**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x Quarterly Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended July 3, 2010**

 

**or**

 

**o Transition Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the transition period from         to      **

 

**Commission File Number: 0-4090**

 

**ANALYSTS INTERNATIONAL CORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Minnesota**                             | ** ** | **41-0905408**                     |
|-------------------------------------------|------------|------------------------------------|
| (State  of Incorporation)                 |       | (IRS  Employer Identification No.) |
|                                      |       |                               |
| **3601 West 76th Street**            |       |                               |
| **Minneapolis, MN**                       | ** ** | **55435**                          |
| (Address  of Principal Executive Offices) |       | (Zip  Code)                        |

 

Registrant’stelephone number, including area code: **(952)835-5900**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Date File required to be submitted andposted 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 registrantwas required to submit and post such files). Yes o No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act.

 

| Large  accelerated filer o |   | Accelerated  Filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  Filer o   |   | Smaller  Reporting Company x |

 

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

 

As of August 3, 2010,4,985,874 shares of the registrant’s common stock were outstanding.

 

 

 

----

 

**ANALYSTS INTERNATIONAL CORPORATION**

 

**INDEX**

 
| **Part I.**   | **FINANCIAL INFORMATION.**                                                                                         | 3      |
|--------------------|--------------------------------------------------------------------------------------------------------------------|--------|
|               |                                                                                                               |   |
| Item 1.            | Financial Statements (Unaudited)                                                                                   | 3      |
|               |                                                                                                               |   |
|               | Consolidated  Balance Sheets as of July 3, 2010 and January 2, 2010                                      | 3      |
|               |                                                                                                               |   |
|               | Consolidated  Statements of Operations for the Three and Six Months Ended July 3, 2010  and July 4, 2009 | 4      |
|               |                                                                                                               |   |
|               | Consolidated  Statements of Cash Flows for the Six Months Ended July 3, 2010 and  July 4, 2009           | 5      |
|               |                                                                                                               |   |
|               | Notes  to Consolidated Financial Statements                                                                        | 6      |
|               |                                                                                                               |   |
| Item 2.            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 11     |
|               |                                                                                                               |   |
| Item 3.            | Quantitative  and Qualitative Disclosures About Market Risk                                                        | 22     |
|               |                                                                                                               |   |
| Item 4T.           | Controls and  Procedures                                                                                           | 22     |
|               |                                                                                                               |   |
| **Part II.**  | **OTHER INFORMATION**                                                                                              | 24     |
|               |                                                                                                               |   |
| Item 1.            | Legal Proceedings                                                                                                  | 24     |
|               |                                                                                                               |   |
| Item 1A.           | Risk Factors                                                                                                       | 24     |
|               |                                                                                                               |   |
| Item 2.            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                       | 24     |
|               |                                                                                                               |   |
| Item 3.            | Defaults Upon  Senior Securities                                                                                   | 24     |
|               |                                                                                                               |   |
| Item 4.            | Submission of  Matters to a Vote of Security Holders                                                               | 24     |
|               |                                                                                                               |   |
| Item 5.            | Other Information                                                                                                  | 25     |
|               |                                                                                                               |   |
| Item 6.            | Exhibits                                                                                                           | 25     |
|               |                                                                                                               |   |
| Signatures         | 26                                                                                                                 |
|               |                                                                                                               |
| Exhibit Index | 27                                                                                                                 |

 

2

----

 

**PART I.FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**AnalystsInternational Corporation**

**ConsolidatedBalance Sheets**

**(Unaudited)**

 
| ** **                                                                                                                        | ** ** | **July 3,** | ** ** | **January 2,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|
| **(In thousands)**                                                                                                                | ** ** | **2010**         | ** ** | **2010**            | ** ** |
|                                                                                                                              |       |             |       |                |       |
| **ASSETS**                                                                                                                        |       |             |       |                |       |
|                                                                                                                              |       |             |       |                |       |
| Current assets:                                                                                                                   |       |             |       |                |       |
| Cash and cash equivalents                                                                                                         |       | $                | 3,439      |                | $          | 3,818 |   |
| Accounts receivable, less allowance for doubtful  accounts of $853 and $958, respectively                                         |       | 19,740           |       | 23,028              |       |
| Prepaid expenses and other current assets                                                                                         |       | 1,226            |       | 1,442               |       |
| Total current assets                                                                                                              |       | 24,405           |       | 28,288              |       |
|                                                                                                                              |       |             |       |                |       |
| Property and equipment, net of accumulated  depreciation of $10,588 and $10,774, respectively                                     |       | 1,195            |       | 1,846               |       |
| Other assets                                                                                                                      |       | 440              |       | 543                 |       |
| Total assets                                                                                                                      |       | $                | 26,040     |                | $          | 30,677 |   |
|                                                                                                                              |       |             |       |                |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                    |       |             |       |                |       |
|                                                                                                                              |       |             |       |                |       |
| Current liabilities:                                                                                                              |       |             |       |                |       |
| Accounts payable                                                                                                                  |       | $                | 5,364      |                | $          | 6,958 |   |
| Line of credit                                                                                                                    |       | —           |       | —              |       |
| Salaries and benefits                                                                                                             |       | 2,916            |       | 2,498               |       |
| Deferred revenue                                                                                                                  |       | 338              |       | 310                 |       |
| Deferred compensation                                                                                                             |       | 425              |       | 522                 |       |
| Restructuring accrual                                                                                                             |       | 1,189            |       | 2,038               |       |
| Other current liabilities                                                                                                         |       | 970              |       | 960                 |       |
| Total current liabilities                                                                                                         |       | 11,202           |       | 13,286              |       |
|                                                                                                                              |       |             |       |                |       |
| Non-current liabilities:                                                                                                          |       |             |       |                |       |
| Deferred compensation                                                                                                             |       | 945              |       | 1,037               |       |
| Restructuring accrual                                                                                                             |       | 705              |       | 1,045               |       |
| Other long-term liabilities                                                                                                       |       | 216              |       | 361                 |       |
| Total non-current liabilities                                                                                                     |       | 1,866            |       | 2,443               |       |
|                                                                                                                              |       |             |       |                |       |
| Shareholders’ equity:                                                                                                        |       |             |       |                |       |
| Common stock, par value $.10 a share; authorized  24,000,000 shares; issued and outstanding 4,985,874 and 4,985,015, respectively |       | 498              |       | 498                 |       |
| Additional capital                                                                                                                |       | 25,629           |       | 25,598              |       |
| Accumulated deficit                                                                                                               |       | (13,155          | )          | (11,148             | )          |
| Total shareholders’ equity                                                                                                   |       | 12,972           |       | 14,948              |       |
| Total liabilities and shareholders’ equity                                                                                   |       | $                | 26,040     |                | $          | 30,677 |   |

 

Seenotes to consolidated financial statements.

 

3

----

 

**AnalystsInternational Corporation**

**Consolidated Statements of Operations**

***(Unaudited)***

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **July 3,**       | ** ** | **July 4,**     | ** ** | **July 3,** | ** ** | **July 4,** | ** ** |
| **(In thousands except per share amounts)**            | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Revenue:                                               |       |                   |       |                 |       |   |   |   |   |
| Professional services provided directly                |       | $                      | 26,658     |                 | $          | 35,053 |   | $ | 54,699 |   | $ | 75,876 |   |
| Professional services provided through  subsuppliers   |       | 188                    |       | 678                  |       | 599 |   | 1,551 |   |
| Product sales                                          |       | —                 |       | 4,797                |       | — |   | 8,233 |   |
| Total revenue                                          |       | 26,846                 |       | 40,528               |       | 55,298 |   | 85,660 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Expenses:                                              |       |                   |       |                 |       |   |   |   |   |
| Cost of services provided directly                     |       | 21,029                 |       | 27,821               |       | 43,104 |   | 60,109 |   |
| Cost of services provided through subsuppliers         |       | 179                    |       | 643                  |       | 565 |   | 1,474 |   |
| Cost of product sales                                  |       | —                 |       | 4,079                |       | — |   | 7,008 |   |
| Selling, administrative and other operating costs      |       | 6,464                  |       | 10,318               |       | 13,437 |   | 21,347 |   |
| Restructuring costs and other severance related  costs |       | 8                      |       | 1,725                |       | 182 |   | 1,791 |   |
| Impairment of intangible assets                        |       | —                 |       | 2,268                |       | — |   | 2,268 |   |
| Amortization of intangible assets                      |       | —                 |       | 224                  |       | — |   | 447 |   |
| Total expenses                                         |       | 27,680                 |       | 47,078               |       | 57,288 |   | 94,444 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Operating loss                                         |       | (834                   | )          | (6,550               | )          | (1,990 | ) | (8,784 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Non-operating income                                   |       | 5                      |       | 13                   |       | 10 |   | 27 |   |
| Interest expense                                       |       | (5                     | )          | (3                   | )          | (8 | ) | (11 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Loss before income taxes                               |       | (834                   | )          | (6,540               | )          | (1,988 | ) | (8,768 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Income tax expense                                     |       | 8                      |       | 12                   |       | 19 |   | 18 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Net loss                                               |       | $                      | (842       | )                    | $          | (6,552 | ) | $ | (2,007 | ) | $ | (8,786 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Per common share (basic):                              |       |                   |       |                 |       |   |   |   |   |
| Net loss                                               |       | $                      | (0.17      | )                    | $          | (1.31 | ) | $ | (0.40 | ) | $ | (1.76 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Per common share (diluted):                            |       |                   |       |                 |       |   |   |   |   |
| Net loss                                               |       | $                      | (0.17      | )                    | $          | (1.31 | ) | $ | (0.40 | ) | $ | (1.76 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Weighted-average shares outstanding:                   |       |                   |       |                 |       |   |   |   |   |
| Basic                                                  |       | 4,986                  |       | 4,985                |       | 4,986 |   | 4,985 |   |
| Diluted                                                |       | 4,986                  |       | 4,985                |       | 4,986 |   | 4,985 |   |

 

Seenotes to consolidated financial statements.

