**** ****

****UNITED STATES****

****SECURITIES AND EXCHANGE COMMISSION****

**Washington, D.C. 20549**

 

****FORM 10-Q****

 

****x QuarterlyReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934****

 

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

 

**or**

 

****oTransition Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934****

 

**For the transition period from            to            **

 

**Commission File Number: 0-4090**

 

****ANALYSTS INTERNATIONAL CORPORATION****

(Exact name of registrant as specified in its charter)

 

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

 

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 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 xNo o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Date File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

As of May 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 April 3, 2010 and January 2, 2010                               | 3      |
|                     |                                                                                                         |   |
|                     | Consolidated  Statements of Operations for the Three Months Ended April 3, 2010 and  April 4, 2009 | 4      |
|                     |                                                                                                         |   |
|                     | Consolidated  Statements of Cash Flows for the Three Months Ended April 3, 2010 and  April 4, 2009 | 5      |
|                     |                                                                                                         |   |
|                     | Notes to Consolidated Financial Statements                                                                   | 6      |
|                     |                                                                                                         |   |
| Item 2.                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                  | 10     |
|                     |                                                                                                         |   |
| Item 3.                  | Quantitative  and Qualitative Disclosures About Market Risk                                                  | 15     |
|                     |                                                                                                         |   |
| Item 4T.                 | Controls and  Procedures                                                                                     | 15     |
|                     |                                                                                                         |   |
| **Part II.**        | **OTHER INFORMATION**                                                                                        | 17     |
|                     |                                                                                                         |   |
| Item 1.                  | Legal Proceedings                                                                                            | 17     |
|                     |                                                                                                         |   |
| Item 1A.                 | Risk Factors                                                                                                 | 17     |
|                     |                                                                                                         |   |
| Item 2.                  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                 | 17     |
|                     |                                                                                                         |   |
| Item 3.                  | Defaults Upon  Senior Securities                                                                             | 17     |
|                     |                                                                                                         |   |
| Item 4.                  | Submission of  Matters to a Vote of Security Holders                                                         | 17     |
|                     |                                                                                                         |   |
| Item 5.                  | Other Information                                                                                            | 17     |
|                     |                                                                                                         |   |
| Item 6.                  | Exhibits                                                                                                     | 17     |
|                     |                                                                                                         |   |
| Signatures               |                                                                                                         | 18     |
|                     |                                                                                                         |   |
| Exhibit Index       |                                                                                                         | 19     |

 

2

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****PART I. FINANCIAL INFORMATION****

 

****Item 1. Financial Statements****

 

****AnalystsInternational Corporation****

****Consolidated Balance Sheets****

**(Unaudited)**

 
| ** **                                                                                                                         | ** ** | **April 3,** | ** ** | **January 2,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|
| **(In thousands)**                                                                                                                 | ** ** | **2010**          | ** ** | **2010**            | ** ** |
|                                                                                                                               |       |              |       |                |       |
| **ASSETS**                                                                                                                         |       |              |       |                |       |
|                                                                                                                               |       |              |       |                |       |
| Current assets:                                                                                                                    |       |              |       |                |       |
| Cash and cash equivalents                                                                                                          |       | $                 | 3,766      |                | $          | 3,818 |   |
| Accounts receivable, less allowance for doubtful  accounts of $930 and $958, respectively                                          |       | 22,152            |       | 23,028              |       |
| Prepaid expenses and other current assets                                                                                          |       | 1,311             |       | 1,442               |       |
| Total current assets                                                                                                               |       | 27,229            |       | 28,288              |       |
|                                                                                                                               |       |              |       |                |       |
| Property and equipment, net of accumulated  depreciation of $10,692 and $10,774, respectively                                      |       | 1,478             |       | 1,846               |       |
| Other assets                                                                                                                       |       | 463               |       | 543                 |       |
| Total assets                                                                                                                       |       | $                 | 29,170     |                | $          | 30,677 |   |
|                                                                                                                               |       |              |       |                |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                     |       |              |       |                |       |
|                                                                                                                               |       |              |       |                |       |
| Current liabilities:                                                                                                               |       |              |       |                |       |
| Accounts payable                                                                                                                   |       | $                 | 5,901      |                | $          | 6,958 |   |
| Line of credit                                                                                                                     |       | —            |       | —              |       |
| Salaries and benefits                                                                                                              |       | 3,830             |       | 2,498               |       |
| Deferred revenue                                                                                                                   |       | 494               |       | 310                 |       |
| Deferred compensation                                                                                                              |       | 465               |       | 522                 |       |
| Restructuring accrual                                                                                                              |       | 1,679             |       | 2,038               |       |
| Other current liabilities                                                                                                          |       | 995               |       | 960                 |       |
| Total current liabilities                                                                                                          |       | 13,364            |       | 13,286              |       |
|                                                                                                                               |       |              |       |                |       |
| Non-current liabilities:                                                                                                           |       |              |       |                |       |
| Deferred compensation                                                                                                              |       | 945               |       | 1,037               |       |
| Restructuring accrual                                                                                                              |       | 861               |       | 1,045               |       |
| Other long-term liabilities                                                                                                        |       | 275               |       | 361                 |       |
| Total non-current liabilities                                                                                                      |       | 2,081             |       | 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                                                                                                                 |       | 25,540            |       | 25,598              |       |
| Accumulated deficit                                                                                                                |       | (12,313           | )          | (11,148             | )          |
| Total shareholders’ equity                                                                                                    |       | 13,725            |       | 14,948              |       |
| Total liabilities and shareholders’ equity                                                                                    |       | $                 | 29,170     |                | $          | 30,677 |   |

 

See notes to consolidated financial statements.

