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 September 29, 2012

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)

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.

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 29, 2012, 5,082,857 shares of the registrant’s common stock were outstanding.

ANALYSTS INTERNATIONAL CORPORATION

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Analysts International Corporation

Consolidated Balance Sheets

(Unaudited)

See notes to consolidated financial statements.

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Analysts International Corporation

Consolidated Statements of Operations

(Unaudited)

See notes to consolidated financial statements.

4

Analysts International Corporation

Consolidated Statements of Cash Flows

(Unaudited)

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 900 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 December 31, 2011.

We operate on a fiscal year ending on the Saturday closest to December 31. Accordingly, fiscal 2012 will end on Saturday, December 29, 2012. The third quarter of fiscal 2012 ended on September 29, 2012 and the third quarter of fiscal 2011 ended on October 1, 2011.

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 December 31, 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 accounting principles generally accepted in the United States of America 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.

3.   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 September 29, 2012 and December 31, 2011 and the estimated useful lives used in the financial statements are as follows:

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”) system. The project to implement the ERP system resulted in approximately $1.5 million of costs being capitalized in fiscal 2011. During the first nine months of fiscal 2012, the Company capitalized an additional $0.5 million of costs related to the ERP system.

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4.   Financing Agreement

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. 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.

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.

On February 22, 2012, we entered into the Third Amendment to the Amended Credit Facility (“Third Amendment”) with Wells Fargo. The Third Amendment increased the total availability of the Amended Credit Facility, which fluctuates based on our level of eligible accounts receivable, by approximately $4.0 million. In addition, the Third Amendment increased our minimum trailing twelve months earnings before taxes financial covenant from a loss of $0.8 million to earnings of $0.25 million. Finally, the Third Amendment added an additional financial covenant which will require us to maintain a minimum excess borrowing base availability of not less than $3.0 million for each reporting period in 2012 and thereafter. 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 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 maturity date of the Amended Credit Facility is September 30, 2014 and 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 or reduction 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. For 2012 and thereafter, we are required to exceed a minimum trailing twelve months earnings before taxes of $0.25 million. The Amended Credit Facility limits our annual capital expenditures to $2.0 million. For 2012 and thereafter, we will also be required to maintain a minimum excess borrowing base availability of not less than $3.0 million. The Amended Credit 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 and bankruptcy events.

As of September 29, 2012, we were in compliance with all the requirements and had no borrowings outstanding under the Amended Credit Facility. Total availability of the Amended Credit Facility, which fluctuates based on our level of eligible accounts receivable, was $12.1 million as of September 29, 2012.

5.   Restructuring Costs and Other Severance Related Costs

For the nine month period ended September 29, 2012, we recorded severance charges of $0.1 million related to changes in our senior executive officers.

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.

A summary of the restructuring charges and subsequent activity in the restructuring accrual for the nine months ended September 29, 2012 is as follows:

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6.   Shareholders’ Equity

7.   Share Based Compensation

Total share based compensation expense for the first nine months of fiscal years 2012 and 2011 was approximately $0.4 million in both years and includes compensation expense related to both stock options and stock awards.

In the first nine months of 2012, we recorded a tax benefit of approximately $21,000 related to the share based compensation and for the first nine months of fiscal 2011, we recorded a tax benefit of $48,000. The tax benefit is offset against our valuation allowance for our deferred tax asset.

Stock Options

The following table summarizes the stock option activity for the nine months ended September 29, 2012:

The total fair value of the stock options that vested during the nine months ended September 29, 2012 was approximately $145,000.

For the nine month period ended September 29, 2012, 13,250 options were exercised and the total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) was approximately $30,000. The income tax benefit realized from stock option exercises was negligible. There were no stock options exercised in the nine months ended October 1, 2011.

Total stock option expense for the nine months ended September 29, 2012 was approximately $0.2 million.

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As of September 29, 2012, there was approximately $0.2 million of unrecognized share based compensation expense related to unvested stock options that are expected to vest over a weighted-average period of approximately 1.3 years. Options to purchase 335,650 shares were outstanding at September 29, 2012.

