** **

**FORM 10-Q**

** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

**ý QuarterlyReport Pursuant to Section 13 or 15(d) of**

**theSecurities Exchange Act of 1934**

 

**Forthe quarterly period ended March 31, 2002**

** **

**or**

 

**o TransitionReport Pursuant to Section 13 or 15(d) of**

**theSecurities Exchange Act of 1934**

 

** **

**Commissionfile number 0-4090**

** **

**ANALYSTSINTERNATIONAL CORPORATION**

 

| **Minnesota** |   | **41-0905408** |
|---------------|--------|----------------|

** **

**3601West 76th Street**

**Minneapolis,MN  55435**

**(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 the preceding12 months and (2) has been subject to such filing requirements for the past 90days.

Yes ý    No     o

** **

** **

As of April 27, 2002, 24,196,967shares of the Registrant's Common Stock were outstanding.

 

 

 

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ANALYSTSINTERNATIONAL CORPORATION

 

INDEX

 

 

 
|                                                                                                             | **Page** |
|------------------------------------------------------------------------------------------------------------------|----------|
| Part I.  FINANCIAL INFORMATION                                                                              |     |
|                                                                                                             |     |
| Item 1.    Condensed Consolidated Balance Sheets  March 31, 2002 (Unaudited) and December 31, 2001     | 3        |
|                                                                                                             |     |
| Condensed  Consolidated Statements of Operations  Three months ended March 31, 2002 and 2001 (Unaudited)         | 4        |
|                                                                                                             |     |
| Condensed  Consolidated Statements of Cash Flows  Three months ended March 31, 2002 and 2001 (Unaudited)         |     |
| 5                                                                                                                |
|                                                                                                             |     |
| Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                | 6-8      |
|                                                                                                             |     |
| Item  2.   Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 9-14     |
|                                                                                                             |     |
| Item  3.   Quantitative and Qualitative  Disclosures About Market Risk                                 | 14       |
|                                                                                                             |     |
| Part II.   OTHER INFORMATION                                                                           |     |
|                                                                                                             |     |
| Item 6.   Exhibits and Reports on Form 8-K                                                             | 15       |

 

 

 

2

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PART I.  FINANCIAL INFORMATION

 

Item 1.

 

**AnalystsInternational Corporation**

**Condensed Consolidated Balance Sheets**

 
| ***(In thousands)***                                       |   | **March 31,** |    | **December  31,** |   |
|------------------------------------------------------------|--------|---------------|---------|-------------------|--------|
|                                                       |   | **2002**      |    | **2001**          |   |
|                                                       |   | *(Unaudited)* |    |              |   |
|                                                       |   |          |    |              |   |
| **ASSETS**                                                 |   |          |    |              |   |
| Current assets:                                            |   |          |    |              |   |
| Cash and cash  equivalents                                 |   | $             | 1,135   |              | $      | 18,204 |   |
| Accounts  receivable, less allowance for doubtful accounts |   | 79,094        |    | 83,322            |   |
| Prepaid expenses  and other current assets                 |   | 10,873        |    | 9,309             |   |
| Total current  assets                                      |   | 91,102        |    | 110,835           |   |
|                                                       |   |          |    |              |   |
| Property and  equipment, net                               |   | 27,737        |    | 28,406            |   |
| Intangible  assets, net of accumulated amortization        |   | 45,457        |    | 45,656            |   |
| Other assets                                               |   | 7,923         |    | 7,987             |   |
|                                                       |   | $             | 172,219 |              | $      | 192,884 |   |
|                                                       |   |          |    |              |   |
| **LIABILITIES AND SHAREHOLDERS'  EQUITY**                  |   |          |    |              |   |
|                                                       |   |          |    |              |   |
| Current  liabilities:                                      |   |          |    |              |   |
| Accounts payable                                           |   | $             | 30,400  |              | $      | 37,778 |   |
| Long-term debt,  current portion                           |   | 25,350        |    | 41,000            |   |
| Salaries and  vacations                                    |   | 10,296        |    | 6,399             |   |
| Self-insured  health care reserves and other amounts       |   | 7,416         |    | 7,882             |   |
| Restructuring  accruals, current portion                   |   | 1,051         |    | 1,154             |   |
| Total current  liabilities                                 |   | 74,513        |    | 94,213            |   |
|                                                       |   |          |    |              |   |
| Restructuring  accruals, non-current portion               |   | 1,100         |    | 1,500             |   |
| Deferred  compensation accrual                             |   | 6,223         |    | 6,088             |   |
| Shareholders'  equity                                      |   | 90,383        |    | 91,083            |   |
|                                                       |   | $             | 172,219 |              | $      | 192,884 |   |
|                                                       |   |          |    |              |   |

Note:  Thebalance sheet at December 31, 2001 has been taken from the audited financialstatements at that date, and condensed.