 

3

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****AnalystsInternational Corporation****

****Consolidated Statements of Operations****

****(Unaudited)****

*** ***
| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **April 3,**      | ** ** | **April 4,** | ** ** |
| **(In thousands except per share amounts)**            | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                                   |       |                   |       |   |   |
| Revenue:                                               |       |                   |       |   |   |
| Professional services provided directly                |       | $                      | 28,041     |   | $ | 40,823 |   |
| Professional services provided through subsuppliers    |       | 411                    |       | 873 |   |
| Product sales                                          |       | —                 |       | 3,436 |   |
| Total revenue                                          |       | 28,452                 |       | 45,132 |   |
|                                                   |       |                   |       |   |   |
| Expenses:                                              |       |                   |       |   |   |
| Cost of services provided directly                     |       | 22,075                 |       | 32,288 |   |
| Cost of services provided through subsuppliers         |       | 386                    |       | 831 |   |
| Cost of product sales                                  |       | —                 |       | 2,929 |   |
| Selling, administrative and other operating costs      |       | 6,973                  |       | 11,029 |   |
| Restructuring costs and other severance related  costs |       | 174                    |       | 66 |   |
| Amortization of intangible assets                      |       | —                 |       | 223 |   |
| Total expenses                                         |       | 29,608                 |       | 47,366 |   |
|                                                   |       |                   |       |   |   |
| Operating loss                                         |       | (1,156                 | )          | (2,234 | ) |
|                                                   |       |                   |       |   |   |
| Non-operating income                                   |       | 5                      |       | 14 |   |
| Interest expense                                       |       | (3                     | )          | (8 | ) |
|                                                   |       |                   |       |   |   |
| Loss before income taxes                               |       | (1,154                 | )          | (2,228 | ) |
|                                                   |       |                   |       |   |   |
| Income tax expense                                     |       | 11                     |       | 6 |   |
|                                                   |       |                   |       |   |   |
| Net loss                                               |       | $                      | (1,165     | ) | $ | (2,234 | ) |
|                                                   |       |                   |       |   |   |
| Per common share (basic):                              |       |                   |       |   |   |
| Net loss                                               |       | $                      | (0.23      | ) | $ | (0.45 | ) |
|                                                   |       |                   |       |   |   |
| Per common share (diluted):                            |       |                   |       |   |   |
| Net loss                                               |       | $                      | (0.23      | ) | $ | (0.45 | ) |
|                                                   |       |                   |       |   |   |
| Weighted-average shares outstanding:                   |       |                   |       |   |   |
| Basic                                                  |       | 4,986                  |       | 4,985 |   |
| Diluted                                                |       | 4,986                  |       | 4,985 |   |

 

See notes to consolidated financial statements.

 

4

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****AnalystsInternational Corporation****

****Consolidated Statements of Cash Flows****

****(Unaudited)****

**** ****
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **April 3,**      | ** ** | **April 4,** | ** ** |
| **(In thousands)**                                    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| *** ***                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                 |       |                   |       |   |   |
| Net loss                                              |       | $                      | (1,165     | ) | $ | (2,234 | ) |
|                                                  |       |                   |       |   |   |
| Adjustments to net loss:                              |       |                   |       |   |   |
| Loss on asset sale                                    |       | 49                     |       | 1 |   |
| Depreciation                                          |       | 241                    |       | 376 |   |
| Amortization of intangible assets                     |       | —                 |       | 223 |   |
| Stock based compensation                              |       | (58                    | )          | 96 |   |
|                                                  |       |                   |       |   |   |
| Changes in:                                           |       |                   |       |   |   |
| Accounts receivable                                   |       | 876                    |       | 7,194 |   |
| Prepaid expenses and other assets                     |       | 211                    |       | 52 |   |
| Accounts payable                                      |       | (1,088                 | )          | (4,542 | ) |
| Salaries and benefits                                 |       | 1,332                  |       | 2,167 |   |
| Deferred revenue                                      |       | 184                    |       | (343 | ) |
| Deferred compensation                                 |       | (149                   | )          | (135 | ) |
| Restructuring accrual                                 |       | (543                   | )          | (23 | ) |
| Other accrued liabilities                             |       | (6                     | )          | (79 | ) |
| Net cash (used in) provided by operating activities   |       | (116                   | )          | 2,753 |   |
|                                                  |       |                   |       |   |   |
| Cash flows from investing activities:                 |       |                   |       |   |   |
| Expended for property and equipment additions         |       | (59                    | )          | (440 | ) |
| Proceeds from asset sale                              |       | 168                    |       | — |   |
| Net cash provided by (used in) investing activities   |       | 109                    |       | (440 | ) |
|                                                  |       |                   |       |   |   |
| Cash flows from financing activities:                 |       |                   |       |   |   |
| Net change in line of credit                          |       | —                 |       | — |   |
| Payment of capital lease obligation                   |       | (45                    | )          | (30 | ) |
| Net cash used in financing activities                 |       | (45                    | )          | (30 | ) |
|                                                  |       |                   |       |   |   |
| Net (decrease) increase in cash and cash  equivalents |       | (52                    | )          | 2,283 |   |
|                                                  |       |                   |       |   |   |
| Cash and cash equivalents at beginning of period      |       | 3,818                  |       | 2,288 |   |
|                                                  |       |                   |       |   |   |
| Cash and cash equivalents at end of period            |       | $                      | 3,766      |   | $ | 4,571 |   |

 

See notes to consolidated financial statements.

 

5

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****AnalystsInternational Corporation****

****Notes to Consolidated Financial Statements****

**(Unaudited)**

 

**1. ******Organization and Natureof Business****

 

Analysts InternationalCorporation (“AIC,” “Company,” “we,” “us,” or “our”) is an informationtechnology (IT) services company. We employ approximately 800 professionals andare 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 ended January 2,2010.

