marketing strategiesassociated with these services and the specialized needs of their respective clients. The following table presents, for the periods indicated, the approximatepercentage of our consolidated contract revenue attributable to each segment: See Item 8 of Part II, "Financial Statements and Supplementary Data" for additional segment information.Engineering Services We provide a broad range of engineering services to the public sector and limited services to the private sector. In general, contracts for engineeringservices (as opposed to construction contracts) are awarded by public agencies based primarily upon the qualifications of the engineering professional, ratherthan the proposed fees. Many jobs are awarded without a mandated proposal process, especially if an agency has a longstanding relationship with anengineering professional with relevant expertise. A substantial percentage of our engineering-related work is for existing clients that we have served for manyyears. Our broad range of engineering services are listed in the following table and described individually below:4 Fiscal Year 2009 2008 2007 Engineering Services 75% 78% 82%Public Finance Services 19% 19% 16%Homeland Security Services 6% 3% 2%City Engineering Geotechnical EngineeringBuilding and Safety Flood ControlPublic Works and Infrastructure Design Code EnforcementConstruction Management Energy EfficiencyTraffic Engineering SustainabilityWater and Wastewater Engineering Water ConservationStructural Engineering EnvironmentalPlanning Greenhouse Gas (GHG) Emission Reduction StrategiesLandscape Architecture Climate Action PlansTable of Contents City Engineering. We specialize in providing engineering services tailored to the unique needs of municipalities. City Engineering can range fromstaffing an entire engineering department to carrying out specific projects within a municipality, such as developing a pavement management program orreviewing engineering plans on behalf of a city. This is the core of our original business and was the first service offered when we were founded. Building and Safety. Our building and safety services can range from managing and staffing an entire municipal building department to providingspecific outsourced services, such as plan review and field inspections. Other aspects of this discipline include performing accessibility compliance andproviding disaster recovery teams, energy compliance evaluations, permit processing and issuance, seismic retrofitting programs, and structural plan review.Many of our building and safety services engagements are with municipalities and counties where we supplement the capacity of in-house staff. Public Works and Infrastructure Design. This sector constitutes our traditional engineering design function. Our engineers design streets andhighways, airport and transit facilities, freeway interchanges, high-occupancy vehicle lanes, pavement reconstruction, and other elements of city, county, andstate infrastructure. Construction Management. We provide construction management services to our public-sector clients. We provide inspection services, along with fullconstruction management and support, depending on the client's needs and the scope of the specific project. Our construction management experienceencompasses projects such as streets, bridges, sewers and storm drains, water systems, parks, pools, public buildings, and utilities. Traffic Engineering. Our traffic engineering services include serving as the contract city traffic engineer in communities, as well as performing designand traffic planning projects for our clients. These services and projects include parking management studies, intersection analyses and improvements, trafficimpact reports, and traffic signal and control systems. Water and Wastewater Engineering. Our water and wastewater engineering services include design and project management of public water andwastewater facilities. Our core competencies include hydraulic modeling, master planning, rate studies and design and construction services. Our designexperience includes reservoirs, pressure reducing stations, pump and lift stations, and pipeline alignment studies, as well as water/wastewater collection,distribution, and treatment facilities. Structural Engineering. Our structural engineering services include bridge design, bridge evaluation and inspection, highway and railroad bridgeplanning and design, highway interchange design, railroad grade separation design, bridge seismic retrofitting, building design and retrofit, sound wall andretaining wall design, and planning and design for bridge rehabilitation and replacement. Planning. As part of our planning services, we assist communities with implementation of general plans, land use enforcement, capital improvementplanning, community development and redevelopment programs, and economic development strategies. For some cities, we provide staff to relieve peakworkload situations or to fill vacant planning positions on an interim basis. We also prepare land use studies, environmental documentation services(NEPA/CEQA/EIR), and economic and community development plans, and can handle the development services function for emerging and newlyincorporated cities. Landscape Architecture. Our services in the area of landscape architecture include design, planning, landscape management, and urban forestry.Specific projects include park design and master planning, bidding and construction documents, water conservation plans, urban beautification programs,landscape maintenance management, site planning, and assessment district management.5 Table of Contents Geotechnical Engineering. We provide geotechnical and earthquake engineering services, including soils engineering, earthquake and seismic hazardstudies, geology and hydrogeology engineering, and construction inspection. We operate a licensed, full-service geotechnical laboratory at our headquartersin Anaheim, California, which offers an array of testing services, including construction materials testing and inspection. Flood Control. We provide a complete analysis and projection of storm flows for use in master drainage plans and for individual storm drain systems toreduce flooding in streets and adjacent properties. Code Enforcement We assist municipalities with the development and implementation of neighborhood preservation programs and the staffing of codeenforcement personnel. Energy Efficiency We provide complete energy efficiency services, including comprehensive surveys and audits, marketing services, implementationservices, program design, benchmark analysis, metering, and partnering with local governments and utilities. We also create and implement innovativeinformation technology solutions for the energy industry. Sustainability. We assist clients (including utilities, schools and private companies) in developing and managing facilities and infrastructures througha holistic, practical approach to sustainability. Our services in the area of sustainability cover renewable energy, master plans, Leadership in Energy andEnvironmental Design (LEED) certification for buildings, GHG reduction strategies, and the development of California Assembly Bill No. 811 (AB-811)projects. Water Conservation. We offer a full range of water and wastewater management services. Our services in the area of water conservation cover waterefficiency hardware retrofits, comprehensive audits, and custom developed processes to ensure that the audits result in actual measurable installations ofconservation measures. We work with local governments and water agencies, to provide solutions, from initial analysis and design to implementation. Environmental. We provide environmental consulting and remediation services to cities, counties, and local governments. Our environmental servicesencompass many technical disciplines and programs, including human health and ecological risk assessment, toxicology, chemistry, geochemistry,hydrogeology, hazardous materials and waste management, surface and storm water management, remediation system selection and design, remediationconstruction management, and environmental compliance. Greenhouse Gas (GHG) Emission Strategies. We assist cities, counties, utilities, municipalities, and other clients with development of strategies toreduce GHG emissions. This includes benchmarking GHG emissions, developing and implementing strategies, and exploring financing options. Climate Action Plans. We assist clients with development and implementation of climate action plans. These plans are inclusive of energy efficiency,water conservation, land development, renewable, and GHG reduction strategies. Representative Projects. Examples of typical ongoing projects we have in the Engineering Services segment include the following:•Gateway Cities Council of Governments (COG). We were retained by COG to provide technical support in responding to the requirements ofSB 375, a complex and evolving legislation passed in 2008 to help the State of California meet the goals of its Global Warming Solutions Act.Since May 2009, we have conducted an on-line survey of COG sustainability efforts and compared the general plans of COG jurisdictions toSouthern California Association of Governments (SCAG) assumptions. Future efforts by COG members that may be needed to6Table of Contentsattain desired GHG emissions reductions were evaluated. Additionally, we monitored and reported on the SB 375 process and related meetingsand organized and conducted a series of SB 375 workshops for COG representatives. Based on our final report, COG has elected to assumeresponsibility from SCAG for preparing Sustainable Communities Strategies for the Gateway Cities sub-region.•City of Rancho Palos Verdes. We secured over $2.5 million in state and federal funding for the Palos Verdes Drive North Bike Lane Project, a1.26-mile bike lane that runs between Crenshaw Boulevard and the western city limits, and provided professional engineering andconstruction engineering services to the city. Improvements included a second through lane at major intersections to increase capacity, theinstallation of raised medians, street resurfacing, and traffic signal modifications. Other services provided by our firm included utilitycoordination and relocation, federal funding administration, environmental clearance (NEPA and CEQA), contract administration, andconstruction inspection. •City of Mendota. We provided complete construction management, plan review, and inspection services for Mendota's new fast-track solarpower plant. This project was the first utility-scale photovoltaic solar farm to be constructed after approval by the California Public UtilitiesCommission (CPUC), and will generate five megawatts of zero-emission electricity for sale to Pacific Gas & Electric (PG&E). •Los Angeles Gateway Region Integrated Regional Water Management (IRWM) Joint Powers Authority (JPA). Our services were retained tohelp member cities meet the California State Water Resources Control Board's Los Angeles River Trash Total Maximum Daily Load (TMDL)requirements. We initially performed a survey and submitted a recommendations report, after which we provided engineering services andplans, specifications and estimates (PS&E). This project was a fast-track effort completed within three months, and contractor bids based on ourPS&E came in well under the projected budget. This savings allows the program to substantially increase the total number of Connector PipeScreens and Automatically Retractable Screens installed and will greatly improve the environmental quality of the Los Angeles River. We willprovide inspection services once construction begins. •Orange County Transportation Authority (OCTA). We were hired by OCTA to prepare plans, specifications and estimates for a new Metrolinkcommuter rail station in the City of Placentia, California. The new station will be located along the San Bernardino subdivision of the BNSFRailway. The project site, identified in the environmental document, is approximately 4.75 acres. The project will provide a commuter railstation that meets current and future transit demand. The station is a key component of transit-oriented development envisioned in theWestgate Specific Plan for the City of Placentia. The Metrolink station project will include street improvements, railroad track improvements,pedestrian improvements, new rail platforms, and parking facilities. •City of San Clemente. We were selected to provide construction project management services for the Senior Center and Orange County FireStation No. 60 Project. The project includes construction of a 7,851 square-foot, two-story fire station facility and a 7,963 square-foot seniorcenter. Both facilities will be constructed within a single building. The estimated project construction cost is $5 million. The projectconstruction is planned to commence in April 2009 and be completed by December 2010. •California Department of State Architects (DSA). We were selected to review plans and specifications for certain projects within the state ofCalifornia on an as-needed basis in accordance with Titles 19 and 24, California Code of Regulations and all National Fire ProtectionAssociation (NFPA) Referenced Standards for Fire and Life Safety, according to the policies and procedures of the California Department ofState Architects (DSA). Our role is to7Table of Contentsprovide plan review, back-check review of drawings and specifications and review of change orders, addendums, deferred approvals, alternatedesigns, and revisions for California school buildings, state buildings, and public colleges and universities. These services are provided to theDSA Sacramento, Oakland, Los Angeles, and San Diego regions.•Con Edison Small Business Direct Install (SBDI) Program. We are currently implementing the SBDI Program for Con Edison (Con Ed). Thisprogram has a goal of saving over 270 million kWh. The SBDI Program offers turn-key energy efficiency solutions to small- to medium-sizedcustomers in the Con Ed service territory. We expect to coordinate audit and implementation activities to over 25,000 small to medium-sizedbusiness customers. •Data Centers. We are providing comprehensive energy efficiency services to data center facility managers in the NYSERDA (New York),Southern California Edison (SCE), and Oncor Electric (Texas) service territories. The programs provide data centers with assistance in design,construction, and implementation of cost-effective energy efficiency strategies (such as virtualization, cooling system optimization, serverload prioritization, and next generation servers). In addition to the energy efficiency services, we provide data centers with financial incentivesto help offset feasibility, audit, and implementation costs. •San Gabriel Valley. We developed the San Gabriel Valley Energy Wise Partnership, a comprehensive energy efficiency program targeting 32cities in the San Gabriel Valley, assisting in the creation of a mutually beneficial relationship between Southern California Edison, SouthernCalifornia Association of Governments and the San Gabriel Valley Council of Governments. The program goal is to deliver 2,701,363 kWh inannual energy savings from a combination of commissioning and retro-commissioning projects in three San Gabriel Valley cities.Additionally, the program promotes increased awareness of energy efficiency programs and the importance of energy conservation amongresidents and businesses. •San Francisco Public Utility Commission. We have been working for the San Francisco Public Utility Commission (SFPUC) to implement theSan Francisco Water Savers program. The SFPUC Water Savers Program targets high-consumption, non-residential water customers thatrepresent the highest 20 percent of water users. The program leverages associated energy-saving opportunities to maximize customer financialincentives through the adoption of water-saving technologies. To date, the program represents a savings of approximately 750 acre feet ofwater to the SFPUC. We are currently providing municipal water audit services to the SFPUC. •Southern California Edison (SCE). We are currently implementing the Hospital Facility Energy Efficiency Program (HFEEP), a SCE 2007-2008 retrofit program that offers cash incentives to energy consumers for providing comprehensive energy efficiency services to existingequipment or systems in medical office buildings. HFEEP targets 20 medical office buildings for energy efficiency implementations, anddelivers energy savings of over 6.3 million kWh. We are also implementing other programs in SCE territories, including the Lodging EnergyEfficiency Program and Direct Install Program. •Pacific Gas & Electric (PG&E). We are currently providing a number of programs for PG&E. The Hospital Energy Efficiency Program (HEEP)offers turn-key energy efficiency services for hospitals and medical office buildings in PG&E's territory. The Ozone Laundry Energy EfficiencyProgram (OLEEP) captures cost-effective natural gas savings for on-premise laundry equipment in the hospitality and medical segments,correctional facilities and other commercial facilities. We are working with Sylvania Lighting on the implementation of the High PerformanceLighting Program which will deliver cost-effective, energy efficient, state-of-the-art lighting solutions to office buildings, warehouses, andother large commercial buildings. We are also implementing the large hotel segment of PG&E's Lodging Savers program, focusing on energyefficiency solutions for hotels.8Table of ContentsPublic Finance Services We acquired our subsidiary Willdan Financial Services (formerly known as MuniFinancial), a public finance consulting business, in 1999 to supplementthe services we offer our public-sector clients. In general, we supply expertise and support for the various financing techniques employed by public agenciesto finance their operations and infrastructure. We also support the mandated reporting and other requirements associated with these financings. We do notprovide underwriting or financial advisory services for municipal securities. Unlike our Engineering Services business, we often compete for business, at least initially, through a competitive bid process. However, since manypublic sector financing instruments, such as tax-exempt bonds, remain outstanding for up to 30 years, clients tend to retain us for as long as the financingremains in place. Our services in this segment include the following: District Administration. We administer special districts on behalf of public agencies. The types of special districts administered include communityfacilities districts (in California, Mello-Roos districts), assessment districts, landscape and lighting districts, school facilities improvement districts, waterdistricts, benefit assessment districts, fire suppression districts, and business improvement districts. Our administration services include calculating the annuallevy for each parcel in the district; billing charges directly or through a county tax roll; preparing the annual Engineer's Report, budget and resolutions;reporting on collections and payment status; calculating prepayment quotes; and providing financial analyses, modeling and budget forecasting. The key to our District Administration services is our proprietary software package, MuniMagic®: Municipal Administration & Government InformationCoordinator, which we developed internally to redefine the way we administer special districts. MuniMagic® is a database management program thatmaintains parcel data; calculates special taxes, assessments, fees and charges; manages payment tracking; maintains bond-related information in a single,central location; and provides reporting, financial modeling and analysis at multiple levels of detail. MuniMagic® offers a significant competitive advantagein an industry driven by the ability to accurately process extremely large quantities of data. MuniMagic® is also available for licensing by our existingclients. See "—Intellectual Property" for a discussion of the licensing terms. Financial Consulting Services. We perform economic analyses and financial projects for public agencies, including:•Fee and rate studies, such as cost allocation studies, user fee analysis, utility rate analysis, fiscal impact studies and development fee studies; •Special district formation, which involves the design, development and initiation of community facilities districts, school facilities,improvement districts, assessment districts, landscape and lighting districts, benefit assessment districts, business improvement districts, firesuppression assessments and re-engineering; •Facility financing plans; •Economic impact analyses; •The formation of new public entities, annexations and incorporations; •Reassessment engineering for bond refunding; and •Infrastructure analysis both to evaluate the need for rehabilitation efforts, and for financial reporting purposes, in association with Willdan.9Table of Contents Federal Compliance Services. We offer federal compliance services to issuers of municipal securities, which can be cities, towns, school districts,housing authorities and other entities that are eligible to issue tax-exempt securities. Specifically, we provide arbitrage rebate calculations and municipaldisclosure services that help issuers remain in compliance with federal regulations. We provide these reports, together with related compliance services suchas bond elections, temporary period yield restriction, escrow fund monitoring, rebate payments and refund requests. In terms of continuing disclosureservices, we both produce the required annual reports and disseminate those reports on behalf of the issuers. We provide federal compliance services toapproximately 595 issuers in 38 states and the District of Columbia on more than 2,500 bond issues totaling over $57 billion in municipal debt. Representative Projects. Examples of typical projects we have in the Public Finance Services segment include the following:•City of Flagstaff. We were retained by the city to prepare a long-term financial plan and rate and fee study for its water, wastewater, andreclaimed water utilities. We assisted the city in meeting its challenges with providing high-quality utility services, including utility revenuesnot keeping pace with increasing operational and capital costs and its rate model being more than 10 years old. We provided the City withrates that fully fund operations, maintenance, and present and future capital costs for plant expansions. •Town of Buckeye. We provided a comprehensive user fee and cost allocation study to the Town of Buckeye. We were asked by the Town toreview its current user fees and indirect cost allocation plan. Based on a time survey administered in the building safety, planning and zoning,and engineering departments, we developed fees that will enable the Town to recover the full cost associated with the services it provides. •City of Miami Beach. We were retained by the City to conduct a revenue enhancement study to accomplish the following: (a) survey similarcommunities for comparable fee structures and recommend new fees; (b) review present Miami Beach fees to ensure they are at market rates;and (c) ensure recommended rates, either new or adjusted, are at or below actual costs. We partnered with The Rose Institute of State and LocalGovernment, Claremont, California, for the survey effort. •Orange County Transportation Authority (OCTA). We developed environmental funding guidelines for OCTA. As the result of renewedMeasure M (originally established to increase sales tax to generate funds for transportation projects), we began assisting OCTA withdeveloping program guidelines for the distribution of such funds over the next 30 years. The renewal of Measure M generated specific funds tobe used for environmental cleanup programs associated with storm water runoff from the County's various streets and highway systems. Thenew grant program guidelines we developed will: (1) ensure effective outreach and communication with environmental interest groups;(2) provide funding guidelines and equitable scoring criteria for new environmental cleanup programs; (3) meet program requirementspromised to the voters that renewed the ballot measure; (4) adequately identify and describe "maintenance of effort" requirements; (5) ensurecontinuity with existing funding guidelines and provide for articulating baselines to address future technological advances; and (6) ensure a"benefit nexus" above existing program levels. •County of San Diego. We are currently preparing a comprehensive Fire Fiscal Impact Analysis on new development occurring within theunincorporated areas of San Diego County. In addition to the fiscal analysis, an Impact Fee Study is being prepared for fire facilities. After thecompletion of both studies, we will facilitate the formation of a Community Facilities District (CFD) for the County to fund the necessary firefacilities and services required to support new development.10Table of ContentsHomeland Security Services In fiscal 2004, we formed our subsidiary Willdan Homeland Solutions, formerly known as American Homeland Solutions. We provide homeland securityand public safety consulting services to cities, counties and related municipal service agencies, such as utility and water companies, as well as schooldistricts, port and transportation authorities, tribal governments and large business enterprises with a need for homeland security related services. We staff ourprojects in this area with former high-level local and regional public safety officers and focus on solutions tailored for local agencies and their personnel. Ourservices include the following: Training Services. We design customized training courses for all aspects of disaster, unusual occurrence and emergency responses. In this regard, wehave developed and own several training courses that meet or exceed the requirements for the federal National Incident Management System (NIMS) training.These courses assist clients in meeting their obligations to prepare their staff to utilize the NIMS. Our courses have been approved by California'sCommission on Peace Officers Standards and Training, the California Office of Emergency Services, and the Federal National Integration Center, Trainingand Education Division, formerly the Department of Homeland Security's "Office of Grants and Training." Emergency Operations Planning. We design, develop, implement, review, and evaluate public and private agencies' emergency operations and hazardmitigation plans, including compliance and consistency with federal, state and local laws and policies. Plans are tailored to respond to terrorism, intentionalacts of sabotage, and natural disasters. We also provide command and control and emergency response training for all types of unusual occurrences. We havedeveloped emergency operations and continuity and hazard mitigation plans for municipal governments, special districts, school districts, and private-industry clients. Terrorism and Threat Vulnerability Assessments. These assessments involve the development of policies and procedures to assess threats and thevulnerability of local, regional, state, and national infrastructures, including city and county buildings, ports and airports, facilities, power supplies, watersupplies, communications networks, and transportation systems. Planning Evaluations and Exercises. We conduct planning sessions and exercises, including those relating to weapons of mass destruction, largeevents, mass casualty transportation disasters, terrorism incident response, natural disaster response and recovery, and civil disorder events. We design theseexercises for multi-agency involvement so they are fully compliant with the federal government's Homeland Security Exercise and Evaluation Program(HSEEP), the State Emergency Management System (SEMS) for California, and the National Response Framework. Exercises are designed to evaluate andtest "first responders" and support personnel, as well as elected officials and agency management. Public Safety and Management Consulting. We provide independent analyses, evaluations and recommendations for enhancing the performance ofpublic safety agencies, such as police and fire departments. Management consulting service areas include organizational assessments and studies, staffingand outsourcing support for new and existing cities, management training and development, administrative investigations, and background investigations.These services are provided to local, state, and tribal governments and agencies; private companies; trade associations; non-profit organizations; andeducational institutions from K-12 through colleges and universities.11Table of Contents Representative Projects. Examples of typical Homeland Security Services projects include the following:•Southern Planning Area Project (SPA). We were awarded a $1.8 million contract with GTSI, Inc. to provide public safety interoperablecommunications professional services to the 11 California counties that comprise the California Statewide Interoperability ExecutiveCommittee Southern Planning Area (SPA). The SPA is an area larger than the State of New York with a population of more than 22 million. Asthe technical lead on the project, we are providing planning and training services in the development of the SPA's tactical interoperablecommunications plans. Our communications professionals will support each of the 11 counties with the goal of unifying the communicationssystems and improving the SPA's interoperable communications through compliance with the California Statewide CommunicationInteroperable Plan and the National Emergency Communication Plan. •Continuity of Operations Plan (COOP) Program. We were awarded a $689,000 contract in 2008 to establish a COOP program. The programwas broken into four developmental phases to support the five largest cities in Orange County, California. Phase I included the developmentof COOP plans for 60 city departments and overarching plans for each city. We provided COOP training for each city during Phase II. Tabletopor discussion-based exercises were designed, developed and delivered to each city during Phase III. Lessons learned during the first threephases were used to finalize the plans in Phase IV. We are currently in discussions with the Anaheim/Santa Ana UASI to provide consultingsupport for the remaining 29 cities in Orange County. •Terrorism Prevention Exercise Program (TPEP). We were awarded a $250,000 contract to support the DHS, National Exercise Division TPEP.The TPEP is broken into three objectives: (1) Program Management and Policy Development; (2) Prevention Exercises; and (3) InteragencyCoordination and Integration. Our personnel supported each of these objectives. Under Objective 1, we supported program management inproviding direction to future TPEP initiatives. Additionally, we continue to lead the development of all TPEP policy initiatives in support ofDHS with the integration of Prevention Exercise Methodologies into the revision of HSEEP doctrine as a national standard. Under Objective 2,we supported and led several prevention exercises, including TPEP's first cross-border functional exercise. Lastly, under Objective 3, wesupported TPEP through formal conference workshops and key note addresses, which included the DOJ/DHS Western Regional Fusion CenterConference and the FEMA National Training and Exercise Conference.Competitive Strengths Founded over 40 years ago, we have a well-established track record of providing a wide range of privatized services to the public sector. We havedeveloped the experience base, professional staff and support technology and software necessary to quickly and effectively respond to the needs of ourclients. We believe we have developed a reputation within our industry as problem solvers across a broad range of client issues. Some of our competitivestrengths include: Quality of service. We pride ourselves on the quality of service that we provide to our clients. The work for which we compete is awarded primarilybased on the company's qualifications, rather than the fees proposed. We believe that our service levels, experience and expertise satisfy even the mostrigorous qualification standards. We have developed a strong reputation for quality, based upon our depth of experience, ability to attract qualityprofessionals, customized technology and software that support our services, local knowledge and the expertise we possess across multiple disciplines. Webelieve we are well-positioned to serve public sector clients due to our knowledge of the unique reporting processes and operating procedures of publicagencies, which differ substantially from the private sector. We believe our high quality of service is a significant reason we currently provide services to over60% of the cities and counties in California.12Table of Contents Broad range of services. Our focus on customer service has led us to continually broaden the scope of the services we provide. At different stages in our40-year history, as the needs of our public sector clients have evolved, we have developed service capabilities complementary to our core engineeringbusiness, including building and safety services, financial and economic services, planning services, geotechnical services, code enforcement services and,most recently, disaster planning and homeland security services. Further, because we recognize that local public sector projects and issues often crossdepartmental lines, we have developed the ability to deliver multiple services in a cohesive manner to better serve our client communities as a whole. Strategic locations in key markets. Local agencies want professionals who understand their local needs. Therefore, we deliver our services through anetwork of offices dispersed throughout the western United States and New York. Each of our offices is staffed with quality professionals, including formermanagement level public sector employees, such as planners, engineers, inspectors, and police and fire department personnel. These professionals understandthe local and regional markets in which they work. Strong, long-term client relationships. We have developed strong relationships with our public agency clients, some of whom we have worked with forover 25 years. The value of these long-term relationships is reflected in the recurring award of new projects, ongoing staffing assignments, and long-termprojects that require high-level supervision. We also seek to maintain close personal relationships with public agency decision-makers to strengthen ourrelationships with them and the agencies with which they work. We frequently develop new client relationships as our public agency contacts are promotedor move to other agencies. Our strong culture of community involvement and leadership in key public agency organizations underscores our customer focusand helps us cultivate and expand our client base. Experienced, talented and motivated employees. Our staff consists of seasoned professionals with a broad array of specialties, and a strong customerservice orientation. Our corporate culture places a high priority on investing in our people, including providing opportunities for stock ownership to attract,motivate and retain top professionals. Our executive officers have an average of more than 32 years of experience in the engineering and consulting industry,and an average of 4 years with our company.Clients Our 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, tribal governments, public utilites and to a lesser extent, private industry. Our typical client is an agencyserving a community of 10,000 to 300,000 people. In fiscal year 2009, we served over 800 distinct clients. No individual client accounted for over 5% of ourconsolidated contract revenue in fiscal year 2009. For fiscal year 2009, each of our top eight clients accounted for between 2% and 5% of our consolidatedcontract revenue. Our clients are predominantly based in California and New York. We also have clients in Arizona and, to a lesser extent, other statesthroughout the United States. In fiscal year 2009, services provided to public agencies and, to a lesser extent, private industry in California accounted forapproximately 90% of our contract revenue.Contract Structure We provide our services under contracts, purchase orders or retainer letters. The contracts we enter into with our clients contain three principal types ofpricing provisions:•Time-and-materials provisions provide for reimbursement of costs and overhead plus a fee for labor based on the time expended on a projectmultiplied by a negotiated hourly billing rate. The profitability achievable on a time and materials basis is driven by billable headcount andcost control.13Table of Contents•Unit-based provisions require the delivery of specific units of work, such as arbitrage rebate calculations, dissemination of municipalsecurities continuing disclosure reports, or building plan checks, at an agreed price per unit, with the total payment under the contractdetermined by the actual number of units performed. •Fixed price provisions require all work under a contract to be performed for a specified lump sum, which may be subject to adjustment if thescope of the project changes. Contracts with fixed price provisions carry certain inherent risks, including risks of losses from underestimatingcosts, delays in project completion, problems with new technologies, price increases for materials, and economic and other changes that mayoccur over the contract period. Consequently, the profitability, if any, of fixed price contracts can vary substantially. Additionally, in 2009, we started receiving monthly retainers from a limited number of our clients. The following table presents, for the periodsindicated, the approximate percentage of our contract revenue subject to each type of pricing provision: The percentage of our contract revenue derived from fixed price contracts increased to 37% in fiscal year 2009 from 27% in fiscal year 2008 primarilybecause of our acquisition of Willdan Energy Solutions in June 2008. Willdan Energy Solutions has fixed price provisions in a higher percentage of itscontracts than our other operating subsidiaries. For time-and-materials and fixed price contracts, we bill our clients periodically in accordance with the contract terms based on costs incurred, on eitheran hourly-fee basis or on a percentage of completion basis, as the project progresses. For unit-based and retainer-based contracts, we bill our clients upondelivery of the contracted item or service, and in some cases, in advance of delivery. Our contracts come up for renewal periodically and at the time of renewal may be subject to renegotiation, which could impact the profitability on thatcontract. In addition, during the term of a contract, public agencies may request additional or revised services which may impact the economics of thetransaction. Most of our contracts permit our clients, with prior notice, to terminate the contracts at any time without cause. While the renewal, termination ormodification of a contract may materially impact an individual project, we do not believe the renewal, termination or modification of any specific contractwould have a material adverse effect on our consolidated operations due to our large volume of transactions and low customer concentration.Competition The market for our services is highly fragmented. We often compete with many other firms ranging from small local firms to large national firms. Contractawards are based primarily on qualifications, relevant experience, staffing capabilities, geographic presence, stability and price. Doing business with governmental agencies is complex and requires the ability to comply with intricate regulations and satisfy periodic audits. We havebeen serving cities, counties, special districts and other public agencies for over 40 years. We believe that the ability to understand these requirements and tosuccessfully conduct business with governmental entities and agencies is a barrier to entry for potential competitors.14 Fiscal Year 2009 2008 Time-and-materials 41% 50%Unit-based 20% 23%Fixed price 37% 27%Monthly retainer 2% —% Total 100% 100% Table of Contents Our competition varies by type of client, type of service and geography. The range of competitors for any one project can vary depending upon technicalspecialties, the relative value of the project, geographic location, financial terms, risks associated with the work, and any client imposed restrictions. Unlikemost of our competitors, we focus our services on public sector clients. Public sector clients generally choose among competing firms by weighing thequality, experience, innovation and timeliness of the firm's services. When selecting consultants for engineering projects, many government agencies arerequired to, and others choose to, employ Qualifications Based Selection, or QBS. QBS requires the selection of the most technically qualified firms for aproject, while the financial and legal terms of the engagement are generally secondary. QBS applies primarily to work done by our Engineering Servicessegment. Contracts in the Public Finance Services and Homeland Security Services areas typically are not subject to mandatory QBS standards, and often areawarded through a competitive bid process. Our competition varies geographically. Although we provide services in several states, we may be stronger in certain service lines in some geographicalareas than in other regions. Similarly, some of our larger competitors are stronger in some service lines in certain localities but are not as competitive inothers. Our smaller competitors generally are limited both geographically as well as in the services they are able to provide. We believe that the primary competitors for our Engineering Services segment include Charles Abbott & Associates, Inc., Bureau Veritas, Harris &Associates, Psomas, RBF Consulting, Tetra Tech, Inc., Stantec, Inc., Michael Baker Corporation, TRC Companies, Inc., AECOM Technology Corporation,CH2M Hill and Jacobs Engineering Group, Inc. Our chief competitors in our Public Finance Services segment include David Taussig & Associates, Harris &Associates, NBS Government Finance Group and Ernst & Young LLP. We believe the Homeland Security Services segment competes primarily with EG&G (adivision of URS Corporation) and SRA International, Inc.Insurance We currently maintain general liability insurance, with coverage in the amount of $1.0 million per occurrence, subject to a $2.0 million generalaggregate limit; and professional liability insurance, with $5.0 million in coverage per claim, and a $10.0 million annual aggregate limit. Our professionalliability policy is a "claims made" policy. We also carry excess coverage of an additional $10.0 million for general, automobile and employer's liabilityclaims. We are liable to pay these claims from our assets if and when the aggregate settlement or judgment amount exceeds our policy limits.Employees At January 1, 2010, we had approximately 320 full-time employees and 146 part-time employees. All Public Agency Resources' employees are classifiedas part-time. Our employees include, among others, licensed civil, traffic and structural engineers, land surveyors, certified building officials, licensedgeotechnical engineers and engineering geologists, certified inspectors and plans examiners, licensed architects and landscape architects, certified planners,and information technology specialists. We believe that we attract and retain highly skilled personnel with significant industry experience and strong clientrelationships by offering them challenging assignments in a stable work environment. We believe that our employee relations are good. We currently haveone field survey employee covered by a Master Labor Agreement between the International Union of Operating Engineers Local Union No. 12 and theSouthern California Association of Civil Engineers and Land Surveyors, which expires in October 2010.15Table of Contents The following table sets forth the number of our employees in each of our business segments and our holding company: At January 1, 2010, we contracted with approximately 138 former and current public safety officers to conduct homeland security services trainingcourses. These instructors are classified as sub-consultants and not employees.Intellectual Property The Willdan, Willdan Group, Inc., Willdan Engineering, Willdan Financial Services, Willdan Geotechnical, Willdan Energy Solutions, WilldanResource Solutions and Willdan Homeland Services names are service marks of ours, and we have applied for a service mark for the Willdan logo. We havealso applied for federal trademark registration with the United States Patent and Trademark Office for the "Willdan" name and the "extending your reach"tagline. We believe we have strong name recognition in the western United States and that this provides us a competitive advantage in obtaining newbusiness. Consequently, we believe it is important to protect our brand identity through trademark registrations. The name and logo of our proprietarysoftware, MuniMagic®, are registered trademarks of Willdan Financial Services, and we have registered a federal copyright for the source code for theMuniMagic® software. We license the MuniMagic® software to existing clients pursuant to licensing agreements that allow varying levels of access to data.This technology allows clients to view their own data and is a form of deliverable to our clients. The use of licensing provides us protection for thisproprietary technology. MuniMagic® is not a commercial product offered for sale.Available Information Our website is www.willdan.com and our investor relations page is under the caption "Investors" on our website. We make available on this websiteunder "SEC Filings," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to thosereports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission, or SEC. Wealso make available on this website our prior earnings calls and, under the heading "Investors—Corporate Governance," our Code of Ethical Conduct. Theinformation on our website is not a part of or incorporated by reference into this filing. Further, a copy of this annual report on Form 10-K is located at theSEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room can beobtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and otherinformation regarding our filings at http://www.sec.gov.16 As of Fiscal Year End 2009 2008 2007 Engineering Services 324 401 496 Public Finance Services 65 74 75 Homeland Security Services 20 16 8 Holding Company Employees (Willdan Group, Inc.) 57 59 49 Total 466 550 628 Table of Contents ITEM 1A. RISK FACTORS Risks Relating to Our Business and Industry A downturn in public and private sector construction activity in the regions we serve may have a material adverse effect on our business, financialcondition and results of operations. A downturn in construction activity in our geographic service areas may affect demand for our services, which could have a material adverse effect on theresults of our operations and our financial condition. During fiscal year 2009, a majority of our contract revenue was generated by services rendered to publicagencies in connection with private and public sector construction projects. The current recession in the United States has led to a slowdown in construction, particularly residential housing construction, in the western UnitedStates. As a result of this slowdown, our engineering services segment has suffered declines in revenue and we have made several reductions in workforce andfacility leases in order to align resources to workload and reduce costs. We believe that the reductions achieved through January 1, 2010 will be sufficient toalign resources with expected future demand for our services. However, should the economic slowdown continue for longer than expected or worsen, we willneed to evaluate further reductions in headcount and facilities in geographic areas that are underperforming. Our business, financial condition and results of operations may also be adversely affected by conditions that impact the construction sector in general,including, among other things:•Changes in national and local market conditions due to changes in general or local economic conditions and neighborhood characteristics; •Slow-growth or no-growth initiatives or legislation; •Adverse changes in local and regional governmental policies on investment in infrastructure; •Adverse changes in federal and state policies regarding the allocation of funds to local and regional agencies; •The impact of present or future environmental legislation and compliance with environmental laws and other regulatory requirements; •Changes in real estate tax rates and assessments; •Increases in interest rates and changes in the availability, cost and terms of financing; •Adverse changes in other governmental rules and fiscal policies; and •Earthquakes and other natural disasters, which can cause uninsured losses, and other factors which are beyond our control. Any of these factors could adversely affect the demand for our services, which could have a material adverse effect on our business, results of operationsand financial condition.Changes in the local and regional economies of California could have a material adverse effect on our business, financial condition and results ofoperations. Adverse economic and other conditions affecting the local and regional economies of California may reduce the demand for our services, which couldhave a material adverse effect on our business, financial condition and results of operations. During fiscal year 2009, approximately 90% of our contractrevenue was derived from services rendered to public agencies and, to a lesser extent, private industry in California, including contract revenue from publicutilities. From 1991 to 1996, California experienced an economic downturn that had a negative impact on the construction and development17Table of Contentssectors. This economic downturn caused us to experience cash flow difficulties and substantial operating losses. California is currently experiencing anothereconomic downturn, which has negatively impacted our revenue and profitability. Our revenue in fiscal year 2009 decreased by 15.8% from fiscal year 2008and we sustained a net loss of $5.6 million for fiscal year 2009 as compared to net loss of $1.6 million for fiscal year 2008. We believe the downturn in theresidential housing market has had a significant impact on our results, in particular the loss of revenue from fees associated with building permits andinspection services.We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders. We anticipate that our current cash, cash equivalents, cash provided by operating activities and funds available through our revolving line of credit willbe sufficient to meet our current and anticipated needs for general corporate purposes during the next 12 months. It is possible, however, that we may notgenerate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. For example, at the end of our third andfourth fiscal quarters in 2008, we did not meet certain financial covenants under our revolving credit facility with Wells Fargo Bank, National Association("Wells Fargo"). As a result of these covenant violations, Wells Fargo was no longer obligated to extend funds to us under the revolving credit agreement.Wells Fargo waived these breaches and eliminated or modified certain financial covenants in the credit agreement in exchange for a reduction in thecommitment from $10 million to $5 million, increased pricing and additional collateral being provided. As of January 1, 2010, we had $1.0 million inoutstanding borrowings under this facility. The credit agreement, as amended, matures on January 1, 2011. If we fail to comply with any covenant, includingthe remaining financial covenant, in the credit agreement, any loans outstanding at that time could be accelerated by Wells Fargo and Wells Fargo would notbe obligated to make any new loans under the revolving credit facility. We cannot provide any assurance that Wells Fargo will continue to make loans underthe facility if we violate a covenant in the future or that Wells Fargo will renew the facility when it expires. If this occurs and we do not generate sufficientcash flow from operations or otherwise, we may need additional financing to execute on our current or future business strategies, which include thefollowing:•Hire additional personnel; •Develop new or enhance existing service lines; •Expand our business geographically; •Enhance our operating infrastructure; •Acquire complementary businesses; or •Otherwise respond to competitive pressures. If we raise additional funds through the issuance of convertible debt or equity securities, the percentage ownership of our stockholders could besignificantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. We cannot assureyou that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms,if and when needed, our ability to fund our operations, take advantage of strategic opportunities, or otherwise respond to competitive pressures would besignificantly limited.18Table of ContentsReductions in state and local government budgets could negatively impact their capital spending and adversely affect our business, financial conditionand results of operations. Several of our state and local government clients are currently facing budget deficits, resulting in smaller budgets and reduced capital spending, whichhas negatively impacted our revenue and profitability. Our state and local government clients may continue to face budget deficits that prohibit them fromfunding new or existing projects. In addition, existing and potential clients may either postpone entering into new contracts or request price concessions. Ifwe are not able to reduce our costs quickly enough to respond to the revenue decline from these clients that may occur, our operating results would beadversely affected. Accordingly, these factors affect our ability to accurately forecast our future revenue and earnings from business areas that may beadversely impacted by market conditions.Legislation may be enacted that limits the ability of state, regional or local agencies to contract for our privatized services. Such legislation would affectour ability to obtain new contracts and may decrease the demand for our services. Legislation is proposed periodically, particularly in the state of California, that attempts to limit the ability of governmental agencies to contract withprivate consultants to provide services. Should such legislation pass and be upheld, demand for our services may be materially adversely affected. Duringfiscal year 2009, approximately 90% of our contract revenue was derived from services rendered to public agencies, including public utilities, in California.While attempts at such legislation have failed in the past, as the composition of California's legislative body changes over time there is an increased risk thatmeasures could be adopted in the future that limit the market for privatized services.State and other public employee unions may bring litigation that seeks to limit the ability of public agencies to contract with private firms to performgovernment employee functions in the area of public improvements. Judicial determinations in favor of these unions could affect our ability to compete forcontracts and may have an adverse effect on our revenue and profitability. Over at least the last 20 years, state and other public employee unions have challenged the validity of propositions, legislation, charters and othergovernment regulations that allow public agencies to contract with private firms to provide services in the fields of engineering, design and construction ofpublic improvements that might otherwise be provided by public employees. These challenges could have the affect of eliminating, or severely restricting,the ability of municipalities to hire private firms for the purpose of designing and constructing public improvements, and otherwise require them to use unionemployees to perform the services. For example, the Professional Engineers in California Government, or PECG, a union representing state civil service employees, has been challengingCaltrans' hiring of private firms since 1986, and in 2002 began a judicial challenge of Caltrans' hiring practices based on Caltrans' interpretation of the effectof Proposition 35 (Professional Engineers in California Government, et al. v. Jeff Morales, et al.). The California Supreme Court ruled in favor of Caltrans,concluding that Caltrans may hire private contractors to perform architectural and engineering services on public works. Although Caltrans was successful inthis recent litigation, similar claims may be brought in the future and we cannot predict their outcome. If a state or other public employee union is successfulin its challenge and as a result the ability of state agencies to hire private firms is severely limited, such a decision would likely lead to additional litigationchallenging the ability of the state, counties, municipalities and other public agencies to hire private engineering, architectural and other firms, the outcomeof which could affect our ability to compete for contracts and may have an adverse effect on our revenue and profitability.19Table of ContentsChanges in elected or appointed officials could have a material adverse effect on our ability to retain an existing contract with or obtain additionalcontracts from a public agency. Since the decision to retain our services is made by individuals, such as city managers, city councils and other elected or appointed officials, ourbusiness and financial results or condition could be adversely affected by the results of local and regional elections. A change in the individuals responsiblefor selecting consultants for and awarding contracts on behalf of a public agency due to an election could adversely affect our ability to retain an existingcontract with or obtain additional contracts from such public agency.Fixed price contracts under which we perform some of our services impose risks to our ability to maintain or grow our profitability. In fiscal year 2009, approximately 37% of our contract revenue was derived from fixed price contracts, which increased from 27% in fiscal year 2008.This increase was primarily a result of our June 2008 acquisition of Willdan Energy Solutions, which has fixed price provisions in a higher percentage of itscontracts than our other operating subsidiaries. Under fixed price contracts, we perform services under a contract at a stipulated price which protects clientsbut exposes us to a greater number of risks than time-and-materials and unit-based contracts. These risks include:•Underestimation of costs; •Ambiguities in specifications; •Problems with new technologies; •Unforeseen costs or difficulties; •Failures of subcontractors; •Delays beyond our control; and •Economic and other changes that may occur during the contract period. The occurrence of any such risk could have a material adverse effect on our results of operations or financial condition.Because we primarily provide services to municipalities and other public agencies, we are more susceptible to the unique risks associated with governmentcontracts. We primarily work for municipalities and other public agencies. Consequently, we are exposed to certain risks associated with government contracting,any one of which can have a material adverse effect on our business, financial condition or results of operations. These risks include:•The ability of the public agency to terminate the contract with 30 days' prior notice or less; •Changes in government spending and fiscal policies which can have an adverse effect on demand for our services; •Contracts that are subject to government budget cycles, and often are subject to renewal on an annual basis; •The often wide variation of the types and pricing terms of contracts from agency to agency; •The difficulty of obtaining change orders and additions to contracts; and •The requirement to perform periodic audits as a condition of certain contract arrangements.20Table of ContentsChanges in the perceived risk of acts of terrorism or natural disasters could have a material adverse effect on our ability to grow our Willdan HomelandSolutions business. If there is a significant decrease in the perceived risk of the likelihood that one or more acts of terrorism will be conducted in the United States, or asignificant decrease in the perceived risk of the occurrence of natural disasters, our ability to grow and generate revenue through Willdan HomelandSolutions, or WHS, could be negatively affected. WHS provides training and consulting services to local and regional agencies related to preparing for andresponding to incidents of terrorism and natural disaster. Should the perceived risk of such incidence decline, federal and state funding for homeland securityand emergency preparedness could be reduced which might decrease demand for our services and have a material adverse affect on our business, financialcondition and results of operations.The loss of certain of our key executives could adversely affect our business, including our ability to secure and complete engagements and attract andretain employees. We have experienced turnover in our management team since 2006. In 2006, our co-founder and Chief Executive Officer, Dan Heil, passed awayunexpectedly. Just prior to Mr. Heil's death, and at his recommendation, our Board of Directors elected Win Westfall to succeed Mr. Heil. Mr. Westfallresigned as our Chief Executive Officer in February 2007 and we appointed Thomas Brisbin as our new President and Chief Executive Officer in April 2007.In July 2007, Kimberly Gant was appointed as our Chief Financial Officer when Mallory McCamant, our former Chief Financial Officer, assumed the role ofChief Operations Officer. Ms. McCamant resigned in May 2008. Additionally, Richard Kopecky, our former Senior Vice President and President of WilldanEngineering, was terminated in February 2007 and replaced by David Hunt, who has been with us for more than 21 years. In December 2008, Daniel Chowreplaced Mr. Hunt as Chief Executive Officer and President of Willdan Engineering. Mr. Hunt currently holds the position of Senior Vice President, Directorof Operations for Willdan Engineering responsible for business management activities for that subsidiary. Because of the turnover of our management team, any additional losses of our management team or key employees could have a material adverse effecton our business, including the ability to secure or complete contracts and to attract and retain additional employees. Our success is highly dependent uponthe efforts, talents, abilities, marketing skills and operational execution of our key executives and managers.Our ability to grow and compete in our industry will be hampered if we are unable to retain the continued service of our key professionals or to identify,hire and retain additional qualified professionals. A critical factor to our business is our ability to attract and retain qualified professionals. We are continually at risk of losing current professionals orbeing unable to hire additional professionals as needed. If we are unable to attract new qualified employees, our ability to grow will be adversely affected. Ifwe are unable to retain current employees, our financial condition and results of operations may be adversely affected. We would also be increasing ourcompetition, as former employees pose the greatest threat of significant competition to our business.We operate in a highly fragmented industry, and we may not be able to compete effectively with our larger competitors. The market for services in the engineering, municipal consulting, public finance consulting, geotechnical, homeland security and other technicalservices industries is competitive and highly fragmented. Contract awards are based primarily on quality of service, relevant experience, staffing capabilities,reputation, geographic presence, stability and price. Some of our competitors in certain service areas have more personnel and greater financial, technical andmarketing resources than us.21Table of ContentsWith regard to engineering related services, which represented approximately 75% and 78% of our contract revenue for fiscal years 2009 and 2008,respectively, our competitors include many larger consulting firms such as AECOM Technology Corporation, CH2M Hill, Jacobs Engineering Group Inc.and Tetra Tech, Inc. In certain public finance consulting services, we may compete with large accounting firms, such as Ernst & Young LLP. We can offer noassurance that we will be able to compete successfully in the future with these or other competitors.Our services may expose us to liability in excess of our current insurance coverage, which may have a material adverse effect on our liquidity. Our services involve significant risks of professional and other liabilities, which may substantially exceed the fees we derive from our services. Inaddition, from time to time, we assume liabilities as a result of indemnification provisions contained in our service contracts. We cannot predict themagnitude of these potential liabilities. We currently maintain general liability insurance, with coverage in the amount of $1.0 million per occurrence, subject to a $2.0 million generalaggregate limit; and professional liability insurance, with $5.0 million in coverage per claim, and a $10.0 million annual aggregate limit. We also carryexcess coverage of an additional $10.0 million for general, automobile and employer's liability claims. Claims may be made against us that exceed theselimits. We are liable to pay claims from our assets if and when the aggregate settlement or judgment amount exceeds our policy limits. Our professionalliability policy is a "claims made" policy. Thus, only claims made during the term of the policy are covered. If we terminate our professional liability policyand do not obtain retroactive coverage, we would be uninsured for claims made after termination even if these claims are based on events or acts that occurredduring the term of the policy. Further, our insurance may not protect us against liability because our policies typically have various exceptions to the claimscovered and also require us to assume some costs of the claim even though a portion of the claim may be covered. In addition, if we expand into new markets,we may not be able to obtain insurance coverage for these new activities or, if insurance is obtained, the dollar amount of any liabilities incurred couldexceed our insurance coverage. A partially or completely uninsured claim, if successful and of significant magnitude, could have a material adverse effect onour liquidity.The quality of our service and our ability to perform under some of our contracts would be adversely affected if qualified sub-consultants are unavailablefor us to engage. Under some of our contracts, we rely on the efforts and skills of sub-consultants for the performance of some of the tasks. In fiscal years 2009 and 2008,sub-consultant costs comprised approximately 13% and 11%, respectively, of our contract revenue. The absence of qualified sub-consultants with whom wehave a satisfactory relationship could adversely affect the quality of our service offerings and therefore our financial results.Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impairour financial results. As part of our business strategy, we intend to consider acquisitions of companies that are complementary to our business, such as our acquisition ofIntergy Corporation in June 2008. Appropriate acquisitions could allow us to expand into new geographical locations, offer new services, or acquireadditional talent. Accordingly, our future performance will be impacted by our ability to identify appropriate businesses to acquire, negotiate favorable termsfor such acquisitions and then effectively and efficiently integrate such acquisitions into our existing businesses. There is no certainty that we will succeed insuch endeavors.22Table of Contents Acquisitions involve numerous risks, any of which could harm our business, including:•Difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of the target company andrealizing the anticipated synergies of the combined businesses; •Difficulties in supporting and transitioning customers, if any, of the target company; •Diversion of our financial and management resources from existing operations; •The price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocatedthe purchase price or other resources to another opportunity; •Risks of entering new markets in which we have limited or no experience; •Potential loss of key employees, customers and strategic alliances from either our current business or the target company's business; •Assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company's services; and •Inability to generate sufficient net income to justify the acquisition costs. Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairment in the future thatcould harm our financial results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may bediluted, which could lower the market price of our common stock. As a result, if we fail to properly evaluate acquisitions or investments, we may not achievethe anticipated benefits of any such acquisitions, and we may incur costs in excess of amounts that we anticipate.If we fail to comply with the requirements imposed by Section 404 of the Sarbanes-Oxley Act, the trading price of our stock could drop significantly. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, we are required to provide a management certification on our internalcontrols over financial reporting. Because we are a smaller reporting company, we will be required to provide an attestation report related to the effectivenessof our internal controls over financial reporting from our independent registered public accounting firm for the first time for fiscal year 2010. In order toachieve compliance with Section 404 of Sarbanes-Oxley, in 2007 we engaged outside professional consultants to assist us in documenting and evaluatingour internal control over financial reporting. This exercise was both costly and challenging. We believe the efforts we have put forth to date give us the basisto conclude that we have effective internal controls over financial reporting. When our independent auditors attest to the effectiveness of our internalcontrols over financial reporting this upcoming fiscal year end and in future years, our auditors may not agree with our management's conclusion and, as aresult, may not be able to conclude that our internal controls over financial reporting are effective. Moreover, the costs to comply with the provisions ofSection 404 of Sarbanes-Oxley, as presently in effect, could continue to be significant. In addition, during the course of testing the design and effectiveness of our internal controls, we or our independent registered public accounting firmmay identify deficiencies that we may not be able to remediate in time to allow for an unqualified report from our independent registered public accountingfirm. Furthermore, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended fromtime to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting inaccordance with Section 404 of Sarbanes-Oxley. Effective internal controls, particularly those related to revenue recognition, are necessary for us to producereliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our businessand operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could dropsignificantly.23Table of ContentsWe have incurred, and will continue to incur, significant costs as a public company. As a public company, we incur significant legal, accounting and other expenses that we did not incur prior to November 2006 as a private company. Newrules and regulations for public companies may increase our legal and financial compliance costs and will make some activities more time-consuming andcostly. For example, we expect rules and regulations applicable to public companies to make it more difficult and more expensive for us to maintain directorand officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.The concentration of ownership of our stock may delay or prevent a change of control of our company or changes in our management, and as a result mayhinder the ability of our stockholders to take advantage of a premium offer. The concentration of ownership of our stock may have the effect of delaying or preventing a change in control of the company or a change in ourmanagement and may adversely affect the voting or other rights of other holders of our common stock. As of March 17, 2010 our directors and executiveofficers beneficially own 1,500,589 shares of common stock, or approximately 20% of our outstanding common stock. Of these shares, 925,120 shares, orapproximately 13% of our outstanding common stock, are owned by Linda L. Heil, a member of our board of directors.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 LitigationReform Act of 1995. These statements relate to our future operations, prospects, potential products, services, developments and business strategies. Thesestatements can, in some cases, be identified by the use of words like "may," "will," "should," "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 cash equivalents being sufficient to meet normal operatingrequirements. These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressedor implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in this section. We do not intend, andundertake 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 1B. UNRESOLVED STAFF COMMENTS None.24Table of Contents ITEM 2. PROPERTIES Our corporate headquarters are located in approximately 42,000 square feet of office space that we lease at 2401 East Katella Avenue, Anaheim,California. In addition, we lease office space in 20 other locations principally in California, Arizona and New York. In total, our facilities containapproximately 164,000 square feet of office space and are subject to leases that expire through fiscal year 2014. We also rent additional office space on amonth-to-month basis. We believe that our existing facilities are adequate to meet current requirements and that suitable additional or substitute space willbe available as needed to accommodate any expansion of operations and for additional offices. ITEM 3. LEGAL PROCEEDINGS We are subject to claims and lawsuits from time to time, including those alleging professional errors or omissions that arise in the ordinary course ofbusiness against firms, like ours, that operate in the engineering and consulting professions. We carry professional liability insurance, subject to certaindeductibles 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. Wemay incur substantial expenses in defending against third party claims. In the event of a determination adverse to us, we may incur substantial monetaryliability and be required to change our business practices. Either of these results could have a material adverse effect on our financial position, results ofoperations or cash flows.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 anunincorporated area of San Diego County. The design was completed by us and a contract was awarded to a construction contractor for construction of theimprovements. The construction was originally scheduled for completion in December 2008; however completion was delayed until fall 2009. The lawsuitalleges that the delays in construction were caused by errors and omissions in our preparation of reports and design and engineering of the project, resultingin 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 inthe lawsuit and will vigorously defend against the claims.Topaz v. City of Laguna Beach, Superior Court of California, Orange County This suit concerns a project by the City of Laguna Beach to reconstruct a retaining wall supporting a city road. We served as the construction observerfor this project and designed the retaining wall. 