UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended October 1, 2011
or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 1-33981
ANALYSTS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota | | 41-0905408 |
(State of Incorporation) | | (IRS Employer Identification No.) |
| | |
7700 France Ave South | | |
Minneapolis, MN | | 55435 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (952) 835-5900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required 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 shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | | Accelerated Filer o |
| | |
Non-accelerated Filer o | | Smaller Reporting Company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of October 31, 2011, 5,017,385 shares of the registrant’s common stock were outstanding.
ANALYSTS INTERNATIONAL CORPORATION
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Analysts International Corporation
Consolidated Balance Sheets
(Unaudited)
| | October 1, | | January 1, | |
(In thousands, except share and per share amounts) | | 2011 | | 2011 | |
| | | | | |
ASSETS | | | | | |
| | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 5,787 | | $ | 4,328 | |
Accounts receivable, less allowance for doubtful accounts of $644 and $713, respectively | | 19,426 | | 17,425 | |
Prepaid expenses and other current assets | | 392 | | 643 | |
Total current assets | | 25,605 | | 22,396 | |
| | | | | |
Property and equipment, net of accumulated depreciation of $7,369 and $8,290, respectively | | 1,494 | | 784 | |
Other assets | | 475 | | 432 | |
Total assets | | $ | 27,574 | | $ | 23,612 | |
| | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
| | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 4,616 | | $ | 4,261 | |
Salaries and benefits | | 3,697 | | 2,189 | |
Deferred revenue | | 379 | | 359 | |
Deferred compensation | | 138 | | 181 | |
Restructuring accrual | | 654 | | 339 | |
Other current liabilities | | 744 | | 694 | |
Total current liabilities | | 10,228 | | 8,023 | |
| | | | | |
Non-current liabilities: | | | | | |
Deferred compensation | | 391 | | 901 | |
Restructuring accrual | | 34 | | 167 | |
Other long-term liabilities | | — | | 52 | |
Total non-current liabilities | | 425 | | 1,120 | |
| | | | | |
Shareholders’ equity: | | | | | |
Common stock, par value $0.10 a share; authorized 24,000,000 shares; issued and outstanding 5,017,385 and 4,985,874, respectively | | 502 | | 498 | |
Additional capital | | 26,014 | | 25,599 | |
Accumulated deficit | | (9,595 | ) | (11,628 | ) |
Total shareholders’ equity | | 16,921 | | 14,469 | |
Total liabilities and shareholders’ equity | | $ | 27,574 | | $ | 23,612 | |
See notes to consolidated financial statements.
3
Analysts International Corporation
Consolidated Statements of Operations
(Unaudited)
| | Three Months Ended | | Nine Months Ended | |
| | October 1, | | October 2, | | October 1, | | October 2, | |
(In thousands, except per share amounts) | | 2011 | | 2010 | | 2011 | | 2010 | |
| | | | | | | | | |
Revenues | | $ | 28,876 | | $ | 26,049 | | $ | 82,023 | | $ | 81,347 | |
Cost of revenues | | 21,659 | | 20,187 | | 62,349 | | 63,856 | |
Gross profit | | 7,217 | | 5,862 | | 19,674 | | 17,491 | |
| | | | | | | | | |
Selling, administrative and other operating costs | | 5,389 | | 5,772 | | 16,845 | | 19,209 | |
Restructuring costs and other severance related costs | | 23 | | (482 | ) | 769 | | (300 | ) |
Total operating expenses | | 5,412 | | 5,290 | | 17,614 | | 18,909 | |
| | | | | | | | | |
Operating income (loss) | | 1,805 | | 572 | | 2,060 | | (1,418 | ) |
| | | | | | | | | |
Non-operating income | | — | | 4 | | — | | 14 | |
Interest expense | | — | | (3 | ) | — | | (11 | ) |
| | | | | | | | | |
Income (loss) before income taxes | | 1,805 | | 573 | | 2,060 | | (1,415 | ) |
| | | | | | | | | |
Income tax expense (benefit) | | 11 | | (14 | ) | 27 | | 5 | |
| | | | | | | | | |
Net income (loss) | | $ | 1,794 | | $ | 587 | | $ | 2,033 | | $ | (1,420 | ) |
| | | | | | | | | |
Per common share (basic): | | | | | | | | | |
Net income (loss) | | $ | 0.36 | | $ | 0.12 | | $ | 0.41 | | $ | (0.28 | ) |
| | | | | | | | | |
Per common share (diluted): | | | | | | | | | |
Net income (loss) | | $ | 0.36 | | $ | 0.12 | | $ | 0.41 | | $ | (0.28 | ) |
| | | | | | | | | |
Weighted-average shares outstanding: | | | | | | | | | |
Basic | | 5,015 | | 4,986 | | 5,008 | | 4,986 | |
Diluted | | 5,024 | | 4,988 | | 5,018 | | 4,986 | |
See notes to consolidated financial statements.
4
Analysts International Corporation
Consolidated Statements of Cash Flows
(Unaudited)
| | Nine Months Ended | |
| | October 1, | | October 2, | |
(In thousands) | | 2011 | | 2010 | |
| | | | | |
Cash flows from operating activities: | | | | | |
Net income (loss) | | $ | 2,033 | | $ | (1,420 | ) |
| | | | | |
Adjustments to net income (loss): | | | | | |
Loss on asset sales and disposals | | — | | 157 | |
Depreciation | | 464 | | 677 | |
Share based compensation | | 419 | | (33 | ) |
| | | | | |
Changes in: | | | | | |
Accounts receivable | | (2,001 | ) | 4,571 | |
Prepaid expenses and other assets | | 163 | | 851 | |
Accounts payable | | 265 | | (2,576 | ) |
Salaries and benefits | | 1,508 | | 1,392 | |
Deferred revenue | | 20 | | (11 | ) |
Deferred compensation | | (553 | ) | (377 | ) |
Restructuring accrual | | 182 | | (2,064 | ) |
Other accrued liabilities | | 58 | | (215 | ) |
Net cash provided by operating activities | | 2,558 | | 952 | |
| | | | | |
Cash flows from investing activities: | | | | | |
Expended for property and equipment additions | | (1,084 | ) | (91 | ) |
Proceeds from asset sale | | — | | 186 | |
Proceeds from cash surrender of insurance policy | | 531 | | — | |
Net cash (used in) provided by investing activities | | (553 | ) | 95 | |
| | | | | |
Cash flows from financing activities: | | | | | |
Payment of insurance policy loan | | (486 | ) | — | |
Payment of capital lease obligation | | (60 | ) | (135 | ) |
Net cash used in financing activities | | (546 | ) | (135 | ) |
| | | | | |
Net increase in cash and cash equivalents | | 1,459 | | 912 | |
| | | | | |
Cash and cash equivalents at beginning of period | | 4,328 | | 3,818 | |
| | | | | |
Cash and cash equivalents at end of period | | $ | 5,787 | | $ | 4,730 | |
See notes to consolidated financial statements.
5
Analysts International Corporation
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Nature of Business
Analysts International Corporation (“AIC,” “Company,” “we,” “us,” or “our”) is an information technology (“IT”) services company. We employ approximately 970 IT professionals, management and administrative staff and are focused on serving the IT needs of mid-market to Fortune 500 companies and government agencies across North America. AIC was incorporated in Minnesota in 1966 and our corporate headquarters is located in Minneapolis, Minnesota. For a more complete description of our Company, please refer to our Annual Report on Form 10-K for the fiscal year ended January 1, 2011.