 

We operate on afiscal year ending on the Saturday closest to December 31. Accordingly,fiscal 2010 will end on Saturday, January 1, 2011. The first quarter offiscal 2010 ended on April 3, 2010 and the first quarter of fiscal 2009ended on April 4, 2009.

 

****2.  Summary of Significant Accounting Policies****

 

*Basis ofConsolidation*

 

The accompanyingunaudited Consolidated Financial Statements of AIC have been prepared on theaccrual basis of accounting and in accordance with the requirements of theSecurities and Exchange Commission (“SEC”) for interim financial reporting. Aspermitted under these rules, certain footnotes and other financial informationthat are normally required by accounting principles generally accepted in theUnited States (“U.S. GAAP”) can be condensed or omitted. The ConsolidatedFinancial Statements included in this document reflect, in the opinion of ourmanagement, all adjustments (consisting of only normal recurring adjustments,except as noted elsewhere in the Notes to Consolidated Financial Statements)necessary for fair presentation of the results of operations for the interimperiods presented. 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 on Form 10-Kfor the fiscal year ended January 2, 2010. Revenues, expenses, cash flows,assets and liabilities can and do vary during the year. Therefore, interimresults are not necessarily indicative of the results to be expected for thefull 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 Value Measurement****

 

Accounting StandardsCodification (“ASC”) Topic 820, *Fair Value Measurementsand Disclosures*provides a fair value hierarchy which gives thehighest priority to unadjusted quoted prices in active markets for identicalassets or liabilities (Level 1) and the lowest priority to unobservable inputs(Level 3). A financial instrument’s level within the hierarchy is based on thelowest level of any input that is significant to the fair value measurement.The levels of the fair value hierarchy are defined as follows:

 

Level 1 — Quoted pricesin active 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 — Observableinputs other 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 cashinvestments in money market accounts are considered to be cash equivalents. Theestimated fair values for cash equivalents approximate their carrying valuesdue to the short-term maturities of these instruments. Cash equivalents areclassified as Level 1 and are recorded in our cash and cash equivalents line onour Consolidated Balance Sheets.

 

6

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**4.   Sale of Assets**

 

*Saleof Customer Contracts*

 

On March 3, 2010,AIC sold certain customer contracts, property and equipment and sublet afacility lease. In consideration for the assets sold and the liabilitiestransferred, the Company received $0.2 million in cash. The Companyrecorded a loss on the sale of approximately $50,000 which is included withinSelling, administrative and other operating costs (“SG&A”) in ourConsolidated Statement of Operations.

 

**5.   Intangible Assets**

 
| ** **         | ** ** | **April 3, 2010**      | ** ** | **April 4, 2009**        | ** ** |
|--------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **(In thousands)** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Other  Intangibles,  Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Other  Intangibles,  Net** | ** ** |
|               | ** ** | ** **                  | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer lists     |       | $                           | —     |                          | $          | — |   | $ | — |   | $ | 12,841 |   | $ | (6,960 | ) | $ | 5,881 |   |
|                    |            |                             |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the first quarterof fiscal 2010, no intangible assets were acquired. In the first quarter offiscal 2009, we recorded amortization expense of $0.2 million related to ourintangible assets and disposed of a customer list and a trade name that werefully amortized.

 

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

 

*RevolvingCredit Facility*

 

On September 30,2009, AIC entered into a revolving line of credit (the “Credit Facility”) withWells Fargo Bank, National Association (“Wells Fargo”) pursuant to which WellsFargo will advance up to $15.0 million to AIC for working capital purposes andto facilitate the issuance of letters of credit.  The total amountavailable for borrowing under the Credit Facility will fluctuate based on theCompany’s level of eligible accounts receivable.

 

The Credit Facilitycarries an interest rate equal to the three-month LIBOR rate plus 3.5%. The Credit Facility has an unused line fee of 0.50% annually on the dailyaverage unused amount.  The maturity date of the Credit Facility is September 30,2012. Borrowings under the Credit Facility are secured by all of the Company’sassets.

 

The Credit Facilityrequires the Company to meet certain levels of year-to-date earnings/lossbefore taxes. The Credit Facility limits the Company’s annual capitalexpenditures to $2.0 million and requires the Company to maintain an excessborrowing base of at least $5.0 million. The Credit Facility contains customaryaffirmative and negative covenants and upon an event of default Wells Fargo mayterminate the facility or declare the entire amount outstanding under theCredit Facility to be immediately due and payable and exercise other rightsunder the agreement.

 

As of April 3, 2010,we were 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 $9.2 million as of April 3,2010.

 

**7.   Restructuring Costs and Other SeveranceRelated Costs**

 

A summary of therestructuring charges and subsequent activity in the restructuring accrual forthe three months ended April 3, 2010 is as follows:

 
| **(In thousands)**                 | ** ** | **Workforce  Reduction** | ** ** | **Office Closure/  Consolidation** | ** ** | **Total** | ** ** |
|------------------------------------|------------|--------------------------|------------|------------------------------------|------------|-----------|------------|
| Balance as of January 2, 2010 |       | $                        | 1,215      |                               | $          | 1,868     |       | $ | 3,083 |   |
| Additional restructuring charges   |       | 174                      |       | —                             |       | 174       |       |
| Cash expenditures                  |       | (500                     | )          | (217                               | )          | (717      | )          |
| Balance as of April 3, 2010   |       | $                        | 889        |                               | $          | 1,651     |       | $ | 2,540 |   |

 

During the first quartersof fiscal 2010 and fiscal 2009, we recorded workforce reduction chargestotaling $0.2 million and $0.1 million, respectively, all of which related toseverance and benefits.