 

4

----

 

**AnalystsInternational Corporation**

**Consolidated Statements of Cash Flows**

***(Unaudited)***

 
| ** **                                            | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|
| ** **                                            | ** ** | **July 3,**     | ** ** | **July 4,** | ** ** |
| **(In thousands)**                                    | ** ** | **2010**             | ** ** | **2009** | ** ** |
| ** **                                            | ** ** | ** **           | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                 |       |                 |       |   |   |
| Net loss                                              |       | $                    | (2,007     | ) | $ | (8,786 | ) |
|                                                  |       |                 |       |   |   |
| Adjustments to net loss:                              |       |                 |       |   |   |
| Depreciation                                          |       | 467                  |       | 767 |   |
| Amortization of intangible assets                     |       | —               |       | 447 |   |
| Impairment of intangible assets                       |       | —               |       | 2,268 |   |
| Stock based compensation                              |       | 31                   |       | 213 |   |
| Loss on asset sales and disposals                     |       | 107                  |       | 8 |   |
|                                                  |       |                 |       |   |   |
| Changes in:                                           |       |                 |       |   |   |
| Accounts receivable                                   |       | 3,288                |       | 11,576 |   |
| Accounts payable                                      |       | (1,623               | )          | (5,365 | ) |
| Salaries and benefits                                 |       | 418                  |       | 636 |   |
| Restructuring accrual                                 |       | (1,189               | )          | 1,567 |   |
| Deferred compensation                                 |       | (189                 | )          | (149 | ) |
| Prepaid expenses and other assets                     |       | 319                  |       | 340 |   |
| Deferred revenue                                      |       | 28                   |       | (374 | ) |
| Other accrued liabilities                             |       | (45                  | )          | (56 | ) |
| Net cash (used in) provided by operating  activities  |       | (395                 | )          | 3,092 |   |
|                                                  |       |                 |       |   |   |
| Cash flows from investing activities:                 |       |                 |       |   |   |
| Expended for property and equipment additions         |       | (78                  | )          | (762 | ) |
| Proceeds from asset sale                              |       | 184                  |       | — |   |
| Net cash provided by (used in) investing  activities  |       | 106                  |       | (762 | ) |
|                                                  |       |                 |       |   |   |
| Cash flows from financing activities:                 |       |                 |       |   |   |
| Net change in line of credit                          |       | —               |       | — |   |
| Payment of capital lease obligation                   |       | (90                  | )          | (59 | ) |
| Net cash used in financing activities                 |       | (90                  | )          | (59 | ) |
|                                                  |       |                 |       |   |   |
| Net (decrease) increase in cash and cash  equivalents |       | (379                 | )          | 2,271 |   |
|                                                  |       |                 |       |   |   |
| Cash and cash equivalents at beginning of period      |       | 3,818                |       | 2,288 |   |
|                                                  |       |                 |       |   |   |
| Cash and cash equivalents at end of period            |       | $                    | 3,439      |   | $ | 4,559 |   |

 

Seenotes to consolidated financial statements.

 

5

----

 

**Analysts International Corporation**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**1. ****Organization andNature of Business**

 

Analysts InternationalCorporation (“AIC,” “Company,” “we,” “us,” or “our”) is an informationtechnology (“IT”) services company. We employ approximately 800 professionalsand are focused on serving the information technology needs of mid-market toFortune 500 companies and government agencies across North America. AIC wasincorporated in Minnesota in 1966 and our corporate headquarters is located inMinneapolis, Minnesota. For a more complete description of our Company, pleaserefer to our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2010.

 

We operate on a fiscal yearending on the Saturday closest to December 31. Accordingly, fiscal 2010will end on January 1, 2011. The second quarter of fiscal 2010 ended on July 3,2010 and the second quarter of fiscal 2009 ended on July 4, 2009.

 

**2.  Summary of Significant Accounting Policies**

 

*Basis ofConsolidation*

 

The accompanying unauditedConsolidated Financial Statements of AIC have been prepared on the accrualbasis of accounting and in accordance with the requirements of the Securitiesand Exchange Commission (“SEC”) for interim financial reporting. As permittedunder these rules, certain footnotes and other financial information that arenormally required by accounting principles generally accepted in the UnitedStates (“U.S. GAAP”) can be condensed or omitted. The Consolidated FinancialStatements included in this document reflect, in the opinion of our management,all adjustments (consisting of only normal recurring adjustments, except asnoted elsewhere in the Notes to Consolidated Financial Statements) necessaryfor fair presentation of the results of operations for the interim periodspresented. The following notes should be read in conjunction with theaccounting policies and other disclosures in the Notes to the ConsolidatedFinancial Statements incorporated by reference in our Annual Report onForm 10-K for the fiscal year ended January 2, 2010. 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 beexpected for the full fiscal year.

 

*Estimates*

 

The preparation ofConsolidated Financial Statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions affecting the reported amounts ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the Consolidated Financial Statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom these estimates.

 

**3.**  **Fair ValueMeasurement**

 

Accounting StandardsCodification (“ASC”) Topic 820, *Fair ValueMeasurements and Disclosures,*

 

6

----

 

provides a fair valuehierarchy which gives the highest priority to unadjusted quoted prices inactive markets for identical assets or liabilities (Level 1) and the lowestpriority to unobservable inputs (Level 3). A financial instrument’s levelwithin the hierarchy is based on the lowest level of any input that issignificant to the fair value measurement. The levels of the fair valuehierarchy are defined as follows:

 

Level 1 — Quoted prices inactive markets for identical assets or liabilities. The types of assets andliabilities included in Level 1 are highly liquid and actively tradedinstruments with quoted market prices.

 

Level 2 — Observable inputsother than Level 1 prices such as quoted prices for similar assets orliabilities; quoted prices in markets that are not active; or other inputs thatare observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities. The type of assetsand liabilities included in Level 2 are typically either comparable to activelytraded securities or contracts or priced with models using observable inputs.

 

Level 3 — Unobservableinputs that are supported by little or no market activity and that aresignificant to the fair value of the assets and liabilities. The type of assetsand liabilities included in Level 3 are those with inputs requiring significantmanagement judgment or estimation.

 

Short-term cash investmentsin money market accounts are considered to be cash equivalents. The estimatedfair values for cash equivalents approximate their carrying values due to theshort-term maturities of these instruments. Cash equivalents are classified asLevel 1 and are recorded in our cash and cash equivalents line on ourConsolidated Balance Sheets.

 

**4.  Sale of Assets**

 

*Sale ofCertain Customer Contracts*

 

On March 3, 2010, AICsold certain customer contracts, property and equipment and sublet a facility.In consideration for the assets sold and the liabilities transferred, theCompany received $0.2 million in cash. The Company recorded a loss on thesale of approximately $50,000 which is included within Selling, administrativeand other operating costs (“SG&A”) in our Consolidated Statement ofOperations.

 

**5.  Intangible Assets**

 
| ** **              | ** ** | **July 3, 2010** | ** ** | **July 4, 2009**         | ** ** |
|-------------------------|------------|-----------------------|------------|-------------------------------|------------|
| **(In thousands)** | ** ** | **Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Intangibles,  Net** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Intangibles,  Net** | ** ** |
|                    |       |                  |       |                          |       |   |   |   |   |   |   |   |   |
| Customer lists          |       | $                     | —     |                          | $          | — |   | $ | — |   | $ | 10,573 |   | $ | (7,184 | ) | $ | 3,389 |   |
|                         |            |                       |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In the second quarter offiscal 2009, we incurred amortization expense related to intangible assets of $0.2million. For the six month period ended July 4, 2009, we incurredamortization expense related to intangible assets of $0.4 million..