We operate on a fiscal year ending on the Saturday closest to December 31. Accordingly, fiscal 2011 will end on Saturday, December 31, 2011. The third quarter of fiscal 2011 ended on October 1, 2011 and the third quarter of fiscal 2010 ended on October 2, 2010.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying unaudited Consolidated Financial Statements of AIC have been prepared on the accrual basis of accounting and in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim financial reporting. As permitted under these rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States (“U.S. GAAP”) can be condensed or omitted. The Consolidated Financial Statements included in this document reflect, in the opinion of our management, all adjustments (consisting of only normal recurring adjustments, except as noted elsewhere in the Notes to Consolidated Financial Statements) necessary for fair presentation of the results of operations for the interim periods presented. The following notes should be read in conjunction with the accounting policies and other disclosures in the Notes to the Consolidated Financial Statements incorporated by reference in our Annual Report on Form 10-K for the fiscal year ended January 1, 2011. Revenues, expenses, cash flows, assets and liabilities can and do vary during the year. Therefore, interim results are not necessarily indicative of the results to be expected for the full fiscal year.
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Changes to Consolidated Statements of Operations
As presented on our third quarter 2011 Form 10-Q, we have changed the format of our Consolidated Statements of Operations for reporting revenues and cost of revenues. The change in format combines Professional services provided directly and Professional services provided through subsuppliers for both revenues and cost of revenues. Professional services provided through subsuppliers is immaterial to our current and historical operations for the periods presented.
3. Sale of Assets
Sale of Customer Contracts
On March 3, 2010, we sold certain client contracts, property and equipment and sublet a facility. In consideration for the assets sold and the liabilities transferred, we received $0.2 million in cash. We recorded a loss on the sale of approximately $50,000 which is included within Selling, administrative and other operating costs (“SG&A”) in our Consolidated Statement of Operations.
4. Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets for financial statement purposes and accelerated methods for income tax purposes. The balances of our Property and equipment as of October 1, 2011 and January 2, 2011 and the estimated useful lives used in the financial statements are as follows:
6
(In thousands) | | October 1, 2011 | | January 1, 2011 | | Useful lives (in years) | |
| | | | | | | |
Leasehold improvements | | $ | 237 | | $ | 269 | | Shorter of useful life or lease term | |
Office furniture & equipment | | 1,772 | | 1,656 | | 5 - 10 | |
Computer hardware | | 1,482 | | 1,793 | | 2 - 5 | |
Software | | 4,575 | | 5,356 | | 2 - 5 | |
Work in process | | 797 | | — | | | |
| | 8,863 | | 9,074 | | | |
Accumulated depreciation | | (7,369 | ) | (8,290 | ) | | |
Property and equipment, net | | $ | 1,494 | | $ | 784 | | | |
In the third quarter of fiscal 2011, the Company commenced a project to replace its current financial and human resource information systems with a fully integrated enterprise resource planning (“ERP”) solution. The project to implement the ERP solution resulted in approximately $0.8 million of costs being capitalized in the third quarter of fiscal 2011.
In the second and third quarters of fiscal 2011, the Company disposed of approximately $1.4 million of fully amortized and depreciated property and equipment. The disposed property and equipment primarily relates to decommissioned software, computer hardware and the relocation of our corporate headquarters.
5. Financing Agreement
Revolving Credit Facility
On February 23, 2011, we entered into the First Amendment to Credit and Security Agreement (“Amended Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), pursuant to which the interest rate on future borrowings and the unused line fee were reduced, the maturity date was extended until September 30, 2014 and certain covenants were made less restrictive. On September 21, 2011, we entered into the Second Amendment to the Amended Credit Facility with Wells Fargo, which increased our annual capital expenditures covenant for fiscal 2011 from $2.0 million to $2.5 million.
Under the Amended Credit Facility, Wells Fargo will continue to advance up to $15.0 million to us for working capital purposes and to facilitate the issuance of letters of credit. The total amount available for borrowing under the Amended Credit Facility will fluctuate based on our level of eligible accounts receivable.
The Amended Credit Facility carries an interest rate equal to the three-month LIBOR rate plus 1.50% - 2.50% depending on our operating results. The Credit Facility had a one-time origination fee of $150,000, the balance of which is being amortized over the new term of the Amended Credit Facility. The annual unused line fee varies between 0.25% - 0.375%, depending on our operating results, and is based on the daily average unused amount. The Amended Credit Facility may be terminated or reduced by us on 90 days notice in exchange for a termination fee of 1.0% of the maximum line amount through September 30, 2011, 0.50% of such amount thereafter until September 30, 2012, 0.25% of such amount thereafter until September 30, 2013 and no fee in the final year. Borrowings under the Amended Credit Facility are secured by all of our assets.
The Amended Credit Facility requires us to meet certain levels of year-to-date earnings before taxes. The Amended Credit Facility limit on our annual capital expenditures is $2.5 million for fiscal 2011 and $2.0 million for each fiscal year thereafter. The facility contains customary affirmative covenants, including covenants regarding annual, quarterly and projected financial reporting requirements, collateral and insurance maintenance, and compliance with applicable laws and regulations. Further, the facility contains customary negative covenants limiting our ability to grant liens, incur indebtedness, make investments, repurchase our stock, create new subsidiaries, sell assets or engage in any change of control transaction without the consent of Wells Fargo.
Upon an event of default, Wells Fargo may terminate the facility or declare the entire amount outstanding under the facility to be immediately due and payable and exercise other rights under the agreement. The events of default under the facility include, among other things, payment defaults, breaches of covenants, a change in control of the Company and bankruptcy events.
As of October 1, 2011, we were in compliance with all the requirements and had no borrowings under the Amended Credit Facility. Total availability of the Amended Credit Facility, which fluctuates based on our level of eligible accounts receivable, was $7.1 million as of October 1, 2011.
6. Restructuring Costs and Other Severance Related Costs
For the nine month period ended October 1, 2011, we recorded severance and office closure charges of $0.8 million. Of these charges,
7
$0.4 million related to severance and severance-related charges for changes in our senior executive officers and $0.4 million related to the relocation of our corporate headquarters.
For the nine month period ended October 2, 2010, we recorded a net reversal of restructuring costs and other severance-related costs of $0.3 million. The net reversal is comprised of a $0.4 million charge relating to severance and severance-related expenses and a reversal of $0.7 million, primarily relating to the modification of lease agreements for office space previously vacated.
A summary of the restructuring charges and subsequent activity in the restructuring accrual for the nine months ended October 1, 2011 is as follows:
(In thousands) | | Severance | | Office Closure | | Total | |
Balance as of January 1, 2011 | | $ | 22 | | $ | 484 | | $ | 506 | |
Additional restructuring charges | | 370 | | 399 | | 769 | |
Cash expenditures | | (145 | ) | (442 | ) | (587 | ) |
Balance as of October 1, 2011 | | $ | 247 | | $ | 441 | | $ | 688 | |
7. Shareholders’ Equity
| | | | | | | | | | Total | |
| | Outstanding | | Common | | Additional | | Accumulated | | Shareholders’ | |
(In thousands, except share amounts) | | Shares | | Stock | | Capital | | Deficit | | Equity | |
| | | | | | | | | | | |
Balances as of January 1, 2011 | | 4,985,874 | | $ | 498 | | $ | 25,599 | | $ | (11,628 | ) | $ | 14,469 | |
Common stock issued | | 31,511 | | 3 | | 128 | | — | | 131 | |
Share based compensation expense | | — | | — | | 288 | | — | | 288 | |
Net income | | — | | — | | — | | 2,033 | | 2,033 | |
Balance as of October 1, 2011 | | 5,017,385 | | $ | 501 | | $ | 26,015 | | $ | (9,595 | ) | $ | 16,921 | |
8. Share Based Compensation
Total share based compensation expense for the three and nine month periods ended October 1, 2011 was approximately $0.1 million and $0.4 million, respectively. This includes compensation expense related to both stock options and stock awards. The tax benefit recorded for these same periods was approximately $16,000 and $48,000. The tax benefit is offset against our valuation allowance for our deferred tax asset.