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 and 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 appropriategeotechnical data during the design stage and by allowing the work to be constructed during the rainy season. The lawsuit names Merit Engineering, theproject designer, Peterson-Chase Engineering, the general contractor and us, the construction observer, as defendants. We were named as a defendant in thefirst amended complaint filed on October 17, 2007. The plaintiffs issued a statement of damages on April 25, 2008 indicating damages to real and personalproperty in the amount of $0.8 million and general damages between $1.6 million and $4.7 million. A cross-complaint has been filed in the action byPeterson-Chase against us seeking equitable apportionment. We deny the allegations asserted in the lawsuit and the cross-complaint and will vigorouslydefend against the claims. ITEM 4. [RESERVED] 25Table of Contents PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES Market Information for Common Stock Since November 21, 2006, the common stock of Willdan Group, Inc. has been listed and traded on the Nasdaq Global Market under the symbol "WLDN".The following table sets out the high and low daily closing sale prices as reported on the NASDAQ Global Market for fiscal years 2009 and 2008. Thesereported prices reflect inter-dealer prices without adjustments for retail markups, markdowns, or commissions. On March 29, 2010, the closing sales price per share of our common stock, as reported on the Nasdaq Global Market, was $2.24.Stockholders As of March 29, 2010, there were 108 stockholders of record of our common stock.Dividends We did not declare or pay cash dividends on our common stock in fiscal years 2009 and 2008. Our revolving credit agreement prohibits the payment ofany dividend or distribution on our common stock either in cash, stock or any other property without the lender's consent.Recent Sales of Unregistered Securities In the three years preceding the filing of this report, we have issued the following securities that were not registered under the Securities Act: In connection with our purchase of Willdan Energy Solutions (formerly, Intergy Corporation) on June 9, 2008, we agreed to make potential earn-outpayments of up to $6,160,000 to the sellers if Willdan Energy Solutions achieves certain levels of earnings before interest and taxes in each of the first threeyears following completion of the acquisition. If any earn-out payments are due, we may elect, in our sole discretion, to pay up to 50% of such earn-outpayments 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 theapplicable period for which the earn-out was achieved. If the Average Daily Trading Volume (as defined in the Stock Purchase Agreement) of our commonstock 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% ofthe applicable earn-out payment in shares of our common stock.26 2009 2008 High Low High Low 1st Quarter $2.99 $1.46 $6.88 $5.00 2nd Quarter $1.99 $1.15 $5.94 $4.71 3rd Quarter $3.75 $1.34 $5.09 $2.99 4th Quarter $3.10 $2.06 $3.20 $1.50 Table of Contents The issuance of shares in connection with the acquisition were made in reliance upon the exemption from registration pursuant to Section 4(2) of theSecurities Act as transactions by an issuer not involving any public offering. The purchasers were provided financial and other information concerning us andwere allowed the opportunity to ask questions and receive information from us prior to making their investment decisions. The purchasers represented theirintention to acquire the securities for investment purposes and not with a view to sell or for sale in connection with any distribution thereof. Based on thelimited nature of the offering, the level of knowledge and relationships of the purchasers with us, the provision and access to information and the restrictionson transfer, we believe our offering satisfied the Section 4(2) exemption of the Act.Issuer Purchases of Equity Securities None.27Table of Contents ITEM 6. SELECTED FINANCIAL DATA The financial data set forth below should be read in conjunction with our corresponding consolidated financial statements and notes thereto andManagement's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this annual report.28 Fiscal Year 2009 2008 2007 2006 2005 (in thousands except per share amounts) Consolidated Statement of Operations Data: Contract revenue $61,605 $73,190 $78,798 $78,339 $67,263 Direct costs of contract revenue (exclusive of depreciation andamortization shown separately below): Salaries and wages 18,130 21,991 25,769 24,602 20,918 Sub-consultant services 7,997 7,750 4,600 4,168 4,745 Other direct costs 2,715 2,973 1,568 1,496 1,529 Total direct costs of contract revenue 28,842 32,714 31,937 30,266 27,192 General and administrative expenses: Salaries and wages, payroll taxes, employee benefits 20,325 24,439 25,061 26,051 22,720 Facilities and facility related 4,430 4,803 4,546 4,046 3,481 Stock-based compensation 272 214 209 38 2,737 Depreciation and amortization 1,814 1,978 1,747 1,584 1,257 Lease abandonment 707 742 — — — Impairment of goodwill 2,763 148 — — — Litigation accrual (reversal) (1,125) — 1,049 (1,049) 2,686 Other 11,070 10,952 11,727 10,359 7,935 Total general and administrative expenses 40,256 43,276 44,339 41,029 40,816 (Loss) income from operations (7,493) (2,800) 2,522 7,044 (745) Other (expense) income: Interest income 30 313 693 135 19 Interest expense (38) (33) 499 (773) (630) Other, net (5) (15) (27) 2,335 (8) Total other (expense) income (13) 265 1,165 1,697 (619) (Loss) income before income tax expense (7,506) (2,535) 3,687 8,741 (1,364)Income tax (benefit) expense (1,931) (930) 1,543 2,021 17 Net (loss) income $(5,575)$(1,605)$2,144 $6,720 $(1,381) Earnings per common share, basic and diluted $(0.78)$(0.22)$0.30 $1.37 $(0.35) Weighted average common shares outstanding: Basic 7,192 7,159 7,149 4,900 3,994 Diluted 7,192 7,160 7,150 4,900 3,994 S Corporation distributions paid per share $1.16 $0.46 Table of Contents 29 Fiscal Year 2009 2008 2007 2006 2005 (in thousands except per share amounts) Pro Forma Data (unaudited)(1): Pro forma provision for income taxes $2,596 $549 Pro forma net income (loss) $6,145 $(1,913)Pro forma earnings per common share, basic and diluted $1.25 $(0.48)Other Operating Data (unaudited): Adjusted EBITDA(2) $(3,333)$68 $5,326 $7,651 $5,951 Revenue per employee(3) $132 $133 $132 $131 $125 Employee headcount at period end(4) 466 550 628 670 599 January 1,2010 January 2,2009 December 28,2007 December 29,2006 December 30,2005 Consolidated Balance Sheet Data: Cash and cash equivalents $8,445 $8,144 $15,511 $20,633 $3,066 Working capital 16,704 19,820 30,171 26,721 9,429 Total assets 40,332 47,570 48,226 57,108 32,797 Total indebtedness 1,230 394 1,547 1,632 1,858 Total redeemable common stock — — — — 14,660 Total stockholders' equity 29,117 34,336 35,652 33,264 — (1)Prior to our initial public offering in November 2006, we were taxed as an S Corporation for purposes of federal and state incometaxes. As a result of that offering, our S Corporation status terminated and we are now taxed as a C Corporation under federal and statetax laws. The pro forma data reflects combined federal and state income taxes on a pro forma basis as if we had been taxed as a CCorporation during those periods using an effective tax rate of 40%. (2)Adjusted EBITDA is a supplemental measure used by our management to measure our operating performance. We define AdjustedEBITDA as net income plus net interest expense, income tax expense (benefit), depreciation and amortization, goodwill impairmentexpense, lease abandonment expense, loss (gains) on sales of assets, accrued expenses related to a litigation matter and a one-timestock-based compensation expense recorded in anticipation of our IPO, less proceeds from life insurance policies carried on our formerchief executive officer. Our definition of Adjusted EBITDA may differ from those of many companies reporting similarly namedmeasures. This measure should be considered in addition to, and not as a substitute for or superior to, other measures of financialperformance prepared in accordance with U.S. generally accepted accounting principles, or GAAP, such as operating income and netincome. We believe Adjusted EBITDA enables management to separate non-recurring income and expense items from our results ofoperations to provide a more normalized and consistent view of operating performance on a period-to-period basis. We use AdjustedEBITDA to evaluate our performance for, among other things, budgeting, forecasting and incentive compensation purposes. We alsobelieve Adjusted EBITDA is useful to investors, research analysts, investment bankers and lenders because it removes from ouroperational results the impact of certain non-recurring income and expense items, which may facilitate comparison of our results fromperiod to period. Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to operating income or net incomeas an indicator of operating performance or any other GAAP measure.Table of Contents30The following is a reconciliation of net income to Adjusted EBITDA (in thousands): Fiscal Year 2009 2008 2007 2006 2005 Net (loss) income $(5,575)$(1,605)$2,144 $6,720 $(1,381)Interest income (30) (313) (693) (135) (19)Interest expense (reversal) 38 33 (499) 773 630 Income tax (benefit) expense (1,931) (930) 1,543 2,021 17 Lease abandonment expense 707 742 — — — Goodwill impairment 2,763 148 — — — Depreciation and amortization 1,814 1,978 1,755 1,584 1,257 Loss (gain) on sale of assets 6 15 27 (13) 24 Life insurance proceeds — — — (2,250) — Litigation (reversal) accrual (1,125) — 1,049 (1,049) 2,686 Stock-based compensation expense recorded inanticipation of our IPO — — — — 2,737 Adjusted EBITDA $(3,333)$68 $5,326 $7,651 $5,951 (3)Reflects contract revenue, excluding revenue related to reimbursement of sub-consultants and other costs, divided by the averagenumber of full-time equivalent employees during the period. (4)Includes full-time and part-time employees.Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a provider of outsourced services to small and mid-sized public agencies and large public utilities in California, New York, and to a lesser extent,other states throughout the United States. Outsourcing enables these agencies to provide a wide range of specialized services, without having to incur andmaintain 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 primarily in California and New York. We also have operations in Arizona and, to lesserextent, other states throughout the United States. As of January 1, 2010, we had a staff of 466 that includes licensed engineers and other professionals. Basedon our 2008 revenue, we ranked 164 out of 500 top design firms in Engineering News-Record's 2009 Design Survey. Our traditional clients have been publicagencies in communities with populations ranging from 10,000 to 300,000 people. We believe communities of this size are underserved by large outsourcingcompanies that tend to focus on securing large federal and state projects, as well as projects for the private sector. We also provide services to large publicutilities which service major metropolitan communities. We seek to establish close working relationships with our public agency clients and, over time, toexpand the breadth and depth of the services we provide to them. While we currently serve communities throughout the country, our business with public agencies is concentrated in California and neighboring states.We provide services to approximately 60% of the 480 cities and over 60% of the 58 counties in California. We also serve special districts, school districts, arange of public agencies, and to a lesser extent, private industry. Our business with large public utilities is concentrated in California and New York. We were founded over 40 years ago, and today consist of a family of wholly owned companies that operate within the following segments for financialreporting purposes:•Engineering Services. Our Engineering Services segment includes the operations of our subsidiaries, Willdan Engineering, WilldanGeotechnical, Willdan Energy Solutions, Willdan Resource Solutions and Public Agency Resources (PARs). These businesses collectivelyprovide engineering-related services, geotechnical engineering services, environmental engineering and environmental related services andenergy efficiency, water conservation, sustainability and renewable energy services to public agencies and, to a lesser extent, private industry.Additionally, PARs primarily provides staffing to Willdan Engineering. Willdan Engineering is our largest subsidiary and currently representsour core business. Contract revenue for the Engineering Services segment represented approximately 75% and 78% of our consolidatedcontract revenue for fiscal year 2009 and fiscal year 2008, respectively.31Table of Contents•Public Finance Services. Our Public Finance Services segment consists of the business of our subsidiary, Willdan Financial Services, whichoffers financial and economic consulting services to public agencies. For fiscal years 2009 and 2008, contract revenue for the Public FinanceServices segment represented approximately 19% of our consolidated contract revenue. •Homeland Security Services. Our Homeland Security Services segment consists of the business of our subsidiary, Willdan HomelandSolutions, which offers homeland security, management consulting and public safety consulting services. For fiscal years 2009 and 2008,contract revenue for our Homeland Security Services segment represented approximately 6% and 3%, respectively, of our overall contractrevenue.Recent Developments General economic conditions have continued to decline due to a number of factors including slower economic activity, a lack of available credit,decreased consumer confidence and reduced corporate profits and capital spending. These conditions have led to a slowdown in construction, particularlyresidential housing construction, in the western United States. As a result of this slowdown, both our engineering services segment and public financeservices segment have suffered declines in revenue and operating margin compression. As a result, we have made several reductions in workforce and facilityleases in order to align resources to workload and reduce costs. Should the economic slowdown continue for longer than expected or worsen, we will need toevaluate further reductions in headcount and facilities in business lines that are underperforming. We will also continue to focus on reducing discretionaryexpenditures and the efficient procurement of necessary services. Declining revenue resulting from the economic conditions discussed above also contributed to us violating certain financial covenants in fiscal 2008 inour revolving credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"). Wells Fargo agreed to waive these defaults and eliminate ormodify certain financial covenants in exchange for our agreement to reduce the aggregate revolving loan commitment from $10.0 million to $5.0 million,amend certain financial covenants, cash collateralize the commitment and increase pricing. The terms of our amended credit agreement are discussed in moredetail below under "—Liquidity and Capital Resources—Outstanding Indebtedness." Additionally, the credit agreement, as amended, matures on January 1,2011 and we cannot provide any assurance that Wells Fargo will renew this line of credit. While we believe that our cash on hand, cash generated byoperating activities and funds available under our amended credit facility with Wells Fargo will be sufficient to finance our operating activities for the next12 months, if we do experience a cash flow shortage or violate the current terms of our credit agreement, we may have difficulty obtaining additional fundson favorable terms, if at all, in the current credit market. During the fourth quarter of 2009, we concluded that the estimated value of our financial services segment had declined to a point where it was necessaryto recognize impairment for the full amount of the goodwill of $2.8 million.Components of Income and ExpenseContract Revenue We enter into contracts with our clients that contain three principal types of pricing provisions: fixed price, time-and-materials and unit-based. Contractrevenue on our fixed price contracts is determined on the percentage-of-completion method based generally on the ratio of direct costs incurred to date toestimated total direct costs at completion. Many of our fixed price contracts are relatively short in duration, thereby lowering the risks of not properlyestimating the percent complete. Revenue on our time-and-materials and unit-based contracts are recognized as the work is performed in accordance withspecific terms of the contract. Approximately 41% of our contracts are based on32Table of Contentscontractual rates per hour plus costs incurred. Some of these contracts include maximum contract prices, but the majority of these contracts are not expectedto 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 estimateindicates a loss, such loss is provided for currently in its entirety. Claims revenue is recognized only upon resolution of the claim. Change orders in disputeare evaluated as claims. Costs related to un-priced change orders are expensed when incurred and recognition of the related contract revenue is based on anevaluation of the probability of recovery of the costs. Estimated profit is recognized for un-priced change orders if realization of the expected price of thechange order is probable.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 connectionwith revenue producing projects. Direct costs of contract revenue also include production expenses, sub-consultant services and other expenses that areincurred in connection with revenue producing projects. Direct costs of contract revenue exclude depreciation and amortization, that portion of technical andnontechnical salaries and wages related to marketing efforts, vacations, holidays and other time not spent directly generating revenue under existingcontracts. Such costs are included in general and administrative expenses. Additionally, payroll taxes, bonuses and employee benefit costs for all of ourpersonnel are included in general and administrative expenses since no allocation of these costs is made to direct costs of contract revenue. No allocation offacilities costs is made to direct costs of contract revenue nor is depreciation and amortization allocated to direct costs. We expense direct costs of contractrevenue 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 ourperformance and therefore we do not use this measure as construction contractors and other types of consulting firms may. Other companies may classify asdirect 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 maynot 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 administrativepersonnel costs, payroll taxes, bonuses and employee benefits for all of our employees and the portion of salaries and wages not allocated to direct costs ofcontract revenue for those employees who provide our services. General and administrative expenses also include facility costs, depreciation andamortization, 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 andadministrative costs when incurred.Critical Accounting Policies This discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have beenprepared in accordance with generally accepted accounting principles in the U.S., or 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 reportedamount of revenue and expenses in the reporting period. Our actual results may differ from these estimates. We have provided a summary of our significantaccounting policies in Note 2 to our consolidated financial statements included elsewhere in this report. We describe below those accounting policies thatrequire material subjective or complex judgments and that have the most significant impact on our financial condition and results of operations. Ourmanagement evaluates these estimates on an ongoing basis, based upon information currently available and on various assumptions management believesare reasonable as of the date of this report.33Table of ContentsContract Accounting Applying the percentage-of-completion method of recognizing revenue requires us to estimate the indicated outcome of our long-term contracts. Weforecast such outcomes to the best of our knowledge and belief of current and expected conditions and our expected course of action. Differences betweenour estimates and actual results often occur resulting in changes to reported revenue and earnings. Such changes could have a material effect on our futureconsolidated financial statements. Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon our review of all outstandingamounts on a monthly basis. We determine the allowance for doubtful accounts by identifying troubled accounts and by using historical experience appliedto an aging of accounts. Our credit risk is minimal with governmental entities. Account receivables are written off when deemed uncollectible. Recoveries ofaccounts receivable previously written off are recorded when received. For further information on the types of contracts under which we perform our services,see "Business—Contract Structure" elsewhere in this report.Goodwill We test goodwill, at least annually, for possible impairment. Accordingly, we complete our annual testing of goodwill as of the last day of the first monthof our fourth fiscal quarter each year to determine whether there is impairment. In addition to our annual test, we regularly evaluate whether events andcircumstances have occurred that may indicate a potential impairment of goodwill. We recognized impairment charges for fiscal year 2009 related to ourPublic Finance Services reporting unit and for fiscal year 2008 related to our Homeland Security Services reporting unit. Neither our Public Finance Servicesreporting unit nor our Homeland Security Services reporting unit have any remaining goodwill following these impairment charges. We did not recognizeany goodwill impairment charges in fiscal year 2007. We test our goodwill for impairment at the level of our reporting units, which are components of our operating segments. The reporting unit that still hasa material amount of goodwill is Willdan Energy Solutions, which is part of our engineering services segment. The process of testing goodwill for impairmentinvolves the determination of the fair value of the applicable reporting units. To estimate the fair value of our reporting units, we have historically used anincome approach based on a multiple of historical cash flows, management's estimates of future cash flows and other market data. In fiscal year 2008, weexpanded our methodology to include a market approach based upon multiples of EBITDA earned by similar public companies. For our fiscal years 2009 and2008 annual impairment testing, we weighted the income approach and the market approach at 80% and 20%, respectively. The income approach was givena higher weight because it has a more direct correlation to the specific economics of the reporting units than the market approach, which is based on multiplesof public companies that, although comparable, may not provide the same mix of services as our reporting units. Once the fair value is determined, we then compare the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of thereporting unit is determined to be less than the carrying value, we perform an additional assessment to determine the extent of the impairment based on theimplied fair value of goodwill compared with the carrying amount of the goodwill. In the event that the current implied fair value of the goodwill is less thanthe carrying value, an impairment charge is recognized. Inherent in such fair value determinations are significant judgments and estimates, including but not limited to assumptions about our future revenue,profitability and cash flows, our operational plans and our interpretation of current economic indicators and market valuations. To the extent theseassumptions are incorrect or economic conditions that would impact the future operations of our reporting units change, our goodwill may be deemed to beimpaired, and an impairment charge could result in a material adverse effect on our financial position or results of operation. At our measurement34Table of Contentsdate, the estimated fair value of our energy solutions reporting unit exceeded the carrying value by approximately 25%.Accounting for Claims Against the Company We record liabilities to claimants for probable and estimable claims, if any, on our consolidated balance sheet, which we include in accrued liabilities,and record a corresponding receivable from our insurance company for the portion of the claim that is probable of being covered by insurance, which isincluded in other receivables. The estimated claim amount net of the amount estimated to be recoverable from the insurance company is included in ourgeneral and administrative expenses. Determining probability and estimating claim amounts is highly judgmental. Initial accruals and any subsequentchanges 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 apercentage of contract revenue. Amounts may not add to the totals due to rounding.35 Fiscal Year 2009 2008 2007 Statement of Operations Data: Contract revenue 100.0% 100.0% 100.0% Direct costs of contract revenue (exclusive of depreciation and amortization shown separatelybelow): Salaries and wages 29.4 30.0 32.7 Sub-consultant services 13.0 10.6 5.8 Other direct costs 4.4 4.1 2.0 Total direct costs of contract revenue 46.8 44.7 40.5 General and administrative expenses: Salaries and wages, payroll taxes, employee benefits 33.0 33.4 31.8 Facilities and facility related 7.2 6.6 5.8 Stock-based compensation 0.4 0.3 0.3 Depreciation and amortization 2.9 2.7 2.2 Lease abandonment 1.1 1.0 — Impairment of goodwill 4.5 0.2 — Litigation accrual (reversal) (1.8) — 1.3 Other 18.0 15.0 14.9 Total general and administrative expenses 65.3 59.1 56.3 (Loss) income from operations (12.2) (3.8) 3.2 Other (expense) income: Interest income — 0.4 0.9 Interest expense (0.1) — 0.6 Other, net — — — Total other (expense) income — 0.4 1.5 (Loss) income before income tax expense (12.2) (3.5) 4.7 Income tax (benefit) expense (3.1) (1.3) 2.0 Net (loss) income (9.0) (2.2)% 2.7% Table of ContentsFiscal Year 2009 Compared to Fiscal Year 2008 Contract revenue. Our contract revenue was $61.6 million for the fiscal year ended January 1, 2010, with $46.3 million attributable to the EngineeringServices segment and $11.8 million attributable to the Public Finance Services segment. Our Homeland Security Services segment generated $3.5 millionduring this period. Consolidated contract revenue decreased $11.6 million, or 15.8%, from $73.2 million in the fiscal year ended January 1, 2009. Thisdecrease was due primarily to a decrease of $11.0 million, or 19.2%, in contract revenue of the Engineering Service segment, and a decrease of $1.9 million,or 13.9%, in our Public Finance Services segment, offset by an increase of $1.3 million, or 59.1%, in contract revenue of our Homeland Security Servicessegment. Contract revenue of the Engineering Services segment has been significantly impacted by the decline in the California residential housing market andstate and local government budget deficits. A historical significant source of revenue in our Engineering Services segment is fees assessed for buildingpermits. Since the second half of fiscal 2007, we have experienced reductions in revenue from these fees because of the continuing slowdown in residentialconstruction in the western United States. Revenue declines in the Public Finance Services segment were primarily due to decreased financial consultingservices and fewer new district formations to fund infrastructure projects, partially offset by increased delinquency management services. Revenue inHomeland Security Services has increased due to an increase in our emergency response training courses and exercises, emergency operations planning andother public safety and management consulting services. Direct costs of contract revenue. Direct costs of contract revenue was $28.8 million for the fiscal year ended January 1, 2010, with $23.8 millionattributable to the Engineering Services segment and $3.3 million attributable to the Public Finance Services segment. The additional $1.7 million isattributable to direct costs of contract revenue for our Homeland Security Services segment. Direct costs of contract revenue decreased $3.9 million, or 11.9%,from $32.7 million for the fiscal year ended January 2, 2009. Of this total decrease, direct costs of contract revenue decreased $4.0 million, or 14.4%, in theEngineering Services segment and $0.4 million, or 10.8%, in the Public Finance Services segment. The $0.5 million difference was attributable to an increasein cost in our Homeland Security Services segment. The decrease in direct costs of contract revenue for our