 

7

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**8. ReverseStock Split**

 

On February 11,2010, the Company’s Board of Directors declared a 1-for-5 reverse stock split (“ReverseStock Split”) of the Company’s common shares to all holders of record,effective February 26, 2010. AIC’s Board of Directors has authorized anamendment to the Company’s Articles of Incorporation giving effect to theReverse Stock Split and on February 26, 2010 the total authorized numberof shares was reduced to 24,000,000 common shares with a par value of ten cents($0.10) per share. All fractional shares were rounded down and any shareholderthat would be entitled to receive a fractional share will be paid the fairmarket value of the fractional share in cash.

 

The Company hasretroactively adjusted all share and per share data to reflect the Common stockand 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 to reflect the effect of the ReverseStock Split.

 

OnFebruary 27, 2008, the Company’s Board of Directors approved an amendmentto the Company’s existing Shareholder Rights Plan (the “Amended Rights Plan”)which, among other things, extended the final expiration date on which CommonShare Purchase Rights (“Rights”) under the Amended Rights Plan are exercisable(until February 27, 2018).  Asamended, each Right entitled the registered holder to purchase from the Companyone common share of the Company at a price of $15 per common share (the“Purchase Price”), subject to adjustment. On February 26, 2010, the Company amended its Articles ofIncorporation to effect a Reverse Stock Split which also resulted inproportionate adjustments under the Amended Rights Plan in (a) the numberof shares issuable under the Amended Rights Plan and (b) the PurchasePrice.

 

**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                      |       |
| ASC Topic 718 Stock Compensation    |       | —     |       | (62            | )          | —          |       | (62                    | )          |
| Net loss                            |       | —     |       | —         |       | (1,165          | )          | (1,165                 | )          |
| Balance as of April 3, 2010    |       | $          | 498        |           | $          | 25,540          |       | $                      | (12,313    | ) | $ | 13,725 |   |

 

****10.**** ****Equity Compensation Plans****

 

Total equity-basedcompensation expense for the first quarters of fiscal 2010 and fiscal 2009 wasapproximately $(0.1) million and $0.1 million, respectively, and includescompensation expense related to both stock options and stock awards. Thereduction in deferred tax benefit recorded for the first quarter of fiscal 2010was $10,000 and the tax benefit recorded for the first quarter of fiscal 2009was $7,000. The tax benefit is offset against our valuation allowance for ourdeferred tax asset.

 

No stock options wereexercised during the periods ended April 3, 2010 and April 4, 2009.As of April 3, 2010, there was approximately $0.4 million of unrecognizedcompensation expense related to unvested option awards that are expected tovest over a weighted-average period of 1.6 years.

 

We granted equitycompensation awards as follows:

 
| ** **    | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|------------------------|------------|
| ** **    | ** ** | **April 3,**      | ** ** | **April 4,** | ** ** |
| ** **    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **    | ** ** | **Grants**             | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** | **Grants** | ** ** | **Weighted- Average  Grant Date Fair  Value** | ** ** |
|          | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock Options |       | 86,800                 |       | 1.73 |   | 20,800 |   | $ | 1.20 |   |
| Stock Awards  |       | 1,200                  |       | 3.36 |   | 2,400 |   | $ | 2.20 |   |

 

**11.  Loss Per Share**

 

Basic and dilutedloss per share 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 623,044 and470,200 shares of common stock were outstanding at April 3, 2010 and April 4,2009, respectively.  All options wereconsidered anti-dilutive and excluded from the computation of common equivalentshares at April 3, 2010 and April 4, 2009, because we reported a netloss.  The computation of basic anddiluted loss per share for the three months ended April 3, 2010 and April 4,2009, is as follows:

 

8

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| ** **                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **April 3,**      | ** ** | **April 4,** | ** ** |
| **(In thousands except per share amounts)**                                 | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                                                        |       |                   |       |   |   |
| Net loss                                                                    |       | $                      | (1,165     | ) | $ | (2,234 | ) |
| Weighted-average number of common shares  outstanding                       |       | 4,986                  |       | 4,985 |   |
| Dilutive effect of equity compensation awards                               |       | —                 |       | — |   |
| Weighted-average number of common and common  equivalent shares outstanding |       | 4,986                  |       | 4,985 |   |
|                                                                        |       |                   |       |   |   |
| Net loss per share:                                                         |       |                   |       |   |   |
| Basic                                                                       |       | $                      | (0.23      | ) | $ | (0.45 | ) |
| Diluted                                                                     |       | $                      | (0.23      | ) | $ | (0.45 | ) |

 

9

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****Item 2. Management’s Discussion and Analysis of Financial Condition andResults 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 “RiskFactors” described in Item 1A of our Annual Report on Form 10-k for thefiscal year ended January 2, 2010.

 

***A.******           ******OurBusiness***

 

Analysts InternationalCorporation (“AIC,” “Company,” “we,” “us,” or “our”) is an informationtechnology (IT) services company. We employ approximately 800 professionals andare 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***

 

Weexpected our 2010 first quarter operating results to improve from the 2009fourth quarter and 2009 first quarter due to the specific actions taken by AICand the recent improvement in the United States economy. We are cautiouslyoptimistic that the United States economy will improve for the benefit of ourcustomers and our operating performance. However, if we are unsuccessful in executing on our initiatives toachieve our 2010 objectives or the United States economy does not improve orexpand, we would expect to incur additional losses from operations andreductions in our cash flows and liquidity.

 

***C.******           ******Fiscal2010 Strategic Plan***

 

Our primary goal forfiscal 2010 is to achieve profitability and return value to our shareholders.In order to achieve that goal, our fiscal 2010 strategy emphasizes growing ourIT staffing business, improving the productivity of our sales and recruitingpersonnel, and controlling costs.