As a result of changes in our senior leadership personnel, we recorded a reversal of equity-based compensation expense for the three- and nine-month periods ended October 2, 2010 of approximately $0.1 million and $33,000, respectively. This includes compensation expense related to both stock options and stock awards, and the reversal of compensation expense related to the forfeiture of unvested stock options in excess of original estimates. The reduction in tax benefit recorded for third quarter of fiscal 2010 was approximately $5,000 and the tax benefit recorded for the nine-month period ended October 2, 2010 was approximately $10,000. The tax benefit is offset against our valuation allowance for our deferred tax asset.
No stock options were exercised during the periods ended October 1, 2011 and October 2, 2010. As of October 1, 2011, there was approximately $0.3 million of unrecognized share based compensation expense related to unvested stock options and awards that are expected to vest over a weighted-average period of 1.4 years. Options to purchase approximately 448,000 and 348,000 shares of common stock were outstanding at October 1, 2011 and October 2, 2010, respectively.
During the three and nine month periods ended October 1, 2011 and October 2, 2010, we granted equity compensation awards as follows:
8
| | Three Months Ended | |
| | October 1, 2011 | | October 2, 2010 | |
| | Grants | | Weighted-
Average
Grant Date
Fair Value | | Grants | | Weighted-
Average
Grant Date
Fair Value | |
| | | | | | | | | |
Stock Options | | 20,000 | | $ | 1.99 | | — | | $ | — | |
Stock Awards | | 20,000 | | $ | 3.10 | | — | | $ | — | |
| | Nine Months Ended | |
| | October 1, 2011 | | October 2, 2010 | |
| | Grants | | Weighted-
Average
Grant Date
Fair Value | | Grants | | Weighted-
Average
Grant Date
Fair Value | |
| | | | | | | | | |
Stock Options | | 130,050 | | $ | 2.62 | | 86,800 | | $ | 1.73 | |
Stock Awards | | 122,450 | | $ | 4.19 | | 1,200 | | $ | 3.36 | |
9. Net Income (Loss) Per Share
Basic and diluted income (loss) per share is presented in accordance with ASC Topic 260, Earnings Per Share. Basic income (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income per share includes dilutive potential common shares outstanding and is computed by dividing income available to common stockholders by the weighted-average number of common and common equivalent shares outstanding for the period.
There were approximately 373,000 and 335,000 anti-dilutive weighted average shares excluded from the calculation of weighted average number of common equivalent shares outstanding for the three and nine month periods ended October 1, 2011, respectively. For the three-month period ended October 2, 2010, approximately 462,000 anti-dilutive weighted shares were excluded from the calculation of weighted average number of common equivalent shares outstanding. For the nine month period ended October 2, 2010, all potential common shares outstanding were considered anti-dilutive and excluded from the calculation of weighted average number of common and common equivalent shares outstanding because we reported a net loss. The computation of basic and diluted income (loss) per share for the three and nine month periods ended October 1, 2011 and October 2, 2010, is as follows:
| | Three Months Ended | | Nine Months Ended | |
| | October 1, | | October 2, | | October 1, | | October 2, | |
(In thousands except per share amounts) | | 2011 | | 2010 | | 2011 | | 2010 | |
| | | | | | | | | |
Net income (loss) | | $ | 1,794 | | $ | 587 | | $ | 2,033 | | $ | (1,420 | ) |
Weighted-average number of common shares outstanding | | 5,015 | | 4,986 | | 5,008 | | 4,986 | |
Dilutive effect of potential common shares outstanding | | 9 | | 2 | | 11 | | — | |
Weighted-average number of common and common equivalent shares outstanding | | 5,024 | | 4,988 | | 5,018 | | 4,986 | |
| | | | | | | | | |
Net income (loss) per share: | | | | | | | | | |
Basic | | $ | 0.36 | | $ | 0.12 | | $ | 0.41 | | $ | (0.28 | ) |
Diluted | | $ | 0.36 | | $ | 0.12 | | $ | 0.41 | | $ | (0.28 | ) |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under “Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q, including the “Risk Factors” described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 1, 2011.
A. Our Business
Analysts International Corporation (“AIC,” “Company,” “we,” “us,” or “our”) is an information technology (“IT”) services company. We employ approximately 970 IT professionals, management and administrative staff and are focused on serving the IT needs of mid-market to Fortune 500 companies and government agencies across North America. AIC was incorporated in Minnesota in 1966 and our corporate headquarters is located in Minneapolis, Minnesota.
B. Fiscal 2011 Strategic Plan
Our primary goals for fiscal 2011 are to deliver profitability while making the investments required to position us for long-term growth and position AIC as a leading IT services company. Our strategy emphasizes:
· Building on our strong brand;
· Leveraging our longstanding client relationships; and
· Investing in core markets where we believe we can become a market leader in either presence or specialty.
Our fiscal 2011 objectives in support of our strategy are as follows:
· Build a platform for growth
During fiscal year 2011, we expect to increase our sales and recruiting capacity by more than 40% from the beginning of fiscal 2011. We have added approximately three-quarters of our targeted increase in sales and recruiting capacity by the end of the third quarter of fiscal 2011. These investments have had a positive effect on fiscal 2011 revenues; however, based on the time we believe it takes an account executive and a recruiter to reach full productivity, we expect a greater impact on future period revenues.
During the balance of fiscal 2011 and as part of our long-term growth strategy, we will consider the possibility of strategic acquisitions if and when the right opportunity arises. Our acquisition strategy is to identify IT staffing firms located in our core markets that complement our existing IT staffing business. We evaluate potential future acquisitions based on the size of the firm, capabilities of their sales force and recruiter personnel and cultural fit as well as other relevant criteria.
· Improve gross margin rates
We anticipate additional gross margin rate improvement from the 22.3% we achieved in fiscal 2010 as we continue to change our mix of business and focus on our core markets.
In the third quarter of fiscal 2011, we generated a gross margin rate of 25.0%, a 250 basis point improvement over the prior year third quarter and a 190 basis point improvement over our fiscal 2011 second quarter gross margin rate. For the first nine months of fiscal 2011, we generated a gross margin rate of 24.0%, a 250 basis point improvement over the prior year comparable period. The year-over-year improvement in gross margin rates is primarily due to implementing our strategy of evolving our mix of business and lower benefit costs.
· Generate profitability in fiscal 2011
We plan to continue to make investments in our sales and recruiting operations and we believe that improvements in our gross margin rate and continued focus on controlling our administrative and other operating costs will allow us to generate profitability in fiscal 2011.
For the third quarter of fiscal 2011, we generated net income of $1.8 million and on a year-to-date basis we have generated net income of $2.0 million. In the third quarter of fiscal 2011, we incurred charges of approximately $23,000 relating to restructuring costs and other severance related costs. For the first nine months of fiscal 2011, we have incurred charges of approximately $0.8
10
million relating to the relocation of our corporate headquarters and for severance charges related to changes in our senior executive officers. We anticipate the relocation of our corporate headquarters will reduce our annualized operating expenses by approximately $0.3 million. We believe we will be profitable for the balance of fiscal 2011.