 

Duringthe second quarter of fiscal 2009, we reviewed our customer lists in accordancewith FASB ASC Topic 360, *Property, Plant, andEquipment*, based on the expectation that the business with which thecustomer lists were associated would be sold significantly before the end oftheir previously estimated useful life. Based on this measurement, we recordeda $2.3 million impairment loss, which is the amount by which the carrying valueof the customer lists exceeded the fair value of the expected consideration tobe received from the sale of assets. 

 

7

----

 

Theimpairment loss is included within Impairment of intangible assets in theConsolidated Statement of Operations

 

**6. ** **Financing Agreement**

 

*RevolvingCredit Facility*

 

On September 30, 2009,AIC entered into a revolving line of credit (the “Credit Facility”) with WellsFargo Bank, National Association (“Wells Fargo”) pursuant to which Wells Fargowill advance up to $15.0 million to AIC for working capital purposes and tofacilitate the issuance of letters of credit.  The total amount availablefor borrowing under the Credit Facility will fluctuate based on the Company’slevel of eligible accounts receivable.

 

The Credit Facility carriesan interest rate equal to the three month LIBOR rate plus 3.5%.  TheCredit Facility has an unused line fee of 0.50% annually on the daily averageunused amount.  The maturity date of the Credit Facility isSeptember 30, 2012. Borrowings under the Credit Facility are secured byall of the Company’s assets.

 

The Credit Facility requiresthe Company to meet certain levels of year-to-date earnings/loss before taxes.The Credit Facility limits the Company’s annual capital expenditures to $2.0million and requires the Company to maintain an excess borrowing base of atleast $5.0 million. The Credit Facility contains customary affirmative andnegative covenants and upon an event of default Wells Fargo may terminate thefacility or declare the entire amount outstanding under the Credit Facility tobe immediately due and payable and exercise other rights under the agreement.

 

As of July 3, 2010, wewere in compliance with all the requirements and had no borrowing under theCredit Facility. Total availability of the Credit Facility, which fluctuatesbased on our level of eligible accounts receivable, was $7.7 million as ofJuly 3, 2010. See *“Sources and Uses ofCash/Credit Facility,”* below, for further information.

 

**7.  Restructuring Costs and Other Severance RelatedCosts**

 

For the six month periodended July 3, 2010, we recorded workforce reduction charges and officeclosure charges of $0.2 million. Of these charges, $0.2 million related toseverance and severance-related charges and $8,000 related to future rentobligations (net of anticipated sublease income).

 

In the second quarter offiscal 2009, we recorded office closure and consolidation charges totaling $1.7million related to future rent obligations (net of anticipated subleaseincome). The office closure charges are for locations we closed prior to July 4,2009 and the consolidation charge relates to the consolidation of our corporateoffice.

 

For the six month periodended July 4, 2009, we recorded workforce reduction charges and officeclosure charges of $1.8 million. Of these charges, $0.1 million relates toseverance and severance-related charges and $1.7 million relates to future rentobligations (net of anticipated sublease income).

 

A summary of the activity inthe restructuring accrual for the six months ended July 3, 2010 is asfollows:

 

8

----

 
| ** **                         | ** ** | **Workforce** | ** ** | **Office Closure/** | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------|------------|--------------------------|------------|------------|------------|
| **(In thousands)**            | ** ** | **Reduction** | ** ** | **Consolidation**        | ** ** | **Total**  | ** ** |
|                               |       |          |       |                     |       |       |       |
| Balance as of January 2, 2010 |       | $             | 1,215      |                     | $          | 1,868      |       | $ | 3,083 |   |
| Additional restructuring charges   |       | 174           |       | 8                        |       | 182        |       |
| Cash expenditures                  |       | (940          | )          | (431                     | )          | (1,371     | )          |
| Balance as of July 3, 2010    |       | $             | 449        |                     | $          | 1,445      |       | $ | 1,894 |   |

 

**8. Reverse Stock Split and Amendment to Rights Plan**

 

On February 26, 2010,the Company amended its Articles of Incorporation to effect a one-for-fivereverse stock split (the “Reverse Stock Split”) of its common stock, par value$0.10 per share (the “Common Stock”). As a result of the Reverse Stock Split,every five shares of the Company’s Common Stock were automatically convertedinto one share of the Company’s Common Stock immediately prior to the openingof trading on March 1, 2010. All fractional shares were rounded down andany shareholder that would be entitled to receive a fractional share would bepaid the fair market value of the fractional share in cash.

 

To reflect the effect of theReverse Stock Split, the Company has retroactively adjusted all share and pershare data to reflect the Common stock and Additional capital line in itsConsolidated Balance Sheets as of January 2, 2010 and the weighted-averageshares outstanding in its Consolidated Statements of Operations and relateddisclosures for the periods presented.

 

The Reverse Stock Split alsoresulted in proportionate adjustments under the Company’s then-existing Amendedand Restated Rights Agreement having an effective date of February 27,2008 (the “Amended Rights Plan”) in (a) the number of shares issuableunder the Amended Rights Plan and (b) the Purchase Price.

 

On May 25, 2010, theCompany amended the Amended Rights Plan by entering into Amendment No. 1to the Amended Rights Plan with Wells Fargo Bank, N.A. as rights agent (“AmendmentNo. 1”). The principal purposes of Amendment No. 1 were to reflectthe Reverse Stock Split (by decreasing the Purchase Price for Common SharePurchase Rights to $30.00 per share), and to make certain other technical andconforming changes.

 

**9.  Shareholders’ Equity**

 
| ** **                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **      | ** ** | **Total**              | ** ** |
|-------------------------------------|------------|------------|------------|----------------|------------|-----------------|------------|------------------------|------------|
| ** **                          | ** ** | **Common** | ** ** | **Additional** | ** ** | **Accumulated** | ** ** | **Shareholders’** | ** ** |
| **(In thousands)**             | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)**   | ** ** | **Equity**             | ** ** |
|                                |       |       |       |           |       |            |       |                   |       |
| Balances as of January 2, 2010 |       | $          | 498        |           | $          | 25,598          |       | $                      | (11,148    | ) | $ | 14,948 |   |
| Common stock issued - 1,200 shares  |       | —     |       | 4              |       | —          |       | 4                      |       |
| Stock Compensation                  |       | —     |       | 27             |       | —          |       | 27                     |       |
| Net loss                            |       | —     |       | —         |       | (2,007          | )          | (2,007                 | )          |
| Balance as of July 3, 2010     |       | $          | 498        |           | $          | 25,629          |       | $                      | (13,155    | ) | $ | 12,972 |   |

 

**10.** **Equity CompensationPlans**

 

Total equity-basedcompensation expense for the three- and six-month periods ended July 3,2010 was approximately $0.1 million and $31,000, respectively. This includescompensation expense related to both stock options and stock awards. The taxbenefit recorded for these same periods was approximately $4,000 and $6,000 

 

9

----

 

respectively. The taxbenefit is offset against our valuation allowance for our deferred tax asset.

 

Total equity-basedcompensation expense for the three and six month periods ended July 4,2009 was approximately $0.1 million and $0.2 million, respectively. Thisincludes compensation expense related to both stock options and stock awards.The tax benefit recorded for these same periods was approximately $15,000 and$22,000 respectively. The tax benefit is offset against our valuation allowancefor our deferred tax asset.

 

No stock options wereexercised during the three and six month periods ended July 3, 2010 or July 4,2009. As of July 3, 2010, there was approximately $0.3 million ofunrecognized compensation expense related to unvested option awards that areexpected to vest over a weighted-average period of 1.4 years.

 

During the three and sixmonth periods ended July 3, 2010, and July 4, 2009, we granted equitycompensation awards as follows:

 
| ** **     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**                           | ** ** |
|----------------|------------|----------------------------------|------------|----------------------------------------------------------|------------|
| ** **     | ** ** | **July 3,  2010**           | ** ** | **July 4,  2009**                                   | ** ** | **July 3,  2010** | ** ** | **July 4,  2009** | ** ** |
| ** **     | ** ** | **Grants**                       | ** ** | **Weighted-  Average Grant  Date Fair  Value** | ** ** | **Grants** | ** ** | **Weighted-  Average Grant  Date Fair  Value** | ** ** | **Grants** | ** ** | **Weighted-  Average Grant  Date Fair  Value** | ** ** | **Grants** | ** ** | **Weighted-  Average Grant  Date Fair  Value** | ** ** |
|           |       | ** **                       |       | ** **                                               |       | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |
| Stock  Options |       | —                           |       | —                                                   |       | 40,000 |   | $ | 1.75 |   | 86,800 |   | 1.73 |   | 60,800 |   | $ | 1.55 |   |
| Stock  Awards  |       | —                           |       | —                                                   |       | — |   | $ | — |   | 1,200 |   | 3.36 |   | 2,400 |   | $ | 2.20 |   |

 

**11.  Loss Per Share**

 