 

Our 2010 objectives areas follows:

 

·                  ***Become aprofitable company***

During the first quarter of fiscal 2010, wegenerated a net loss of $1.2 million which is an improvement of $2.0 million and$1.1 million over the fourth and the first quarters of fiscal 2009,respectively. Our success in reaching profitability in the second half offiscal 2010 is dependent on our ability to achieve growth in our revenues,further improvements in our gross margin percentage and further reductions inour selling, administrative and other costs.

 

·                  ***Increaserevenue***

Our first quarter offiscal 2010 revenues increased $1.8 million, or 6.9%, over the fourth quarterof fiscal 2009. There were 65 billing days in the first quarter of fiscals 2010and 2009 and 61 billing days in the fourth quarter of fiscal 2009. While webelieve there is an overall increased demand for IT professionals in the UnitedStates marketplace, our ability to participate in the economic recovery isdependent on the effectiveness and productivity of our sales and recruitingpersonnel. We continue to invest in our sales and recruiting portion of ourbusiness through additional tools to enhance productivity, lead generationactions and increased focus on our existing customer base.

 

·                  ***End fiscal2010 with 1,000 billable consultants***

Weended the first quarter of fiscal 2010 with 798 billable consultants.  We expect the number of billable consultantsto increase during fiscal 2010 as we expand our opportunities within existingcustomers and as the number of new customers increase.

 

·                  ***Achieveindustry standard gross margin rates***

Ourfirst quarter of fiscal 2010 gross margin percentage was 21.1%, which wasconsistent with our 2009 fourth quarter gross margin percentage and 100 basispoints greater than our 2009 first quarter gross margin percentage. Dependingon the mix of clients served, we believe further improvements to our grossmargin percentage can be achieved through disciplined placement of ourconsultants.

 

·                  ***Build cashto invest in our strategy***

Weended the first quarter of fiscal 2010 with approximately $3.8 million in cashand cash equivalents. We expect to use our available cash and cash equivalentsto fund our expected growth in revenues and our strategic initiatives.

 

10

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**D.****           ****BusinessDevelopments**

 

*Reverse Stock Split*

 

On February 11,2010, AIC’s Board of Directors declared a 1-for-5 reverse stock split (“ReverseStock Split”) of the Company’s common shares to all holders of record effectiveFebruary 26, 2010. AIC’s Board of Directors has authorized an amendment tothe Company’s Articles of Incorporation giving effect to the Reverse StockSplit and on February 26, 2010 the total authorized number of shares wasreduced to 24,000,000 common shares with a par value of ten cents ($0.10) pershare. All fractional shares were rounded down and any shareholder that wouldbe entitled to receive a fractional share will be paid the fair market value ofthe fractional share in cash.

 

The Company hasretroactively adjusted all share and per share data to reflect the Common stockand 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 to reflect the effect of the ReverseStock Split.

 

OnFebruary 27, 2008, the Company’s Board of Directors approved an amendmentto the Company’s existing Shareholder Rights Plan (the “Amended Rights Plan”)which, among other things, extended the final expiration date on which CommonShare Purchase Rights (“Rights”) under the Amended Rights Plan are exercisable(until February 27, 2018).  Asamended, each Right entitled the registered holder to purchase from the Companyone common share of the Company at a price of $15 per common share (the“Purchase Price”), subject to adjustment. On February 26, 2010, the Company amended its Articles ofIncorporation to effect a Reverse Stock Split which also resulted inproportionate adjustments under the Amended Rights Plan in (a) the numberof shares issuable under the Amended Rights Plan and (b) the PurchasePrice.

 

*Saleof Customer Contracts*

 

On March 3, 2010,AIC sold certain customer contracts, property and equipment and sublet afacility lease. In consideration for the assets sold and the liabilitiestransferred, the Company received $0.2 million in cash. The Companyrecorded a loss on the sale of approximately $50,000 which is included withinSelling, administrative and other operating costs (“SG&A”) in ourConsolidated Statement of Operations. For the preceding 12 months before thesale date, the customer contracts generated revenues of approximately $3.2million and had an unfavorable contribution margin of approximately $0.7million.

 

***E.******           ******Overviewof First Quarter Fiscal 2010 Operations***

 

Our revenues decreased$16.7 million, or 37%, from the first quarter of fiscal 2009 primarily dueto our planned exit from non-core and low-margin lines of business (22%) andfrom less demand for our IT professional services (15%).

 

Gross margins as apercent of revenue increased due to our focus on higher margin business and theimpact of exiting lower margin lines of business and accounts in fiscal 2009.

 

SG&A expensesdeclined $4.1 million in first quarter 2010 over the prior year quarter duelargely to the exit from the value added reseller (“VAR”) operations, theimpact of the personnel and facility reductions and the overall reduction inbusiness volume.

 

We used cash from operationsof $0.1 million and generated cash from investing activities of$0.1 million during the first quarter of fiscal 2010. As of April 4,2010, we had a cash balance of $3.8 million and no borrowings under ourrevolving line of credit.

 

****RESULTS OF OPERATIONS,THREE MONTHS ENDED APRIL 3, 2010 VS. APRIL 4, 2009****

 

The following tableillustrates the relationship between revenue and expense categories along witha count of employees and technical consultants as of April 3, 2010 and April 4,2009.