 

 

See notes to condensedconsolidated financial statements.

 

 

3

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**Analysts International Corporation**

**CondensedConsolidated Statements of Operations**

*(Unaudited)*

             
|                                                     |   | **Three  Months Ended March 31,** |     |
|----------------------------------------------------------|--------|-----------------------------------|----------|
| ***(In thousands except per share  amounts)***           |   | **2002**                          |     | **2001** |   |
|                                                     |   |                              | * * |   | * * |
| Professional  services revenue:                          |   |                              |     |   |   |
| Provided  directly                                       |   | $                                 | 83,481   |   | $ | 110,378 |   |
| Provided through  sub-suppliers                          |   | 31,203                            |     | 34,062 |   |
| Total revenues                                           |   | 114,684                           |     | 144,440 |   |
|                                                     |   |                              |     |   |   |
| Expenses:                                                |   |                              |     |   |   |
| Salaries,  contracted services and direct charges        |   | 95,434                            |     | 118,326 |   |
| Selling,  administrative and other operating costs       |   | 19,350                            |     | 23,415 |   |
| Amortization of  goodwill and other intangible assets    |   | 199                               |     | 775 |   |
|                                                     |   |                              |     |   |   |
| Operating (loss)  income                                 |   | (299                              | )        | 1,924 |   |
|                                                     |   |                              |     |   |   |
| Non-operating  income                                    |   | 44                                |     | 90 |   |
| Interest expense                                         |   | (658                              | )        | (771 | ) |
|                                                     |   |                              |     |   |   |
| (Loss) income  before income taxes                       |   | (913                              | )        | 1,243 |   |
| Income tax  (benefit) expense                            |   | (212                              | )        | 472 |   |
|                                                     |   |                              |     |   |   |
| Net (loss)  income                                       |   | $                                 | (701     | ) | $ | 771 |   |
|                                                     |   |                              |     |   |   |
| Per common  share:                                       |   |                              |     |   |   |
| Net (loss)  income (basic)                               |   | $                                 | (.03     | ) | $ | .03 |   |
| Net (loss)  income (diluted)                             |   | $                                 | (.03     | ) | $ | .03 |   |
|                                                     |   |                              |     |   |   |
| Average common  shares outstanding                       |   | 24,196                            |     | 24,195 |   |
| Average common  and common equivalent shares outstanding |   | 24,196                            |     | 24,289 |   |

 

 

 

See notes tocondensed consolidated financial statements.

 

 

4

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**Analysts International Corporation**

**CondensedConsolidated Statements of Cash Flows**

*(Unaudited)*

* *
|                                                 |   | **Three  Months Ended March 31,** |   |
|------------------------------------------------------|--------|-----------------------------------|--------|
| ***(In thousands)***                                 |   | **2002**                          |   | **2001** |   |
|                                                 |   |                              |   |   |   |
| Net cash (used  in) provided by operating activities |   | $                                 | (837   | ) | $ | 10,349 |   |
|                                                 |   |                              |   |   |   |
| Cash flows from  investing activities:               |   |                              |   |   |   |
| Property and  equipment additions                    |   | (594                              | )      | (1,209 | ) |
| Proceeds from  property and equipment sales          |   | 11                                |   | 4 |   |
| Net cash used in  investing activities               |   | (583                              | )      | (1,205 | ) |
|                                                 |   |                              |   |   |   |
| Cash flows from  financing activities:               |   |                              |   |   |   |
| Cash dividends  paid                                 |   | -                                 |   | (1,452 | ) |
| Proceeds from  borrowings                            |   | 22,065                            |   | 2,220 |   |
| Repayment of  borrowings                             |   | (37,715                           | )      | (2,220 | ) |
| Proceeds from  exercise of stock options             |   | 1                                 |   | - |   |
| Net cash used in  financing activities               |   | (15,649                           | )      | (1,452 | ) |
|                                                 |   |                              |   |   |   |
| Net (decrease)  increase in cash and equivalents     |   | (17,069                           | )      | 7,692 |   |
|                                                 |   |                              |   |   |   |
| Cash and cash  equivalents at beginning of period    |   | 18,204                            |   | 2,192 |   |
|                                                 |   |                              |   |   |   |
| Cash and cash  equivalents at end of period          |   | $                                 | 1,135  |   | $ | 9,884 |   |
|                                                 |   |                              |   |   |   |

 

 

See notes to condensedconsolidated financial statements.

 

 

5

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**Analysts International Corporation**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

 

1.                                   Summary of Significant AccountingPolicies

 

Condensed ConsolidatedFinancial Statements - The condensed consolidated balance sheet as of March 31,2002, and the condensed consolidated statements of operations and cash flowsfor the three month periods ended March 31, 2002 and 2001 have been prepared bythe Company, without audit.  In theopinion of management, all adjustments (which include only normal recurringadjustments) necessary to present fairly the financial position at March 31,2002 and the results of operations and the cash flows for the periods endedMarch 31, 2002 and 2001 have been made. The results of operations for the period ended March 31, 2002 are notnecessarily indicative of the results to be expected for the full fiscal year.