Basic and diluted loss pershare is presented in accordance with ASC Topic 260, *Earnings Per Share*. Basic loss per share excludes dilutionand is computed by dividing loss available to common stockholders by theweighted-average number of common shares outstanding for the period. Options to purchase approximately 517,924 and 507,000 shares of common stockwere outstanding at July 3, 2010 and July 4, 2009,respectively.  All options were considered anti-dilutive and excluded fromthe computation of common equivalent shares at July 3, 2010 andJuly 4, 2009, because we reported a net loss. The computation ofbasic and diluted loss per share for the three and six months endedJuly 3, 2010 and July 4, 2009, is as follows:

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** **  | **Six Months Ended**   | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|-------------|------------------------|------------|
| **(In thousands except per share amounts)**                                 | ** ** | **July 3,  2010** | ** **  | **July 4,  2009** | ** ** | **July 3,  2010** | ** ** | **July 4,  2009** | ** ** |
|                                                                        |       |                   |        |                   |       |   |   |   |   |
| Net loss                                                                    |       | $                      | (842        | )                      | $          | (6,552 | ) | $ | (2,007 | ) | $ | (8,786 | ) |
| Weighted-average number of common shares  outstanding                       |       | 4,986                  |        | 4,985                  |       | 4,986 |   | 4,985 |   |
| Dilutive effect of equity compensation awards                               |       | —                 |        | —                 |       | — |   | — |   |
| Weighted-average number of common and common  equivalent shares outstanding |       | 4,986                  |        | 4,985                  |       | 4,986 |   | 4,985 |   |
|                                                                        |       |                   |        |                   |       |   |   |   |   |
| Net loss per share:                                                         |       |                   |        |                   |       |   |   |   |   |
| Basic                                                                       |       | $                      |  (0.17 | )                      | $          |  (1.31 | ) | $ |  (0.40 | ) | $ |  (1.76 | ) |
| Diluted                                                                     |       | $                      |  (0.17 | )                      | $          |  (1.31 | ) | $ |  (0.40 | ) | $ |  (1.76 | ) |

 

10

----

 

 

**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

The following discussionshould be read in conjunction with our consolidated financial statements andrelated notes. This discussion contains forward-looking statements that involverisks and uncertainties. Our actual results could differ materially from thoseanticipated 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 fiscalyear ended January 2, 2010.

 

***A.           ******Our Business***

 

Analysts InternationalCorporation (“AIC,” “Company,” “we,” “us,” or “our”) is an informationtechnology (“IT”) services company. We employ approximately 800 professionalsand are focused on serving the information technology needs of mid-market toFortune 500 companies and government agencies across North America. AIC wasincorporated in Minnesota in 1966 and our corporate headquarters is located inMinneapolis, Minnesota.

 

***B.           ******Business Environment***

 

Our business plan includesspecific actions to be implemented during the balance of fiscal year 2010.Although we believe these actions will lead to sequential improvements in ouroperating results, whether or not any sequential improvements in our operatingresults will materialize in such a way as to improve our financial performancedepends on a number of factors.

 

We operate in a highlycompetitive industry. Our ability to achieve our goals (including our primarygoal of attaining profitability in the third quarter and the second half offiscal 2010) is dependent, among other things, on customer demand for ourservices, our continuing ability to staff that customer demand with qualifiedIT professionals, our ability to reduce and manage our expenses, our ability tosuccessfully implement and execute on our strategic plan, continued demand ingeneral for IT services and staffing and improved stability in the United Stateseconomy. If we are not successful in attaining profitability during the secondhalf of fiscal 2010, we risk non-compliance with the financial covenantrequirement of our revolving line of credit (“Credit Facility”) with WellsFargo Bank, National Association, (“Wells Fargo”). If we are unable to satisfythe financial covenant requirement, an “Event of Default” would exist under theCredit Facility which would enable Wells Fargo, in its discretion, to exercisecertain rights including the right to terminate the Credit Facility and declareall amounts outstanding under the Credit Facility to be immediately due andpayable.

 

***C.           ******Fiscal 2010 Strategic Plan***

 

Our primary goal for fiscal2010 is to achieve profitability in the third quarter and the second half offiscal 2010 and thereby return value to our shareholders. In order to helpachieve that goal, our fiscal 2010 strategy emphasizes initiatives aimed atgrowing our IT staffing business, improving the productivity of our sales andrecruiting personnel and controlling costs.

 

The main objectives weexpect to achieve in 2010 are as follows:

 

·      ***Become a profitable company***

During the second quarter offiscal 2010, we incurred a net loss of $0.8 million which is an improvement of$0.3 million and $5.7 million over the first quarter of fiscal 2010 and thesecond quarter of fiscal 2009, respectively.

 

For the six month periodended July 3, 2010, we incurred a net loss of $2.0 million compared to anet loss 

 

11

----

 

of $8.8 million for the sixmonth period ended July 4, 2009.

 

As noted above, our successin reaching profitability in the third quarter and the second half of fiscal2010 is dependent, among other things, on our ability to achieve growth in ourrevenues, realize improvements in our gross margins and implement furtherreductions in our Selling, administrative and other costs.

 

·      ***Increase revenue***

Our second quarter of fiscal2010 revenues decreased $1.6 million, or 5.6%, from the first quarter of fiscal2010 and our average revenue per day decreased 4.2% from approximately $438,000to approximately $420,000 in the first and second quarters of fiscal 2010,respectively. There were 65 billing days in the first quarter of fiscal 2010and 64 billing days in the second quarter of fiscal 2010.

 

·      ***End fiscal 2010 with 1,000 billableconsultants***

We ended the second quarterof fiscal 2010 with 807 billable consultants. It is our goal to attempt toincrease the number of billable consultants during fiscal 2010 as we work onexpanding opportunities within existing customers and undertake initiatives tosell our services to new customers.

 

·      ***Achieve industry standard grossmargin rates***

Our second quarter of fiscal2010 gross margin percentage was 21.0%, which was consistent with our 2010first quarter gross margin percentage and 130 basis points greater than our2009 second quarter gross margin percentage. Depending on the mix of clientsserved, we believe further improvements to our gross margin percentage can beachieved through disciplined placement of our consultants and by controllingour consultant costs.

 

·      ***Build cash to invest in our strategy***

We ended the second quarterof fiscal 2010 with approximately $3.4 million in cash and cash equivalents. Weplan to use our available cash and cash equivalents to fund growth in revenuesand for our strategic initiatives.

 

**D.           ****Business Developments**

 

*ReverseStock Split and Amendment to Rights Plan*

 

On February 26, 2010,the Company amended its Articles of Incorporation to effect a one-for-fivereverse stock split (the “Reverse Stock Split”) of its common stock, par value$0.10 per share (the “Common Stock”). As a result of the Reverse Stock Split,every five shares of the Company’s Common Stock were automatically convertedinto one share of the Company’s Common Stock immediately prior to the openingof trading on March 1, 2010. All fractional shares were rounded down andany shareholder that would be entitled to receive a fractional share would bepaid the fair market value of the fractional share in cash.

 

To reflect the effect of theReverse Stock Split, the Company has retroactively adjusted all share and pershare data to reflect the Common stock and Additional capital line in itsConsolidated Balance Sheets as of January 2, 2010 and the weighted-averageshares outstanding in its Consolidated Statements of Operations and relateddisclosures for the periods presented.

 

The Reverse Stock Split alsoresulted in proportionate adjustments under the Company’s then-existing Amendedand Restated Rights Agreement having an effective date of February 27,2008 (the “Amended Rights Plan”) in (a) the number of shares issuableunder the Amended Rights Plan and (b) the Purchase Price.

 

12

----

 

On May 25, 2010, theCompany amended the Amended Rights Plan by entering into Amendment No. 1to the Amended Rights Plan with Wells Fargo Bank, N.A. as rights agent (“AmendmentNo. 1”). The principal purposes of Amendment No. 1 were to reflectthe Reverse Stock Split (by decreasing the Purchase Price for Common SharePurchase Rights to $30.00 per share), and to make certain other technical andconforming changes.

 

*Sale ofCertain Customer Contracts*

 

On March 3, 2010, AICsold certain customer contracts, property and equipment and sublet a facility.In consideration for the assets sold and the liabilities transferred, theCompany received $0.2 million in cash. The Company recorded a loss on thesale of approximately $50,000 which is included within Selling, administrativeand other operating costs (“SG&A”) in our Consolidated Statement of Operations.For the preceding 12 months before the sale date, the customer contractsgenerated revenues of approximately $3.2 million and had an unfavorablecontribution margin of approximately $0.7 million.

 

***E.           ******Overview of Second Quarter Fiscal2010 Operations***

 

Our revenues decreased$13.7 million, or 33.8%, from the second quarter of fiscal 2009 primarilydue to our planned exit from non-core and low-margin lines of business (27.2%)and from less demand for our IT professional services (6.6%).

 

Gross margins as a percentof revenue increased 130 basis points from 19.7% in the second quarter offiscal 2009 to 21.0% in the second quarter of fiscal 2010 due to our focus onhigher margin business and the impact of exiting lower margin lines of businessand accounts in fiscal 2009.

 

SG&A expenses declined$3.9 million in second quarter 2010 over the prior year quarter due largely tothe exit from the value added reseller (“VAR”) operations, the impact of thepersonnel and facility reductions and the overall reduction in business volume.

 

We used cash from operationsactivities of $0.3 million during the second quarter of fiscal 2010. As ofJuly 3, 2010, we had a cash balance of $3.4 million and no borrowingsunder our revolving line of credit.

 

**RESULTS OFOPERATIONS, THREE MONTHS ENDED JULY 3, 2010 VS. JULY 4, 2009**

 

The following tableillustrates the relationship between revenue and expense categories along witha count of employees and technical consultants for the three months endedJuly 3, 2010 and July 4, 2009.

 

13

----

 
| ** **                                             | ** ** | **Three Months Ended  July 3, 2010** | ** ** | **Three Months Ended  July 4, 2009** | ** ** | **Increase (Decrease)** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------|------------|
| **(Dollars in thousands)**                   | ** ** | **Amount**                                               | ** ** | **% of  Revenue**                                   | ** ** | **Amount**                   | ** ** | **% of  Revenue** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenue:                                               |       |                                                     |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Professional services provided directly                |       | $                                                        | 26,658     |                                                     | 99.3       | %                            | $          | 35,053 |   | 86.5 | % | $ | (8,395 | ) | (23.9 | )% |
| Professional services provided through  subsuppliers   |       | 188                                                      |       | 0.7                                                      |       | 678                          |       | 1.7 |   | (490 | ) | (72.3 | ) |
| Product sales                                          |       | —                                                   |       | —                                                   |       | 4,797                        |       | 11.8 |   | (4,797 | ) | (100.0 | ) |
| Total revenue                                          |       | 26,846                                                   |       | 100.0                                                    |       | 40,528                       |       | 100.0 |   | (13,682 | ) | (33.8 | ) |
|                                                   |       |                                                     |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Expenses:                                              |       |                                                     |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Cost of services provided directly                     |       | 21,029                                                   |       | 78.3                                                     |       | 27,821                       |       | 68.6 |   | (6,792 | ) | (24.4 | ) |
| Cost of services provided through subsuppliers         |       | 179                                                      |       | 0.7                                                      |       | 643                          |       | 1.6 |   | (464 | ) | (72.2 | ) |
| Cost of product sales                                  |       | —                                                   |       | —                                                   |       | 4,079                        |       | 10.1 |   | (4,079 | ) | (100.0 | ) |
| Selling, administrative and other operating costs      |       | 6,464                                                    |       | 24.1                                                     |       | 10,318                       |       | 25.5 |   | (3,854 | ) | (37.4 | ) |
| Restructuring costs and other severance related  costs |       | 8                                                        |       | —                                                   |       | 1,725                        |       | 4.2 |   | (1,717 | ) | (99.5 | ) |
| Impairment of intangible assets                        |       | —                                                   |       | —                                                   |       | 2,268                        |       | 5.6 |   | (2,268 | ) | (100.0 | ) |
| Amortization of intangible assets                      |       | —                                                   |       | —                                                   |       | 224                          |       | 0.6 |   | (224 | ) | (100.0 | ) |
| Total expenses                                         |       | 27,680                                                   |       | 103.1                                                    |       | 47,078                       |       | 116.2 |   | (19,398 | ) | (41.2 | ) |
|                                                   |       |                                                     |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Operating loss                                         |       | (834                                                     | )          | (3.1                                                     | )          | (6,550                       | )          | (16.2 | ) | (5,716 | ) | (87.3 | ) |
|                                                   |       |                                                     |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Non-operating income                                   |       | 5                                                        |       | —                                                   |       | 13                           |       | — |   | (8 | ) | (61.5 | ) |
| Interest expense                                       |       | (5                                                       | )          | —                                                   |       | (3                           | )          | — |   | 2 |   | 66.7 |   |
|                                                   |       |                                                     |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Loss before income taxes                               |       | (834                                                     | )          | (3.1                                                     | )          | (6,540                       | )          | (16.2 | ) | (5,706 | ) | (87.2 | ) |
|                                                   |       |                                                     |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Income tax expense                                     |       | 8                                                        |       | —                                                   |       | 12                           |       | — |   | (4 | ) | (33.3 | ) |
|                                                   |       |                                                     |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Net loss                                               |       | $                                                        | (842       | )                                                        | (3.1       | )%                           | $          | (6,552 | ) | (16.2 | )% | $ | (5,710 | ) | (87.1 | )% |
|                                                   |       |                                                     |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Personnel:                                             |       |                                                     |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Management and Administrative                          |       | 113                                                      |       |                                                     |       | 210                          |       |   |   | (97 | ) | (46.2 | )% |
| Technical Consultants                                  |       | 807                                                      |       |                                                     |       | 1,079                        |       |   |   | (272 | ) | (25.2 | )% |

 

*Revenue*

 

Revenue from servicesprovided directly for the three months ended July 3, 2010 declined 23.9%from the comparable period a year ago. The decline in revenue was primarily dueto our planned exit from non-core and low-margin lines of business and alsofrom less demand for our IT professional services which resulted in a reductionin the number of billable hours and technical consultants which was partiallyoffset by a 5.2% increase in overall billing rates over the prior year period.Our subsupplier revenue, which is mainly pass-through revenue with associatedfees, declined by 72.3% over the prior year period as a result of our focusingon higher margin business. We had no product sales in the second quarter offiscal 2010 as a result of the sale of our VAR operations in the third quarterof fiscal 2009.

 

*Cost ofServices Provided Directly*

 

Cost of services provideddirectly represents our payroll and benefit costs associated with our billableconsultants. This category of expense as a percentage of direct servicesrevenue decreased to 78.9% in the second quarter of fiscal 2010 compared to79.4% in the prior comparable period. The decrease in expense as a percentageof direct services revenue is primarily due to the reduction in volume at lowermargin staffing accounts.

 

14

----

 

*Cost ofServices Provided Through Subsuppliers*

 

Costof services provided through subsuppliers represents our cost when we utilizethird parties to fulfill our obligations to our large staffing clients. This category of expense as a percentage of revenue for services providedthrough subsuppliers was 95.2% for second quarter in fiscal 2010 compared to94.8% for the prior year comparable period.

 

*Cost ofProduct Sales*

 

Cost of product salesrepresents our cost when we resold hardware and software products.  Thiscategory of expense, as a percentage of product sales, was 85.0% in the secondquarter of fiscal 2009. With the sale of our VAR operations in the thirdquarter of fiscal 2009, we no longer resell hardware and software products.

 

*Selling,Administrative and Other Operating Costs*

 

SG&A costs includemanagement and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs and other administrativecosts.  This category of costs decreased approximately $3.9 million fromthe comparable period in 2009 and represented 24.1% of total revenue for thesecond quarter of fiscal 2010 compared to 25.5% in the second quarter of fiscal2009. SG&A expenses decreased primarily due to the impact of personnelreductions that occurred in the prior year as a result of the asset sales andimplementation of non-personnel cost reductions.

 

*RestructuringCosts and Other Severance Related Costs*

 

During the second quartersof fiscal 2010 and fiscal 2009, we recorded workforce reductions and officeclosure charges of totaling $8,000 and $1.7 million, respectively.

 

*Amortizationof Intangible Assets*

 

This category of expensedecreased during the second quarter of fiscal 2010 from the prior year due tothe sale of all our remaining customer lists in third quarter of fiscal 2009.In the second quarter of fiscal 2009, we disposed of a customer list and atrade name that were fully amortized.

 

*Non-operatingIncome*

 

Non-operating incomedecreased slightly in the second quarter of fiscal 2010 compared to the secondquarter of fiscal 2009, as a result of less interest income earned on our cashbalances and lower interest income related to customer financed equipment.

 

*InterestExpense*

 

We had no borrowingoutstanding in the second quarter of fiscal 2010 and 2009.

 

*IncomeTaxes*

 

For both the second quartersof fiscal 2010 and fiscal 2009, we recorded accruals for amounts due forcertain state income taxes and changes in our reserves for tax obligations. Werecorded no additional income tax expense associated with our net operatinglosses because any tax expense that would otherwise have been recorded has 

 

15

----

 

been negated by adjusting thevaluation allowance against our deferred tax asset.  If, however, wesuccessfully return to profitability to a point where future realization ofdeferred tax assets, which are currently reserved, becomes “more likely thannot,” we may be required to reverse the existing valuation allowance to realizethe benefit of these assets.

 

*Personnel*

 

Our technical consultingstaff levels finished the second quarter of fiscal 2010 at 807, a 25.2% declineagainst the comparable period last year.  The decline in technicalconsulting staff levels is primarily due to an overall decline in businessvolume and sale of operations. The decline in management and administrativepersonnel is due to our focus on reducing the number of management andadministrative personnel that are necessary to support the existing businessoperations. The reported technical consulting staff levels for fiscal 2009exclude Medical Concepts Staffing, our medical staffing business that we soldin the third quarter of fiscal 2009, due to the separate industry focus of thatbusiness.