 

11

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| ** **                                             | ** ** | **Three Months Ended  April 3, 2010** | ** ** | **Three Months Ended  April 4, 2009** | ** ** | **Increase (Decrease)** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------|------------|
| **(Dollars in thousands)**                             | ** ** | **Amount**                                 | ** ** | **% of  Revenue**                          | ** ** | **Amount**              | ** ** | **% of  Revenue** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenue:                                               |       |                                       |       |                                       |       |                    |       |   |   |   |   |   |   |
| Professional services provided directly                |       | 28,041                                     |       | 98.6                                       | %          | 40,823                  |       | 90.5 | % | (12,782 | ) | (31.3 | )% |
| Professional services provided through subsuppliers    |       | 411                                        |       | 1.4                                        |       | 873                     |       | 1.9 |   | (462 | ) | (52.9 | ) |
| Product sales                                          |       | —                                     |       | —                                     |       | 3,436                   |       | 7.6 |   | (3,436 | ) | (100.0 | ) |
| Total revenue                                          |       | 28,452                                     |       | 100.0                                      |       | 45,132                  |       | 100.0 |   | (16,680 | ) | (37.0 | ) |
|                                                   |       |                                       |       |                                       |       |                    |       |   |   |   |   |   |   |
| Expenses:                                              |       |                                       |       |                                       |       |                    |       |   |   |   |   |   |   |
| Cost of services provided directly                     |       | 22,075                                     |       | 77.6                                       |       | 32,288                  |       | 71.5 |   | (10,213 | ) | (31.6 | ) |
| Cost of services provided through subsuppliers         |       | 386                                        |       | 1.4                                        |       | 831                     |       | 1.8 |   | (445 | ) | (53.5 | ) |
| Cost of product sales                                  |       | —                                     |       | —                                     |       | 2,929                   |       | 6.5 |   | (2,929 | ) | (100.0 | ) |
| Selling, administrative and other operating costs      |       | 6,973                                      |       | 24.5                                       |       | 11,029                  |       | 24.4 |   | (4,056 | ) | (36.8 | ) |
| Restructuring costs and other severance related  costs |       | 174                                        |       | 0.6                                        |       | 66                      |       | 0.1 |   | 108 |   | 163.6 |   |
| Amortization of intangible assets                      |       | —                                     |       | —                                     |       | 223                     |       | 0.5 |   | (223 | ) | (100.0 | ) |
| Total expenses                                         |       | 29,608                                     |       | 104.1                                      |       | 47,366                  |       | 104.9 |   | (17,758 | ) | (37.5 | ) |
|                                                   |       |                                       |       |                                       |       |                    |       |   |   |   |   |   |   |
| Operating loss                                         |       | (1,156                                     | )          | (4.1                                       | )          | (2,234                  | )          | (4.9 | ) | (1,078 | ) | (48.3 | ) |
|                                                   |       |                                       |       |                                       |       |                    |       |   |   |   |   |   |   |
| Non-operating income                                   |       | 5                                          |       | 0                                          |       | 14                      |       | 0 |   | (9 | ) | (64.3 | ) |
| Interest expense                                       |       | (3                                         | )          | 0                                          |       | (8                      | )          | 0 |   | (5 | ) | (62.5 | ) |
|                                                   |       |                                       |       |                                       |       |                    |       |   |   |   |   |   |   |
| Loss before income taxes                               |       | (1,154                                     | )          | (4.1                                       | )          | (2,228                  | )          | (4.9 | ) | (1,074 | ) | (48.2 | ) |
|                                                   |       |                                       |       |                                       |       |                    |       |   |   |   |   |   |   |
| Income tax expense                                     |       | 11                                         |       | 0                                          |       | 6                       |       | 0 |   | 5 |   | 83.3 |   |
|                                                   |       |                                       |       |                                       |       |                    |       |   |   |   |   |   |   |
| Net loss                                               |       | (1,165                                     | )          | (4.1                                       | )%         | (2,234                  | )          | (4.9 | )% | (1,069 | ) | (47.9 | )% |
|                                                   |       |                                       |       |                                       |       |                    |       |   |   |   |   |   |   |
| Personnel:                                             |       |                                       |       |                                       |       |                    |       |   |   |   |   |   |   |
| Management and Administrative                          |       | 111                                        |       |                                       |       | 223                     |       |   |   | (112 | ) | (50.2 | )% |
| Technical Consultants                                  |       | 798                                        |       |                                       |       | 1,174                   |       |   |   | (376 | ) | (32.0 | )% |

 

**Revenue**

 

Revenue fromservices provided directly declined 31.3% from the comparable period a year ago.The decline in revenue was primarily due to a reduction in the number ofbillable hours and technical consultants as a result of lower business volumeswhich was partially offset by a 3.3% increase in overall billing rates over theprior year period. Our subsupplier revenue, which is mainly pass-throughrevenue with associated fees, declined by 52.9% over the prior year period as aresult of our focusing on higher margin business. We had no product sales inthe first quarter of fiscal 2010 as a result of the sale of our VAR operationsin the third quarter of fiscal 2009.

 

**Cost of ServicesProvided Directly**

 

Cost of servicesprovided directly represents our payroll and benefit costs associated with ourbillable consultants. This category of expense as a percentage of directservices revenue decreased to 78.7% in the first quarter of fiscal 2009compared to 79.1% 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 accounts.

 

**Cost of ServicesProvided Through Subsuppliers**

 

**Cost ofservices 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 ofrevenue for services provided through subsuppliers was 93.9% for first quarterin fiscal 2010 compared to 95.2% for the prior year comparable period.**

 

**Cost of ProductSales**

 

Cost of productsales represents our cost when we resold hardware and software products.  This category of expense, as a percentage ofproduct sales, was 85.2% in the first quarter of fiscal 2009. With the sale ofour VAR operations in the third quarter of fiscal 2009, we no longer resellhardware and software products.

 

12

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**Selling,Administrative and Other Operating Costs**

 

SG&A costsinclude management and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs, and other administrativecosts.  This category of costs decreasedapproximately $4.1 million from the comparable period in 2009 and represented24.5% of total revenue for the first quarter of fiscal 2010 compared to 24.4%in fiscal 2009. SG&A expenses decreased primarily due to the impact ofpersonnel reductions that occurred in the prior year as a result of the assetsales and implementation of non-personnel cost reductions.