C. Business Developments
Leadership
On February 22, 2011, our Board of Directors appointed Brittany B. McKinney as our President and Chief Executive Officer and on May 24, 2011, she was elected as a Director of our Company. Ms. McKinney served as our Interim President and Chief Executive Officer since September 2010. Previously, Ms. McKinney was our Vice President of Corporate Development and the Senior Vice President of the Central Region.
On May 4, 2011, Randy W. Strobel resigned from his employment as the Company’s Senior Vice President, Chief Financial Officer effective on August 31, 2011. On August 3, 2011, Mr. Strobel resigned from his position as the Company’s Senior Vice President, Chief Financial Officer effective as of August 5, 2011; however, Mr. Strobel remained an employee through August 31, 2011.
On August 3, 2011, the Company and William R. Wolff entered into an Employment Agreement with an effective date of August 8, 2011, which provides that Mr. Wolff will be employed as Senior Vice President, Chief Financial Officer of the Company. Prior to this appointment, since December 2009, Mr. Wolff served as Chief Executive for a startup video hosting website for youth sports, TeamKLPZ, LLC of Burnsville, Minnesota.
Lawson Enterprise Resource Planning (“ERP”) Solution
In mid-August, our Board of Directors approved a project to replace our existing financial and human resource information systems with a fully integrated Lawson ERP solution. The Lawson ERP solution should allow us to streamline our business processes and allow for cost efficient scalability as well as improve management reporting and analysis. We believe the implementation of the ERP solution will be complete in early fiscal 2012 and estimate the total capitalized project costs at approximately $1.5 million. Through the third quarter of fiscal 2011, we have incurred capitalized expenditures related to the implementation of the ERP solution of approximately $0.8 million.
Revolving Credit Facility
On February 23, 2011, we entered into the First Amendment to the Credit and Security Agreement (“Amended Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), which amended the terms of the Credit Facility and extended the maturity date to September 30, 2014. On September 21, 2011, we entered into the Second Amendment to the Amended Credit Facility with Wells Fargo, which increased our annual capital expenditures covenant for fiscal 2011 from $2.0 million to $2.5 million. Under the Amended Credit Facility, Wells Fargo will continue to advance up to $15.0 million to us for working capital purposes and to facilitate the issuance of letters of credit.
Sale of Customer Contracts
On March 3, 2010, AIC sold certain customer contracts, property and equipment and sublet a facility lease. In consideration for the assets sold and the liabilities transferred, the Company received $0.2 million in cash. The Company recorded a loss on the sale of approximately $50,000 which is included within Selling, administrative and other operating costs (“SG&A”) in our Consolidated Statement of Operations. For the preceding 12 months before the sale date, the customer contracts generated revenues of approximately $3.2 million and had an unfavorable contribution margin of approximately $0.7 million.
D. Overview of Third Quarter Fiscal 2011 Operations
Our revenues increased $2.8 million compared to the third quarter of fiscal 2010. When compared to the prior year quarter, the number of billable hours increased 5.1% and our average billing rates increased 4.2%.
The gross margin rate increased 250 basis points primarily due to our strategy of evolving our mix of business.
SG&A expenses declined $0.4 million, or 6.6%, in the third quarter of fiscal 2011 over the prior year quarter as a result of personnel, benefit and non-personnel cost reductions. Restructuring costs and other severance related costs increased approximately $0.5 million in the third quarter of fiscal 2011 due to a net expense reversal in the prior year quarter primarily as a result of the modification of lease agreements.
We provided cash from operations of $2.4 million during the third quarter of fiscal 2011. As of October 1, 2011, we had a cash balance of $5.8 million and no borrowings under our Amended Credit Facility.
11
RESULTS OF OPERATIONS - THREE MONTHS ENDED OCTOBER 1, 2011 VS. OCTOBER 2, 2010
The following table illustrates the relationship between revenue and expense categories along with a count of management and administrative personnel and IT professionals for the three months ended October 1, 2011 and October 2, 2010.
| | Three Months Ended | | Three Months Ended | | | | | |
| | October 1, 2011 | | October 2, 2010 | | | |
| | | | % of | | | | % of | | Increase (Decrease) | |
(Dollars in thousands) | | Amount | | Revenue | | Amount | | Revenue | | Amount | | % | |
| | | | | | | | | | | | | |
Revenues | | $ | 28,876 | | 100.0 | % | $ | 26,049 | | 100.0 | % | $ | 2,827 | | 10.9 | % |
Cost of revenues | | 21,659 | | 75.0 | | 20,187 | | 77.5 | | 1,472 | | 7.3 | |
Gross profit | | 7,217 | | 25.0 | | 5,862 | | 22.5 | | 1,355 | | 23.1 | |
| | | | | | | | | | | | | |
Selling, administrative and other operating costs | | 5,389 | | 18.7 | | 5,772 | | 22.2 | | (383 | ) | (6.6 | ) |
Restructuring costs and other severance related costs | | 23 | | 0.0 | | (482 | ) | (1.9 | ) | 505 | | 104.8 | |
Total operating expenses | | 5,412 | | 18.7 | | 5,290 | | 20.3 | | 122 | | 2.3 | |
| | | | | | | | | | | | | |
Operating income | | 1,805 | | 6.3 | | 572 | | 2.2 | | 1,233 | | 215.6 | |
| | | | | | | | | | | | | |
Non-operating income | | — | | 0.0 | | 4 | | 0.0 | | (4 | ) | (100.0 | ) |
Interest expense | | — | | 0.0 | | (3 | ) | (0.0 | ) | (3 | ) | (100.0 | ) |
| | | | | | | | | | | | | |
Income before income taxes | | 1,805 | | 6.3 | | 573 | | 2.2 | | 1,232 | | 215.0 | |
| | | | | | | | | | | | | |
Income tax expense (benefit) | | 11 | | 0.1 | | (14 | ) | (0.1 | ) | 25 | | 178.6 | |
| | | | | | | | | | | | | |
Net income | | $ | 1,794 | | 6.2 | % | $ | 587 | | 2.3 | % | $ | 1,207 | | 205.6 | % |
| | | | | | | | | | | | | |
Personnel: | | | | | | | | | | | | | |
Management and Administrative | | 119 | | | | 111 | | | | 8 | | 7.2 | % |
IT Professionals | | 852 | | | | 819 | | | | 33 | | 4.0 | % |
Revenues
Our revenues increased $2.8 million, or 10.9%, from the comparable period a year ago. The increase in our third quarter of fiscal 2011 revenues over the prior year period is primarily due a 5.1% ($1.3 million) increase in the number of hours billed coupled with a 4.2% ($1.1 million) increase in our average billing rates.
Cost of Revenues
Cost of revenues represents our payroll and benefit costs associated with our billable consultants and our cost of using subcontractors. This category of expense as a percentage of revenues decreased 250 basis points from 77.5% to 75.0%, in the third quarter of fiscal 2011 compared to the prior year period primarily due to our strategy of evolving our mix of business.
Selling, Administrative and Other Operating Costs
SG&A costs include management and administrative salaries, salaries and commissions paid to account executives and recruiters, benefits, location costs and other administrative costs. This category of costs decreased approximately $0.4 million from the comparable period in 2010 and represented 18.7% of revenue for the third quarter of fiscal 2011 compared to 22.2% in fiscal 2010. In the third quarter of
12
fiscal 2011, SG&A expenses declined as a result of previously implemented general expense reductions ($0.5 million) and lower employee benefit costs ($0.1 million), which was partially offset by higher sales and recruiting costs ($0.2 million).