 

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted. It is suggested these condensed consolidated financial statements beread in conjunction with the financial statements and notes thereto included inthe Company's December 31, 2001 annual report to shareholders.

 

Comprehensive (loss)income (i.e. net (loss) income plus available-for-sale securities valuationadjustments) for the three months ended March 31, 2002 and 2001 was ($701,000)and $727,000, respectively.

 

Effective January 1,2002, the Company adopted certain provisions of SFAS No. 142.  SFAS No. 142 prescribes a two-phase processfor impairment testing of goodwill.  Thefirst phase, required to be completed by June 30, 2002, screens for impairment;while the second phase required to be completed by December 31, 2002, measuresthe impairment.  The Company completedits first phase impairment analysis during the current quarter.  This analysis indicated an impairment of thegoodwill assigned to the Network Infrastructure Reporting Unit.  The second testing phase, and the finaladoption of the remaining provisions of SFAS No. 142, is expected to becompleted during the second quarter. The adoption of the remaining provisions is expected to result in therecording of an impairment charge of $12,000,000 to $15,000,000 before theeffect of income taxes.

 

6

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Also under SFAS No. 142,the Company will no longer amortize goodwill. The effect of this provision of SFAS No. 142 is reflectedprospectively.  Supplemental comparativedisclosure as if the change had been retroactively applied to the prior yearperiod is as follows:

* *
| ***(In thousands, except per share  amounts)*** |   | **Three  Months Ended March 31,** |   |
|-------------------------------------------------|--------|-----------------------------------|--------|
|                                            |   | **2002**                          |   | **2001** |   |
| Net (loss)  income:                             |   |                              |   |   |   |
| As reported                                     |   | $                                 | (701   | ) | $ | 771 |   |
| Goodwill  amortization                          |   | —                            |   | 576 |   |
| As adjusted                                     |   | $                                 | (701   | ) | $ | 1,347 |   |
|                                            |   |                              |   |   |   |
| Basic and  diluted (loss) income per share:     |   |                              |   |   |   |
| As reported                                     |   | $                                 | (0.03  | ) | $ | 0.03 |   |
| Goodwill  amortization                          |   | —                            |   | 0.02 |   |
| As adjusted                                     |   | $                                 | 0.03   |   | $ | 0.05 |   |

 

For the three monthsended March 31, 2002, no goodwill or other intangibles were acquired, impairedor disposed.  Other intangibles consistedof the following:

 
|                 |   | **March 31,  2002** |   | **December  31, 2001** |   |
|----------------------|--------|---------------------|--------|------------------------|--------|
| ***(In thousands)*** |   | **Gross**           |   |                   |   | **Other** |   | **Gross** |   |   |   | **Other** |   |
|                 |   | **Carrying**        |   | **Accumulated**        |   | **Intangibles,** |   | **Carrying** |   | **Accumulated** |   | **Intangibles,** |   |
|                 |   | **Amount**          |   | **Amoritization**      |   | **Net** |   | **Amount** |   | **Amortization** |   | **Net** |   |
|                 |   |                |   |                   |   |   |   |   |   |   |   |   |   |
| Customer list        |   | $                   | 12,270 |                   | $      | (1,228 | ) | $ | 11,042 |   | $ | 12,270 |   | $ | (1,051 | ) | $ | 11,219 |   |
| Tradename            |   | 1,720               |   | (155                   | )      | 1,565 |   | 1,720 |   | (133 | ) | 1,587 |   |
| Workforce            |   | —              |   | —                 |   | — |   | 1,340 |   | (260 | ) | 1,080 |   |
|                 |   | $                   | 13,990 |                   | $      | (1,383 | ) | $ | 12,607 |   | $ | 15,330 |   | $ | (1,444 | ) | $ | 13,886 |   |

 

These intangibles arescheduled to be fully amortized by 2018 with corresponding amortizationestimated to be approximately $800,000 per year.

 

2.                                   Long-term Debt

 

                                          In January 2000 the Company secured a$25,000,000 bank line of credit. At March 31, 2002 the Company had $6,850,000outstanding on this line of credit, accruing interest at 9%.  The line of credit had a maturity date ofJune 30, 2002.

 

In December 1998the Company entered into a Note Purchase Agreement whereby it sold $20,000,000 of7% senior notes due December 30, 2006. The Note Purchase Agreement was amended in March, August and December,2001 to modify certain covenants contained in the agreement.  The August amendment increased the interestrate from 7% to 9%. The December amendment deferred the $5,250,000 principalpayment due at December 28, 2001, required a $1,500,000 principal payment whichwas paid on March 29, 2002 and moved the maturity of the remaining note balanceto June 30, 2002.