 

*RestructuringCosts and Other Severance Related Costs*

 

During the firstquarters of fiscal 2010 and fiscal 2009, we recorded restructuring andseverance related expenses totaling $0.2 million and $0.1 million,respectively, all of which related to workforce reductions and severance.

 

*Amortizationof Intangible Assets*

 

This category ofexpense decreased during the first quarter of fiscal 2010 from the prior yeardue to the sale of all our remaining customer lists in third quarter of fiscal2009. In the first quarter of fiscal 2009, we disposed of a customer list and atrade name that were fully amortized.

 

*Non-operatingIncome*

 

Non-operatingincome decreased slightly in the first quarter of fiscal 2010 compared to thefirst quarter of fiscal 2009 as a result of less interest income earned on ourcash balances and lower interest income related to customer financed equipment.

 

**Interest Expense**

 

We had no borrowingoutstanding in the first quarter of fiscal 2010. In the first quarter of fiscal2009, we had average borrowing outstanding under our credit facility of $0.1million at an average rate of 3.25%.

 

**Income Taxes**

 

For both the firstquarters of fiscal 2010 and fiscal 2009, we recorded accruals for amounts duefor certain state income taxes and changes in our reserves for tax obligations.We recorded no additional income tax expense associated with our net operatinglosses because any tax expense that would otherwise have been recorded has beennegated by adjusting the valuation allowance against our deferred taxasset.  If, however, we successfullyreturn to profitability to a point where future realization of deferred taxassets, which are currently reserved, becomes “more likely than not,” we may berequired to reverse the existing valuation allowance to realize the benefit ofthese assets.

 

**Personnel**

 

Our technicalconsulting staff levels finished the first quarter of fiscal 2010 at 798, a 32.0%decline against the comparable period last year.  The decline in technical consulting stafflevels is primarily due to an overall decline in business volume and sale ofoperations. The decline in management and administrative personnel is due toour focus on reducing the number of management and administrative personnelthat are necessary to support the existing 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 April 3,2010, we did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities that would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes. We are, therefore, not exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in theserelationships.

 

**Liquidityand Capital Resources**

 

The followingtable provides information relative to the liquidity of our business.

 

13

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| **(In thousands)**              | ** ** | **April 3,  2010** | ** ** | **January 2,  2010** | ** ** | **Increase  (Decrease)** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|---------------------------------|------------|-------------------------|------------|---------------------------|------------|--------------------------|------------|--------------------------------------|------------|
|                            |       |                    |       |                      |       |                     |       |                                 |       |
| Cash and cash equivalents       |       | $                       | 3,766      |                      | $          | 3,818                    |       | $                                    | (52        | ) | (1.4 | )% |
| Accounts receivable             |       | 22,152                  |       | 23,028                    |       | (876                     | )          | (3.8                                 | )          |
| Other current assets            |       | 1,311                   |       | 1,442                     |       | (131                     | )          | (9.1                                 | )          |
| Total current assets            |       | $                       | 27,229     |                      | $          | 28,288                   |       | $                                    | (1,059     | ) | (3.7 | )% |
|                            |       |                    |       |                      |       |                     |       |                                 |       |
| Accounts payable                |       | $                       | 5,901      |                      | $          | 6,958                    |       | $                                    | (1,057     | ) | (15.2 | )% |
| Line of credit                  |       | —                  |       | —                    |       | —                   |       | —                               |       |
| Salaries and benefits           |       | 3,830                   |       | 2,498                     |       | 1,332                    |       | 53.3                                 |       |
| Deferred revenue                |       | 494                     |       | 310                       |       | 184                      |       | 59.4                                 |       |
| Deferred compensation           |       | 465                     |       | 522                       |       | (57                      | )          | (10.9                                | )          |
| Restructuring accrual           |       | 1,679                   |       | 2,038                     |       | (359                     | )          | (17.6                                | )          |
| Other current liabilities       |       | 995                     |       | 960                       |       | 35                       |       | 3.6                                  |       |
| Total current liabilities       |       | $                       | 13,364     |                      | $          | 13,286                   |       | $                                    | 78         |   | 0.6 | % |
|                            |       |                    |       |                      |       |                     |       |                                 |       |
| Working capital                 |       | $                       | 13,865     |                      | $          | 15,002                   |       | $                                    | (1,137     | ) | (7.6 | )% |
| Current ratio                   |       | 2.04                    |       | 2.13                      |       | (0.09                    | )          | (4.2                                 | )%         |
|                            |       |                    |       |                      |       |                     |       |                                 |       |
| Total shareholders’ equity |       | $                       | 13,725     |                      | $          | 14,948                   |       | $                                    | (1,223     | ) | (8.2 | )% |

 

*Changein Working Capital*

 

Working capital was $13.9million at April 3, 2010, down approximately $1.1 million from January 2,2010. The ratio of current assets to current liabilities decreased 4.2% to 2.04at April 3, 2010 compared to 2.13 at January 2, 2010.

 

Our total current assetsdecreased approximately $1.1 million at April 3, 2010 compared to theend of fiscal 2009 as a result of lower accounts receivable and other currentassets. Our accounts receivable decreased 3.8% as a result of improvedcollection experience which lowered our day’s sales outstanding from 78 at theend of fiscal 2009 to 71 at April 3, 2010.

 

Our total currentliabilities increased slightly by approximately $0.1 million at April 3,2010 compared to the end of fiscal 2009. The timing of our payroll periods fromour fiscal year end to the first quarter of fiscal 2010 caused our salaries andbenefits payable balance to increase approximately $1.3 million which waspartially offset by our lower accounts payable balance.