Restructuring Costs and Other Severance Related Costs
In the third quarter of fiscal 2011, we recorded severance and office closure charges of $23,000.
In the third quarter of fiscal 2010, we recorded a net expense reversal of $0.5 million. The net reversal is comprised of a $0.2 million charge relating to severance and severance-related expenses and a reversal of $0.7 million for modification of lease agreements.
Non-operating Income
We had no non-operating income in the third quarter of fiscal 2011.
Interest Expense
We had no borrowing outstanding in the third quarter of fiscal 2011 or 2010 under our revolving credit facility.
Income Taxes
Our income tax expense reflects the utilization of net operating loss carryforwards to offset taxable income. We currently have approximately $25.5 million of operating loss carryforwards available to offset federal and state taxes. For both the third quarters of fiscal 2011 and fiscal 2010, we recorded accruals for amounts due for certain state income taxes and changes in our reserves for tax obligations. We recorded no additional income tax expense or benefit associated with our net operating income or loss because any tax expense or benefit that would otherwise have been recorded has been negated by adjusting the valuation allowance against our deferred tax asset. If, however, we successfully return to profitability to a point where future realization of deferred tax assets, which are currently reserved, becomes “more likely than not,” we may be required to reverse the existing valuation allowance to realize the benefit of these assets.
Personnel
Our IT professional staff levels, which include subcontractors, finished the third quarter of fiscal 2011 at 852, a 4.0% increase against the comparable period last year and is primarily due to recent increases in our staffing business. The increase in management and administrative personnel is due to our focus on increasing the number of account executives and recruiters that are necessary to increase revenues.
Certain Information Concerning Off-Balance Sheet Arrangements
As of October 1, 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
E. Overview of Year to Date Fiscal 2011 Operations
Our revenues increased $0.7 million, or 0.8%, from the first nine months of fiscal 2010. When compared to the prior year period, our average billing rates increased 2.6%; however, the increase in our average billing rates was partially offset by a 1.3% decline in the number of billable hours.
The gross margin rate increased 250 basis points primarily due our strategy of evolving our mix of business and lower benefit costs.
SG&A expenses declined $2.4 million, or 12.3%, in first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 as a result of personnel, benefit and non-personnel cost reductions. Restructuring costs and other severance related costs increased approximately $1.1 million as a result of changes in senior executives and the relocation of our corporate headquarters in fiscal 2011 compared to a net expense reversal in the prior year primarily as a result of the modification of lease agreements.
We generated cash from operations of $2.6 million during the first nine months of fiscal 2011. As of October 1, 2011, we had a cash balance of $5.8 million and no borrowings under our Amended Credit Facility.
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RESULTS OF OPERATIONS, NINE MONTHS ENDED OCTOBER 1, 2011 VS. OCTOBER 2, 2010
The following table illustrates the relationship between revenue and expense categories along with a count of management and administrative personnel and IT professionals as of October 1, 2011 and October 2, 2010.
| | Nine Months Ended | | Nine Months Ended | | | | | |
| | October 1, 2011 | | October 2, 2010 | | | | | |
| | | | % of | | | | % of | | Increase (Decrease) | |
(Dollars in thousands) | | Amount | | Revenue | | Amount | | Revenue | | Amount | | % | |
| | | | | | | | | | | | | |
Revenues | | $ | 82,023 | | 100.0 | % | $ | 81,347 | | 100.0 | % | $ | 676 | | 0.8 | % |
Cost of revenues | | 62,349 | | 76.0 | | 63,856 | | 78.5 | | (1,507 | ) | (2.4 | ) |
Gross profit | | 19,674 | | 24.0 | | 17,491 | | 21.5 | | 2,183 | | 12.5 | |
| | | | | | | | | | | | | |
Selling, administrative and other operating costs | | 16,845 | | 20.5 | | 19,209 | | 23.6 | | (2,364 | ) | (12.3 | ) |
Restructuring costs and other severance related costs | | 769 | | 0.9 | | (300 | ) | (0.3 | ) | 1,069 | | 356.3 | |
Total operating expenses | | 17,614 | | 21.5 | | 18,909 | | 23.2 | | (1,295 | ) | (6.8 | ) |
| | | | | | | | | | | | | |
Operating income (loss) | | 2,060 | | 2.5 | | (1,418 | ) | (1.7 | ) | 3,478 | | 245.3 | |
| | | | | | | | | | | | | |
Non-operating income | | — | | 0.0 | | 14 | | 0.0 | | (14 | ) | (100.0 | ) |
Interest expense | | — | | 0.0 | | (11 | ) | (0.0 | ) | (11 | ) | (100.0 | ) |
| | | | | | | | | | | | | |
Income (loss) before income taxes | | 2,060 | | 2.5 | | (1,415 | ) | (1.7 | ) | 3,475 | | 245.6 | |
| | | | | | | | | | | | | |
Income tax expense | | 27 | | 0.0 | | 5 | | 0.0 | | 22 | | 440.0 | |
| | | | | | | | | | | | | |
Net income (loss) | | $ | 2,033 | | 2.5 | % | $ | (1,420 | ) | (1.7 | )% | $ | 3,453 | | 243.2 | % |
| | | | | | | | | | | | | |
Personnel: | | | | | | | | | | | | | |
Management and Administrative | | 119 | | | | 111 | | | | 8 | | 7.2 | % |
IT Professionals | | 852 | | | | 819 | | | | 33 | | 4.0 | % |
Revenues
Our revenues increased $0.7 million, or 0.8%, from the comparable period a year ago. The increase in our revenues over the prior comparable period is primarily from a 2.6% ($2.1 million) increase in average billing rates which was partially offset by a 1.3% ($1.0 million) decline in the number of billing hours and approximately $0.6 million of subsupplier revenues, which we no longer pursue as a result of implementing our strategy of evolving our mix of business.
After adjusting for the planned exit from a non-core line of business, revenues increased 1.4% from the comparable period a year ago as a result of a 2.9% increase in the average billing rates which is was partially offset by a 0.8% decline in the number of billing hours.
Cost of Revenues
Cost of revenues represents our payroll and benefit costs associated with our billable consultants and our cost of using subcontractors. This category of expense as a percentage of revenues decreased 250 basis points from 78.5% to 76.0%, in the first nine months of fiscal 2011 compared to the prior year period primarily due a decrease in our benefit costs and implementing our strategy of evolving our mix of business.
Selling, Administrative and Other Operating Costs
SG&A costs include management and administrative salaries, salaries and commissions paid to account executives and recruiters, benefits, location costs and other administrative costs. This category of costs decreased approximately $2.4 million from the comparable period in 2010 and represented 20.5% of revenue for the first nine months of fiscal 2011 as compared to 23.6% in fiscal 2010. In the first nine months of fiscal 2011, SG&A expenses declined as a result of previously implemented general expense reductions ($1.2 million), lower
14
employee benefit costs ($1.0 million) and personnel and related cost reductions ($0.1 million), which was partially offset by higher sale and recruiting costs ($0.3 million). In addition, during the first nine months of fiscal l 2011, we required the participants in our post-retirement medical benefit plan to move to a standardized plan or accept a buyout, which resulted in a decline in our future benefit obligation of $0.4 million.
Restructuring Costs and Other Severance Related Costs
For the nine month period ended October 1, 2011, we recorded severance and office closure charges of $0.8 million. Of these charges, $0.4 million related to severance and severance-related charges for changes in our senior executive officers and $0.4 million related to the relocation of our corporate headquarters.
For the nine month period ended October 2, 2010, we recorded a net expense reversal of $0.3 million. The net reversal is comprised of a $0.4 million charge relating to severance and severance-related expenses and a reversal of $0.7 million for modification of lease agreements.
Non-operating Income
We had no non-operating income for the first nine months of fiscal 2011.
Interest Expense
We had no borrowing outstanding in the first nine months of fiscal 2011 or 2010 under our revolving credit facility.
Income Taxes
Our income tax expense reflects the utilization of net operating loss carryforwards to offset taxable income. We currently have approximately $25.5 million of operating loss carryforwards available to offset federal and state taxes. For the nine months ended October 1, 2011 and October 2, 2010, we recorded accruals for amounts due for certain state income taxes and changes in our reserves for tax obligations. We recorded no additional income tax expense or benefit associated with our net operating income or loss because any tax expense or benefit that would otherwise have been recorded has been negated by adjusting the valuation allowance against our deferred tax asset. If, however, we successfully return to profitability to a point where future realization of deferred tax assets, which are currently reserved, becomes “more likely than not,” we may be required to reverse the existing valuation allowance to realize the benefit of these assets.
Personnel
Our IT professional staff levels, which include subcontractors, finished third quarter of fiscal 2011 at 852, a 4.0% increase against the comparable period last year and is primarily due to recent increases in our staffing business. The increase in management and administrative personnel is due to our focus on increasing the number of account executives and recruiters that are necessary to increase revenues.
Certain Information Concerning Off-Balance Sheet Arrangements
As of October 1, 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
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Liquidity and Capital Resources
The following table provides information relative to the liquidity of our business.
| | | | | | | | Percentage | |
| | October 1, | | January 1, | | Increase | | Increase | |
(In thousands) | | 2011 | | 2011 | | (Decrease) | | (Decrease) | |
| | | | | | | | | |
Cash and cash equivalents | | $ | 5,787 | | $ | 4,328 | | $ | 1,459 | | 33.7 | % |
Accounts receivable | | 19,426 | | 17,425 | | 2,001 | | 11.5 | |
Prepaid expenses and other current assets | | 392 | | 643 | | (251 | ) | (39.0 | ) |
Total current assets | | $ | 25,605 | | $ | 22,396 | | $ | 3,209 | | 14.3 | % |
| | | | | | | | | |
Accounts payable | | $ | 4,616 | | $ | 4,261 | | $ | 355 | | 8.3 | % |
Salaries and benefits | | 3,697 | | 2,189 | | 1,508 | | 68.9 | |
Deferred revenue | | 379 | | 359 | | 20 | | 5.6 | |
Deferred compensation | | 138 | | 181 | | (43 | ) | (23.8 | ) |
Restructuring accrual | | 654 | | 339 | | 315 | | 92.9 | |
Other current liabilities | | 744 | | 694 | | 50 | | 7.2 | |
Total current liabilities | | $ | 10,228 | | $ | 8,023 | | $ | 2,205 | | 27.5 | % |
| | | | | | | | | |
Working capital | | $ | 15,377 | | $ | 14,373 | | $ | 1,004 | | 7.0 | % |
Current ratio | | 2.50 | | 2.79 | | (0.29 | ) | (10.4 | )% |
| | | | | | | | | |
Total shareholders’ equity | | $ | 16,921 | | $ | 14,469 | | $ | 2,452 | | 16.9 | % |
Change in Working Capital
Working capital was $15.4 million at October 1, 2011, an increase of approximately $1.0 million from January 1, 2011. The ratio of current assets to current liabilities decreased 0.29 to 2.50 at October 1, 2011 compared to 2.79 at January 1, 2011.
Our total current assets increased approximately $3.2 million at October 1, 2011 compared to the end of fiscal 2010 primarily as a result of increased Accounts receivable balances and an increase in cash. Our Accounts receivable balance increased 11.5% as a result of a 13.9% increase in our revenues during the third quarter of fiscal 2011 over the fourth quarter of fiscal 2010 which was partially offset by a decline in our days sales outstanding from 63 days at the end of fiscal 2010 to 59 days at October 1, 2011.
Our total current liabilities increased by approximately $2.2 million at October 1, 2011 compared to the end of fiscal 2010. The timing of our payroll periods from our fiscal year end to the third quarter of fiscal 2010 caused our Salaries and benefits payable balance to increase approximately $1.5 million. The relocation of our corporate headquarters and changes in our senior executive officers during the second quarter of fiscal 2011 increased our Restructuring accrual balance.
We believe our existing working capital and availability under our Amended Credit Facility with Wells Fargo will be sufficient to support the cash flow needs of our business in fiscal 2011. We expect to be able to comply with the requirements of our credit agreement; however, failure to do so could affect our ability to obtain necessary working capital and could have a material adverse effect on our business.
Sources and Uses of Cash/Credit Facility
Cash and cash equivalents increased $1.5 million from January 1, 2011 to October 1, 2011. Our primary need for working capital is to fund the time lag between payroll and vendor disbursements and receipt of amounts billed to clients. Historically, we have been able to support internal growth in our business with internally generated funds and through the use of our credit facility.
On February 23, 2011, we entered into the Amended Credit Facility, which amended the terms of the Credit Facility and extended the maturity date to September 30, 2014. On September 21, 2011, we entered into the Second Amendment to the Amended Credit Facility with Wells Fargo, which increased our annual capital expenditures covenant for fiscal 2011 from $2.0 million to $2.5 million. Under the Amended
16
Credit Facility, Wells Fargo will continue to advance up to $15.0 million to us for working capital purposes and to facilitate the issuance of letters of credit. The total amount available for borrowing under the Amended Credit Facility will fluctuate based on our level of eligible accounts receivable.
The Amended Credit Facility carries an interest rate equal to the three-month LIBOR rate plus 1.50% - 2.50%, depending on our operating results. The Credit Facility had a one-time origination fee of $150,000, the balance of which is being amortized over the new term of the Amended Credit Facility. The annual unused line fee varies between 0.25% - 0.375%, depending on our operating results, on the daily average unused amount. The Amended Credit Facility may be terminated or reduced by us on 90 days notice in exchange for a termination fee of 1.0% of the maximum line amount through September 30, 2011, 0.50% thereafter until September 30, 2012, 0.25% thereafter until September 30, 2013 and no fee in the final year. Borrowings under the Amended Credit Facility are secured by all of our assets.
The Amended Credit Facility requires us to meet certain levels of year-to-date earnings before taxes. Additionally, the Amended Credit Facility limit on our annual capital expenditures is $2.5 million in fiscal 2011 and $2.0 million for each fiscal year thereafter and contains customary affirmative covenants, including covenants regarding annual, quarterly and projected financial reporting requirements, collateral and insurance maintenance, and compliance with applicable laws and regulations. Further, the facility contains customary negative covenants limiting our ability to grant liens, incur indebtedness, make investments, repurchase our stock, create new subsidiaries, sell assets or engage in any change of control transaction without the consent of Wells Fargo.
Upon an event of default, Wells Fargo may terminate the facility or declare the entire amount outstanding under the facility to be immediately due and payable and exercise other rights under the agreement. The events of default under the facility include, among other things, payment defaults, breaches of covenants, a change in control and bankruptcy events.
As of October 1, 2011, we were in compliance with all the requirements and had no borrowing under the Amended Credit Facility. Total availability under the Amended Credit Facility, which fluctuates based on our level of eligible accounts receivable, was $7.1 million as of October 1, 2011.