 

                                            Subsequent to March 31, 2002, the Companyconsummated an asset-based revolving credit facility with up to $55,000,000 ofavailability.  Borrowings under thiscredit agreement are secured by all of the Company’s assets.  This transaction closed on April 11, 2002.The Company used an initial advance of $29,800,000 to pay the outstandingbalance of the senior notes ($19,100,000, including make whole obligations),the outstanding balance on the line of credit ($10,300,000), and certaintransaction expenses.  Under the newrevolving credit agreement, which matures on April 10, 2005, the Company musttake advances or pay down the outstanding balance daily.  The Company can, however, choose to requestfixed term advances of one, two, or three months for a portion of theoutstanding balance on the line of credit. Daily advances on the line of creditbear interest at the Wall Street Journal’s “Prime Rate” plus .75% (5.5% onApril 11, 2002) while the fixed term advances bear interest at the LIBOR rateplus 3.0%.  The credit agreementrequires the payment of a commitment fee of .50% of the unused portion of theline plus an annual administration fee of $50,000.  The agreement restricts, among other things, the payment ofdividends, establishes limits on capital expenditures, and requires the Companyto maintain a minimum accounts payable turnover ratio.  The Company believes it will be able to meetthe requirements of the new agreement. Proceeds from the new credit agreementused to repay the senior notes will result in a loss on the earlyextinguishment of debt of approximately $700,000, before the effect of incometaxes, in the quarter ending June 30, 2002.

 

 

7

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3.           Shareholders' Equity
|                                    |   | **Three Months Ended** |   |
|-----------------------------------------|--------|------------------------|--------|
|                                    |   | **March 31, 2002**     |   |
|                                    |   | ***(In thousands)***   |   |
|                                    |   |                   |   |
| Balance at beginning of period          |   | $                      | 91,083 |   |
| Proceeds upon exercise of stock options |   | 1                      |   |
| Net loss                                |   | (701                   | )      |
| Balance at end of period                |   | $                      | 90,383 |   |

 

4.          Net Income Per Common Share

 

Basic and dilutedearnings per share are presented in accordance with Statement of FinancialAccounting Standards (SFAS) No. 128, “Earnings per Share.”  The difference between average common sharesand average common and common equivalent shares for the period ended March 31,2001 is the result of outstanding stock options.

 

5.          Restructuring

 

In December 2000,the Company recorded a restructuring charge of $7,000,000.  Of this charge, $2,600,000 related toworkforce reductions (primarily non-billable staff), and $4,400,000 related tolease termination and abandonment costs (net of sub-lease income) including anamount for assets to be disposed of in conjunction with this consolidation.

 

A summary of firstquarter activity with respect to the restructuring charge is as follows:

 
|                         |   | **Workforce** |   | **Office Closure/** |   |      |   |
|------------------------------|--------|---------------|--------|---------------------|--------|-----------|--------|
| ***(In thousands)***         |   | **Reduction** |   | **Consolidation**   |   | **Total** |   |
|                         |   |          |   |                |   |      |   |
| Balance at December 31, 2001 |   | $             | 24     |                | $      | 2,630     |   | $ | 2,654 |   |
|                         |   |          |   |                |   |      |   |
| Cash expenditures            |   | 3⁄4        |   | 503                 |   | 503       |   |
|                         |   |          |   |                |   |      |   |
| Balance at March 31, 2002    |   | $             | 24     |                | $      | 2,127     |   | $ | 2,151 |   |

 

 

 

8

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Item 2.

 

**Management's Discussion and Analysis**

**of Financial Condition and Results of Operations**

Three Months Ended March 31, 2002 and 2001

 

The following discussion of the results of ouroperations and our financial condition should be read in conjunction with ourconsolidated financial statements and the related notes to consolidatedfinancial statements in this 10-Q, our other filings with the Securities andExchange Commission and our other investor communications.

 

Critical Accounting Policies

 

The discussion and analysis of our financial conditionand results of operations are based on consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States.  The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amount of assets and liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities at the date of ourfinancial statements.  Actual resultsmay differ from these estimates under different assumptions or conditions.

 

Critical accounting policies are defined as those thatare reflective of significant judgments and uncertainties, and potentiallyresult in materially different results under different assumptions andconditions.  Application of thesepolicies is particularly important to the portrayal of our financial conditionand results of operations.  We believethe accounting policies described below meet these characteristics.  Our significant accounting policies are morefully described in the notes to the consolidated financial statements includedin our annual report on Form 10-K.

 

*                RevenueRecognition*

 

We recognize revenue for our staffing business and themajority of our business solutions and infrastructure business as services areperformed or products are delivered. Certain of our outsourcing and help desk engagements provide for aspecific level of service each month for which we bill a standard monthlyfee.  Revenue for these engagements isrecognized in monthly installments over the billable portion of the contract.

 

We generally do not enter into fixed priceengagements.

 

In all of our services, risk associated withsatisfactory service delivery exists. Although management feels these risks are adequately addressed by theCompany’s adherence to proven project management methodologies and otherprocedures, the potential exists for future revenue charges relating tounresolved issues.

 

*                Bad Debt*

 

Each accounting period, we determine an amount to beset aside to cover potentially uncollectable accounts.  Our determination is based upon anevaluation of accounts receivable for risk associated with a client’s inabilityto make contractual payments.  Thesedeterminations require considerable judgment in assessing the ultimatepotential for realization of these receivables, including reviewing thefinancial stability of the client and gauging current market conditions.  If our evaluation of a client’s ability topay is incorrect, we may incur future charges.

 

*                Goodwill and IntangibleImpairment*

 

We evaluate goodwill and other intangible assets on aperiodic basis.  This evaluation relieson assumptions regarding estimated future cash flows and other factors todetermine the fair value of the respective assets.  If these estimates or related assumptions change, we may berequired to recognize impairment charges.

 

In June 2001, the Financial Accounting Standards Boardissued Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwilland Other Intangible Assets”.  Inaccordance with the provisions of SFAS No. 142 effective January 1, 2002 weceased amortization of goodwill. Identifiable intangible assets will continue to be amortized over theiruseful lives and reviewed for impairment in accordance with SFAS No. 121“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed of”. Also in conjunction with the adoption of the provisions ofSFAS No. 142, we expect to record a goodwill impairment charge upon adoptionduring the second quarter. We expect the charge to be between $12.0 and $15.0million before the effect of income taxes. Such an impairment will be recorded as a cumulative effect of a changein accounting principle and therefore will not impact operating income.

 

9

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*                Deferred Taxes*

 

We account for income taxes in accordance with SFASNO. 109, “Accounting for Income Taxes,” which requires that deferred tax assetsand liabilities be recognized using enacted tax rates for the effect oftemporary differences between the book and tax basis of recorded assets andliabilities.  SFAS 109 also requiresthat deferred tax assets be reduced by a valuation allowance if it is morelikely than not that some portion or all of the deferred tax asset will not berealized.  Based upon prior taxableincome and estimates of future taxable income, we have determined that it ismore likely than not that our net deferred tax assets, with the exception ofthe asset associated with a capital loss carry-forward, which has been fullyreserved, will be fully realized in the future.  If actual taxable income varies from these estimates, we may berequired to record a valuation allowance against our deferred tax assetsresulting in additional income tax expense which will be recorded in ourconsolidated statement of operations.

 

*                Restructuring*

 

We recorded a restructuring charge and reservesassociated with restructuring plans approved by management in December2000.  The remaining reserve primarilyincludes an estimate pertaining to real estate lease obligations.  The reserve associated with leaseobligations could be materially affected by factors such as the ability toobtain subleases, the creditworthiness of sub-lessees, and the ability tonegotiate early termination agreements with lessors.  While the Company believes that its current estimates regardinglease obligations are adequate, future events could necessitate significantadjustments to these estimates.

 

Liquidity and Capital Resources

 

Working capital at March 31, 2002 was $16.6 million,the same as December 31, 2001.  Thisincludes cash and cash equivalents of $1.1 million compared to $18.2 million atDecember 31, 2001 and accounts receivable of $79.1 million compared to $83.3million at December 31, 2001.  Thedecrease in cash and cash equivalents corresponds to the decrease in short-termdebt to $25.4 million at March 31, 2002 from $41.0 million at December 31, 2002.  Following the amendment of the long-termdebt described below, all of our available cash was used to reduce the balanceon our line of credit.  The ratios ofcurrent assets to current liabilities and total assets to total liabilitieshave increased since December 31, 2001.

 

In December 1998 we issued $20.0 million in seniornotes under a Note Purchase Agreement. In January 2000, we obtained a $25.0 million revolving line ofcredit.  Both the Note PurchaseAgreement and the line of credit were amended in March, August and December,2001 and contained a number of restrictions, including restrictions on paymentof dividends and repurchase of our stock.

 

Subsequent to March 31, 2002, we consummated anasset-based revolving credit agreement with up to $55.5 million ofavailability. Borrowings under the credit agreement are secured by all of ourassets.  This transaction closed onApril 11, 2002 and we received an initial advance of $29.8 million to pay theoutstanding balance of the senior notes ($19.1 million, including make wholeobligations), the outstanding balance on the line of credit ($10.3 million) andcertain transaction expenses.  Under thenew revolving credit agreement, which matures on April 10, 2005, we must takeadvances or pay down the outstanding balance daily.  We can, however, choose to request fixed term advances of one,two, or three months for a portion of the outstanding balance on the line ofcredit.  The daily advances on the lineof credit bear interest at the Wall Street Journal’s “Prime Rate” plus .75%(5.5% on April 11, 2002) while the fixed term advances bear interest at theLIBOR rate plus 3.0%.  The creditagreement requires the payment of a commitment fee of .50% of the unusedportion of the line plus an annual administration fee of $50,000.  The agreement restricts, among other things,the payment of dividends, establishes limits on capital expenditures, andrequires us to maintain a minimum accounts payable turnover ratio. We believewe will be able to meet the requirements of the new agreement.  Proceeds from the new credit agreement usedto repay the senior notes will result in a loss on the early extinguishment ofdebt of approximately $700,000, before the effect of income taxes, during thequarter ending June 30, 2002.

 

 

10

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Our primary need for working capital is to supportaccounts receivable and to fund the time lag between payroll disbursement andreceipt of fees billed to clients.  Webelieve the new credit agreement, along with internally generated funds, willbe sufficient to fund our business’ working capital needs.  Nevertheless, to strengthen our workingcapital position for the future growth of the Company, we have concludednegotiations to sell our corporate headquarters building and remain in thebuilding as its major tenant.  We expectto complete this sale during the second quarter.  We expect the sale of our corporate headquarters building togenerate in excess of $16.0 million of additional working capital.  Upon the sale, we expect to record a loss onthe sale of approximately $1.7 million. The lease under which we will occupy the building provides that if werenew the lease after its initial five-year term, we will receive renewalpayments of $200,000 per year based on the amount of space we will occupy atthe time of closing.  The amount ofrenewal payments can increase or decrease depending on the amount of space weoccupy when payments are due.

 

Results ofOperations

 

*                Revenue*

 

Revenue provideddirectly for the three months ended March 31, 2002 was $83.5 million, adecrease of 24.4% from the same period a year ago.  This decrease is the result of a reduction in billable technicalconsultants due to the industry-wide decrease in demand for IT services.  While we have been able to increase averagebilling rates slightly from the same period a year ago, there can be noassurance we will be able to continue this as competitive conditions in theindustry make it difficult for us to increase or maintain the hourly rates wecharge for our services.

 

Revenue provided through sub-suppliers for the threemonth period ended March 31, 2002 was $31.2 million.  This total represents a decrease of 8.4% from the same period ayear ago.  This decrease is the resultof reduced billable hours with existing managed services clients.  The decrease in managed services revenue wasoffset somewhat by the addition of a new MSG client.

 

*               PersonnelHeadcount*

 

Personnel totaled approximately 3,500 as of March 31,2002.  Of this total, approximately2,950 were technical consultants.  Thistotal decreased from December 31, 2001 numbers of 3,800 for total staff and3,200 technical consultants.  Thedecrease in consultants primarily came in our staffing business as assignmentswere completed and new assignments were not available. The decrease in overheadstaff was planned as part of our ongoing efforts to keep our cost structure inline with our revenue. We now believe consultant headcount will remain steadyor slightly decline until the business environment for IT services improves.  The 3,500 total personnel at March 31, 2002reflects a decrease of 1,100 or 23.9% from the 4,600 total at March 31,2001.  This decrease includesapproximately 225 administrative and management positions eliminated inconnection with the restructuring and a decrease in billable technical staff.

 

 

11

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*                Labor Costs*

 

Salaries, contracted services and direct charges,which represent primarily the Company's direct labor cost, were $95.4 millionor 83.2% of revenues for the three months ended March 31, 2002 compared to$118.3 million or 81.9% for the same period a year ago.  By comparison, these costs were 84.1% ofrevenue for the previous quarter, which included unusually high employeebenefits costs.

 

Our efforts tocontrol these costs involve controlling labor costs, passing on labor costincreases through increased billing rates where possible, and maintainingproductivity levels of our billable technical staff.  Labor costs, however, are difficult to control because of thehighly skilled technical personnel we seek to hire and retain.  It is also difficult to pass on labor costincreases to customers due to intense competition in the industry, theindustry-wide decrease in demand for our services and the general state of theeconomy.  Although we continuouslyattempt to control the factors which affect this category of expense, there canbe no assurance we will be able to maintain or improve this level.

 

Our labor costs as a percentage of revenue for thequarter ended March 31, 2002 have increased from the same period a yearago.  We believe the following factorsaccount for this increase and are directly tied to the industry-wide slowdownin business.  First, in some cases weare agreeing to lower hourly rates to attempt to keep our share of availablebusiness.  Second, our reduction intechnical staff headcount to rightsize our organization carries with it certaincosts.  Third, in certain areas of ourbusiness we are experiencing a lower utilization rate, which means a higherlevel of unbilled idle time than in prior periods.  We expect continuing pressure on hourly rates as long as theindustry-wide slowdown continues. We are working to improve our utilizationrate by managing headcount in the areas of our business experiencing lowerutilization.

 

*                Selling, General andAdministrative Expenses*

 

Selling, administrative and other operating (SG&A)costs, which include commissions, employee fringe benefits and location costs,represented $19.4 million or 16.9% of revenue for the three months ended March31, 2002 compared to $23.4 million or 16.2% for the same period a yearago.  Although SG&A increasedslightly as a percentage of revenue, we reduced SG&A by approximately $4.0million over the same period in the prior year.  Excluding subsupplier revenue associated with our subsuppliercontracts, this percentage would have been 23.2% for the three months endedMarch 31, 2002 and 21.2% for the same period a year ago.  While we are committed to careful managementof these costs, there can be no assurance we will be able to maintain thesecosts at their current relationship to revenue.

 

*                Amortization of Goodwill*

 

Amortization of goodwill and other intangible assetshas decreased from $775,000 for the three months ended March 31, 2001 to$199,000 for the three months ended March 31, 2002, primarily as a result ofthe discontinuation of the amortization of goodwill as required by SFAS No.142.

 

*                Non-Operating Income*

 

Non-operating income, consisting primarily of interestincome, has declined from $90,000 for the three months ended March 31, 2001 to$44,000 for the three months ended March 31, 2002.  Interest expense has decreased from $771,000 to $658,000 duringthe same periods.  The change in theamount of interest income is primarily the result of the decrease in cash andcash equivalents, and the decrease in interest expense is due primarily to adecrease in outstanding debt.

 

*                Net Income*

 

The net loss for the three months ended March 31, 2002of $701,000 represents a decrease of $1.5 million from the same period a yearago.  As a percentage of revenue, thenet loss was (0.6%) for the three months ended March 31, 2002 compared with thenet income of .5% for the three months ended March 31, 2001.  This decrease is primarily a result of theincreases, as a percentage of revenue, in the expenses discussed above.  The net (loss) income as a percentage ofdirect revenue for the three months ended March 31, 2002 and 2001 was (.8%) and..7%, respectively.

 

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*                Restructuring Activities*

 

In December 2000, werecorded a restructuring charge of $7.0 million.  Of this charge, $2.6 million related to workforce reductions(primarily non-billable staff), and $4.4 million related to lease terminationand abandonment costs (net of sub-lease income), including an amount for assetsto be disposed of in conjunction with this consolidation.

 

Asummary of first quarter activity with respect to the restructuring charge isas follows:

 
|                          |   | **Workforce** |   | **Office Closure/** |   |      |   |
|-------------------------------|--------|---------------|--------|---------------------|--------|-----------|--------|
| ***(In thousands)***          |   | **Reduction** |   | **Consolidation**   |   | **Total** |   |
|                          |   |          |   |                |   |      |   |
| Balance at December 31,  2001 |   | $             | 24     |                | $      | 2,630     |   | $ | 2,654 |   |
|                          |   |          |   |                |   |      |   |
| Cash expenditures             |   | 3⁄4        |   | 503                 |   | 503       |   |
|                          |   |          |   |                |   |      |   |
| Balance at March 31,  2002    |   | $             | 24     |                | $      | 2,127     |   | $ | 2,151 |   |

 

Market Conditions, Business Outlook and Risks to OurBusiness

 

*ForwardLooking Statements*

 

The statements contained in “Management’s Discussionand Analysis of Financial Condition and Results of Operations,” includingwithout limitation, our statements relating to prospects for our business,recovery of the IT services industry, our working capital needs and sufficiencyof our working capital, the continued need of current and prospective customersfor our services and our ability to win that business, the effects ofcompetition and our ability to respond to competitive conditions, theavailability and utilization of qualified professional staff, our ability toincrease billing rates as labor and benefit costs increase, our ability tomaintain gross margin levels and control operating cost increases, and ourability to achieve and maintain profitability are forward looking statementsmade under the safe harbor provision of the Private Securities LitigationReform Act.  Words such as “believes,”“intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans” andsimilar expressions are intended to identify forward looking statements.  Such statements are based on management’scurrent expectations as of the date of this document but involve risks,uncertainties and other factors which could cause actual results to differmaterially from those contemplated by such forward looking statements.  Investors are cautioned to consider theseforward looking statements in light of important factors which may result invariations from results contemplated by such forward looking statementsincluding, but not limited to, the risk factors discussed below.

 

Several competitive conditions are affecting ourindustry.  The number of largecompetitors, the industry-wide decrease in demand for IT services and thegeneral state of the economy have created pricing and gross margin pressures inthe technical staff augmentation sector of the computer consultingindustry.  Staff augmentation continuesto represent over half of total revenue (revenue from services provideddirectly to client (direct revenue) plus revenue from services provided to ourclients by subsuppliers (subsupplier revenue)) and direct revenue.  While we expect the industry slowdown tobegin to reverse in 2002, there can be no assurance as to when, or if, revenuewill return to previous levels.  Ourability to respond to these competitive conditions will bear directly on ourperformance until recovery in the general economy and the IT services begins.

 

Increased competition in the area of technical staffaugmentation has created pressure on billable hourly rates, and clients havebegun to request increasingly lower cost models for staff augmentationservices.  As a result, while we havebeen able to increase average billing rates slightly over the prior periods,there can be no assurance we will be able to continue to do so or to return tohistorical gross margin levels. Management expects that clients will continue for the foreseeable futureto request lower cost offerings for staff augmentation services throughe-procurement systems, extremely competitive bidding processes, the granting ofvarious types of discounts and the use of off-shore resources.  We are considering various low-costalternatives, including relationships with e-procurement software vendors andoff-shore service providers, in response to these developments in the industry,and we have implemented new software and internet capabilities in ourrecruiting function.  Our ability torespond to customer requests for lower pricing or to provide other low costsolutions in this area of our business will have a direct effect on ourperformance.  Management expectscompetitive conditions in the area of technical staff augmentation to continuefor the foreseeable future, although it expects that demand for these serviceswill increase as the general economy begins to recover.

 

 

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Increased competition also could affect our ability toobtain and retain client contracts.  Ingeneral, our clients can cancel or reduce their contracts on short notice. Lossof a significant client relationship or a significant portion thereof, asignificant number of relationships or a major contract could have a materialadverse effect on our business.

 

As a result of the pricing and other competitivepressures affecting the technical staff augmentation area of our business,management has sought and plans to continue to seek new customers for our otherservice offerings, especially with small and medium size companies.  Management plans to continue adding newcustomers or obtaining contracts with existing customers in the areas ofsoftware and web site development and maintenance (business solutions), networkinfrastructure services, computer security and criminal justice.  While we believe these areas of our businesspresent opportunities, growth in these areas will depend on improvement inspending in the overall IT services market, our ability to compete with ourvendors and how successful we are at obtaining new clients.

 

Our ability to attract and retain qualified technicalpersonnel, especially when recovery begins, will affect our results ofoperations and ability to grow in the future. Competition for qualified personnel is intense, and if we are unable tohire required talent, it will affect our ability to grow our business.

 

Our ability to control labor costs, employee benefitcosts and other costs also will affect our future performance.  In an effort to contain our benefits costs,we implemented substantial changes to our benefits plans for fiscal year2002.  While we believe the changes weimplemented will be effective, the actual results from these changes may varydue to factors we cannot control such as rising medical costs, the amount ofmedical services used by our employees and similar factors.  We have streamlined our operations byconsolidating offices, reducing administrative and management personnel andcontinue to review our company structure for more efficient methods ofoperating our business and delivering our services.  We may not be able to continue to reduce costs without affectingour ability to deliver service to our clients and therefore may choose toforego particular cost reductions if we believe it would be prudent to do sofor the future business of the Company.

 

While we believe our working capital will besufficient for the foreseeable needs of our business, significant rapid growthin our business could create a need for additional working capital.  An inability to obtain additional workingcapital could have an adverse material effect on our business.  We expect to be able to comply with therequirements of our credit agreement; however, failure to do so could have amaterial adverse effect on our business.

 

Item 3.

 

**Quantitativeand Qualitative Disclosures About Market Risk**

 

The Company is exposed to certain market risks on thenew credit agreement because of the variable interest rate charged.  Market risk is the potential loss arisingfrom the adverse changes in market rates and prices, such as interestrates.  Market risk is estimated as thepotential increase in fair value resulting from a hypothetical one percentincrease in interest rates which assuming an average outstanding debt balanceof $30.0 million would result in an annual interest expense increase ofapproximately $300,000.

 

 

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PART II.  OTHERINFORMATION

 

Item 6.

 

**Exhibitsand Reports on Form 8-K**

 

             None.

 

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SIGNATURES

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned there untoduly authorized.

 
|       | ANALYSTS INTERNATIONAL CORPORATION |
|------------|------------------------------------|
|       |                               | (Registrant) |
|       |                               |
| Date  | May 15, 2002                       |   | By | /s/ John T. Paprocki |   |
|       |                               | John T. Paprocki |   |
|       |                               | Chief Financial Officer |   |
|       |                               |
| Date       | May 15, 2002                       |   | By | /s/ David J. Steichen |   |
|       |                               | David J. Steichen |   |
|       |                               | Controller and Assistant Treasurer |   |
|       |                               | (Chief Accounting Officer) |   |
|            |                                    |  |  |  |  |  |  |  |

 

 

 

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