Engineering Services segment and Public FinanceServices segment is primarily due to decreased direct salary costs. Direct costs of contract revenue as a percentage of contract revenue for the fiscal year endedJanuary 1, 2010 increased to 46.8% from 44.7% for the fiscal year ended January 2, 2009, primarily because contract revenue decreased at a higher rate thanthe direct costs. Within direct costs of contract revenue, salaries and wages decreased to 29.4% of contract revenue for the fiscal year ended January 1, 2010 from 30.0%for the fiscal year ended January 2, 2009. Comparing those same periods, sub-consultant services increased to 13.0% of contract revenue from 10.6% ofcontract revenue. Sub-consultant costs increased primarily due to our activity associated with our energy efficiency practice in our Engineering Servicessegment where we outsource installation services. General and administrative expenses. General and administrative expenses decreased by $2.9 million, or 6.7%, to $40.3 million for the fiscal yearended January 1, 2010 from $43.2 million for the fiscal year ended January 2, 2009. Of the net $2.9 million decrease, $4.1 million was due to a decrease insalaries and wages, payroll taxes and employee benefits. The reduction in employee related costs are the direct result of continued cost reduction efforts.Included in general and administrative expenses for the fiscal year ended January 1, 2010 is $2.7 million in goodwill impairment charges and $0.7 million inlease abandonment expense, which were partially offset by a favorable legal settlement of $1.1 million. Lease abandonment expense includes future rental obligations and other costs associated with leased space that we have ceased to use, offset by futureproceeds from sublease arrangements.36Table of Contents As discussed above under "—Components of Income and Expense-Direct Costs of Contract Revenue," we do not allocate that portion of salaries andwages not related to time spent directly generating revenue to direct costs of contract revenue. Loss from operations. As a result of the above factors, loss from operations was $7.5 million for the fiscal year ended January 1, 2010 as compared to$2.8 million for the fiscal year ended January 2, 2009. Loss from operations, as a percentage of contract revenue, decreased to (12.2)% for the fiscal yearended January 1, 2010, from (3.8)% for the fiscal year ended January 2, 2009. Other (expense) income. Other (expense) income, net, decreased by $0.3 million to an expense of $13,000 in the fiscal year ended January 1, 2010 fromincome of $0.3 million for the fiscal year ended January 2, 2009. This change was primarily due to a decrease in interest income from invested funds. Income tax benefit. Income tax benefit was $1.9 million for the fiscal year ended January 1, 2010, as compared to $0.9 million for the fiscal year endedJanuary 2, 2009. During fiscal year 2009, we recorded a $0.9 million valuation allowance against deferred tax assets in excess of the deferred tax liability fordeferred revenue. Net loss. As a result of the above factors, our net loss was $5.6 million for the fiscal year ended January 1, 2010, compared to $1.6 million for the fiscalyear ended January 2, 2009.Fiscal Year 2008 Compared to Fiscal Year 2007 Contract revenue. Our contract revenue was $73.2 million for the fiscal year ended January 2, 2009, with $57.3 million attributable to the EngineeringServices segment and $13.7 million attributable to the Public Finance Services segment. Our Homeland Security Services segment generated $2.2 millionduring this period. Consolidated contract revenue decreased $5.6 million, or 7.1%, from $78.8 million in the fiscal year ended December 28, 2007. Thisdecrease was due primarily to a decrease of $7.1 million, or 11.0%, in contract revenue of the Engineering Service segment, offset by increases of$1.0 million, or 7.9%, and $0.5 million, or 29.4%, in contract revenue of the Public Finance Services and Homeland Security Services segments, respectively.Our revenue for fiscal year 2008 also includes $7.8 million of revenue from Willdan Energy Solutions, which we acquired in June 2008. Contract revenue of the Engineering Services segment has been significantly impacted by the decline in the California residential housing market andstate and local government budget cuts. A source of revenue in our Engineering Services segment is fees assessed for building permits. Since the second halfof fiscal 2007, we have experienced reductions in revenue from these fees because of the continuing slowdown in residential construction in the westernUnited States. The $7.1 million decrease in contract revenue for the Engineering Services segment is net of $7.8 million of revenue recognized by WilldanEnergy Solutions following our acquisition of Willdan Energy Solutions in June 2008. Our Public Finance Services business, specifically districtadministration projects, tends to run counter-cyclical to the residential housing market. Revenue in the Public Finance Services segment increased primarilydue to increased district formation services to fund infrastructure projects as well as increased delinquency management services in our district administrationservices. Revenue in Homeland Security Services has increased due to an increase in our emergency response training courses, particularly in SouthernCalifornia. Additionally, our Homeland Security Services segment has expanded its service offerings beyond its traditional training services to includetraining exercises and management consulting services.37Table of Contents Direct costs of contract revenue. Direct costs of contract revenue was $32.7 million for the fiscal year ended January 2, 2009, with $27.8 millionattributable to the Engineering Services segment and $3.7 million attributable to the Public Finance Services segment. The additional $1.2 million isattributable to direct costs of contract revenue for our Homeland Security Services segment. Direct costs of contract revenue increased $0.8 million, or 2.5%,from $31.9 million for the fiscal year ended December 28, 2007. Of this total increase, direct costs of contract revenue increased $0.1 million, or 0.3%, in theEngineering Services segment and $0.4 million, or 11.7%, in the Public Finance Services segment. The remaining $0.3 million increase was attributable tothe Homeland Security Services segment. The increase in direct costs of contract revenue for our Engineering Services segment is primarily due to increasedsalary, sub-consultant and other direct costs related to Willdan Energy Solutions which we acquired in June 2008, offset by decreases in direct salary costsacross other areas of the segment. Increases in direct costs of contract revenue for our Public Finance Services and Homeland Security Services segments wereprimarily 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 fiscal year ended January 2, 2009 increased to 44.7% from 40.5% for the fiscalyear ended December 28, 2007, primarily because contract revenue in our Engineering Services segment decreased at a higher rate than the direct costs ofcontract revenue attributable to this segment. Within direct costs of contract revenue, salaries and wages decreased to 30.0% of contract revenue for the fiscal year ended January 2, 2009 from 32.7%for the fiscal year ended December 28, 2007. Comparing those same periods, sub-consultant services increased to 10.6% of contract revenue from 5.8% ofcontract revenue. Sub-consultant costs increased primarily due to our acquisition of Willdan Energy Solutions which utilizes a higher percentage of sub-consultants than our other subsidiaries. General and administrative expenses. General and administrative expenses decreased by $1.1 million, or 2.3%, to $43.2 million for the fiscal yearended January 2, 2009 from $44.3 million for the fiscal year ended December 28, 2007. The $1.1 million decrease in general and administrative expensesprimarily relates to decreases in salaries and wages, payroll taxes and employee benefits and other general and administrative expenses. The reduction inemployee related costs primarily resulted from reductions in headcount and cost control measures. The reduction in other general and administrativeexpenses related to cost control measures and reductions in professional service costs primarily related to the legal costs incurred during fiscal year 2007 forthe settlement of the West Hollywood litigation and lower professional fees during fiscal year 2008 as compared to fiscal year 2007 primarily because we hadto comply with Section 404 of the Sarbanes-Oxley Act for the first time in fiscal year 2007. The decreases in general and administrative expenses werepartially offset by increases of $0.3 million in amortization of acquired intangibles related to Willdan Energy Solutions, $0.7 million of lease abandonmentcosts and $0.1 million of goodwill impairments. Fiscal year 2007 general and administrative expenses also included a $1.0 million litigation accrual for theWest Hollywood litigation. Lease abandonment expense includes future rental obligations and other costs associated with leased space that is no longer utilized by us or subleasetenants. As discussed above under "—Components of Income and Expense-Direct Costs of Contract Revenue," we do not allocate that portion of salaries andwages not related to time spent directly generating revenue to direct costs of contract revenue. (Loss) income from operations. As a result of the above factors, loss from operations was $2.8 million for the fiscal year ended January 2, 2009 ascompared to income from operations of $2.5 million for the fiscal year ended December 28, 2007. (Loss) income from operations as a percentage of contractrevenue decreased to (3.8)% for the fiscal year ended January 2, 2009, from 3.2% for the fiscal year ended December 28, 2007.38Table of Contents Other (expense) income. Other income, net, decreased by $0.9 million, or 77.3%, to $0.3 million in the fiscal year ended January 2, 2009 from$1.2 million of income in the fiscal year ended December 28, 2007. This was due primarily to (i) a decrease in interest income of $0.4 million resultingprimarily from a reduction in average invested balances due to the purchase of Willdan Energy Solutions, and (ii) an increase in interest expense of$0.5 million related primarily to the inclusion in fiscal year 2007 of a reversal of $0.6 million of accrued interest related to the West Hollywood litigationthat was settled without payment of interest. Income tax (benefit) expense. Income tax benefit was $0.9 million for the fiscal year ended January 2, 2009, as compared to income tax expense of$1.5 million for the fiscal year ended December 28, 2007. Net (loss) income. As a result of the above factors, our net loss was $1.6 million for the fiscal year ended January 2, 2009, compared to net income of$2.1 million for the fiscal year ended December 28, 2007.Liquidity and Capital Resources As of January 1, 2010, we had $8.4 million of cash and cash equivalents. Our primary sources of liquidity are cash generated from operations andborrowings under our revolving line of credit. We believe that our cash on hand, cash generated by operating activities and funds available under our creditfacility will be sufficient to finance our operating activities for at least the next 12 months.Cash Flows from Operating Activities Cash flows provided by operating activities were $2.2 million for fiscal year 2009 compared to $3.5 million for fiscal year 2008 and cash flows used inoperating activities of $0.3 million for fiscal year 2007. The cash flows provided by operating activities in fiscal year 2009 were comparatively lower than infiscal year 2008 due primarily to a higher net loss partially offset by non-cash impairment charges related to goodwill, lease abandonment expenses and thecollection of the income tax receivable accrued during fiscal year 2008. The cash flows provided by operating activities in fiscal year 2008 also included anincrease in collection of accounts receivable and the payment of accrued liabilities related to litigation accrued in fiscal year 2007, net of amounts paid forby our insurance company. Higher cash flows provided by operating activities in fiscal year 2008 as compared to fiscal year 2007 were partially offset by anet loss incurred in fiscal year 2008 compared to net income earned in fiscal year 2007.Cash Flows from Investing Activities Cash flows used in investing activities were $2.8 million for fiscal year 2009 compared to $9.5 million for fiscal year 2008 and $1.9 million for fiscalyear 2007. Payments for business acquisitions, net of cash acquired, in fiscal 2009 was $2.4 million as compared to $10.2 million in fiscal 2008. Thesepayments were in accordance with the provisions of the stock purchase agreement for the 2008 purchase of Willdan Energy Solutions, formerly known asIntergy Corp. Fiscal years 2008 and 2007 also contained purchases of liquid investments and proceeds from sales of liquid investments. Aside from paymentsfor business acquisitions, our cash used in investing activities is primarily related to the purchase of equipment and leasehold improvements.Cash Flows from Financing Activities Cash flows provided by financing activities in fiscal 2009 was $0.9 million as compared to cash flows used in financing activities of $1.4 million forfiscal year 2008 and $2.9 million for fiscal year 2007. The net cash flows provided in 2009 was primarily attributable to borrowings under our line of credit tosupport working capital needs. The decrease of cash used in financing activities for fiscal year 2008 over fiscal year 2007 resulted primarily from the fiscalyear 2007 payment of $3.2 million in distributions to holders of our redeemable common stock, partially offset by an increase in net39Table of Contentspayments of notes payable of $1.1 million. The fiscal year 2007 distribution was our final S corporation distribution to our stockholders and we used theproceeds from our initial public offering to pay this amount.Outstanding Indebtedness We currently have a revolving line of credit with Wells Fargo Bank, National Association ("Wells Fargo"), which was amended on November 9, 2009.We have also financed, from time to time, insurance premiums by entering into unsecured notes payable with insurance companies. During our annualinsurance renewals in the fourth quarter of our fiscal year ended January 1, 2010, we elected not to finance our insurance premiums for the upcoming fiscalyear. Under the terms of our credit agreement with Wells Fargo, we can borrow up to $5.0 million from time to time (as may be limited by the covenants in thecredit agreement as discussed below) up to and until January 1, 2011. Loans made under the revolving line of credit will accrue interest at either (i) thefloating rate equal to the prime rate in effect from time to time or (ii) the fixed rate of 1.75% above LIBOR, at our election. For prime rate loans, the interestrate will be adjusted when each prime rate change by the bank is announced and becomes effective. There were outstanding borrowings of $1.0 million underthis agreement as of January 1, 2010. Borrowings under the credit agreement are secured by all of our accounts receivable and other rights to payment, general intangibles, inventory andequipment, including those of our subsidiaries. In addition, borrowings under the credit agreement are secured by investment property we hold in a securitiesaccount at Wells Fargo that must at all times have a collateral value of at least $5.0 million. Each of our subsidiaries (except Public Agency Resources andWilldan Resource Solutions) has signed an unconditional guaranty of our obligations under the agreements. The credit agreement contains customary representations and affirmative covenants, including a covenant to maintain a tangible net worth of at least$18.0 million at all times. Tangible net worth is defined in the credit agreement as stockholders' equity less intangible assets and loans or advances to, orinvestments in, any related entities or individuals. As of January 1, 2010, our tangible net worth as defined under our credit agreement was $19.1 million(1).(1)Tangible net worth is a supplemental measure used in our credit agreement. If we do not maintain tangible net worth of at least $18.0 million, Wells Fargo could choose to accelerate any loans thenoutstanding under the facility or refuse to make additional loans to us under the facility. Management therefore believes that presentation of tangible net worth as defined in the credit agreement is usefulto investors because it helps them understand how our tangible net worth compares to the financial covenant contained in our credit agreement and whether we are close to violating such covenant.Management also reviews tangible net worth to ensure it will continue to have access to its financing sources. Tangible net worth is defined in the credit agreement as the "aggregate of totalstockholders' equity less any intangible assets and less any loans or advances to, or investments in, any related entities or individuals. For the purposes of calculating Tangible Net Worth, the impact ofnon-cash property lease termination expense of up to $1,000,000.00 in the aggregate recorded during the period from October 1, 2009 through December 31, 2010 will be excluded from the covenantcalculation." This definition of tangible net worth may differ from those of many companies reporting similarly named measures. This measure should be considered in addition to, and not as asubstitute for or superior to, other measures of financial performance prepared in accordance with U.S. generally accepted accounting principles, or GAAP, such as stockholders' equity. Tangible networth is not a recognized term under GAAP and does not purport to be an alternative to stockholders' equity as an indicator of net worth or any other GAAP measure. The following is a reconciliation of stockholders' equity to tangible net worth:40 As ofJanuary 1, 2010 Stockholders' equity $29,117,000 Goodwill and other intangibles, net (10,520,000)Permitted lease abandonment 531,000 Tangible net worth $19,128,000 Table of Contents Prior to the amendment of the credit agreement in March 2009, the credit agreement contained additional financial covenants, including minimum netincome and maximum net loss covenants. As discussed above in "—Recent Developments," we breached our minimum net income covenant for the quarterended September 26, 2008 and, in exchange for Wells Fargo's waiver of this breach, we amended our credit agreement in December 2008 to reduce theamount available under the facility from $10.0 million to $5.0 million and to revise the financial covenants under the facility. We also breached ourmaximum net loss covenant for the year ended January 2, 2009 by sustaining net losses before taxes greater than $1.0 million. In March 2009, Wells Fargowaived this breach and eliminated or modified certain financial covenants in the credit agreement in exchange for increased pricing and additional collateralbeing provided. The credit agreement also includes customary negative covenants, including a covenant that prohibits the incurrence of additional indebtedness by us orour subsidiaries other than purchase money indebtedness not to exceed $2.0 million and indebtedness existing on the date of the credit agreement, and acovenant that prohibits payment of dividends on our stock and redemptions, repurchases or other acquisitions of our stock; provided that we can repurchasestock with an aggregate fair market value up to $5.0 million in any calendar year. In addition, the credit agreement includes customary events of default for acredit facility. Upon a default, the interest rate will be increased by a default rate margin of 4.0%. Upon the occurrence of an event of default under the creditagreement, including a breach of any of the covenants discussed above, Wells Fargo has the option to make any loans then outstanding under the creditagreement immediately due and payable and is no longer obligated to extend further credit to us under the credit agreement.Contractual Obligations We have certain cash obligations and other commitments which will impact our short- and long-term liquidity. At January 1, 2010, such obligations andcommitments consisted of long-term debt, operating leases and capital leases. The following table sets forth our contractual obligations as of January 1,2010:(1)Long-term debt includes principal and interest payments under our debt agreements assuming no additional borrowings or principal payments and includes borrowings under our line of credit of$1,000,000.New Accounting Pronouncements In June 2009, the Financial Accounting Standards Board (FASB) issued a standard entitled "The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles, a replacement of FASB No. 162." This standard establishes the FASB Accounting StandardsCodification ("Codification"), as the single source of authoritative United States accounting and reporting standards applicable for all non-governmententities, with the exception of the Securities and Exchange Commission rules and interpretative releases. The Codification, which changes the referencing offinancial standards, is effective for interim or annual financial periods ending after September 15, 2009. As the Codification is not intended to change or alterexisting U.S. GAAP, the adoption of the standard did not have any effect on our consolidated financial position, results of operations or cash flows.41Contractual Obligations Total Less than1 Year 1-3 Years 3-5 Years More than5 Years Long term debt(1) $1,024,000 $1,024,000 $— $— $— Operating leases 10,915,000 3,601,000 5,525,000 1,789,000 — Capital leases 272,000 158,000 114,000 — — Total contractual cash obligations $12,211,000 $4,783,000 $5,639,000 $1,789,000 $— Table of Contents In April 2008, the FASB issued a standard entitled "Determination of the Useful Life of Intangible Assets." This standard amends the factors that shouldbe considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the standard forgoodwill and other intangible assets. The new standard was effective for fiscal years beginning after December 15, 2008. We adopted the standard onJanuary 3, 2009 and this had no effect on our financial statements. In December 2007, the FASB issued a standard entitled "Business Combinations." This standard establishes the principles and requirements for how anacquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest inthe acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines whatinformation to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The standardmakes significant changes to existing accounting practices for acquisitions and applies prospectively to business combinations consummated on or after thebeginning of the first annual reporting period on or after December 15, 2008. We adopted the new standard effective January 3, 2009 and the adoption didnot have any effect on our financial statements and disclosures. ITEM 7A. 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 marketchanges. Market risk is attributed to all market risk sensitive financial instruments, including long-term debt. We had cash and cash equivalents of $8.4 million as of January 1, 2010. This amount includes $0.6 million invested in the Wells Fargo Stage CoachSweep Investment Account, $5.3 million invested in the Wells Fargo Money Market Mutual Fund and $1.1 million invested in the Wells Fargo AdvantageHeritage 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. We do not engage in trading activities and do not participate in foreign currency transactions or utilize derivative financial instruments. As of January 1,2010, we had $1.0 million outstanding debt under our revolving credit facility that bears interest at variable rates.42Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and related financial information, as listed under Item 15, appear in a separate section of this annual report beginning on page F-1.Index to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in and/or disagreements with accountants on accounting and financial disclosure during the year ended January 1, 2010. ITEM 9A(T). CONTROLS AND PROCEDURES Evaluation of Disclosure 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 toensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarizedand reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is accumulatedand communicated to our management, including our President and Chief Executive Officer, Thomas Brisbin, and our Chief Financial Officer, KimberlyGant, as appropriate to allow timely decisions regarding required disclosure. In connection with the preparation of this Annual Report, an evaluation was performed under the supervision and with the participation of management,including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation,our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of January 1, 2010.43 PageReport of Independent Registered Public Accounting Firm F-1Consolidated Balance Sheets as of January 1, 2010 and January 2, 2009 F-2Consolidated Statements of Operations for each of the fiscal years in the three-year period ended January 1, 2010 F-3Consolidated Statements of Stockholders' Equity for each of the fiscal years in the three-year period ended January 1,2010 F-4Consolidated Statements of Cash Flows for each of the fiscal years in the three-year period ended January 1, 2010 F-5Notes to Consolidated Financial Statements F-6Table of ContentsManagement's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate control over financial reporting (as defined in Rule 13a-15(f) under theSecurities Exchange Act of 1934, as amended). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliabilityof our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherentlimitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would beprevented or detected. Our management assessed the effectiveness of our internal control over financial reporting as of January 1, 2010. In making thisassessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in InternalControl—Integrated Framework. Our management has concluded that, as of January 1, 2010, our internal control over financial reporting was effective basedon these criteria.Report of Independent Registered Public Accounting Firm This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financialreporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the company to provide only management's report in this annual report.Changes in Internal Controls Based on our evaluation carried out in accordance with SEC Rule 15d-15(b) under the supervision and with the participation of our management,including our President and Chief Executive Officer and our Chief Financial Officer, we concluded that there were no changes during the fourth fiscal quarterof 2009 of our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls overfinancial reporting. ITEM 9B. OTHER INFORMATION None.44Table of Contents PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to Willdan Group, Inc.'s Proxy Statement for its 2010 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the Company's 2009 fiscal year. We have posted our Code of Ethical Conduct on our website, www.willdan.com, under the heading "Investors—Corporate Governance." The Code ofEthical Conduct applies to our Chief Executive Officer and Chief Financial Officer. Upon request, we will provide any person with a copy of the Code ofEthical Conduct. See "Item 1. Business—Available Information." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to Willdan Group, Inc.'s Proxy Statement for its 2010 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the Company's 2009 fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The information required by this item is incorporated by reference to Willdan Group, Inc.'s Proxy Statement for its 2010 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the Company's 2009 fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to Willdan Group, Inc.'s Proxy Statement for its 2010 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the Company's 2009 fiscal year. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference to Willdan Group, Inc.'s Proxy Statement for its 2010 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the Company's 2009 fiscal year.45Table of Contents PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)The following documents are filed as part of this report: 1.Financial Statements The following financial statements of Willdan Group, Inc. and report of independent auditors are included in Item 8 of this annual report and submittedin a separate section beginning on page F-1:2.Financial Statements Schedules All required schedules are omitted because they are not applicable or the required information is shown in the financial statements or the accompanyingnotes.3.Exhibits The exhibits filed as part of this annual report are listed in Item 15(b).(b)Exhibits. The following exhibits are filed as a part of this report:46 PageReport of Independent Registered Public Accounting Firm F-1Consolidated Balance Sheets as of January 1, 2010 and January 2, 2009 F-2Consolidated Statements of Operations for each of the fiscal years in the three-year period ended January 1, 2010 F-3Consolidated Statements of Stockholders' Equity for each of the fiscal years in the three-year period ended January 1,2010 F-4Consolidated Statements of Cash Flows for each of the fiscal years in the three-year period ended January 1, 2010 F-5Notes to Consolidated Financial Statements F-6ExhibitNumber Exhibit Description 2.1 Stock Purchase Agreement, dated as of June 9, 2008, by and among Willdan Group, Inc., Intergy Corporation andthe 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) 4.2 The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of eachinstrument with respect to issues of long-term debt of Willdan Group, Inc. and its subsidiaries, the authorizedprincipal amount of which does not exceed 10% of the consolidated assets of Willdan Group, Inc. and itssubsidiaries. 10.1 Credit Agreement, dated December 28, 2007, between Willdan Group, Inc. and Wells Fargo Bank, NationalAssociation, relating to the Revolving Line of Credit Note in 10.6(3) 10.2 First Amendment to Credit Agreement, dated May 8, 2008, between Willdan Group, Inc. and Wells Fargo Bank,National Association(4) 10.3 Second Amendment to Credit Agreement, dated June 9, 2008, between Willdan Group, Inc. and Wells Fargo Bank,National Association(4)Table of Contents47ExhibitNumber Exhibit Description 10.4 Third Amendment to Credit Agreement, entered into on December 19, 2008, between Willdan Group, Inc. andWells Fargo Bank, National Association(5) 10.5 Fourth Amendment to Credit Agreement, entered into on March 30, 2009, between Willdan Group, Inc. and WellsFargo Bank, National Association(6) 10.6 Fifth Amendment to Credit Agreement, entered into on November 9, 2009, between Willdan Group, Inc. and WellsFargo Bank, National Association(7) 10.7 Revolving Line of Credit Note for $5,000,000, dated November 9, 2009, by Willdan Group, Inc. in favor of WellsFargo Bank, National Association(7) 10.8 Security Agreement: Equipment, dated December 28, 2007, between Willdan Group, Inc. and Wells Fargo Bank,National Association, relating to the Revolving Line of Credit Note in 10.6(3) 10.9 Continuing Security Agreement: Rights to Payment and Inventory, dated December 28, 2007, between WilldanGroup, Inc. and Wells Fargo Bank, National Association, relating to the Revolving Line of Credit Note in 10.6(3) 10.10 Security Agreement: Securities Account, dated March 30, 2009, between Willdan Group, Inc. and Wells FargoBank, National Association, relating to the Revolving Line of Credit Note in 10.6(6) 10.11†Willdan Group, Inc. 2006 Stock Incentive Plan(2) 10.12†Form of Incentive Stock Option Agreement(2) 10.13†Form of Non-Qualified Stock Option Agreement(2) 10.14†Amended and Restated Willdan Group, Inc. 2006 Employee Stock Purchase Plan(8) 10.15†Willdan Group, Inc. 2008 Performance Incentive Plan(9) 10.16†Form of Indemnification Agreement between Willdan Group, Inc. and its Directors and Officers(2) 10.17 Office Lease by and between Spectrum Waples Street, LLC, a California limited liability company, SpectrumLambert Plaza, LLC, a California limited liability company and The Willdan Group of Companies datedOctober 15, 2004 for the principal office located at 2401 East Katella Avenue, Anaheim, California(2) 10.18 First Amendment to Lease by and between 2401 Katella, LLC and The Willdan Group of Companies, datedFebruary 27, 2006 for the principal office located at 2401 Katella Avenue, Anaheim, California(2) 10.19 Second Amendment to Lease by and between 2401 Katella, LLC and The Willdan Group of Companies datedMarch 6, 2006 for the principal office located at 2401 Katella Avenue, Anaheim, California(2) 10.20 Warrant Agreement between Willdan Group, Inc. and Wedbush Morgan Securities Inc.(2) 10.21†Indemnification Agreement between Willdan Group, Inc. and Linda Heil(2) 10.22†Employment Agreement between Willdan Group, Inc. and Thomas D. Brisbin dated April 2, 2007(10) 10.23†Employment Agreement between Willdan Group, Inc. and Kimberly D. Gant dated July 23, 2007(11)Table of Contents48ExhibitNumber Exhibit Description 10.24†Amendment to Executive Employment Agreement between Willdan Group, Inc. and Kimberly D. Gant datedApril 22, 2009(12) 10.25†Offer Letter from Willdan Group, Inc. to Daniel Chow dated October 29, 2008 and accepted November 9, 2008(13) 10.26†Employment Agreement dated May 22, 2007 between Marc Tipermas and Willdan Group, Inc.(14) 14.1 Code of Ethical Conduct of Willdan Group, Inc.(8) 21.1 Subsidiaries of Willdan Group, Inc.* 23.1 Consent of Independent Registered Public Accounting Firm* 24.1 Power of Attorney (included on signature page hereto) 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities ExchangeAct 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) or 15d-14(a) under the Securities Exchange Actof 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 adoptedpursuant to § 906 of the Sarbanes-Oxley Act of 2002**Filed herewith. †Indicates a management contract or compensating plan or arrangement. (1)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commissionon June 9, 2008. (2)Incorporated by reference to Willdan Group, Inc.'s Registration Statement on Form S-1, filed with the Securities and ExchangeCommission on August 9, 2006, as amended (File No. 333-136444). (3)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commissionon January 2, 2008. (4)Incorporated by reference to Willdan Group, Inc.'s Quarterly Report on Form 10-Q, filed with the Securities and ExchangeCommission on August 11, 2008. (5)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commissionon December 23, 2008. (6)Incorporated by reference to Willdan Group, Inc.'s Annual Report on Form 10-K, filed with the Securities and Exchange Commissionon April 2, 2009. (7)Incorporated by reference to Willdan Group, Inc.'s Quarterly Report on Form 10-Q, filed with the Securities and ExchangeCommission on November 12, 2009. (8)Incorporated by reference to Willdan Group, Inc.'s Annual Report on Form 10-K, filed with the Securities and Exchange Commissionon March 27, 2007. (9)Incorporated by reference to Exhibit I to Willdan Group, Inc.'s Proxy Statement, filed with the Securities and Exchange Commissionon April 25, 2008.Table of Contents49(10)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commissionon April 3, 2007. (11)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commissionon July 26, 2007. (12)Incorporated by reference to Willdan Group, Inc.'s Quarterly Report on Form 10-Q, filed with the Securities and ExchangeCommission on May 14, 2009. (13)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commissionon December 17, 2008. (14)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commissionon June 11, 2009.Table of Contents SIGNATURES AND CERTIFICATIONS Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on March 30, 2010. KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Kimberly D. Gant his/herattorney-in-fact, with the power of substitution, for him/her in any and all capacities, to sign any amendments to this Report on Form 10-K and to file thesame, with Exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming allthat said attorney-in-fact, or substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant andin the capacities and on the dates indicated.50 WILLDAN GROUP, INC. /s/ KIMBERLY D. GANTKimberly D. GantChief Financial Officer and Senior Vice PresidentDate: March 30, 2010Signature Title Date /s/ THOMAS D. BRISBINThomas D. Brisbin Director, President and Chief Executive Officer March 30, 2010/s/ KIMBERLY D. GANTKimberly D. Gant Chief Financial Officer and Senior VicePresident March 30, 2010/s/ WIN WESTFALLWin Westfall Director March 30, 2010/s/ LINDA L. HEILLinda L. Heil Director March 30, 2010/s/ W. TRACY LENOCKERW. Tracy Lenocker Director March 30, 2010/s/ KEITH W. RENKENKeith W. Renken Director March 30, 2010Table of Contents51Signature Title Date /s/ WAYNE SHELTONWayne Shelton Director March 30, 2010/s/ JOHN M. TOUPSJohn M. Toups Director March 30, 2010/s/ RAYMOND W. HOLDSWORTHRaymond W. Holdsworth Director March 30, 2010/s/ DOUGLAS J. MCEACHERNDouglas J. McEachern Director March 30, 2010Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and StockholdersWilldan Group, Inc.: We have audited the accompanying consolidated balance sheets of Willdan Group, Inc. and subsidiaries as of January 1, 2010 and January 2, 2009, andthe related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended January 1, 2010.These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were notengaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates madeby management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Willdan Group, Inc.and subsidiaries as of January 1, 2010 and January 2, 2009, and the results of their operations and their cash flows for each of the years in the three-yearperiod ended January 1, 2010, in conformity with U.S. generally accepted accounting principles.F-1 /s/ KPMG LLPMarch 30, 2010Los Angeles, California Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS See accompanying notes to consolidated financial statements.F-2 January 1,2010 January 2,2009 Assets Current assets: Cash and cash equivalents $8,445,000 $8,144,000 Accounts receivable, net of allowance for doubtful accounts of $1,862,000 and $662,000at January 1, 2010 and January 2, 2009, respectively 10,097,000 12,862,000 Costs and estimated earnings in excess of billings on uncompleted contracts 6,649,000 8,281,000 Income tax receivable 51,000 956,000 Other receivables 73,000 48,000 Prepaid expenses and other current assets 1,500,000 1,784,000 Total current assets 26,815,000 32,075,000 Equipment and leasehold improvements, net 1,596,000 2,377,000 Goodwill 10,371,000 11,145,000 Other intangible assets, net 149,000 1,367,000 Other assets 318,000 373,000 Deferred income taxes, net of current portion 1,083,000 233,000 Total assets $40,332,000 $47,570,000 Liabilities and Stockholders' Equity Current liabilities: Excess of outstanding checks over bank balance $488,000 $448,000 Accounts payable 1,457,000 2,111,000 Purchase price payable — 1,000,000 Accrued liabilities 4,509,000 5,253,000 Billings in excess of costs and estimated earnings on uncompleted contracts 1,030,000 704,000 Borrowings under line of credit 1,000,000 — Current portion of notes payable 23,000 52,000 Current portion of capital lease obligations 125,000 168,000 Current portion of deferred income taxes 1,479,000 2,519,000 Total current liabilities 10,111,000 12,255,000 Notes payable, less current portion — 17,000 Capital lease obligations, less current portion 82,000 157,000 Lease obligations 1,022,000 805,000 Total liabilities 11,215,000 13,234,000 Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued andoutstanding — — Common stock, $0.01 par value, 40,000,000 shares authorized; 7,208,000 and 7,164,000shares issued and outstanding at January 1, 2010 and January 2, 2009, respectively 72,000 72,000 Additional paid-in capital 33,440,000 33,084,000 (Accumulated deficit) retained earnings (4,395,000) 1,180,000 Total stockholders' equity 29,117,000 34,336,000 Total liabilities and stockholders' equity $40,332,000 $47,570,000 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS See accompanying notes to consolidated financial statements.F-3 Fiscal Year 2009 2008 2007 Contract revenue $61,605,000 $73,190,000 $78,798,000 Direct costs of contract revenue (exclusive of depreciation andamortization shown separately below): Salaries and wages 18,130,000 21,991,000 25,769,000 Sub-consultant services 7,997,000 7,750,000 4,600,000 Other direct costs 2,715,000 2,973,000 1,568,000 Total direct costs of contract revenue 28,842,000 32,714,000 31,937,000 Gross profit 32,763,000 40,476,000 46,861,000 General and administrative expenses: Salaries and wages, payroll taxes and employee benefits 20,325,000 24,439,000 25,061,000 Facilities and facility related 4,430,000 4,803,000 4,546,000 Stock-based compensation 272,000 214,000 209,000 Depreciation and amortization 1,814,000 1,978,000 1,755,000 Lease abandonment, net 707,000 742,000 — Impairment of goodwill 2,763,000 148,000 — Litigation (reversal) accrual (1,125,000) — 1,049,000 Other 11,070,000 10,952,000 11,719,000 Total general and administrative expenses 40,256,000 43,276,000 44,339,000 (Loss) income from operations (7,493,000) (2,800,000) 2,522,000 Other (expense) income: Interest income 30,000 313,000 693,000 Interest expense (38,000) (33,000) 499,000 Other, net (5,000) (15,000) (27,000) Total other (expense) income (13,000) 265,000 1,165,000 (Loss) income before income tax expense (7,506,000) (2,535,000) 3,687,000 Income tax (benefit) expense (1,931,000) (930,000) 1,543,000 Net (loss) income $(5,575,000)$(1,605,000)$2,144,000 (Loss) earnings per share: Basic and diluted $(0.78)$(0.22)$0.30 Weighted-average shares outstanding: Basic 7,192,000 7,159,000 7,149,000 Diluted 7,192,000 7,159,000 7,150,000 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY See accompanying notes to consolidated financial statements.F-4 Common Stock RetainedEarnings/(AccumulatedDeficit) AdditionalPaid-inCapital Shares Amount Total Balances at December 29, 2006 7,148,000 $71,000 $32,552,000 $641,000 $33,264,000 Shares of common stock issued in connection withemployee stock purchase plan 2,000 — 25,000 — 25,000 Reduction of offering costs in connection withinitial public offering. — — 10,000 — 10,000 Stock-based compensation — — 209,000 — 209,000 Net income — — — 2,144,000 2,144,000 Balances at December 28, 2007 7,150,000 71,000 32,796,000 2,785,000 35,652,000 Shares of common stock issued in connection withemployee stock purchase plan 14,000 1,000 74,000 — 75,000 Stock-based compensation — — 214,000 — 214,000 Net loss — — — (1,605,000) (1,605,000) Balances at January 2, 2009 7,164,000 72,000 33,084,000 1,180,000 34,336,000 Shares of common stock issued in connection withemployee stock purchase plan 44,000 — 84,000 — 84,000 Stock-based compensation — — 272,000 — 272,000 Net loss — — — (5,575,000) (5,575,000) Balances at January 1, 2010 7,208,000 $72,000 $33,440,000 $(4,395,000)$29,117,000 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS See accompanying notes to consolidated financial statements.F-5 Fiscal Year 2009 2008 2007 Cash flows from operating activities: Net (loss) income $(5,575,000)$(1,605,000)$2,144,000 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 1,814,000 1,978,000 1,755,000 Impairment of goodwill 2,763,000 148,000 — Lease abandonment expense, net 707,000 742,000 — Loss on sale of equipment, net 6,000 17,000 28,000 Provision for doubtful accounts 1,829,000 585,000 212,000 Stock-based compensation 272,000 214,000 209,000 Changes in operating assets and liabilities: Accounts receivable 936,000 3,266,000 (1,032,000) Costs and estimated earnings in excess of billings on uncompleted contracts 1,632,000 187,000 624,000 Income tax receivable 905,000 (956,000) — Other receivables (25,000) 53,000 4,348,000 Prepaid expenses and other current assets 284,000 292,000 (209,000) Other assets 55,000 50,000 69,000 Accounts payable (654,000) (186,000) (134,000) Accrued liabilities (959,000) (831,000) (8,792,000) Billings in excess of costs and estimated earnings on uncompleted contracts 326,000 (236,000) (281,000) Deferred income taxes (1,890,000) (112,000) 737,000 Lease obligations (272,000) (60,000) 59,000 Net cash provided by (used in) operating activities 2,154,000 3,546,000 (263,000) Cash flows from investing activities: Purchase of equipment and leasehold improvements (386,000) (552,000) (654,000) Proceeds from sale of equipment — 49,000 35,000 Purchase of other assets — (75,000) — Payments for business acquisitions, net of cash acquired (2,373,000) (10,236,000) — Purchase of liquid investments — (7,100,000) (22,800,000) Proceeds from sale of liquid investments — 8,400,000 21,500,000 Net cash used in investing activities (2,759,000) (9,514,000) (1,919,000) Cash flows from financing activities: Changes in excess of outstanding checks over bank balance 40,000 (185,000) 376,000 Payments on notes payable (46,000) (1,119,000) (1,210,000) Proceeds from notes payable — — 1,184,000 Borrowings under line of credit 3,553,000 — 418,000 Repayments of line of credit (2,553,000) — (418,000) Principal payments on capital leases (172,000) (170,000) (175,000) Proceeds from sales of common stock under employee stock purchase plan 84,000 75,000 25,000 Final distributions to former holders of redeemable common stock — — (3,150,000) Refund of offering costs — — 10,000 Net cash provided by (used in) financing activities 906,000 (1,399,000) (2,940,000) Net increase (decrease) in cash and cash equivalents 301,000 (7,367,000) (5,122,000)Cash and cash equivalents at beginning of the year 8,144,000 15,511,000 20,633,000 Cash and cash equivalents at end of the year $8,445,000 $8,144,000 $15,511,000 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $40,000 $34,000 $84,000 Income taxes 3,000 853,000 902,000 Supplemental disclosures of noncash investing and financing activities: Equipment acquired under capital leases $60,000 $42,000 $147,000 Note payable issued in connection with acquisition of assets — 100,000 — Purchase price payable — 1,000,000 — Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal Years 2009, 2008 and 2007 1. ORGANIZATION AND OPERATIONS OF THE COMPANYNature of Business Willdan Group, Inc. and subsidiaries ("Willdan Group" or the "Company") is a provider of outsourced services to small and mid-sized public agenciesand large public utilities in California, New York, and to a lesser extent, other states throughout the United States. Outsourcing enables these agencies toprovide a wide range of specialized services without having to incur and maintain the overhead necessary to develop staffing in-house. The Companyprovides a broad range of services to public agencies and, to a lesser extent, private industry, including civil engineering, building and safety services,geotechnical engineering, environmental engineering and environmental services, financial and economic consulting, energy efficiency, sustainability,water conservation, renewable energy, disaster preparedness, public safety consulting, management consulting and homeland security. Clients primarilyconsist of cities, counties, redevelopment agencies, water districts, school districts and universities, state agencies, federal agencies, a variety of other specialdistricts and agencies, private industry and tribal governments.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of Consolidation The consolidated financial statements include the accounts of Willdan Group Inc. and its wholly owned subsidiaries, Willdan Engineering, WilldanFinancial Services, Willdan Geotechnical, Willdan Homeland Solutions, Willdan Energy Solutions, Willdan Resource Solutions and Public AgencyResources. Willdan Energy Solutions is included as of June 9, 2008, the date of its acquisition. All significant intercompany balances and transactions havebeen eliminated in consolidation.Fiscal Years The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to December 31. Fiscal years 2009 and2007 contained 52 weeks. Fiscal year 2008 contained 53 weeks. All references to years in the notes to consolidated financial statements represent fiscal years.Cash and Cash Equivalents All highly liquid investments purchased with a remaining maturity of three months or less are considered to be cash equivalents. Outstanding checks inexcess of cash on deposit have been classified as current liabilities. Cash and cash equivalents consisted of the following:F-6 January 1,2010 January 2,2009 Wells Fargo Stage Coach Sweep Investment Account $609,000 $382,000 Wells Fargo Money Market Mutual Fund 5,280,000 6,035,000 Wells Fargo Advantage Heritage Fund 1,097,000 564,000 Cash on hand in business checking accounts 1,459,000 1,163,000 $8,445,000 $8,144,000 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20072. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company from time to time may be exposed to credit risk with its bank deposits in excess of the FDIC insurance limits and with uninsured moneymarket investments. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash andcash equivalents.Fair Value of Financial Instruments As of January 1, 2010 and January 2, 2009, the carrying amounts of the Company's cash, cash equivalents, accounts receivable, costs and estimatedearnings in excess of billings on uncompleted contracts, income tax receivable, other receivables, prepaid expenses and other current assets, excess ofoutstanding checks over bank balance, accounts payable, purchase price payable, accrued liabilities and billings in excess of costs and estimated earnings onuncompleted contracts, approximate their fair values because of the relatively short period of time between the origination of these instruments and theirexpected realization or payment. The carrying amounts of debt obligations approximate their fair values since the terms are comparable to terms currentlyoffered by local lending institutions for loans of similar terms to companies with comparable credit risk.Segment Information Willdan Group, Inc. (WGI) is a holding company with seven wholly-owned subsidiaries. The Company presents segment information externallyconsistent with the manner in which the Company's chief operating decision maker reviews information to assess performance and allocate resources. WGIperforms administrative functions on behalf of its subsidiaries, such as treasury, legal, accounting, information systems, human resources and certain businessdevelopment activities, and earns revenue that is only incidental to the activities of the enterprise. As a result, WGI does not meet the definition of anoperating segment. Five of the seven WGI subsidiaries are aggregated into one reportable segment as they have similar economic characteristics includingthe nature of services, the methods used to provide services and the type of customers. The remaining two subsidiaries each comprise separate reportingsegments.Off-Balance Sheet Financings and Liabilities Other than lease commitments, legal contingencies incurred in the normal course of business, and employment contracts, the Company does not haveany off-balance sheet financing arrangements or liabilities. In addition, the Company's policy is not to enter into derivative instruments, futures or forwardcontracts. Finally, the Company does not have any majority-owned subsidiaries or any interests in, or relationships with, any special-purpose entities that arenot included in the consolidated financial statements.Accounting for Contracts The Company enters into contracts with its clients that contain three principal types of pricing provisions: fixed price, time-and-materials, and unit-based. Revenue on fixed price contracts is recognized on the percentage-of-completion method based generally on the ratio of direct costs (exclusive ofdepreciation and amortization costs) incurred to date to estimated total direct costs at completion. Revenue on time-and-materials and unit-based contracts isrecognized as the work isF-7Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20072. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)performed in accordance with the specific terms of the contract. Revenue for amounts that have been billed but not earned is deferred and such deferredrevenue 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 estimateindicates a loss, such loss is provided for currently in its entirety. Claims revenue is recognized only upon resolution of the claim. Change orders in disputeare evaluated as claims. Costs related to un-priced change orders are expensed when incurred and recognition of the related contract revenue is based on anevaluation of the probability of recovery of the costs. Estimated profit is recognized for un-priced change orders if realization of the expected price of thechange order is probable. Applying the percentage-of-completion method of recognizing revenue requires the Company to estimate the indicated outcome of its long-termcontracts. 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 amaterial 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 connectionwith revenue producing projects. Direct costs of contract revenue also include production expenses, sub-consultant services and other expenses that areincurred 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, holidaysand 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 and administrative expenses in the accompanyingconsolidated statements of operations since no allocation of these costs is made to direct costs of contract revenue. No allocation of facilities costs is made todirect costs of contract revenue nor is depreciation and amortization allocated to direct costs. Other companies may classify as direct costs of contract revenuesome 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 amountson a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experienceapplied to an aging of accounts. Credit risk is generally minimal with governmental entities, but disputes may arise related to these receivable amounts.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 amountthat is retained by the customer, in accordance with the terms of the contract, generally until performance is substantially complete.F-8Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20072. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Leases All of the Company's office leases are classified as operating leases and rent expense is included in facilities expense in the accompanying consolidatedstatements of operations. Some of the lease terms include rent concessions and rent escalation clauses, all of which are taken into account in computingminimum lease payments. Minimum lease payments are recognized on a straight-line basis over the minimum lease term. The excess of rent expenserecognized over the amounts contractually due pursuant to the underlying leases is reflected as a liability in the accompanying consolidated balance sheets.The cost of improvements that the Company makes to the leased office space is capitalized as leasehold improvements. The Company is subject to non-cancellable leases for offices or portions of offices for which use has been ceased. For each of these abandoned leases, the present value of the future leasepayments, net of estimated sublease payments, along with any unamortized tenant improvement costs, are recognized as lease abandonment expense in theCompany's consolidated statements of operations with a corresponding liability in the Company's consolidated balance sheets.Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Equipment under capital leases is stated at thepresent value of the minimum lease payments as of the acquisition date. Depreciation and amortization on equipment are calculated using the straight-linemethod over estimated useful lives of two to five years. Leasehold improvements and assets under capital leases are amortized using the straight-line methodover the shorter of estimated useful lives or the term of the related lease. Following are the estimated useful lives used to calculate depreciation and amortization: Equipment and leasehold improvements are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount ofan asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.Goodwill Goodwill represents the excess of costs over fair value of the assets acquired. The goodwill, which has an indefinite useful life, is not amortized, butinstead tested for impairment at least annually or more frequently if events and circumstances indicate that the asset might be impaired. Impairment losses forreporting units are recognized to the extent that a reporting unit's carrying amount exceeds its fair value.F-9Category Estimated Useful LifeFurniture and fixtures 5 yearsComputer hardware 2 yearsComputer software 3 yearsAutomobiles and trucks 3 yearsField equipment 5 yearsTable of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20072. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Accounting for Claims Against the Company The Company records liabilities to claimants for probable and estimable claims on its consolidated balance sheet, which is included in accruedliabilities, and records a corresponding receivable from the insurance company for the portion of the claim that is probable of being 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 ingeneral and administrative expense.Stock Options The Company accounts for stock options under the fair value recognition provisions of the accounting standard entitled "Compensation—StockCompensation." This standard requires the measurement of compensation cost at the grant date, based upon the estimated fair value of the award, and requiresamortization of the related expense over the employee's requisite service period.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 oftemporary differences between the financial reporting basis and tax basis of the Company's assets and liabilities. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered orsettled. 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. Avaluation allowance is recorded when it is more likely than not that some of the deferred tax assets may not be realized.Operating Cycle In accordance with industry practice, amounts realizable and payable under contracts, which may extend beyond one year, are included in current assetsand liabilities.Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the U.S. requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of theconsolidated financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differfrom those estimates.New Accounting Pronouncements In June 2009, the Financial Accounting Standards Board (FASB) issued a standard entitled "The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles, a replacement of FASB No. 162." This standard establishes the FASB Accounting StandardsCodification ("Codification"), as the single source of authoritative United States accounting and reporting standards applicable for all non-governmententities, with the exception of the Securities and Exchange Commission rules and interpretative releases. The Codification, which changes the referencing ofF-10Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20072. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)financial standards, is effective for interim or annual financial periods ending after September 15, 2009. As the Codification is not intended to change or alterexisting U.S. GAAP, the adoption of the standard did not have any effect on the Company's consolidated financial position, results of operations or cashflows. In April 2008, the FASB issued a standard entitled "Determination of the Useful Life of Intangible Assets." This standard amends the factors that shouldbe considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the standard forgoodwill and other intangible assets. The new standard was effective for fiscal years beginning after December 15, 2008. The Company adopted the standardon January 3, 2009 and this had no effect on its financial statements. In December 2007, the FASB issued a standard entitled "Business Combinations." This standard establishes the principles and requirements for how anacquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest inthe acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines whatinformation to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The standardmakes significant changes to existing accounting practices for acquisitions and applies prospectively to business combinations consummated on or after thebeginning of the first annual reporting period on or after December 15, 2008. The Company adopted the new standard effective January 3, 2009 and theadoption did not have any effect on its financial statements and disclosures.3. BUSINESS COMBINATION On June 9, 2008, the Company acquired all of the outstanding stock of Willdan Energy Solutions, formerly known as Intergy Corporation, a California—based consulting company that assists companies, institutions and agencies with planning and implementing their energy efficiency, water conservation andrenewable energy strategies. The acquisition cost recorded by the Company as of January 1, 2010 was $13.1 million, consisting of $9.9 million in cash paidat closing, a $0.2 million net asset value adjustment, a guaranteed payment of $1.0 million in cash paid in June 2009, an earn-out payment of $1.3 millionpaid in August 2009 and $0.7 million of transaction costs. The acquisition cost may increase by up to $4.9 million if Willdan Energy Solutions achievescertain financial targets over the annual periods ending on the last day of the Company's second fiscal quarters in 2010 and 2011. The Company has finalizedits estimates of fair values of the assets acquired and the liabilities assumed and the acquisition cost was allocated as follows:F-11Current assets $3,242,000 Equipment 49,000 Backlog 920,000 Other assets 8,000 Current liabilities (1,502,000)Goodwill 10,371,000 Total $13,088,000 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20073. BUSINESS COMBINATION (Continued) The $10.4 million of goodwill is the amount paid to acquire Willdan Energy Solutions over and above the fair value of the net assets acquired, whichincludes the estimated fair value of the backlog in place as of the date of acquisition. The amount paid that has been classified as goodwill primarily relatesto the expected future business that was not part of the backlog at the time of acquisition. The goodwill is deductible for income tax purposes over a period of15 years. Unaudited pro forma consolidated statements of operations for the fiscal years ended January 1, 2010, January 1, 2009 and December 28, 2007 as thoughWilldan Energy Solutions had been acquired as of the first day of each of the respective periods presented is as follows: The Company finalized its purchase price allocation during fiscal year 2009. Associated with that, the Company recorded $0.6 million of amortization ofintangible assets. This amount is also reflected in the unaudited pro forma information presented above as the pro forma information assumes the acquisitionwas effective as of the first day of the first year presented.4. GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying value of goodwill by reporting unit for the fiscal year ended January 1, 2010 were as follows: F-12 Fiscal Year 2008 2007 Contract revenue $77,831,000 $86,121,000 (Loss) income from operations (919,000) 3,876,000 Net (loss) income (1,053,000) 2,638,000 Basic and diluted (loss) earnings per share $(0.15)$0.37 Fiscal Year 2009 Balance atBeginning of Year GoodwillAdditions Impairment Balance atEnd of Year Reporting Unit: Energy Solutions $8,382,000 $1,989,000 $— $10,371,000 Financial Services 2,763,000 — (2,763,000) — Homeland Security Services — — — — $11,145,000 $1,989,000 $(2,763,000)$10,371,000 Fiscal Year 2008 Balance atBeginning of Year GoodwillAdditions Impairment Balance atEnd of Year Reporting Unit: Energy Solutions $— $8,382,000 $— $8,382,000 Financial Services 2,763,000 — — 2,763,000 Homeland Security Services 148,000 — (148,000) — $2,911,000 $8,382,000 $(148,000)$11,145,000  Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20074. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued) There were no changes on the carrying value of goodwill for the fiscal year ended December 28, 2007. In fiscal 2008, the fair value of the HomelandSecurity Services reporting unit did not exceed its carrying value and an impairment charge of $148,000 was recognized. The additions to goodwill duringfiscal 2009 for Energy Solutions related to the $1.3 million earn-out payment and finalization of the purchase price allocation. In fiscal 2009, the fair value ofthe Financial Services reporting unit did not exceed its carrying value and step two of the impairment analysis indicated that there was no implied value tothis reporting unit's goodwill. Accordingly an impairment charge of $2.8 million was recognized. The fair value of the reporting unit is a Level 3 valuation.The valuation was based on an 80% weighting of an income approach value and a 20% weighting using a market approach value. The income approach wasbased on the present value of projected cash flows during the holding period and disposition of the reporting unit at the end of the final year of the assumedholding period. The market approach was based on a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA) utilizing publiclyavailable EBITDA multiples for similar companies. The terminal sales value computed in the income approach was also based on a multiple of projectedEBITDA for the last year of the assumed holding period. The goodwill balances included in the accompanying consolidated balance sheets consist of the following: The gross amounts and accumulated amortization of the Company's acquired identifiable intangible assets with finite useful lives as of January 1, 2010and January 2, 2009, included in Intangible assets, net in the accompanying consolidated balance sheets, were as follows:F-13 Reporting Units Energy Solutions Financial Services HomelandSecurity Services Total January 1, 2010: Goodwill $10,371,000 $2,763,000 $148,000 $13,282,000 Accumulated impairment — (2,763,000) (148,000) (2,911,000) $10,371,000 $— $— $10,371,000 January 2, 2009: Goodwill $8,382,000 $2,763,000 $148,000 $11,293,000 Accumulated impairment — — (148,000) (148,000) $8,382,000 $2,763,000 $— $11,145,000 January 1, 2010 January 2, 2009 GrossAmount AccumulatedAmortization GrossAmount AccumulatedAmortization AmortizationPeriod (yrs) Backlog $920,000 $920,000 $1,264,000 $355,000 1 Customer relationships — — 272,000 22,000 7 Training materials/courses 282,000 134,000 282,000 80,000 5 Non-compete agreements 30,000 29,000 30,000 24,000 3 $1,232,000 $1,083,000 $1,848,000 $481,000 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20074. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued) At the time of acquisition, the Company estimates the fair value of the acquired identifiable intangible assets based upon the facts and circumstancesrelated to the particular intangible asset. Inherent in such estimates are judgments and estimates of future revenue, profitability, cash flows and appropriatediscount rates for any present value calculations. The Company preliminarily estimates the value of the acquired identifiable intangible assets and thenfinalizes the estimated fair values during the purchase allocation period, which does not extend beyond 12 months from the date of acquisition. The finalpurchase allocation for Willdan Energy Solutions was finalized during the second quarter of fiscal 2009. For the years ended January 1, 2010, January 2, 2009 and December 28, 2007, the Company's amortization expense for acquired identifiable intangibleassets with finite useful lives was $602,000, $429,000 and $31,000, respectively. Estimated future amortization expense for acquired identifiable intangibleassets is as follows:5. ACCOUNTS RECEIVABLE-NET Net accounts receivable consisted of the following:F-14Fiscal year: 2010 $54,000 2011 46,000 2012 37,000 2013 12,000 $149,000 January 1,2010 January 2,2009 Billed $11,895,000 $13,507,000 Unbilled 6,649,000 8,281,000 Contract retentions 64,000 17,000 18,608,000 21,805,000 Allowance for doubtful accounts (1,862,000) (662,000) $16,746,000 $21,143,000 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20075. ACCOUNTS RECEIVABLE-NET (Continued) The movements in the allowance for doubtful accounts consisted of the following for fiscal years 2009, 2008 and 2007: Billed accounts receivable represent amounts billed to clients that have yet to be collected. Unbilled accounts receivable represent revenue recognizedbut not yet billed pursuant to contract terms or accounts billed after the period end. Substantially all unbilled receivables as of January 1, 2010 andJanuary 2, 2009 are expected to be billed and collected within twelve months of such date. Contract retentions represent amounts invoiced to clients wherepayments have been withheld pending the completion of certain milestones, other contractual conditions or upon the completion of the project. Theseretention agreements vary from project to project and could be outstanding for several months or years. Allowances for doubtful accounts have been determined through specific identification of amounts considered to be uncollectible and potential write-offs, plus a non-specific allowance for other amounts for which some potential loss has been determined to be probable based on current and past experience. No client accounted for more than 10% of the Company's outstanding receivables as of January 1, 2010 or January 2, 2009.6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following: Included in accumulated depreciation and amortization is $156,000 and $176,000 of amortization related to equipment held under capital leases infiscal years 2009 and 2008, respectively.F-15 Fiscal Year 2009 2008 2007 Balance as of the beginning of the year $662,000 $372,000 $492,000 Provision for doubtful accounts 1,749,000 589,000 282,000 Write-offs of uncollectible accounts (555,000) (300,000) (403,000)Recoveries of accounts written off 6,000 1,000 1,000 Balance as of the end of the year $1,862,000 $662,000 $372,000 January 1,2010 January 2,2009 Furniture and fixtures $4,452,000 $4,680,000 Computer hardware and software 4,903,000 4,921,000 Leasehold improvements 748,000 772,000 Equipment under capital leases 719,000 790,000 Automobiles, trucks, and field equipment 424,000 419,000 11,246,000 11,582,000 Accumulated depreciation and amortization (9,650,000) (9,205,000) Equipment and leasehold improvements, net $1,596,000 $2,377,000 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20077. ACCRUED LIABILITIES Accrued liabilities consist of the following:8. STOCK OPTIONS As of January 1, 2010, the Company had two share-based compensation plans, which are described below. The Company may no longer grant awardsunder the 2006 Stock Incentive Plan. The compensation expense that has been recognized for stock options issued under these plans was $272,000,$214,000 and $209,000 for fiscal years 2009, 2008 and 2007, respectively. 2006 STOCK INCENTIVE PLAN In June 2006, the Company's board of directors adopted the 2006 Stock Incentive Plan ("2006 Plan") and it received stockholder approval. TheCompany re-submitted the 2006 Plan to its stockholders for post-IPO approval at the 2007 annual meeting of the stockholders and it was approved. The 2006Plan will terminate ten years after the board of directors approved it and no additional awards were or will be granted under the 2006 Plan after the Company'sshareholders approved the 2008 Plan (as defined below) in June 2008. The 2006 Plan had 300,000 shares of common stock reserved for issuance to theCompany's directors, executives, officers, employees, consultants and advisors. As of June 9, 2008, approximately 36,167 shares were available for awardgrant purposes under the 2006 Plan. These shares became available for grant under the 2008 Plan following shareholder approval of the 2008 Plan. Optionsgranted under the 2006 Plan could be "non-statutory stock options" which expire no more than ten years from the date of grant or "incentive stock options" asdefined in Section 422 of the Internal Revenue Code of 1986, as amended. Upon exercise of non-statutory stock options, the Company is generally entitledto a tax deduction on the exercise of the option for an amount equal to the excess over the exercise price of the fair market value of the shares at the date ofexercise. The Company is generally not entitled to any tax deduction on the exercise of an incentive stock option. Option awards provide for acceleratedvesting if there is a change in control (as defined in the 2006 Plan). Through January 1, 2010, options granted, net of forfeitures and expirations, under the2006 Plan consisted of 192,500 shares and 19,000 shares for incentive stock options and non-statutory stock options, respectively.F-16 January 1,2010 January 2,2009 Accrued bonuses $169,000 $155,000 Paid leave bank 1,155,000 1,449,000 Compensation and payroll taxes 581,000 719,000 Accrued legal 136,000 54,000 Accrued workers' compensation insurance 27,000 18,000 Litigation accrual — 110,000 Accrued rent 563,000 562,000 Employee withholdings 171,000 265,000 Client deposits 469,000 790,000 Other 1,238,000 1,131,000 Total accrued liabilities $4,509,000 $5,253,000 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20078. STOCK OPTIONS (Continued) 2008 PERFORMANCE INCENTIVE PLAN In March 2008, the Company's board of directors adopted the 2008 Performance Incentive Plan, ("2008 Plan") and it received stockholder approval at the2008 annual meeting of the stockholders in June 2008. The 2008 Plan will terminate ten years after the board of directors approved it. The 2008 Plan has486,167 shares of common stock reserved for issuance to the company's directors, executives, officers, employees, consultants and advisors. The maximumnumber of shares of the Company's common stock that may be issued or transferred pursuant to awards under the 2008 Plan can also be increased by anyshares subject to stock options granted under the 2006 Plan and outstanding as of June 9, 2008 which expire, or for any reason are cancelled or terminated,after June 9, 2008 without being exercised. Awards authorized by the 2008 Plan include stock options, stock appreciation rights, restricted stock, stockbonuses, stock units, performance stock, and other share-based awards. No participant may be granted an option to purchase more than 100,000 shares in anyfiscal year. Options generally may not be granted with exercise prices less than fair market value at the date of grant, with vesting provisions and contractualterms determined by the compensation committee of the board of directors on a grant-by-grant basis. Options granted under the 2008 Plan may be"nonqualified stock options" or "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended. The maximum termof each option shall be 10 years. Upon exercise of nonqualified stock options, the Company is generally entitled to a tax deduction on the exercise of theoption for an amount equal to the excess over the exercise price of the fair market value of the shares at the date of exercise. The Company is generally notentitled to any tax deduction on the exercise of an incentive stock option. Option awards provide for accelerated vesting if there is a change in control (asdefined in the 2008 Plan). Through January 1, 2010, options granted under the 2008 Plan consisted of 302,800 shares and 52,000 shares for incentive stockoptions and non-statutory stock options, respectively. The fair value of each option is calculated using the Black-Scholes option valuation model that uses the assumptions noted in the following table.Expected volatility is based upon historical volatility of "guideline companies" since the length of time the Company's shares have been publicly traded isshorter than the expected or contractual term of the options. The expected term of the option, taking into account both the contractual term of the option andthe effects of employees' expected exercise and expected post-vesting termination behavior is estimated based upon the simplified method. Under thisapproach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term. The risk-free rate for periods withinthe contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions are as follows:F-17 2009 2008 2007Expected volatility 39% - 40% 35% - 39% 31% - 34%Expected dividends 0% 0% 0%Expected term (in years) 5.75 - 6.00 5.00 - 6.00 5.00 - 6.00Risk-free rate 2.20% - 2.95% 1.50% - 3.61% 4.34% - 5.26%Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20078. STOCK OPTIONS (Continued) A summary of option activity under the 2006 Plan and 2008 Plan as of January 1, 2010 and changes during the fiscal years ended January 1, 2010,January 2, 2009 and December 28, 2007 is presented below. The intrinsic value of the fully-vested options is $9,000, based on the Company's closing stockprice of $2.38 on January 1, 2010. F-18 Options Weighted-AverageExercisePrice Weighted-AverageRemainingContractualTerm (Years) Outstanding at January 2, 2009 303,000 $7.23 8.8 Granted 291,000 1.80 9.4 Exercised — — — Forfeited or expired (28,000) 5.47 — Outstanding at January 1 , 2010 566,000 $4.54 8.6 Vested at January 1, 2010 172,000 $8.01 7.7 Exercisable at January 1, 2010 172,000 $8.01 7.7 Options Weighted-AverageExercisePrice Weighted-AverageRemainingContractualTerm (Years) Outstanding at December 28, 2007 233,000 $9.50 8.6 Granted 119,000 3.81 9.6 Exercised — — — Forfeited or expired (49,000) 9.72 — Outstanding at January 2 , 2009 303,000 $7.23 8.8 Vested at January 2, 2009 85,000 $8.85 8.5 Exercisable at January 2, 2009 85,000 $8.85 8.5 Options Weighted-AverageExercisePrice Weighted-AverageRemainingContractualTerm (Years) Outstanding at December 29, 2006 28,000 $10.19 4.2 Granted 205,000 9.40 9.4 Exercised — — — Forfeited or expired — — — Outstanding at December 28, 2007 233,000 $9.50 8.6 Vested at December 28, 2007 33,000 $10.22 4.2 Exercisable at December 28, 2007 33,000 $10.22 4.2 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20078. STOCK OPTIONS (Continued) A summary of the status of the Company's non-vested options and changes in non-vested options during the fiscal years ended January 1, 2010,January 2, 2009 and December 28, 2007, is presented below: As of January 1, 2010, there was $301,000 of total unrecognized compensation expense related to non-vested stock options. That expense is expected tobe recognized over a weighted-average period of 1.7 years. The total fair value of vested options granted during the fiscal years ended January 1, 2010,January 2, 2009 and December 28, 2007 was $0, $29,000 and $20,000, respectively.F-19 Options Weighted-AverageGrant-DateFair Value Non-vested at January 2, 2009 218,000 $2.64 Granted 291,000 0.78 Vested (96,000) 2.87 Forfeited (19,000) 1.88 Non-vested at January 1, 2010 394,000 1.24 Options Weighted-AverageGrant-DateFair Value Non-vested at December 28, 2007 200,000 $3.76 Granted 119,000 1.47 Vested (74,000) 3.39 Forfeited (27,000) 3.76 Non-vested at January 2, 2009 218,000 2.64 Options Weighted-AverageGrant-DateFair Value Non-vested at December 29, 2006 8,000 $3.91 Granted 205,000 3.76 Vested (13,000) 3.95 Forfeited — — Non-vested at December 28, 2007 200,000 3.76 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20078. STOCK OPTIONS (Continued) AMENDED AND RESTATED 2006 EMPLOYEE STOCK PURCHASE PLAN The Company adopted its Amended and Restated 2006 Employee Stock Purchase Plan to allow eligible employees the right to purchase shares ofcommon stock, at semi-annual intervals, with their accumulated payroll deductions. The plan received stockholder approval in June 2006. The Company re-submitted the plan to its stockholders for post-IPO approval at the 2007 annual stockholders' meeting where approval was obtained. A total of 300,000 sharesof the Company's common stock have been reserved for issuance under the plan, with no more than 100,000 shares being issuable in any one calendar year. The plan has semi-annual periods beginning on each January 1 and ending on each June 30 and beginning on each July 1 and ending on eachDecember 31. The first offering period commenced on February 10, 2007 and ended on June 30, 2007. Participants make contributions under the plan only by means of payroll deductions each payroll period. The accumulated contributions are applied tothe purchase of shares. Shares are purchased under the plan on or as soon as practicable after, the last day of the offering period. The purchase price per shareequals 95% of the fair market value of a share on the last day of such offering period. The Company's Amended and Restated 2006 Employee Stock Purchase Plan is a non-compensatory plan. As a result, stock-based compensation expenseis not recognized in relation to this plan. As of January 1, 2010, there were 239,684 shares available for issuance under the plan.9. DEBT OBLIGATIONS Debt obligations consist of the following: Under the terms of the Company's credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), the Company can borrow up to$5.0 million from time to time (as may be limited by the covenants in the credit agreement as discussed below) up to and until January 1, 2011. Loans madeunder the revolving line of credit will accrue interest at either (i) the floating rate equal to the prime rate in effect from time to time or (ii) the fixed rate of1.75% above LIBOR, at the Company's election. For prime rate loans, the interest rate will be adjusted when each prime rate change by the bank isannounced and becomes effective.F-20 2009 2008 Outstanding borrowings on line of credit $1,000,000 $— Other 23,000 69,000 1,023,000 69,000 Less current portion (1,023,000) (52,000) Debt obligations, less current portion $— $17,000 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 20079. DEBT OBLIGATIONS (Continued) Borrowings under the credit agreement are secured by all of the Company's accounts receivable and other rights to payment, general intangibles,inventory and equipment, including those of the Company's subsidiaries. In addition, borrowings under the credit agreement are secured by investments heldin a securities account at Wells Fargo that must at all times have a collateral value of at least $5.0 million. Each of the Company's subsidiaries (except PublicAgency Resources and Willdan Resource Solutions) has signed an unconditional guaranty of the Company's obligations under the agreements. The credit agreement contains customary representations and affirmative covenants, including a covenant to maintain a tangible net worth of at least$18.0 million at all times. Tangible net worth is defined in the credit agreement as stockholders' equity less intangible assets and loans or advances to, orinvestments in, any related entities or individuals. The impact of any non-cash property lease termination expense of up to $1.0 million in the aggregaterecorded during the period from October 1, 2009 through December 31, 2010 will be excluded from the calculation of tangible net worth under the creditagreement. As of January 1, 2010, the Company's tangible net worth as defined under the Company's credit agreement was met. The credit agreement also includes customary negative covenants, including a covenant that prohibits the incurrence of additional indebtedness by theCompany or the Company's subsidiaries other than purchase money indebtedness not to exceed $2.0 million and indebtedness existing on the date of thecredit agreement, and a covenant that prohibits payment of dividends on the Company's stock and redemptions, repurchases or other acquisitions of theCompany's stock; provided that the Company can repurchase stock with an aggregate fair market value up to $5.0 million in any calendar year. In addition,the credit agreement includes customary events of default for a credit facility. Upon a default, the interest rate will be increased by a default rate margin of4.0%. Upon the occurrence of an event of default under the credit agreement, including a breach of any of the covenants discussed above, Wells Fargo has theoption to make any loans then outstanding under the credit agreement immediately due and payable and is no longer obligated to extend further credit to theCompany under the credit agreement.10. COMMITMENTSLeases The Company is obligated under capital leases for certain furniture and office equipment that expire at various dates through the year 2012. The Company also leases certain office facilities under non-cancelable operating leases that expire at various dates through the year 2014 and iscommitted under non-cancelable operating leases for the lease of computer equipment and automobiles through the year 2011.F-21 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 200710. COMMITMENTS (Continued) Future minimum rental payments under capital and non-cancelable operating leases are summarized as follows: On November 3, 2009, the Company subleased a portion of its headquarters office space to an entity that is owned by one of the Company's directors.Pursuant to the sublease agreement, this tenant will pay the Company monthly rent ranging from approximately $8,500 to $9,300, for a total ofapproximately $376,000 through June 29, 2013. The tenant will also pay the Company a proportionate share of certain operating expenses and taxes relatingto the subleased space. Rent expense and related charges for common area maintenance for all facility operating leases for fiscal years 2009, 2008 and 2007 was approximately$3,306,000, $3,544,000 and $3,337,000, respectively. During the fiscal years ended January 1, 2010 and January 2, 2009, the Company closed certain of its offices or separable sections of offices.Additionally, a tenant that was subleasing an office from the company defaulted on its lease. As a result of the office closures and the sublease default, theCompany recorded lease abandonment expense, net, of $707,000 and $742,000, which is included in the accompanying consolidated statement ofoperations for the fiscal years ended January 1, 2010 and January 2, 2009, respectively. This expense includes future rental obligations and other costsassociatedF-22 Capital Operating Fiscal year: 2010 $158,000 $3,601,000 2011 90,000 3,315,000 2012 24,000 2,210,000 2013 — 1,062,000 2014 — 727,000 Total future minimum lease payments 272,000 $10,915,000 Amount representing maintenance (53,000) Amount representing interest (at rates ranging from 3.75% to11.0%) (12,000) Present value of net minimum lease payments undercapital leases 207,000 Less current portion (125,000) $82,000 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 200710. COMMITMENTS (Continued)with the leased space net of the fair value of subleases. The following is a reconciliation of the liability for lease abandonment expense for fiscal year 2009: The current portion of the liability for abandoned leases is included in accrued liabilities and the non-current portion is included in lease obligations inthe accompanying consolidated balance sheets.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 CodeSection 401(k) covering substantially all employees. Employees may elect to contribute up to 50% of compensation limited to the amount allowed by taxlaws. Company contributions are made solely at the discretion of the Company's board of directors. The Company made matching contributions ofapproximately $0, $260,000, and $237,000 during fiscal years 2009, 2008 and 2007, respectively. The Company has a discretionary bonus plan for regional managers, division managers and others as determined by the Company president. Bonuses areawarded if certain financial goals are achieved. The financial goals are not stated in the plan; rather they are judgmentally determined each year. 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. Bonus expense for fiscal years 2009, 2008 and 2007 totaled approximately $421,000,$316,000, and $202,000, respectively, of which approximately $169,000, and $155,000 is included in accrued liabilities at January 1, 2010 and January 2,2009, respectively.Post employment health benefits In May 2006, the Company's board of directors approved providing lifetime health insurance coverage for Win Westfall, the Company's former chiefexecutive officer and current chairman of the board of directors, and his spouse and for Linda Heil, the widow of the Company's former chief executiveofficer, Dan Heil. Mrs. Heil is also a member of the Company's board of directors. Additionally, the board approved health insurance coverage for Mrs. Heil'stwo dependents until they reach the maximum age for dependent coverage under the Company's health insurance policy. These benefits relate to pastservices provided to the Company. Accordingly, there is no unamortized compensation cost for the benefits.F-23 Fiscal 2009 Fiscal 2008 Liability for abandoned leases as of beginning of year $757,000 $— Lease abandonment expense, net 707,000 742,000 Lease payments on abandoned leases, net of sublease payments (462,000) — Other 46,000 15,000 Liability for abandoned leases as of the end of the year $1,048,000 $757,000 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 200710. COMMITMENTS (Continued) Included in accrued liabilities in the accompanying consolidated balance sheets related to this obligation is the present value of expected payments forhealth insurance coverage, $189,000 as of January 1, 2010 and $119,000 as of January 2, 2009.11. INCOME TAXES The (benefit) provision for income taxes is comprised of: The (benefit) provision for income taxes reconciles to the amounts computed by applying the statutory federal tax rate to our (loss) income beforeincome taxes. The sources and tax effects of the differences for fiscal years 2009, 2008 and 2007 are as follows:F-24 Fiscal Year 2009 2008 2007 Current federal (benefit) taxes $— $(827,000)$650,000 Current state taxes 10,000 9,000 156,000 Deferred federal (benefit) taxes (1,564,000) 77,000 570,000 Deferred state (benefit) taxes (377,000) (189,000) 167,000 $(1,931,000)$(930,000)$1,543,000 2009 2008 2007 Computed "expected" federal income tax (benefit) expense $(2,552,000)$(862,000)$1,253,000 Permanent differences 121,000 74,000 81,000 Current and deferred state income tax (benefit) expense, net of federal benefit (413,000) (119,000) 217,000 Valuation allowances on deferred tax assets 934,000 — — Other (21,000) (23,000) (8,000) $(1,931,000)$(930,000)$1,543,000 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 200711. INCOME TAXES (Continued) The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets and liabilities are as follows: During fiscal year 2009, the Company recorded a $0.9 million valuation allowance against deferred tax assets in excess of the deferred tax liability fordeferred revenue as management is currently unable to assert that it is more likely than not that the Company will realize the benefit of this portion of relateddeferred tax assets. Management believes the existing deductible for temporary differences reflected in the deferred tax assets not covered by the valuationallowance will reverse during period in which the deferred revenue is recognized for tax purposes; however, there can be no assurance that the Company willgenerate any earnings or any specific level of continuing earnings in future years. Management also believes that there are no material uncertain tax positions that would impact the accompanying consolidated financial statements.F-25 January 1,2010 January 2,2009 December 28,2007 Current deferred tax assets: Accrued litigation judgment $54,000 $65,000 $127,000 Accounts receivable allowance 741,000 250,000 206,000 Other accrued liabilities 786,000 520,000 643,000 1,581,000 835,000 976,000 Valuation allowance (412,000) — — Net deferred tax assets 1,169,000 835,000 976,000 Current deferred tax liabilities: Deferred revenue (2,623,000) (3,306,000) (2,978,000) Other (25,000) (48,000) — (2,648,000) (3,354,000) (2,978,000) Net current deferred tax liability $(1,479,000)$(2,519,000)$(2,002,000) Deferred tax assets, net of current portion: Federal and state net operating losses $914,000 $628,000 $— Equipment and leasehold improvement depreciation 191,000 165,000 162,000 Intangible assets 803,000 — — Other 93,000 27,000 23,000 2,001,000 820,000 185,000 Valuation allowance (522,000) — — Net deferred tax assets 1,479,000 820,000 185,000 Deferred tax liabilities, net of current portion: Goodwill amortization (396,000) (587,000) (580,000) Net deferred tax assets (liability), net of current portion $1,083,000 $233,000 $(395,000)  Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 200711. INCOME TAXES (Continued) At January 1, 2010, the Company had federal and state net operating loss carryovers of $2.0 million and $4.1 million, respectively. These carryoversexpire through 2030 and 2031 for federal and state income taxes, respectively.12. SEGMENT INFORMATION The Company has three segments: Engineering Services, Public Finance Services and Homeland Security Services. The Engineering Services segmentincludes Willdan Engineering, Willdan Geotechnical, Public Agency Resources, Willdan Resource Solutions and Willdan Energy Solutions. TheEngineering Services segment performs services for a broad range of public agency clients and, to a lesser extent, private industry, and offers a fullcomplement of civil and geotechnical engineering, building and safety services, energy efficiency, sustainability, water conservation, constructionmanagement, and municipal planning services to clients throughout the western United States. The Public Finance Services segment, which consists ofWilldan Financial Services, provides expertise and support for the various financing techniques employed by public agencies to finance their operations andinfrastructure along with the mandated reporting and other requirements associated with these financings. The Homeland Security Services segment, whichconsists of Willdan Homeland Solutions, provides homeland security, management consulting and public safety consulting services to cities, counties andrelated 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.There were no intersegment sales for any of the fiscal years in the three-year period ended January 2, 2009. Management evaluates the performance of eachsegment based upon income or loss from operations before income taxes. Certain segment asset information including expenditures for long-lived assets hasnot 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 notincluded as it is impracticable to report this information for each group of similar services.F-26Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 200712. SEGMENT INFORMATION (Continued) Financial information with respect to the reportable segments and reconciliation to the amounts reported in the Company's consolidated financialstatements follows:F-27 EngineeringServices Public FinanceServices Homeland SecurityServices UnallocatedCorporate(1)(2) Intersegment ConsolidatedTotal Fiscal Year 2009: Contract revenue $46,287,000 $11,792,000 $3,526,000 $— $— $61,605,000 Depreciation and amortization 1,491,000 219,000 104,000 — — 1,814,000 Interest expense 25,000 6,000 7,000 — — 38,000 Segment (loss) profit beforeincome tax expense (5,661,000) (1,747,000) (13,000) (85,000) — (7,506,000) Income tax (benefit) expense (1,469,000) (442,000) 3,000 (23,000) — (1,931,000) Net loss (4,192,000) (1,305,000) (16,000) (62,000)(1) — (5,575,000) Segment assets 137,673,000 23,151,000 6,250,000 140,987,000(2) (267,729,000) 40,332,000 Fiscal Year 2008: Contract revenue 57,324,000 13,660,000 2,206,000 — — 73,190,000 Depreciation and amortization 1,639,000 252,000 87,000 — — 1,978,000 Interest expense (income) 18,000 (8,000) 23,000 — — 33,000 Segment (loss) profit beforeincome tax expense (3,580,000) 2,101,000 (955,000) (101,000) — (2,535,000) Income tax (benefit) expense (1,377,000) 863,000 (376,000) (40,000) — (930,000) Net (loss) income (2,203,000) 1,238,000 (579,000) (61,000)(1) — (1,605,000) Segment assets 82,062,000 14,396,000 2,657,000 74,470,000(2) (126,015,000) 47,570,000 Fiscal Year 2007: Contract revenue 64,372,000 12,684,000 1,742,000 — — 78,798,000 Depreciation and amortization 1,352,000 336,000 59,000 — — 1,747,000 Interest (income) expense (494,000) (26,000) 21,000 — — (499,000) Segment profit (loss) beforeincome tax expense 2,076,000 1,765,000 (68,000) (86,000) — 3,687,000 Income tax expense (benefit) 875,000 727,000 (25,000) (34,000) — 1,543,000 Net income (loss) 1,200,000 1,038,000 (42,000) (52,000)(1) — 2,144,000 Segment assets 26,852,000 10,658,000 1,048,000 29,040,000(2) (19,372,000) 48,226,000 (1)The following sets forth the amounts included in the net income (loss) that was Unallocated Corporate for fiscal years 2009, 2008 and 2007: 2009 2008 2007 Unallocated net (loss) income: Income tax benefit $23,000 $40,000 $34,000 Other (85,000) (101,000) (86,000) $(62,000)$(61,000)$(52,000) Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 200712. SEGMENT INFORMATION (Continued)13. CONTINGENCIESClaims 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 theordinary course of business against firms that operate in the engineering and consulting professions. The Company carries 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 consideredprobable 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 locatedin an unincorporated area of San Diego County. The design was completed by the Company and a contract was awarded to a construction contractor forconstruction of the improvements. The construction was originally scheduled for completion in December 2008; however completion was delayed untilOctober 2009. The lawsuit alleges that the delays in construction were caused by errors and omissions in the Company's preparation of reports and design andengineering 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.Topaz v. City of Laguna Beach, Superior Court of California, Orange County This suit concerns a project by the City of Laguna Beach to reconstruct a retaining wall supporting a city road. The Company served as the constructionobserver for this project. The construction work was performed from February 2005 to March 2005. Subsequent to completion of the project by the City, theplaintiffs, with the assistance of a neighbor, planted a row of trees along the top of the slope and added surface irrigation along the line of trees. In June 2005,a portion of the slope below the retaining wall near the newly planted trees experienced a superficial failure, damaging the plaintiffs'F-28(2)The following sets forth the assets that are included in Unallocated Corporate as of January 1, 2010, January 2, 2009 and December 28, 2007: 2009 2008 2007 Assets: Cash and cash equivalents $8,207,000 $7,049,000 $15,299,000 Liquid investments — — 1,300,000 Prepaid expenses 1,258,000 1,498,000 1,524,000 Intercompany receivables 111,466,000 46,910,000 4,352,000 Income tax receivable 51,000 956,000 — Other receivables 67,000 44,000 69,000 Equipment and leasehold improvements, net 458,000 669,000 952,000 Investments in subsidiaries 18,293,000 16,919,000 5,354,000 Other assets 1,187,000 425,000 190,000 $140,987,000 $74,470,000 $29,040,000 Table of ContentsWILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2009, 2008 and 200713. CONTINGENCIES (Continued)residence. The retaining wall did not fail. The plaintiffs were not injured in the incident. The plaintiffs allege that the City of Laguna Beach violated its ownordinances by not obtaining appropriate geotechnical data during the design stage and by allowing the work to be constructed during the rainy season. Thelawsuit also names the project designer, the general contractor and us, the construction observer, as defendants. The Company was named as a defendant inthe first amended complaint filed on October 17, 2007. The Company has filed a cross-complaint against the plaintiffs' neighbor alleging that the row of treescaused the slope failure. The plaintiffs have asserted damages to real and personal property in the amount of $0.8 million and general damages between$1.6 million and $4.7 million. The Company denies the allegations asserted against it in the lawsuit and will vigorously defend against the claims.14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The tables below reflect selected quarterly information for the fiscal years ended January 1, 2010, January 2, 2009 and December 28, 2007. F-29 Fiscal Three Months Ended April 3,2009 July 3,2009 October 2,2009 January 1,2010 (in thousands except per share amounts) Contract revenue $17,185 $15,484 $14,561 $14,375 Loss from operations (705) (1,433) (1,385) (3,970)(1)Income tax benefit (250) (536) (510) (635)Net loss (454) (898) (878) (3,345)Loss per share: basic and diluted $(0.06)$(0.12)$(0.12)$(0.46)Weighted-average shares outstanding: Basic and diluted 7,169 7,188 7,204 7,208 Fiscal Three Months Ended March 28,2008 June 27,2008 September 26,2008 January 2,2009 (in thousands except per share amounts) Contract revenue $17,776 $17,807 $18,651 $18,956 Income (loss) from operations 43 (130) (704) (2,009)(2)Income tax expense (benefit) 95 16 (250) (791)Net income (loss) 116 (55) (437) (1,229)Earnings (loss) per share: basic and diluted $0.02 $(0.01)$(0.06)$(0.17)Weighted-average shares outstanding: Basic 7,155 7,156 7,160 7,164 Diluted 7,155 7,156 7,160 7,164 (1)Loss from operations for the fiscal three months ended January 1, 2010 includes impairment of goodwill of $2.8 million and areduction in litigation accrual expense of $1.1 million related to a claim settlement on a claim for indemnity in connection with aclaim that arose in fiscal year 2002. (2)Loss from operations for the fiscal three months ended January 2, 2009 includes impairment of goodwill of $0.1 million.Exhibit 21.1 WILLDAN GROUP, INC. LIST OF SUBSIDIARIES Name of Entity Jurisdictionof OrganizationOwnership Interest1.Willdan EngineeringCalifornia100% Willdan Group, Inc.2.Willdan GeotechnicalCalifornia100% Willdan Group, Inc.3.Willdan Energy SolutionsCalifornia100% Willdan Group, Inc.4.Willdan Resource SolutionsCalifornia100% Willdan Group, Inc.5.Public Agency ResourcesCalifornia100% Willdan Group, Inc.6.Willdan Financial ServicesCalifornia100% Willdan Group, Inc.7.Willdan Homeland SolutionsCalifornia100% Willdan Group, Inc. Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of DirectorsWilldan Group, Inc.: We consent to the incorporation by reference in the registration statements (No. 333-139127 and No. 333-152951) on Forms S-8 of Willdan Group, Inc.of our report dated March 30, 2010, with respect to the consolidated balance sheets of Willdan Group, Inc. and subsidiaries as of January 1, 2010 andJanuary 2, 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the fiscal years in the three-yearperiod ended January 1, 2010, which report appears in the January 1, 2010 annual report on Form 10-K of Willdan Group, Inc. /s/ KPMG LLP Los Angeles, CaliforniaMarch 30, 2010 Exhibit 31.1 SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Thomas D. Brisbin, certify that: 1. I have reviewed this annual report on Form 10-K of Willdan Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered bythis report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements 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 report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely 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, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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’sinternal control over financial reporting. Date: March 30, 2010 By:/s/ Thomas D. Brisbin Thomas D. BrisbinPresident and Chief Executive Officer Exhibit 31.2 SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Kimberly D. Gant, certify that: 1. I have reviewed this annual report on Form 10-K of Willdan Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange 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 withinthose entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto 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 theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 internalcontrol over financial reporting. Date: March 30, 2010 By:/s/ Kimberly D. Gant Kimberly D. GantChief 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 Annual Report on Form 10-K of Willdan Group, Inc. (the “Company”) for the annual period ended January 1, 2010, as filed withthe 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 adoptedpursuant 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. BrisbinPresident and Chief Executive OfficerMarch 30, 2010 By:/s/ Kimberly D. Gant Kimberly D. GantChief Financial Officer and Senior Vice PresidentMarch 30, 2010 This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by theSarbanes-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 ofthis written statement required by § 906 has been provided to the Company and will be retained by the Company and furnished to the Securities andExchange Commission or its staff upon request. 

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