Stock Awards

The following table summarizes the stock award activity for the nine months ended September 29, 2012:

The total fair value of stock awards that vested during the nine months ended September 29, 2012 was approximately $185,000.

Total stock award expense for the nine months ended September 29, 2012 was $0.2 million.

As of September 29, 2012, there was $0.2 million of unrecognized compensation expense related to unvested stock awards that were expected to vest over a weighted average period of 1.3 years.

8.   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.

For the nine-month period ended September 29, 2012, anti-dilutive weighted average shares of 258,730 were excluded from the calculation of weighted average number of common equivalent shares outstanding. For the nine-month period ended October 1, 2011, anti-dilutive weighted average shares of 334,928 were excluded from the calculation of weighted average number of common equivalent shares outstanding. The computation of basic and diluted income (loss) per share for the three and nine months ended September 29, 2012 and October 1, 2011 is as follows:

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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 December 31, 2011.

A.                                    Our Business

Analysts International Corporation (“AIC,” “Company,” “we,” “us,” or “our”) is a national information technology (“IT”) services company. We employ approximately 900 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.

We operate on a fiscal year ending on the Saturday closest to December 31. Accordingly, fiscal 2012 will end on Saturday, December 29, 2012. The third quarter of fiscal 2012 ended on September 29, 2012 and the third quarter of fiscal 2011 ended on October 1, 2011.

B.                                    2012 Strategic Plan

In 2012, our plan is to continue our focus on investing for growth in our business while delivering profitability. Our plan includes:

·                  Leveraging our fiscal 2011 investments in sales and recruiting personnel and continuing to focus sales efforts on our core markets with the highest potential for growth;

·                  Leveraging strategic client relationships and expanding our national sales capabilities; and

·                  Continuing to grow our consultant community with a focus on higher-end IT skill sets.

AIC has a long history of serving mid-market to Fortune 500 companies throughout the country. With our renewed focus on providing IT services to our national clients with multiple buying locations around the country, we intend to expand our presence within these clients.

C.                                    Business Developments

Leadership

On February 22, 2011, our Board of Directors appointed Brittany B. McKinney as our President and Chief Executive 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. His resignation was effective on 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 provided that Mr. Wolff would be employed as Senior Vice President, Chief Financial Officer of the Company. On June 12, 2012, Mr. Wolff resigned from his employment as Senior Vice President, Chief Financial Officer of the Company, effective as of the close of business on June 29, 2012.

On June 8, 2012, the Company and Lynn L. Blake entered into an Employment Agreement with an effective date of July 2, 2012, which provided that Ms. Blake will be employed as Senior Vice President, Chief Financial Officer and Treasurer of the Company. For the past five years, Ms. Blake had served as the Vice President of Finance and Chief Accounting Officer at Entegris, Inc., a publicly traded global provider of products and materials used in advanced high-technology manufacturing.

Enterprise Resource Planning (“ERP”) System

On August 18, 2011, our Board of Directors approved a project to replace our financial and human resource information systems with a fully integrated ERP system. The ERP system will allow us to streamline our business processes and allow for cost efficient scalability as well as improve management reporting and analysis. The initial implementation of the ERP system was completed in early fiscal 2012 and resulted

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in approximately $1.5 million of costs being capitalized in fiscal 2011. Through the end of third quarter of fiscal 2012, we have incurred additional capitalized expenditures related to the ERP system of approximately $0.5 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. 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.

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.

On February 22, 2012, we entered into the Third Amendment to the Amended Credit Facility (“Third Amendment”) with Wells Fargo. The Third Amendment increased the total availability of the Amended Credit Facility, which fluctuates based on our level of eligible accounts receivable, by approximately $4.0 million. In addition, the Third Amendment increased our minimum trailing twelve months earnings before taxes financial covenant from a loss of $0.8 million to earnings of $0.25 million. Finally, the Third Amendment added an additional financial covenant which will require us to maintain a minimum excess borrowing base availability of not less than $3.0 million for each reporting period in fiscal 2012 and thereafter.

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.