On March 3, 2010, we closed on an asset sale agreement for certain client contracts. In consideration for the assets sold and the liabilities transferred, we received $0.2 million in cash.
During each of the third quarters of fiscal 2011 and fiscal 2010, we made capital expenditures of approximately $0.8 million and $13,000, respectively. For the nine month periods ended October 1, 2011 and October 2, 2010, we made capital expenditures of approximately $1.1 million and $0.1 million, respectively.
In the third quarter of fiscal 2011, we commenced a project to replace our existing financial and human resource information systems with a fully integrated ERP solution. We believe the implementation of the ERP solution will be complete in early fiscal 2012 and estimate the total capitalized project costs at approximately $1.5 million. We have incurred capitalized expenditures related to the implementation of the ERP solution of approximately $0.8 million through the third quarter of fiscal 2011, which have been recorded in our Property and equipment, net of accumulated depreciation balance as reported in our Consolidated Balance Sheets.
During the first nine months of fiscal 2011, we paid off a loan on a Company owned life insurance policy of approximately $0.5 million and subsequently surrendered the Company owned life insurance policy and received proceeds of approximately $0.5 million.
During fiscal 2011, we required the participants in our post-retirement medical benefit plan to move to a standardized plan or accept a buyout, which resulted in a decline in our future benefit obligation by approximately $0.4 million. The reduction of our post-retirement medical benefits is recorded in our non-current Deferred compensation balance as reported in our Consolidated Balance Sheets.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) about: (i) our strategic plans, the objectives of those strategic plans and our ability to successfully implement our strategic plans, including our goal of profitability during fiscal 2011, (ii) our expectations with respect to the demand for our services and continuing pressure from clients to request lower cost offerings for IT staffing services, (iii) our expectations with respect to competition in our industry and our ability to compete, (iv) our expectations with respect to our financial results and operating performance, and (v) management’s beliefs with respect to its ability to manage its business, increase revenues, maintain profitability, achieve industry standard gross profit margin rates, build cash and return value to its shareholders. You can identify these statements by the use of words such as anticipate, estimate, expect, should, project, forecast, intend, plan, believe, will and other words and terms of similar meaning or import, or variations thereof, and in connection with any discussion of future operating or financial performance.
These forward-looking statements are based on current information, which we have assessed, but which by its nature is dynamic and subject to rapid and even abrupt changes. As such, results may differ materially in response to a change in this information. Among the factors
17
that could cause our estimates and assumptions as to future performance, and our actual results to differ materially, are: (i) our inability, in whole or in part, to implement or execute our strategic plans, (ii) our inability to successfully recruit and hire qualified technical personnel, (iii) our inability to successfully compete on a local and national basis with other companies in our industry or with new competitors who face limited barriers to entry in the markets we serve, (iv) our inability to maintain key client relationships or to attract new clients, (v) our inability to attract, retain or motivate key personnel, (vi) our inability to continue to reduce or leverage our operating costs, (vii) the possibility that we may incur liability for the errors or omissions of our consultants providing IT services for clients or the risk that we may be subject to claims for indemnification under contracts with our clients, (viii) our inability to comply with the requirements in our line of credit or to obtain a replacement line of credit on commercially reasonable terms, (ix) the risk that we will not be able to realize the benefits of our investments or exploit other opportunities of the business in a timely manner or on favorable terms, (x) potentially incorrect assumptions by management with respect to the financial effect of prior cost reduction initiatives and current strategic decisions, and (xi) other economic, business, competitive and/or regulatory factors affecting our business generally, including those set forth in this Quarterly Report on Form 10-Q (especially in the Management’s Discussion and Analysis and Risk Factors sections hereof) and our Current Reports on Form 8-K. All forward-looking statements included in this Form 10-Q are based on information available to us as of the date hereof and largely reflect estimates and assumptions made by our management, which may be difficult to predict and beyond our control. We undertake no obligation (and expressly disclaim any such obligation) to update forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to update reasons why actual results would differ from those anticipated in any such forward-looking statements, other than as required by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4T. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be disclosed timely, is accumulated and communicated to management in a timely fashion. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (“Disclosure Controls”) was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer, Brittany B. McKinney and Chief Financial Officer, William R. Wolff. Based upon that evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that these Disclosure Controls are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
(b) Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending legal proceedings to which we are a party or to which any of our property is subject, other than routine litigation incidental to the business.
Item 1A. Risk Factors
Unforeseen difficulties with the implementation of our new Lawson enterprise resource planning (“ERP”) solution could have an impact on our operations.
During the third quarter of fiscal 2011, we began a project to replace our existing financial and human resource information systems with a fully integrated Lawson ERP solution. We believe the implementation of the Lawson ERP solution will be complete in early fiscal
18
2012; however, unforeseen delays in the implementation of the Lawson ERP solution or unforeseen difficulties in the transition between our existing financial and human resource information systems and the Lawson ERP solution could have a negative effect on our operations.
Except as noted above, there were no material changes in the Company’s risk factors from those previously disclosed in the Company’s Form 10-K for the period ended January 1, 2011, which risk factors are incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Removed and Reserved.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit No. | | Description |
| | |
^ 3.1 | | Articles of Incorporation, as amended (Exhibit 3-a to Annual Report on Form 10-K for fiscal year 1988, Commission File No. 0-4090, incorporated by reference). |
^ 3.2 | | Restated Bylaws (Exhibit 3-b to Annual Report on Form 10-K for fiscal year 2000, Commission File No. 0-4090, incorporated by reference). |
^ 3.3 | | Amendment to Articles of Incorporation to increase authorized shares to 40 million (Exhibit A to Definitive Proxy Statement dated September 5, 1996, Commission File No. 0-4090, incorporated by reference). |
^ 3.4 | | Amendment to Articles of Incorporation to increase authorized shares to 60 million (Exhibit 3-d to Annual Report on Form 10-K for fiscal year 1998, Commission File No. 0-4090, incorporated by reference). |
^ 3.5 | | Amendment to Articles of Incorporation to increase authorized shares to 120 million (Exhibit A to Definitive Proxy Statement dated September 8, 1998, Commission File No. 0-4090, incorporated by reference). |
^3.6 | | Amendment to Articles of Incorporation to reduce authorized shares to 24 million. |
^3.7 | | Amendment No. 1 to Restated Bylaws of Analysts International Corporation (Exhibit 3.1 to the Registrant’s Form 8-K filed May 25, 2010, Commission File No. 0-4090, incorporated by reference). |