 

*CertainInformation Concerning Off-Balance Sheet Arrangements*

 

As of July 3, 2010, wedid not have any relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities that would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. We are, therefore, not exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in theserelationships.

 

***F.           ******Overview of Year to Date Fiscal 2010Operations***

 

Our revenues decreased$30.4 million, or 35.4%, from the first half of fiscal 2009 primarily dueto our planned exit from non-core and low-margin lines of business (24.4%) andfrom less demand for our IT professional services (11.0%).

 

Gross margins as a percentof revenue increased 110 basis points from 19.9% in the first half of fiscal2009 to 21.0% in the first half of fiscal 2010 due to our focus on highermargin business and the impact of exiting lower margin lines of business andaccounts in fiscal 2009.

 

SG&A expenses declined$7.9 million in the first half of fiscal 2010 over the first half of fiscal2009 due largely to the exit from the VAR operations, the impact of thepersonnel and facility reductions and the overall reduction in business volume.

 

We used cash from operationsactivities of $0.4 million during the first half of fiscal 2010. As ofJuly 3, 2010, we had a cash balance of $3.4 million and no borrowingsunder our revolving line of credit.

 

**RESULTS OFOPERATIONS, SIX MONTHS ENDED JULY 3, 2010 VS. JULY 4, 2009**

 

The following tableillustrates the relationship between revenue and expense categories along with acount of employees and technical consultants for the six months endedJuly 3, 2010 and July 4, 2009.

 

16

----

 
| ** **                                             | ** ** | **Six Months Ended  July 3, 2010** | ** ** | **Six Months Ended  July 4, 2009** | ** ** | **Increase (Decrease)** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------|------------|
| **(Dollars in thousands)**                   | ** ** | **Amount**                                             | ** ** | **% of  Revenue**                                 | ** ** | **Amount**                   | ** ** | **% of  Revenue** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenue:                                               |       |                                                   |       |                                                   |       |                         |       |   |   |   |   |   |   |
| Professional services provided directly                |       | $                                                      | 54,699     |                                                   | 98.9       | %                            | $          | 75,876 |   | 88.6 | % | $ | (21,177 | ) | (27.9 | )% |
| Professional services provided through  subsuppliers   |       | 599                                                    |       | 1.1                                                    |       | 1,551                        |       | 1.8 |   | (952 | ) | (61.4 | ) |
| Product sales                                          |       | —                                                 |       | —                                                 |       | 8,233                        |       | 9.6 |   | (8,233 | ) | (100.0 | ) |
| Total revenue                                          |       | 55,298                                                 |       | 100.0                                                  |       | 85,660                       |       | 100.0 |   | (30,362 | ) | (35.4 | ) |
|                                                   |       |                                                   |       |                                                   |       |                         |       |   |   |   |   |   |   |
| Expenses:                                              |       |                                                   |       |                                                   |       |                         |       |   |   |   |   |   |   |
| Cost of services provided directly                     |       | 43,104                                                 |       | 77.9                                                   |       | 60,109                       |       | 70.2 |   | (17,005 | ) | (28.3 | ) |
| Cost of services provided through subsuppliers         |       | 565                                                    |       | 1.0                                                    |       | 1,474                        |       | 1.7 |   | (909 | ) | (61.7 | ) |
| Cost of product sales                                  |       | —                                                 |       | —                                                 |       | 7,008                        |       | 8.2 |   | (7,008 | ) | (100.0 | ) |
| Selling, administrative and other operating costs      |       | 13,437                                                 |       | 24.3                                                   |       | 21,347                       |       | 24.9 |   | (7,910 | ) | (37.1 | ) |
| Restructuring costs and other severance related  costs |       | 182                                                    |       | 0.3                                                    |       | 1,791                        |       | 2.1 |   | (1,609 | ) | (89.8 | ) |
| Impairment of intangible assets                        |       | —                                                 |       | —                                                 |       | 2,268                        |       | 2.6 |   | (2,268 | ) | 100.0 |   |
| Amortization of intangible assets                      |       | —                                                 |       | —                                                 |       | 447                          |       | 0.5 |   | (447 | ) | (100.0 | ) |
| Total expenses                                         |       | 57,288                                                 |       | 103.6                                                  |       | 94,444                       |       | 110.3 |   | (37,156 | ) | (39.3 | ) |
|                                                   |       |                                                   |       |                                                   |       |                         |       |   |   |   |   |   |   |
| Operating loss                                         |       | (1,990                                                 | )          | (3.6                                                   | )          | (8,784                       | )          | (10.3 | ) | (6,794 | ) | (77.3 | ) |
|                                                   |       |                                                   |       |                                                   |       |                         |       |   |   |   |   |   |   |
| Non-operating income                                   |       | 10                                                     |       | —                                                 |       | 27                           |       | — |   | (17 | ) | (63.0 | ) |
| Interest expense                                       |       | (8                                                     | )          | —                                                 |       | (11                          | )          | — |   | (3 | ) | (27.3 | ) |
|                                                   |       |                                                   |       |                                                   |       |                         |       |   |   |   |   |   |   |
| Loss before income taxes                               |       | (1,988                                                 | )          | (3.6                                                   | )          | (8,768                       | )          | (10.3 | ) | (6,780 | ) | (77.3 | ) |
|                                                   |       |                                                   |       |                                                   |       |                         |       |   |   |   |   |   |   |
| Income tax expense                                     |       | 19                                                     |       | —                                                 |       | 18                           |       | — |   | 1 |   | 5.6 |   |
|                                                   |       |                                                   |       |                                                   |       |                         |       |   |   |   |   |   |   |
| Net loss                                               |       | $                                                      | (2,007     | )                                                      | (3.6       | )%                           | $          | (8,786 | ) | (10.3 | )% | $ | (6,779 | ) | (77.2 | )% |
|                                                   |       |                                                   |       |                                                   |       |                         |       |   |   |   |   |   |   |
| Personnel:                                             |       |                                                   |       |                                                   |       |                         |       |   |   |   |   |   |   |
| Management and Administrative                          |       | 113                                                    |       |                                                   |       | 210                          |       |   |   | (97 | ) | (46.2 | )% |
| Technical Consultants                                  |       | 807                                                    |       |                                                   |       | 1,079                        |       |   |   | (272 | ) | (25.2 | )% |

 

*Revenue*

 

Revenue from servicesprovided directly for the six months ended July 3, 2010 declined 27.9%from the comparable period a year ago. The decline in revenue was primarily dueto our planned exit from non-core and low-margin lines of business and alsofrom less demand for out IT services which resulted in a reduction in thenumber of billable hours and technical consultants as a result of lower businessvolumes which was partially offset by a 4.0% increase in overall billing ratesover the prior year period. Our subsupplier revenue, which is mainlypass-through revenue with associated fees, declined by 61.4% over the prioryear period as a result of our focusing on higher margin business. We had noproduct sales in the first six months of fiscal 2010 as a result of the sale ofour VAR operations in the third quarter of fiscal 2009.

 

*Cost ofServices Provided Directly*

 

Cost of services provideddirectly represents our payroll and benefit costs associated with our billableconsultants. This category of expense as a percentage of direct servicesrevenue decreased to 78.8% for the six months ended July 3, 2010 comparedto 79.2% in the prior comparable period. The decrease in expense as apercentage of direct services revenue is primarily due to the reduction involume at lower margin staffing 

 

17

----

 

accounts.

 

*Cost ofServices Provided Through Subsuppliers*

 

Costof services provided through subsuppliers represents our cost when we utilizethird parties to fulfill our obligations to our large staffing clients. This category of expense as a percentage of revenue for services providedthrough subsuppliers was 94.3% for the six months ended July 3, 2010compared to 95.0% for the prior year comparable period.

 

*Cost ofProduct Sales*

 

Cost of product salesrepresents our cost when we resold hardware and software products.  Thiscategory of expense, as a percentage of product sales, was 85.1% for the sixmonths ended July 4, 2009. With the sale of our VAR operations in thethird quarter of fiscal 2009, we no longer resell hardware and softwareproducts.

 

*Selling,Administrative and Other Operating Costs*

 

SG&A costs includemanagement and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs, and other administrativecosts.  This category of costs decreased approximately $7.9 million from$21.3 million for the six months ended July 4, 2009 to $13.4 million forthe six months ended July 3, 2010. These amounts represented 24.9% and24.3% of total revenue for 2009 and 2010, respectively. SG&A expensesdecreased primarily due to the impact of personnel reductions that occurred in theprior year as a result of the asset sales and implementation of non-personnelcost reductions.

 

*RestructuringCosts and Other Severance Related Costs*

 

For the six month periodended July 3, 2010, we recorded workforce reduction charges and officeclosure charges of $0.2 million. Of these charges, $0.2 million related toseverance and severance-related charges and $8,000 related to future rentobligations (net of anticipated sublease income).

 

During the six months ended July 4,2009, we recorded restructuring and severance related expenses totaling $1.8million. Of these charges, $0.1 million related to severance andseverance-related charges and $1.7 million related to future rentobligations (net of anticipated sublease income) related to consolidating ourcorporate back office and for locations we closed prior to July 4, 2009.

 

*Amortizationof Intangible Assets*

 

During the six months ended July 3,2010, this category of expense decreased from the prior year due to the sale ofall our remaining customer lists in third quarter of fiscal 2009.

 

*Non-operatingIncome*

 

Non-operating incomedecreased slightly for the six months ended July 3, 2010, compared to thesix months ended July 3, 2009, as a result of less interest income earnedfrom our cash balances due to lower interest rates and higher interest incomerelated to a customer equipment lease in the prior year.

 

*InterestExpense*

 

We had no borrowingoutstanding for the six months ended July 3, 2010. For the six monthsended July 4,

 

18

----

 

2009, the average interestrate was 3.25% and we incurred interest expense of $11,000.

 

*IncomeTaxes*

 

For the six months ended July 3,2010 and July 4, 2009, we recorded accruals for amounts due for certainstate income taxes and changes in our reserves for tax obligations. We recordedno additional income tax expense associated with our net operating lossesbecause any tax expense that would otherwise have been recorded has beennegated by adjusting the valuation allowance against our deferred taxasset.  If, however, we successfully return to profitability to a pointwhere future realization of deferred tax assets, which are currently reserved,becomes “more likely than not,” we may be required to reverse the existingvaluation allowance to realize the benefit of these assets.

 

*Personnel*

 

For the six months ended July 3,2010 and July 4, 2009, our technical consulting staff levels finished at807 and 1,079 respectively, a 25.2% decline. The decline in technicalconsulting staff levels is primarily due to an overall decline in business volumeand sale of operations. The decline in management and administrative personnelwas due to our focus on reducing the number of management and administrativepersonnel that are necessary to support the business operations. The reportedtechnical consulting staff levels for fiscal 2009 exclude Medical ConceptsStaffing, our medical staffing business that we sold in the third quarter offiscal 2009, due to the separate industry focus of that business.

 

*CertainInformation Concerning Off-Balance Sheet Arrangements*

 

As of July 3, 2010, wedid not have any relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities that would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes. We are, therefore, not exposed to any financing, liquidity, market orcredit risk that could arise if we had engaged in these relationships.

 

**Liquidityand Capital Resources**

 

The following table providesinformation relative to the liquidity of our business.

 

19

----

 
| **(In thousands)**              | ** ** | **July 3,  2010** | ** ** | **January 2,  2010** | ** ** | **Increase  (Decrease)** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|---------------------------------|------------|------------------------|------------|---------------------------|------------|--------------------------|------------|--------------------------------------|------------|
|                            |       |                   |       |                      |       |                     |       |                                 |       |
| Cash and cash equivalents       |       | $                      | 3,439      |                      | $          | 3,818                    |       | $                                    | (379       | ) | (9.9 | )% |
| Accounts receivable             |       | 19,740                 |       | 23,028                    |       | (3,288                   | )          | (14.3                                | )          |
| Other current assets            |       | 1,226                  |       | 1,442                     |       | (216                     | )          | (15.0                                | )          |
| Total current assets            |       | $                      | 24,405     |                      | $          | 28,288                   |       | $                                    | (3,883     | ) | (13.7 | )% |
|                            |       |                   |       |                      |       |                     |       |                                 |       |
| Accounts payable                |       | $                      | 5,364      |                      | $          | 6,958                    |       | $                                    | (1,594     | ) | (22.9 | )% |
| Line of credit                  |       | —                 |       | —                    |       | —                   |       | —                               |       |
| Salaries and benefits           |       | 2,916                  |       | 2,498                     |       | 418                      |       | 16.7                                 |       |
| Deferred revenue                |       | 338                    |       | 310                       |       | 28                       |       | 9.0                                  |       |
| Deferred compensation           |       | 425                    |       | 522                       |       | (97                      | )          | (18.6                                | )          |
| Restructuring accrual           |       | 1,189                  |       | 2,038                     |       | (849                     | )          | (41.7                                | )          |
| Other current liabilities       |       | 970                    |       | 960                       |       | 10                       |       | 1.0                                  |       |
| Total current liabilities       |       | $                      | 11,202     |                      | $          | 13,286                   |       | $                                    | (2,084     | ) | (15.7 | )% |
|                            |       |                   |       |                      |       |                     |       |                                 |       |
| Working capital                 |       | $                      | 13,203     |                      | $          | 15,002                   |       | $                                    | (1,799     | ) | (12.0 | )% |
| Current ratio                   |       | 2.18                   |       | 2.13                      |       | 0.05                     |       | 2.3                                  | %          |
|                            |       |                   |       |                      |       |                     |       |                                 |       |
| Total shareholders’ equity |       | $                      | 12,972     |                      | $          | 14,948                   |       | $                                    | (1,976     | ) | (13.2 | )% |

 

*Change inWorking Capital*

 

Working capital was $13.2million at July 3, 2010, down approximately $1.8 million fromJanuary 2, 2010. The ratio of current assets to current liabilitiesincreased 2.3% to 2.18 at July 3, 2010 compared to 2.13 at January 2,2010.

 

Our total current assetsdecreased approximately $3.9 million at July 3, 2010, compared to theend of fiscal 2009, primarily from lower accounts receivable. Our accountsreceivable decreased 14.3 % as a result of improved collection experience whichlowered our day’s sales outstanding from 78 at the end of fiscal 2009 to 66 atJuly 3, 2010.

 

Our total currentliabilities decreased by approximately $2.1 million at July 3, 2010,compared to the end of fiscal 2009 as a result of lower accounts payablebalances due to reduced business volumes and restructuring accrual payments.

 

We believe our existingworking capital and availability under our Credit Facility with Wells Fargowill be sufficient to support the cash flow needs of our business in fiscal2010. Continuing operating losses, unfavorable bad debt experience, alengthening of payment terms from our clients, or significant costs associatedwith additional restructuring activities could create a need for additionalworking capital. An inability to obtain additional working capital, should itbe required, could have a material adverse effect on our business. We expect tobe able to comply with the requirements of our credit agreement; however,failure to do so could affect our ability to obtain necessary working capitaland could have a material adverse effect on our business.

 

*Sourcesand Uses of Cash/Credit Facility*

 

Cash and cash equivalentsdecreased by $0.4 million from January 2, 2010 to July 3, 2010. Ourprimary 

 

20

----

 

need for working capital isto support accounts receivable and to fund the time lag between payroll andvendor disbursements and receipt of fees billed to clients. Historically, wehave been able to support internal growth in our business with internallygenerated funds and through the use of our credit facility.

 

The Credit Facility willadvance up to $15.0 million to us for working capital purposes and tofacilitate the issuance of letters of credit. The total amount available forborrowing under the Credit Facility will fluctuate based on our level ofeligible accounts receivable.

 

The Credit Facility carriesan interest rate equal to the three month LIBOR rate plus 3.5%. The CreditFacility has an unused line fee of 0.50% annually on the daily average unusedamount. The maturity date of the Credit Facility is September 30, 2012 andmay be terminated or reduced by us on 90 days notice in exchange for atermination fee of 2% of the maximum line amount or reduction of the maximumline amount in the second year or 1% of such amounts in the second year and nofee in the third year. Borrowings under the Credit Facility are secured by allof our assets.

 

The Credit Facility containsa set of covenants with which we are required to comply. These covenantsinclude reporting requirements and financial requirements. The financial requirementsobligate us, among other things, to generate a loss of $2.0 million or less tosatisfy the minimum level of earnings before taxes on a year-to-date basis forfiscal 2010. If we are not able to generate sufficient earnings before taxes tosatisfy the covenant, an “Event of Default” would exist under the CreditFacility which would enable Wells Fargo, in its discretion, to exercise certainrights including the right to terminate the Credit Facility and declare allamounts outstanding under the Credit Facility to be immediately due andpayable.

 

Additionally, the CreditFacility limits our annual capital expenditures to $2.0 million andrequires us to maintain an excess borrowing base of at least $5.0 million.The Credit Facility contains customary affirmative and negative covenants andupon an event of default Wells Fargo may terminate the facility or declare theentire amount outstanding under the Credit Facility to be immediately due andpayable and exercise other rights under the agreement.

 

As of July 3, 2010, wewere in compliance with all the requirements and had no borrowing under theCredit Facility. Total availability under the Credit Facility, which fluctuatesbased on our level of eligible accounts receivable, was $7.7 million as ofJuly 3, 2010.

 

On March 3, 2010, weclosed on an asset sale agreement for certain customer contracts. Inconsideration for the assets sold and the liabilities transferred, we received$0.2 million in cash.