D.                                    Overview of Third Quarter Fiscal 2012 Results of Operations

Our revenues decreased $2.4 million, or 8.2%, compared to the third quarter of fiscal 2011. When compared to the prior year quarter, the number of billable hours and average billing rates decreased by 4.1% and 2.2%, respectively.  Additionally, revenues for the third quarter of fiscal 2012 were negatively impacted by approximately $0.5 million related to unanticipated project-related adjustments on two specific client engagements.

The gross margin rate decreased to 21.0% from the prior year quarter rate of 25.0% primarily due to unanticipated project-related adjustments, decreased permanent placement revenues and increased fringe benefit costs.

Selling, Administrative and Other Operating Costs (“SG&A”) expenses increased $0.8 million, or 14.5%, in the third quarter of fiscal 2012 over the prior year quarter as a result of increased sales costs and increased bad debt expense.  The prior year quarter included the final earn-out benefit associated with a sale of business in fiscal 2008.

We generated cash from operations of $1.3 million during the third quarter of fiscal 2012.  As of September 29, 2012, we had a cash balance of $4.5 million and no outstanding borrowings under our revolving line of credit.

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RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 29, 2012 VS. OCTOBER 1, 2011

The following table illustrates the relationship between revenue and expense categories for the three months ended September 29, 2012 and October 1, 2011.

NM = not meaningful

Revenues

Revenues decreased $2.4 million, or 8.2%, from the comparable period a year ago. The decrease in our third quarter of fiscal 2012 revenues over the prior year is primarily due to a 4.1% ($1.2 million) decrease in the number of hours billed, a 2.2% ($0.6 million) decrease in average billing rates and a decrease of $0.6 million in our permanent placement and other revenues.

Reflected in the figures above, our revenues for the third quarter of fiscal 2012 were negatively impacted by approximately $0.5 million related to unanticipated project-related adjustments on two specific client engagements.

There were 63 billing days in the third quarters of both fiscal years 2012 and 2011.

Cost of Revenues

Cost of revenues represents our payroll and benefit costs associated with our billable consultants and our cost of using sub-contractors. This category of expense decreased $0.7 million from the prior comparable period and was 79.0% of revenue for third quarter of fiscal 2012 compared to 75.0% the prior comparable period.  The increase in cost as a percentage of revenue from the prior year quarter is primarily due to a change in our revenue mix, unanticipated project-related adjustments and increased fringe benefit costs.

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 increased approximately $0.8 million from the comparable period in 2011 and represented 23.3% of revenue for the third quarter of fiscal 2012 compared to 18.7% in fiscal 2011. In the third quarter of fiscal 2012, SG&A expenses increased as a result an increase in sales costs ($0.2 million), increased bad debt expense ($0.3 million), and the final earn-out benefit ($0.3 million) in the prior year quarter associated with a sale of business in fiscal 2008.

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Restructuring Costs and Other Severance Related Costs

For the three-month period ended September 29, 2012, we recorded no restructuring or severance related charges.

For the three-month period ended October 1, 2011, we recorded severance and office closure charges of $23,000.

Interest Expense

We had no borrowings during the third quarter of fiscal 2012 and 2011 under our Amended Credit Facility.

Income Taxes

In the third quarter fiscal 2012, we recorded $57,000 of income tax expense compared to $11,000 in third quarter of fiscal 2011.  The increase in tax expense is the result of a suspension of net operating loss deductions in two states for fiscal year 2011. In the third quarters of both fiscal years 2012 and 2011, our income tax expense reflects the utilization of net operating loss carryforwards to offset taxable income.

We currently have approximately $25.2 million of tax benefits associated with net operating loss carryforwards available to offset federal and state taxes. For the third quarter of both fiscal years 2012 and 2011, 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.

Certain Information Concerning Off-Balance Sheet Arrangements

As of September 29, 2012, 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 2012 Result of Operations

Our revenues decreased $1.7 million, or 2.1%, from the first nine months of fiscal 2011. When compared to the first nine months of fiscal 2011, the number of billable hours decreased 0.9% and our average billing rates decreased 0.3%.

The number of billing days in the first nine months of fiscal 2012 and fiscal 2011 was 191 and 192, respectively.