^3.8 | | Articles of Incorporation, as amended (Exhibit 3.1 to the Registrant’s Form 8-K filed December 17, 2010, Commission File No. 1-33981, incorporated by reference). |
^3.9 | | Amendment to Bylaws of Analysts International Corporation (Exhibit 3.2 to the Registrant’s Form 8-K filed December 17, 2010, Commission File No. 1-33981, incorporated by reference). |
^ 4.1 | | Specimen Common Stock Certificate (Exhibit 4(a) to Annual Report on Form 10-K for fiscal year 1989, Commission File No. 0-4090, incorporated by reference). |
^ 4.2 | | Amended and Restated Rights Agreement dated as of February 27, 2008 between the Company and Wells Fargo Bank N.A. and Form of Right Certificate (Exhibit 4.1 to the Registrant’s Form 8-A12B dated February 27, 2008, Commission File No. 0-4090, incorporated by reference). |
^ 4.3 | | Amendment No. 1 to Amended and Restated Rights Agreement dated as of May 25, 2010 by and between Analysts International Corporation and Wells Fargo Bank, N.A. (Exhibit 4.1 to the Registrant’s Form 8-K filed May 25, 2010, Commission File No. 0-4090, incorporated by reference). |
+ 4.4 | | Second Amendment to Credit & Security Agreement dated as of September 21, 2011 by and between Analysts International Corporation and Wells Fargo Bank, N.A. |
^10.65 | | First Amendment to Credit & Security Agreement with Wells Fargo Bank, National Association, dated February 23, 2011 (Exhibit 10.1 to Current Report on Form 8-K, filed February 24, 2010, Commission File No. 1-33981, incorporated by reference). |
^10.66 | | Employment Agreement together with Exhibits A and B, between the Company and Brittany B. McKinney, dated as of March 1, 2011 (Exhibit 10.1 to the Registrant’s Form 8-K filed February 24, 2010, Commission File No. 1-33981, incorporated by reference). |
^10.67 | | Change in Control Severance Pay Plan, adopted February 22, 2011, dated March 1, 2011 (Exhibit 10.1 to Current Report on Form 8-K, filed February 28, 2011, Commission File No. 1-33981, incorporated by reference). |
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^10.68 | | Separation Agreement and Release of Claims dated May 4, 2011, between the Company and Randy W. Strobel (Exhibit 10.1 to the Registrant’s Form 8-K filed May 5, 2011, Commission File No. 1-33987, incorporated by reference) |
^10.69 | | Separation Agreement and Release of Claims dated as of May 24, 2011, between Analysts International Corporation and Christopher T. Cain (Exhibit 10.1 to the Registrant’s Form 8-K filed May 27, 2011, Commission File No. 1-33987, incorporated by reference) |
^10.70 | | Employment Agreement between Analysts International Corporation and William R. Wolff, fully executed on August 3, 2011, with an effective date of August 8, 2011(Exhibit 10.1 to the Registrant’s Form 8-K filed August 3, 2011, Commission File No. 1-33981, incorporated by reference) |
+ 31.1 | | Certification of CEO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
+ 31.2 | | Certification of CFO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
++ 32 | | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
++ 101.1 | | The following materials from Analysts International Corporation’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2011 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statement of Cash Flows, and (iv) Notes to Consolidated Financial Statements. |
^ | | Denotes an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. |
+ | | Filed herewith. |
++ | | Furnished herewith. |
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.
| | ANALYSTS INTERNATIONAL CORPORATION |
| | (Registrant) |
| | |
| | |
Date: November 3, 2011 | By: | /s/ Brittany B. McKinney |
| | Brittany B. McKinney |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| | |
Date: November 3, 2011 | By: | /s/ William R. Wolff |
| | William R. Wolff |
| | Senior Vice President, Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
21
EXHIBIT INDEX
Exhibit No. | | Description |
| | |
^ 3.1 | | Articles of Incorporation, as amended (Exhibit 3-a to Annual Report on Form 10-K for fiscal year 1988, Commission File No. 0-4090, incorporated by reference). |
^ 3.2 | | Restated Bylaws (Exhibit 3-b to Annual Report on Form 10-K for fiscal year 2000, Commission File No. 0-4090, incorporated by reference). |
^ 3.3 | | Amendment to Articles of Incorporation to increase authorized shares to 40 million (Exhibit A to Definitive Proxy Statement dated September 5, 1996, Commission File No. 0-4090, incorporated by reference). |
^ 3.4 | | Amendment to Articles of Incorporation to increase authorized shares to 60 million (Exhibit 3-d to Annual Report on Form 10-K for fiscal year 1998, Commission File No. 0-4090, incorporated by reference). |
^ 3.5 | | Amendment to Articles of Incorporation to increase authorized shares to 120 million (Exhibit A to Definitive Proxy Statement dated September 8, 1998, Commission File No. 0-4090, incorporated by reference). |
^3.6 | | Amendment to Articles of Incorporation to reduce authorized shares to 24 million. |
^3.7 | | Amendment No. 1 to Restated Bylaws of Analysts International Corporation (Exhibit 3.1 to the Registrant’s Form 8-K filed May 25, 2010, Commission File No. 0-4090, incorporated by reference). |
^3.8 | | Articles of Incorporation, as amended (Exhibit 3.1 to the Registrant’s Form 8-K filed December 17, 2010, Commission File No. 1-33981, incorporated by reference). |
^3.9 | | Amendment to Bylaws of Analysts International Corporation (Exhibit 3.2 to the Registrant’s Form 8-K filed December 17, 2010, Commission File No. 1-33981, incorporated by reference). |
^ 4.1 | | Specimen Common Stock Certificate (Exhibit 4(a) to Annual Report on Form 10-K for fiscal year 1989, Commission File No. 0-4090, incorporated by reference). |
^ 4.2 | | Amended and Restated Rights Agreement dated as of February 27, 2008 between the Company and Wells Fargo Bank N.A. and Form of Right Certificate (Exhibit 4.1 to the Registrant’s Form 8-A12B dated February 27, 2008, Commission File No. 0-4090, incorporated by reference). |
^ 4.3 | | Amendment No. 1 to Amended and Restated Rights Agreement dated as of May 25, 2010 by and between Analysts International Corporation and Wells Fargo Bank, N.A. (Exhibit 4.1 to the Registrant’s Form 8-K filed May 25, 2010, Commission File No. 0-4090, incorporated by reference). |
+ 4.4 | | Second Amendment to Credit & Security Agreement dated as of September 21, 2011 by and between Analysts International Corporation and Wells Fargo Bank, N.A. |
^10.65 | | First Amendment to Credit & Security Agreement with Wells Fargo Bank, National Association, dated February 23, 2011 (Exhibit 10.1 to Current Report on Form 8-K, filed February 24, 2010, Commission File No. 1-33981, incorporated by reference). |
^10.66 | | Employment Agreement together with Exhibits A and B, between the Company and Brittany B. McKinney, dated as of March 1, 2011 (Exhibit 10.1 to the Registrant’s Form 8-K filed February 24, 2010, Commission File No. 1-33981, incorporated by reference). |
^10.67 | | Change in Control Severance Pay Plan, adopted February 22, 2011, dated March 1, 2011 (Exhibit 10.1 to Current Report on Form 8-K, filed February 28, 2011, Commission File No. 1-33981, incorporated by reference). |
^10.68 | | Separation Agreement and Release of Claims dated May 4, 2011, between the Company and Randy W. Strobel (Exhibit 10.1 to the Registrant’s Form 8-K filed May 5, 2011, Commission File No. 1-33987, incorporated by reference) |
^10.69 | | Separation Agreement and Release of Claims dated as of May 24, 2011, between Analysts International Corporation and Christopher T. Cain (Exhibit 10.1 to the Registrant’s Form 8-K filed May 27, 2011, Commission File No. 1-33987, incorporated by reference) |
^10.70 | | Employment Agreement between Analysts International Corporation and William R. Wolff, fully executed on August 3, 2011, with an effective date of August 8, 2011(Exhibit 10.1 to the Registrant’s Form 8-K filed August 3, 2011, Commission File No. 1-33981, incorporated by reference) |
+ 31.1 | | Certification of CEO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
+ 31.2 | | Certification of CFO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
++ 32 | | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
++ 101.1 | | The following materials from Analysts International Corporation’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2011 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statement of Cash Flows, and (iv) Notes to Consolidated Financial Statements. |
^ | | Denotes an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. |
+ | | Filed herewith. |
++ | | Furnished herewith. |
22