 

During each of the secondquarters of fiscal 2010 and fiscal 2009, we made capital expenditures ofapproximately $19,000 and $0.4 million, respectively. For the six monthperiods ended July 3, 2010 and July 4, 2009, we made capitalexpenditures of approximately $0.1 million and $0.8 million, respectively

 

**Forward-LookingStatements**

 

This Form 10-Q containsforward-looking statements (within the meaning of the Private SecuritiesLitigation Reform Act of 1995) about: (i) our expectations and beliefswith respect to the current condition of the United States economy (includingthe economic recession and the volatility of the capital markets), (ii) assumptionswith respect to the effect these economic conditions will have on our business,(iii) our strategic plans, the objectives of those strategic plans and ourability to successfully implement our strategic plans, including our plan toattain profitability at some point during the second half of fiscal year 2010,(iv) our expectations with respect to the demand for our services andcontinuing pressure from customers to request lower cost offerings for ITstaffing services, (v) our expectations with respect 

 

21

----

 

to competition in ourindustry and our ability to compete, (vi) our beliefs regarding theadequacy of our working capital, (vii) our ability to satisfy therequirements of our Credit Facility, and (viii) our expectations withrespect to our financial results and operating performance. These statementscould affect our plans, anticipated operating results and/or financialcondition. 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 variationsthereof, in connection with any discussion of future operating or financialperformance.

 

Among the factors that couldcause our estimates and assumptions as to future performance, and our actualresults to differ materially, are: (i) our inability, in whole or in part,to implement or execute our strategic plans, (ii) our inability tosuccessfully recruit and hire qualified technical personnel, (iii) ourinability to successfully compete on a national basis with other companies inour industry or with new competitors who face limited barriers to entry in themarkets we serve, (iv) our inability to maintain key customerrelationships or to attract new customers, (v) our inability to attract,retain or motivate key personnel, (vi) our inability to continue to reduceoperating costs, (vii) the possibility that we may incur liability for theerrors or omissions of our consultants providing IT services for customers orthe risk that we may be subject to claims for indemnification under contractswith our customers, (viii) our inability to comply with the covenants inour credit facilities or to obtain a replacement credit facility oncommercially reasonable terms, (ix) a continued or worsened downturn inthe national or global economy, and (x) our inability to effectivelymanage accounts receivable; as well as other economic, business, competitiveand/or regulatory factors affecting our business generally, including those setforth in this Quarterly Report on Form 10-Q for fiscal year 2010,especially in the Management’s Discussion and Analysis section, our most recentAnnual Report on Form 10-K (including the Risk Factors section thereof)and our Current Reports on Form 8-K. All forward-looking statementsincluded in this Form 10-Q are based on information available to us as ofthe date hereof and largely reflect estimates and assumptions made by ourmanagement, which may be difficult to predict and beyond our control. Weundertake no obligation (and expressly disclaim any such obligation) to updateforward-looking statements made in this Form 10-Q to reflect events orcircumstances after the date of this Form 10-Q or to update reasons whyactual results would differ from those anticipated in any such forward-lookingstatements, other than as required by law.

 

**Item3.  Quantitative and Qualitative Disclosures About Market Risk.**

 

Not applicable.

 

**Item 4T.Controls and Procedures.**

 

(a)           Evaluation of Disclosure Controls and Procedures

 

As of the end of the periodcovered by this report, we conducted an evaluation under the supervision andwith the participation of our management, including the President and ChiefExecutive Officer, Andrew K. Borgstrom, and Chief Financial Officer, Randy W.Strobel, regarding the effectiveness of the design and operation of our disclosurecontrols and procedures pursuant to Rules 13a-15(e) of the SecuritiesExchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective to ensure that informationthat is required to be disclosed by us in reports that are filed under theExchange Act is recorded, processed, summarized and reported within the timeperiod specified in the rules of the Securities Exchange Commission.

 

(b)           Changes in Internal Controls

 

There were no changes in ourinternal control over financial reporting that occurred during the period 

 

22

----

 

covered by this report thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

23

----

 

**PART II.OTHER INFORMATION**

 

**Item 1.****                                                ****Legal Proceedings**

 

There are no pending legalproceedings 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.    RiskFactors**

 

Therewere no material changes in the Company’s risk factors from those previouslydisclosed in the Company’s Form 10-K for the period ended January 2,2010.

 

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

 

None.

 

**Item 3.**                                                 **Defaults Upon Senior Securities.**

 

None.

 

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

 

At the annual meeting ofshareholders held May 25, 2010, the following actions were taken:

 

(a)  Election of Directors

 

The following nominees, allof whom were listed in our proxy statement prepared in accordance withRegulation 14(a), were elected:

 
| **Nominee**           | ** ** | **For**   | ** ** | **Withhold** | ** ** | **Broker Non-  Votes** | ** ** |
|-----------------------|------------|-----------|------------|--------------|------------|-----------------------------|------------|
| Brigid A. Bonner      |       | 2,143,206 |       | 188,712      |       | 1,655,342                   |       |
| Andrew K. Borgstrom   |       | 2,120,701 |       | 211,217      |       | 1,655,342                   |       |
| Krzysztof K. Burhardt |       | 2,142,616 |       | 189,302      |       | 1,655,342                   |       |
| Joseph T. Dunsmore    |       | 2,169,768 |       | 162,150      |       | 1,655,342                   |       |
| Galen G. Johnson      |       | 2,171,561 |       | 160,357      |       | 1,655,342                   |       |
| Douglas C. Neve       |       | 2,174,159 |       | 157,759      |       | 1,655,342                   |       |
| Robert E. Woods       |       | 2,155,067 |       | 176,851      |       | 1,655,342                   |       |

 

(b)  Amendment to Company’s By-Laws

 

Approval to change theminimum number of directors, to a range of between five and nine, and allow theBoard of Directors to increase or decrease the number of directors within thatrange by the following vote:

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-  Votes** | ** ** |
|--------------------|------------|------------------------|------------|-----------------|------------|-----------------------------|------------|
| 3,742,658          |       | 237,287                |       | 7,315           |       | —                      |       |

 

24

----

 

(c)  Ratification of Auditors

 

The shareholders voted theirshares to ratify the appointment of Deloitte & Touche LLP by thefollowing vote:

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-  Votes** | ** ** |
|--------------------|------------|------------------------|------------|-----------------|------------|-----------------------------|------------|
| 3,921,324          |       | 57,164                 |       | 8,772           |       | —                      |       |

 

**Item 5.****                                                        ****OtherInformation.**

 

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 (Exhibit 3.6 to  Quarterly Report on Form 10-Q dated May 5, 2010, Commission File  No. 0-4090, incorporated by reference).                                                                                            |
| ^ 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).                                                                                                       |
| ^ 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). |
| ^ 10.60              |       | Agreement for Legal  Services between the Company and Robert E. Woods Professional Association  dated March 5, 2010.                                                                                                                                                                                                        |
| + 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.                                                                                                                                                                          |
| ^                    |       | Denotes an exhibit  previously filed with the Securities and Exchange Commission and incorporated  herein by reference.                                                                                                                                                                                                     |
| +                    |       | Filed herewith.                                                                                                                                                                                                                                                                                                             |
| ++                   |       | Furnished herewith.                                                                                                                                                                                                                                                                                                         |

 

25

----

 

**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned there unto dulyauthorized.

 
|                      | ANALYSTS  INTERNATIONAL CORPORATION |                                          |
|---------------------------|-------------------------------------|-----------------------------------------------|
|                      | (Registrant)                        |                                          |
|                      |                                |                                          |   |
|                      |                                |                                          |   |
| Date: August 4, 2010 | By:                                 | /s/ Andrew K. Borgstrom                       |   |
|                      |                                | Andrew K. Borgstrom                           |   |
|                      |                                | President and Chief  Executive Officer        |   |
|                      |                                | (Principal Executive  Officer)                |   |
|                      |                                |                                          |   |
|                      |                                |                                          |   |
| Date: August 4, 2010 | By:                                 | /s/ Randy W. Strobel                          |   |
|                      |                                | Randy W. Strobel                              |   |
|                      |                                | Chief Financial Officer                       |   |
|                      |                                | (Principal Financial and  Accounting Officer) |   |

 

26

----

 

**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 (Exhibit 3.6 to  Quarterly Report on Form 10-Q dated May 5, 2010, Commission File  No. 0-4090, incorporated by reference).                                                                                            |
| ^ 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).                                                                                                       |
| ^ 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). |
| ^ 10.60              |       | Agreement for Legal  Services between the Company and Robert E. Woods Professional Association  dated March 5, 2010.                                                                                                                                                                                                        |
| + 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.                                                                                                                                                                          |
| ^                    |       | Denotes an exhibit  previously filed with the Securities and Exchange Commission and incorporated  herein by reference.                                                                                                                                                                                                     |
| +                    |       | Filed herewith.                                                                                                                                                                                                                                                                                                             |
| ++                   |       | Furnished herewith.                                                                                                                                                                                                                                                                                                         |

 

27

----