 

 We believe ourexisting working capital and availability under our revolving line of credit(the “Credit Facility”) with Wells Fargo Bank, National Association (“WellsFargo”) will be sufficient to support the cash flow needs of our business infiscal 2010. Continuing operating losses, an increase in bad debt experiencefrom our clients, a lengthening of payment terms from our clients, orsignificant costs associated with additional restructuring activities couldcreate a need for additional working capital. An inability to obtain additionalworking capital, should it be required, could have a material adverse effect onour business. We expect to be able to comply with the requirements of ourcredit agreement; however, failure to do so could affect our ability to obtainnecessary working capital and could have a material adverse effect on ourbusiness.

 

*Sourcesand Uses of Cash/Credit Facility*

 

Cash and cash equivalentsdecreased by $0.1 million from January 2, 2010 to April 3, 2010. Ourprimary need for working capital is to support accounts receivable and to fund thetime lag between payroll and vendor disbursements and receipt of fees billed toclients. Historically, we have been able to support internal growth in ourbusiness with internally generated funds and through the use of our creditfacility.

 

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 Facilitycarries an 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 is September 30, 2012and may be terminated or reduced by us on 90 days notice in exchange for atermination fee of 2% of the maximum line amount or 

 

14

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reduction of the maximumline amount in the first 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 Facilityrequires us to meet certain levels of year-to-date earnings/loss before taxes.Additionally, the Credit Facility limits our annual capital expenditures to$2.0 million and requires us 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 April 3, 2010,we were 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 $9.2 million as ofApril 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 firstquarters of fiscal 2010 and fiscal 2009, we made capital expenditures ofapproximately $0.1 million and $0.4 million, respectively.

 

**Forward-LookingStatements**

 

This Form 10-Qcontains forward-looking statements (within the meaning of the PrivateSecurities Litigation Reform Act of 1995) about: (i) our expectations andbeliefs with respect to the economic recession, the volatility of the capitalmarkets, lending standards in the credit markets, and the recent generaldownturn in the global economy, as well as our assumptions with respect to theimpact these economic conditions will have on our business, (ii) ourstrategic plans and the objectives of those strategic plans, including ourplans to attain profitability during the second half of fiscal year 2010, (iii) ourexpectations with respect to demand for our services and continuing pressurefrom customers to request lower cost offerings for IT staffing services, (iv) ourexpectations with respect to competition in our industry and our ability tocompete, (v) our beliefs regarding the adequacy of our working capital andour ability to meet the requirements of our credit facility or to obtain areplacement credit facility on commercially reasonable terms, and (vi) ourexpectations with respect to our financial results and operating performance.These statements could affect our plans, anticipated operating results, and/orfinancial condition You can identify these statements by the use of words suchas “anticipate,” “estimate,” “expect,” “should,” “project,” “forecast,” “intend,”“plan,” “believe,” “will,” and other words and terms of similar meaning orimport, or variations thereof, in connection with any discussion of futureoperating or financial performance.

 

Among the factorsthat could cause our estimates and assumptions as to future performance, andour actual results to differ materially, are: (i) our inability, in wholeor in part, to implement or execute our strategic plans, (ii) ourinability to successfully 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 and our Current Reports on Form 8-K. Allforward-looking statements included in this Form 10-Q are based oninformation available to us as of the date hereof and largely reflect estimatesand assumptions made by our management, which may be difficult to predict andbeyond our control. We undertake no obligation (and expressly disclaim any suchobligation) to update forward-looking statements made in this Form 10-Q toreflect events or circumstances after the date of this Form 10-Q or toupdate reasons why actual results would differ from those anticipated in anysuch forward-looking statements, other than as required by law.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk.**

 

            Not applicable.

 

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

 

(a)       Evaluation of Disclosure Controls andProcedures

 

15

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Asof the end of the period covered by this report, we conducted an evaluationunder the supervision and with the participation of our management, includingthe President and Chief Executive Officer, Andrew K. Borgstrom, and ChiefFinancial Officer, Randy W. Strobel, regarding the effectiveness of the designand operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) ofthe Securities Exchange Act of 1934 (the “Exchange Act”). Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures are effective to ensure thatinformation that is required to be disclosed by us in reports that are filedunder the Exchange Act is recorded, processed, summarized and reported withinthe time period specified in the rules of the Securities ExchangeCommission.

 

(b)       Changes in Internal Controls

 

Therewere no changes in our internal control over financial reporting that occurredduring the period covered by this report that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

16

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**PART II. OTHER INFORMATION**

 

****Item 1.            LegalProceedings****

 

There are nopending legal proceedings to which we are a party or to which any of ourproperty is subject, other than routine litigation incidental to the business.

 

**Item 1A.    RiskFactors**

 

None.

 

****Item 2.            UnregisteredSales of Equity Securities and Use of Proceeds.****

 

None.

 

****Item 3.****            ****Defaults UponSenior Securities.****

 

None.

 

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

 

None.

 

****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.                                                                                                                                                                                                                                   |
| ^ 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). |
| +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.                                                                                                                                                                                                                                                                                                  |

 

17

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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 5, 2010 |   | By:                                 | /s/ Andrew K. Borgstrom |
|                   |   |                                | Andrew K. Borgstrom |
|                   |   |                                | President and Chief  Executive Officer |
|                   |   |                                | (Principal Executive  Officer) |
|                   |   |                                |   |
|                   |   |                                |   |
| Date: May 5, 2010 |   | By:                                 | /s/ Randy W. Strobel |
|                   |   |                                | Randy W. Strobel |
|                   |   |                                | Chief Financial Officer |
|                   |   |                                | (Principal Financial  and Accounting Officer) |

 

18

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****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.                                                                                                                                                                                                                                   |
| ^ 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). |
| +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.                                                                                                                                                                                                                                                                                                  |

 

19

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