The gross margin rate decreased from 24.0% for the first nine months of 2011 to 22.7% for the first nine months of fiscal 2012 primarily due to a change in our revenue mix, unanticipated project-related adjustments and increased fringe benefit costs.

SG&A expenses increased $1.1 million, or 6.5%, in the first nine months of 2012 over the first nine months of the prior year as a result of an increase in sales and recruiter personnel expenses, bad debt expense and the prior year included the final earn-out benefit associated with a sale of business in fiscal 2008.

We used $38,000 of cash from operations during the first nine months of 2012. As of September 29, 2012, we had a cash balance of $4.5 million and no outstanding borrowings under our revolving line of credit.

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RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 29, 2012 VS. OCTOBER 1, 2011

The following table illustrates the relationship between revenue and expense categories as of September 29, 2012 and October 1, 2011.

NM = not meaningful

Revenues

Revenues decreased $1.7 million, or 2.1%, from the comparable period a year ago.  The decrease in revenue for the first nine months of the year over the prior year is primarily due a 0.9% ($0.7 million) decrease in the number of hours billed, a 0.3% decrease ($0.3 million) in average billing rates and a $0.7 million decrease to our permanent placement and other revenues.

In the first nine months of fiscal 2012, there were 191 billing days compared to 192 billing days in fiscal 2011.

Cost of Revenues

Cost of revenues represents our payroll and benefit costs associated with our billable consultants and our cost of using sub-contractors. This category of expense increased $0.2 million compared the prior year and was 77.3% of revenues in the first nine months of fiscal 2012 compared to 76.0% in the prior comparable period.  The increase in cost as a percentage of revenue from the prior year is primarily due to a change in our revenue mix, unanticipated project-related adjustments and increased fringe benefit costs.

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 increased approximately $1.1 million from the comparable period in 2011 and represented 22.3% of revenue for the first nine months of 2012 compared to 20.5% in fiscal 2011. In the first nine months of 2012, SG&A expenses increased as a result of an increase in sales and recruiter personnel expenses ($0.6 million), increased bad debt expense ($0.2 million), and the prior year final earn-out benefit of $0.3 million associated with a sale of business in fiscal 2008.

Restructuring Costs and Other Severance Related Costs

For the nine-month period ended September 29, 2012, we recorded severance charges of $0.1 million related to changes in our senior executive officers.

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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.

Interest Expense

The implementation of the ERP system caused a delay in our normal billing cycles during the first few month of fiscal 2012 which caused an increase in our operating working capital. As a result, we borrowed and repaid $5.0 million on our Amended Credit Facility during the first half of fiscal 2012.  We had no borrowings during the third quarter of fiscal 2012. Our average borrowings for the first nine months of 2012 were approximately $65,000. We had no borrowings during the first nine months of fiscal 2011.

Income Taxes

In the first nine months of fiscal 2012, we recorded $63,000 of income tax expense compared to $27,000 in first nine months of fiscal 2011.  The increase in tax expense is the result of a suspension of net operating loss deductions in two states for fiscal year 2011. In the first nine months of both fiscal years 2012 and 2011, our income tax expense reflects the utilization of net operating loss carryforwards to offset taxable income.

We currently have approximately $25.2 million of tax benefits associated with net operating loss carryforwards available to offset federal and state taxes. For the first nine months of both fiscal years 2012 and 2011, 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.

Certain Information Concerning Off-Balance Sheet Arrangements

As of September 29, 2012, 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

At September 29, 2012, we had $4.5 million of cash and cash equivalents on hand. In addition to our cash balances, we have access to our Amended Credit Facility with $15 million of maximum availability, under which our borrowing availability was $12.1 million as of September 29, 2012. Working capital was $16.7 million at September 29, 2012, up approximately $0.5 million from December 31, 2011. The ratio of current assets to current liabilities increased to 3.29 at September 29, 2012 compared to 3.17 at December 31, 2011.

Historically, we have been able to support internal growth in our business with internally generated funds and through the use of our credit facility. 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 2012. 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.

The following table summarizes the major captions from our Consolidated Statements of Cash Flows: