Table of Contents

 

 

**** ****

****UNITED STATES****

****SECURITIES AND EXCHANGECOMMISSION****

**Washington, D.C. 20549**

** **

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

 

****x********Quarterly Report Pursuant to Section 13 or 15(d) of****

****the Securities Exchange Actof 1934****

 

**For the quarterly period ended September 27,2008**

 

**or**

 

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

****the Securities Exchange Actof 1934****

 

**For the transition period from                      to                    **

** **

**Commission File Number: 0-4090**

 

****ANALYSTS INTERNATIONALCORPORATION****

(Exact name of registrant asspecified in its charter)

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. 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  AcceleratedFiler o  Non-accelerated Filer o  Smaller Reporting Company x

 

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

 

As of November 6, 2008, 24,913,076 shares of the registrant’scommon stock were outstanding.

 

 

 

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****ANALYSTS INTERNATIONAL CORPORATIO********N****

 

****INDEX****

 
| ****Part I.****  | ****FINANCIAL INFORMATION****                                                                | ** ** |
|-----------------------|----------------------------------------------------------------------------------------------|------------|
|                  |                                                                                         |       |
| Item 1.               | Financial Statements                                                                         |       |
|                  |                                                                                         |       |
|                  | Condensed Consolidated  Balance Sheets                                                       |       |
|                  | September 27, 2008  (Unaudited) and December 29, 2007                              |       |
|                  |                                                                                         |       |
|                  | Condensed Consolidated  Statements of Operations                                             |       |
|                  | Three and nine months ended  September 27, 2008 and September 29, 2007 (Unaudited) |       |
|                  |                                                                                         |       |
|                  | Condensed Consolidated  Statements of Cash Flows                                             |       |
|                  | Nine months ended  September 27, 2008 and September 29, 2007 (Unaudited)           |       |
|                  |                                                                                         |       |
|                  | Notes to  Condensed Consolidated Financial Statements (Unaudited)                            |       |
|                  |                                                                                         |       |
| Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations  |       |
|                  |                                                                                         |       |
|                  | Quantitative and Qualitative Disclosures About Market  Risk                                  |       |
|                  |                                                                                         |       |
|                  | Controls and Procedures                                                                      |       |
|                  |                                                                                         |       |
| ****Part II.**** | ****OTHER INFORMATION****                                                                    | ** ** |
|                  |                                                                                         |       |
| Item 1.               | Legal Proceedings                                                                            |       |
|                  |                                                                                         |       |
| Item 1A.              | Risk Factors                                                                                 |       |
|                  |                                                                                         |       |
| Item 2.               | Unregistered  Sales of Equity Securities and Use of Proceeds                                 |       |
|                  |                                                                                         |       |
| Item 3.               | Defaults Upon  Senior Securities                                                             |       |
|                  |                                                                                         |       |
| Item 4.               | Submission  of Matters to a Vote of Security Holders                                         |       |
|                  |                                                                                         |       |
| Item 5.               | Other Information                                                                            |       |
|                  |                                                                                         |       |
| Item 6.               | Exhibits                                                                                     |       |
|                  |                                                                                         |       |
| Signatures            |                                                                                         |       |
|                  |                                                                                         |       |
| Exhibit Index    |                                                                                         |       |

 

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****PART I. FINANCIALINFORMATION****

 

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

 

****Analysts International Corporation****

****Condensed ConsolidatedBalance Sheets****

****(Dollars in thousands)****

 
| **** ****                                             | **** **** | ****September 27,**** | **** **** | ****December 29,**** | **** **** |
|------------------------------------------------------------|----------------|----------------------------|----------------|---------------------------|----------------|
| **** ****                                             | **** **** | ****2008****               | **** **** | ****2007****              | **** **** |
| **** ****                                             | **** **** | ****(Unaudited)****        | ** **     | ** **                | ** **     |
|                                                       |           |                       |           |                      |           |
| ****ASSETS****                                             |           |                       |           |                      |           |
| Current assets:                                            |           |                       |           |                      |           |
| Cash and cash equivalents                                  |           | $                          | 86             |                      | $              | 91 |   |
| Accounts receivable, less allowance for  doubtful accounts |           | 51,110                     |           | 66,074                    |           |
| Prepaid expenses and other current assets                  |           | 1,551                      |           | 2,101                     |           |
| Total current assets                                       |           | 52,747                     |           | 68,266                    |           |
|                                                       |           |                       |           |                      |           |
| Property and equipment, net                                |           | 2,978                      |           | 2,711                     |           |
| Intangible assets, net                                     |           | 6,338                      |           | 7,131                     |           |
| Goodwill                                                   |           | 6,299                      |           | 6,299                     |           |
| Other assets                                               |           | 581                        |           | 864                       |           |
| Total assets                                               |           | $                          | 68,943         |                      | $              | 85,271 |   |
|                                                       |           |                       |           |                      |           |
| ****LIABILITIES AND SHAREHOLDERS’ EQUITY****          |           |                       |           |                      |           |
| Current liabilities:                                       |           |                       |           |                      |           |
| Accounts payable                                           |           | $                          | 20,667         |                      | $              | 27,780 |   |
| Salaries and vacations                                     |           | 3,971                      |           | 6,885                     |           |
| Line of credit                                             |           | 1,466                      |           | 1,587                     |           |
| Deferred revenue                                           |           | 1,087                      |           | 1,943                     |           |
| Restructuring accrual, current portion                     |           | 369                        |           | 1,900                     |           |
| Health care reserves and other amounts                     |           | 1,244                      |           | 1,516                     |           |
| Deferred compensation                                      |           | 438                        |           | 1,868                     |           |
| Total current liabilities                                  |           | 29,242                     |           | 43,479                    |           |
|                                                       |           |                       |           |                      |           |
| Non-current liabilities:                                   |           |                       |           |                      |           |
| Deferred compensation                                      |           | 933                        |           | 927                       |           |
| Restructuring accrual                                      |           | 71                         |           | 138                       |           |
| Other long-term liabilities                                |           | 842                        |           | 692                       |           |
| Total non-current liabilities                              |           | 1,846                      |           | 1,757                     |           |
|                                                       |           |                       |           |                      |           |
| Shareholders’ equity:                                 |           |                       |           |                      |           |
| Common stock                                               |           | 2,491                      |           | 2,490                     |           |
| Additional paid-in capital                                 |           | 23,040                     |           | 22,652                    |           |
| Retained earnings                                          |           | 12,324                     |           | 14,893                    |           |
| Total shareholders’ equity                            |           | 37,855                     |           | 40,035                    |           |
| Total liabilities and shareholders’ equity            |           | $                          | 68,943         |                      | $              | 85,271 |   |

 

See notes to condensedconsolidated financial statements.

 

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**Analysts International Corporation**

**Condensed Consolidated Statementsof Operations**

***(Dollars in thousands, except per share amounts)***

***(Unaudited)***

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | **September 27,  2008**     | ** ** | **September 29,  2007**    | ** ** | **September 27,  2008** | ** ** | **September 29,  2007** | ** ** |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Revenue:                                                 |       |                             |       |                            |       |   |   |   |   |
| Professional services provided directly                  |       | $                                | 50,116     |                            | $          | 59,938 |   | $ | 169,018 |   | $ | 183,275 |   |
| Professional services provided through  subsuppliers     |       | 2,891                            |       | 13,709                          |       | 31,217 |   | 44,651 |   |
| Product sales                                            |       | 9,610                            |       | 19,898                          |       | 27,175 |   | 43,975 |   |
| Total revenue                                            |       | 62,617                           |       | 93,545                          |       | 227,410 |   | 271,901 |   |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Expenses:                                                |       |                             |       |                            |       |   |   |   |   |
| Cost of services provided directly                       |       | 39,167                           |       | 47,936                          |       | 133,275 |   | 146,372 |   |
| Cost of services provided through  subsuppliers          |       | 2,796                            |       | 13,181                          |       | 30,100 |   | 42,881 |   |
| Cost of product sales                                    |       | 8,899                            |       | 18,289                          |       | 24,682 |   | 39,784 |   |
| Selling, administrative and other operating  costs       |       | 11,780                           |       | 14,105                          |       | 38,409 |   | 43,478 |   |
| Restructuring and other severance-related  costs         |       | 291                              |       | 337                             |       | 2,659 |   | 1,759 |   |
| Amortization of intangible assets                        |       | 235                              |       | 266                             |       | 793 |   | 799 |   |
| Total expense                                            |       | 63,168                           |       | 94,114                          |       | 229,918 |   | 275,073 |   |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Operating loss                                           |       | (551                             | )          | (569                            | )          | (2,508 | ) | (3,172 | ) |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Non-operating income                                     |       | 27                               |       | 227                             |       | 97 |   | 251 |   |
| Interest expense                                         |       | (8                               | )          | (100                            | )          | (143 | ) | (243 | ) |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Loss before income taxes                                 |       | (532                             | )          | (442                            | )          | (2,554 | ) | (3,164 | ) |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Income tax expense                                       |       | 6                                |       | 6                               |       | 15 |   | 34 |   |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Net loss                                                 |       | $                                | (538       | )                               | $          | (448 | ) | $ | (2,569 | ) | $ | (3,198 | ) |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Per common share:                                        |       |                             |       |                            |       |   |   |   |   |
| Basic loss                                               |       | $                                | (.02       | )                               | $          | (.02 | ) | $ | (.10 | ) | $ | (.13 | ) |
| Diluted loss                                             |       | $                                | (.02       | )                               | $          | (.02 | ) | $ | (.10 | ) | $ | (.13 | ) |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Average common shares outstanding                        |       | 24,913                           |       | 25,056                          |       | 24,913 |   | 24,917 |   |
| Average common and common equivalent shares  outstanding |       | 24,913                           |       | 25,056                          |       | 24,913 |   | 24,917 |   |

 

See notes to condensed consolidated financialstatements.

 

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****Analysts International Corporation****

****Consolidated Statements ofCash Flows****

****(Dollars in thousands)****

****(Unaudited)****

** **
| **** ****                                       | **** **** | ****Nine Months Ended**** | ** **     |
|------------------------------------------------------|----------------|-------------------------------------|----------------|
| **** ****                                       | **** **** | ****September 27,****          | **** **** | ****September 29,**** | **** **** |
| **** ****                                       | **** **** | ****2008****                        | **** **** | ****2007**** | **** **** |
|                                                 |           |                                |           |   |   |
| Cash flows from operating activities                 |           |                                |           |   |   |
| Net loss                                             |           | $                                   | (2,569         | ) | $ | (3,198 | ) |
| Adjustments:                                         |           |                                |           |   |   |
| Depreciation                                         |           | 1,183                               |           | 1,283 |   |
| Amortization of intangible assets                    |           | 793                                 |           | 799 |   |
| Stock based compensation                             |           | 389                                 |           | 805 |   |
| Loss on asset disposal                               |           | 43                                  |           | 3 |   |
| Settlement of pre-acquisition contingency            |           | —                              |           | (198 | ) |
| Changes in:                                          |           |                                |           |   |   |
| Accounts receivable                                  |           | 15,187                              |           | (5,704 | ) |
| Prepaid expenses and other assets                    |           | 610                                 |           | (160 | ) |
| Accounts payable                                     |           | (6,967                              | )              | 3,189 |   |
| Salaries and vacations                               |           | (2,914                              | )              | (1,852 | ) |
| Other accrued expenses                               |           | (487                                | )              | (553 | ) |
| Deferred revenue                                     |           | (987                                | )              | 264 |   |
| Restructuring accrual                                |           | (1,598                              | )              | (119 | ) |
| Deferred compensation                                |           | (1,424                              | )              | 319 |   |
| Net cash provided by (used in) operating  activities |           | 1,259                               |           | (5,122 | ) |
|                                                 |           |                                |           |   |   |
| Cash flows from investing activities:                |           |                                |           |   |   |
| Expended for property and equipment  additions       |           | (1,063                              | )              | (1,024 | ) |
| Proceeds from property and equipment sales           |           | —                              |           | 1 |   |
| Net cash used in investing activities                |           | (1,063                              | )              | (1,023 | ) |
|                                                 |           |                                |           |   |   |
| Cash flows from financing activities:                |           |                                |           |   |   |
| Net change in line of credit                         |           | (121                                | )              | 6,240 |   |
| Payments of capital lease obligations                |           | (80                                 | )              | — |   |
| Purchase of common stock                             |           | —                              |           | (191 | ) |
| Net cash (used in) provided by financing  activities |           | (201                                | )              | 6,049 |   |
|                                                 |           |                                |           |   |   |
| Net decrease in cash and cash equivalents            |           | (5                                  | )              | (96 | ) |
|                                                 |           |                                |           |   |   |
| Cash and cash equivalents at beginning of  period    |           | 91                                  |           | 179 |   |
|                                                 |           |                                |           |   |   |
| Cash and cash equivalents at end of period           |           | $                                   | 86             |   | $ | 83 |   |

 

See notes to condensedconsolidated financial statements.

 

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****AnalystsInternational Corporation****

****Notes to CondensedConsolidated Financial Statements****

**(Unaudited)**

 

****1.**** ****Summary of Significant Accounting Policies****

 

*Condensed Consolidated Financial Statements*

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with the instructions to Form 10-Q and Rule 10-01of Regulation S-X and do not include all of the information and notes requiredby Generally Accepted Accounting Principles in the United States of America(GAAP) for complete financial statements. Similarly, the December 29, 2007 condensed consolidated balancesheet was derived from audited financial statements but does not include alldisclosures required by GAAP.  In theopinion of management, the accompanying unaudited condensed consolidatedfinancial statements contain all normal and recurring adjustments necessary tomake a fair statement of the consolidated financial position, results ofoperations and cash flows of Analysts International Corporation for the interimperiods presented.  Operating results forthe periods ended September 27, 2008, are not necessarily indicative ofresults that may be expected for any other interim period or for the yearending January 3, 2009.  For furtherinformation, refer to the consolidated financial statements and notes includedin our 2007 Form 10-K.

 

We operate on a fiscal year ending on the Saturday closest to December 31.  Accordingly, our fiscal quarters end on theSaturday closest to the end of the calendar quarter.  Fiscal year 2008 will include 53 weeks.  The additional week will be included in thefourth quarter of fiscal 2008.

 

**Goodwill and Intangible Assets**

 

In accordance with SFAS (Statement of Financial Accounting Standards) No. 142,*Goodwill and Other Intangible Assets*, weare required to evaluate goodwill and indefinite-lived intangible assets forimpairment at least annually and whenever events or changes in circumstances indicatethat the assets might be impaired.  Wecurrently perform the annual test as of the last day of our monthly accountingperiod for August.  This evaluationrelies on assumptions regarding estimated future cash flows and other factorsto determine the fair value of the respective assets.  If these estimates or related assumptionschange, we may be required to recognize impairment charges.  We performed our annual goodwill impairmentevaluation as of August 30, 2008, and determined the fair value of ourreporting units was sufficient to support the recorded goodwill.

 

During the three- and nine-month periods ended September 27, 2008,no intangible assets were acquired, impaired, or disposed.  Intangible assets other than goodwill consistof the following:

 
| **** ****                       | **** **** | ****September 27, 2008**** | ** **     | ****December 29, 2007**** | ** **     |
|--------------------------------------|----------------|--------------------------------------|----------------|-------------------------------------|----------------|
| ****(Dollars in  thousands)**** | **** **** | ****Gross  Carrying  Amount****      | **** **** | ****Accumulated  Amortization****   | **** **** | ****Other  Intangibles,  Net**** | **** **** | ****Gross  Carrying  Amount**** | **** **** | ****Accumulated  Amortization**** | **** **** | ****Other  Intangibles,  Net**** | **** **** |
|                                 |           |                                 |           |                                |           |   |   |   |   |   |   |   |   |
| Customer list                        |           | $                                    | 13,169         |                                | $              | (6,831 | ) | $ | 6,338 |   | $ | 13,169 |   | $ | (6,128 | ) | $ | 7,041 |   |
| Trade name                           |           | 90                                   |           | (90                                 | )              | — |   | 90 |   | — |   | 90 |   |
|                                 |           | $                                    | 13,259         |                                | $              | (6,921 | )  | $ | 6,338 |   | $ | 13,259 |   | $ | (6,128 | ) | $ | 7,131 |   |

 

The customer lists are amortized on a straight-line basis over 4 to 20years and are scheduled to be fully amortized in 2024.  Amortization is estimated to be approximately$1.0 million in 2008, $0.9 million from 2009 to 2014, $0.7 million in 2015, andless than $30,000 from 2016 to 2024.

 

In December of 2007, when we adopted our new business plan, wedetermined the Sequoia trade name was no longer going to be used indefinitelyand therefore determined the trade name to have a finite life.  Use of the trade name ceased entirely duringthe second quarter of 2008, and, therefore, the carrying value has been fullyamortized.

 

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**Accounting Pronouncements**

 

In September 2006, the Financial Accounting Standards Board (FASB)issued SFAS No. 157, **Fair Value Measurements**.  This statement establishes a consistentframework for measuring fair value and expands disclosures on fair valuemeasurements.  The provisions of SFAS No. 157became effective for us beginning December 30, 2007.  The adoption of SFAS No. 157 did nothave a material effect on our consolidated results of operations and financialcondition.

 

In February 2007, the FASB issued SFAS No. 159, *Fair Value Option for Financial Assets and Financial Liabilities*.  This Statement permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The provisions of SFAS No. 159 becameeffective for us beginning December 30, 2007.  We have assessed the provisions of the statementand elected not to apply fair value accounting to our eligible financialinstruments.  As a result, adoption ofthis statement had no impact on our consolidated results of operations andfinancial condition.

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), *Business Combinations* (SFAS No. 141R),which replaced FASB Statement No. 141. SFAS 141R establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, any non-controlling interest in the acquireeand the goodwill acquired.  The Statementalso establishes disclosure requirements, which will enable users to evaluatethe nature and financial effects of the business combination.  SFAS No. 141R applies prospectively tobusiness combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008, and interim periods within those fiscal years.  We will apply the provisions of SFAS 141R toany applicable business combinations after the effective date.

 

**Equity Compensation Plans**

 

Effective January 1, 2006, we adopted SFAS No. 123 (revised2004), *Share-Based Payment*(123R), requiring usto recognize expense related to the fair value of our stock-based compensationawards.  We elected the modifiedprospective transition method as permitted by SFAS No. 123R. The fairvalue of each stock option was estimated on the date of the grant using theBlack-Scholes option-pricing model.

 

Total stock option expense or benefit included in the consolidatedstatements of operations for the three- and nine-month periods ended September 27,2008 and September 29, 2007, was an expense of $0.1 million and $0.4million, respectively, for 2008, and expense of $15,000 and a benefit of$35,000, respectively, for 2007.  Duringthe first quarter of 2007, in conjunction with the resignation of a formerexecutive officer, we recorded an $81,000 reduction of expense to reversepreviously recorded stock option expenses. The tax benefit recorded for these same periods was approximately$11,000 and $42,000, respectively, for 2008, and a benefit of $4,000 and anexpense of $14,000, respectively, for 2007. The tax benefit or expense is offset against our valuation allowance forour deferred tax asset.

 

No stock options were exercised during the three- and nine-monthperiods ended September 27, 2008 and September 29, 2007.

 

As of September 27, 2008, there was approximately $0.5 million ofunrecognized compensation expense related to unvested option awards that areexpected to vest over a weighted average period of 1.5 years.

 

As of September 27, 2008, there was approximately $6,000 of totalunrecognized compensation cost related to non-vested share-based compensationarrangements granted under the 2004 plan. The cost is expected to be recognized over a weighted average period of1.1 years.  The total compensation expenserelated to stock awards during the three- and nine-month periods ended September 27,2008 and September 29, 2007, was approximately $1,000 and $16,000,respectively, in 2008, and $12,000 and $0.8 million, respectively, in2007.  During the first quarter of 2007,we recorded $0.6 million of stock compensation expense as a result of theaccelerated vesting of 325,000 shares of restricted stock upon the resignationof a former executive officer.

 

Total equity-based compensation expense for the three- and nine-monthperiods ended September 27, 2008 and September 29, 2007, wasapproximately $0.1 million and $0.4 million, respectively, for 2008 and $27,000and $0.8 million, respectively, for 2007.

 

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During the three-and nine-month periods ended September 27, 2008and September 29, 2007, we granted the following equity compensation:

 
| **** ****     | **** **** | ****2008****   | ** **     | ****2007****                                                | ** **     |
|--------------------|----------------|----------------|----------------|-------------------------------------------------------------|----------------|
| **** ****     | **** **** | ****Grants**** | **** **** | ****Weighted  Average  Grant Date  Fair Value**** | **** **** | ****Grants**** | **** **** | ****Weighted  Average  Grant Date  Fair Value**** | **** **** |
| Three months ended |           |           |           |                                                        |           |   |   |   |   |
| Stock options      |           | 250,000        |           | $                                                           | 0.55           |   | — |   | $ | — |   |
| Stock awards       |           | —         |           | $                                                           | —         |   | — |   | $ | — |   |
|               |           |           |           |                                                        |           |   |   |   |   |
| Nine months ended  |           |           |           |                                                        |           |   |   |   |   |
| Stock options      |           | 1,313,000      |           | $                                                           | 0.58           |   | 190,321 |   | $ | 0.95 |   |
| Stock awards       |           | 9,000          |           | $                                                           | 1.38           |   | 120,071 |   | $ | 1.92 |   |

 

****2.****  ****Financing Agreements****

 

**Revolving Credit Facility**

 

Effective April 11, 2002, we entered into an asset-based revolvingcredit facility with GE Capital Corporation. This credit facility provides total availability of up to $45.0 million.At September 27, 2008, total availability under this credit facility,which fluctuates based on our level of eligible accounts receivable, was $21.3million. At September 27, 2008, we had borrowings of $1.5 million.Borrowings under this credit agreement are secured by all of our assets. Thecredit agreement requires that we take advances or pay down the outstandingbalance on a daily basis.  We can,however, choose to request fixed-term advances of one, two, or three months fora portion of the outstanding balance on the line of credit.  The credit facility, as amended, requires anannual commitment fee of .25% of the unused portion of the facility, and anannual administration fee of $25,000. The facility carries an interest rate ondaily advances equal to the Wall Street Journal’s “Prime Rate” (5.00% on September 27,2008) and on fixed-term advances equal to the applicable LIBOR rate plus2.0%.  The agreement restricts, amongother things, the payment of dividends and capital expenditures.  We are in compliance with all restrictivecovenants.

 

Effective January 20, 2006, we amended the revolving creditagreement with GE Capital Corporation, extending the expiration date from October 31,2006 to January 20, 2010.  Othermodifications included the elimination of certain reserves in calculating theamount that we can borrow under the facility and changes to the definition ofeligible receivables.

 

**Capital Lease Obligation**

 

Effective July 1, 2008, we entered into a three-year softwareenterprise license agreement.  The licenseagreement qualifies for capital lease accounting treatment which resulted inthe establishment of a $0.6 million software asset and related financingliability.

 

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****3.   Shareholders’ Equity****

 
| ****(Dollars in thousands)**** | **** **** | ****Nine Months  Ended************September 27,  2008**** | **** **** |
|------------------------------------------|----------------|---------------------------------------------------------------------|----------------|
|                                     |           |                                                                |           |
| Balance at beginning of period           |           | $                                                                   | 40,035         |   |
| Issuance of common stock                 |           | 12                                                                  |           |
| Restricted shares amortization           |           | 3                                                                   |           |
| SFAS 123R stock option expense           |           | 374                                                                 |           |
| Net loss                                 |           | (2,569                                                              | )              |
| Balance at end of period                 |           | $                                                                   | 37,855         |   |

 

****On July 25, 2007, we announced that our Boardof Directors authorized the repurchase of up to one million shares of ourcommon stock.  On July 26, 2007, weamended our credit agreement with GE Capital to allow us to use up to $5.0million for repurchase of our common stock. The timing of the repurchases is based on several factors, including theprice of the common stock, general market conditions, corporate and regulatoryrequirements and alternate uses for cash. Repurchases may be made in the open market or through privatetransactions, in accordance with SEC requirements.  Repurchases may be suspended at any time andare subject to the terms and conditions of our credit agreement with GECapital, which restricts repurchases based on our borrowing availability underthe credit agreement and a maximum expenditure for repurchases.  As of September 27, 2008, we haverepurchased 109,000 shares of our common stock at an average price of $1.72 pershare under this authorization.  We madeno repurchases pursuant to this plan during the three- and nine-months ended September 27,2008.****

 

****4.   Loss Per Share****

 

Basic and diluted loss per share is presented in accordance with SFAS No. 128,*Earnings per Share*.  Basic loss per share excludes dilution and iscomputed by dividing the loss available to common stockholders by theweighted-average number of common shares outstanding for the period.  Options to purchase approximately 2,466,000and 1,494,000 shares of common stock were outstanding at September 27,2008 and September 29, 2007, respectively. All options were considered anti-dilutive and excluded from thecomputation of common equivalent shares at September 27, 2008, and September 29,2007, because we reported a net loss. The computation of basic and diluted loss per share for the three- andnine-months ended September 27, 2008 and September 29, 2007, is asfollows:

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(Dollars in thousands, except per share amounts)** | ** ** | **September 27,  2008**     | ** ** | **September 29,  2007**    | ** ** | **September 27,  2008** | ** ** | **September 29,  2007** | ** ** |
|                                                                               |       |                             |       |                            |       |   |   |   |   |
| Net loss                                                                           |       | $                                | (538       | )                               | $          | (448 | ) | $ | (2,569 | ) | $ | (3,198 | ) |
| Weighted-average number of common shares  outstanding                              |       | 24,913                           |       | 25,056                          |       | 24,913 |   | 24,917 |   |
| Dilutive effect of equity compensation plan  awards                                |       | —                           |       | —                          |       | — |   | — |   |
| Weighted-average number of common and  common equivalent shares outstanding        |       | 24,913                           |       | 25,056                          |       | 24,913 |   | 24,917 |   |
| Net loss per share:                                                                |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                              |       | $                                | (.02       | )                               | $          | (.02 | ) | $ | (.10 | ) | $ | (.13 | ) |
| Diluted                                                                            |       | $                                | (.02       | )                               | $          | (.02 | ) | $ | (.10 | ) | $ | (.13 | ) |

 

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****5.   Restructuring****

 

All of the restructuring and other severance-related charges in 2008are related to the implementation of our business transformation plan that wasannounced in January 2008.  Werecorded workforce reduction and office closure/consolidation charges for thethree- and nine-month periods ended September 27, 2008 of $0.3 million and$2.7 million, respectively.  Of thesecharges, $0.4 million and $2.5 million of expense related to severance andseverance-related charges for the three- and nine months ended September 27,2008, and an expense reduction of $0.1 million and an expense of $0.2 millionrelated to adjustments and closures of offices that we closed for the three-and nine-month periods ended September 27, 2008, respectively.

 

Asummary of the activity in the restructuring accrual account for the ninemonths ended September 27, 2008 is as follows:

 
| ****(Dollars in thousands)**** | **** **** | ****Workforce  Reduction**** | **** **** | ****Office Closure/  Consolidation**** | **** **** | ****Total**** | **** **** |
|------------------------------------------|----------------|------------------------------|----------------|---------------------------------------------|----------------|---------------|----------------|
| Balance at December 29, 2007        |           | $                            | 1,698          |                                        | $              | 340           |           | $ | 2,038 |   |
| Additional restructuring charges         |           | 2,427                        |           | 232                                         |           | 2,659         |           |
| Cash expenditures                        |           | (3,947                       | )              | (303                                        | )              | (4,250        | )              |
| Non-cash charges                         |           | —                       |           | (7                                          | )              | (7            | )              |
| Balance at September 27, 2008       |           | $                            | 178            |                                        | $              | 262           |           | $ | 440 |   |

 

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****Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.****

 

**Company Overview**

 

Headquartered in Minneapolis, Minnesota, Analysts InternationalCorporation (AIC) is a diversified IT services company. In business since 1966,we have sales and customer support offices in the United States andCanada.  For a more complete descriptionof our business, please refer to our Annual Report on Form 10-K for thefiscal year ending December 29, 2007.

 

**Overview of Results of 2008 Operations**

 

During the first nine months of 2008, we have focused on reducing ourselling, administrative and other expenses, making the investments required toincrease our mix of higher-margin services and exiting our lowest-margin andnon-core lines of business.  The sale ofSymmetry, the discontinuation of our staffing relationship with one of ourlargest staffing accounts and the reductions in our selling, administrative andother expenses are consistent with the plans we outlined in January 2008to restore the Company to profitability and increase shareholder value, andthey mark important steps in the continued transformation of our business.

 

·                       Total revenue for the three- and nine-monthperiods ended September 27, 2008 was $62.6 million and $227.4 million,respectively, a 33.1% and 16.4% decline when compared to $93.5 million and$271.9 million during the periods ended September 29, 2007.  The decrease in overall revenue is largelythe result of our exit from non-core and low margin lines of business.  Early in the third quarter of 2008, we soldSymmetry Workforce Solutions (Symmetry), our managed services business, anddiscontinued our staffing relationship with one of our large staffingaccounts.  Together, business throughSymmetry and the large staffing account represented approximately $15.0 millionof our quarterly revenues and $60.0 million of our annualized revenues.  The remaining decrease in revenue is due to areduction in product sale activity and lower headcount in our staffing businesswhich was partially offset by an overall increase in billing rates.

 

·                       Gross margin (revenues less the cost ofservices and products divided by revenues) has improved from 15.1% and 15.8%for the three- and nine-month periods ended September 29, 2007 to 18.8%and 17.3 % for the three- and nine-month periods ended September 27, 2008due to our focus on providing higher-margin solutions orientated services andexiting low-margin lines of business.

 

·                       Selling,administrative and other expenses declined by $2.3 million and $5.1 million forthe three- and nine-month periods ended September 27, 2008, respectively,when compared to the comparable periods of 2007, primarily due to our effortsto reduce costs as part of our business transformation plan and reducedcommission expense due to the decrease in business volume.

 

The following tables illustrate the relationship between revenue andexpense categories for the three- and nine-month periods ended September 27,2008 and September 29, 2007 and a count of administrative employees andtechnical consultants as of September 27, 2008 and September 29,2007.

 

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****RESULTSOF OPERATIONS, THREE-MONTH PERIODS ENDED SEPTEMBER 27, 2008 VS. SEPTEMBER 29,2007****

 
| **** ****                                            | **** **** | ****Three  Months Ended**** | ** **     | ****Three  Months Ended****     | ** ** | ** **                       | ** **     | ** **                 | ** **     |
|-----------------------------------------------------------|----------------|----------------------------------|----------------|--------------------------------------|------------|----------------------------------|----------------|----------------------------|----------------|
| ** **                                                | ** **     | **September 27, 2008** | ** **     | ****September 29, 2007**** | ** ** | **In****crease (Decrease)** | ** **     |
| ****(Dollars in thousands)****                  | **** **** | ****Amount****                   | **** **** | ****% of  Revenue****           | ** ** | **Amount**                       | **** **** | ****% of  Revenue**** | **** **** | ****Amount**** | **** **** | ****%**** | **** **** |
| Revenue:                                                  |           |                             |           |                                 |       |                             |           |                       |           |   |   |   |   |
| Professional services provided directly                   |           | $                                | 50,116         |                                 | 80.0       | %                                | $              | 59,938                     |           | 64.1 | % | $ | (9,822 | ) | (16.4 | )% |
| Professional services provided  through subsuppliers |           | 2,891                            |           | 4.6                                  |       | 13,709                           |           | 14.6                       |           | (10,818 | ) | (78.9 | ) |
| Product sales                                             |           | 9,610                            |           | 15.4                                 |       | 19,898                           |           | 21.3                       |           | (10,288 | ) | (51.7 | ) |
| Total revenue                                             |           | 62,617                           |           | 100.0                                |       | 93,545                           |           | 100.0                      |           | (30,928 | ) | (33.1 | ) |
|                                                      |           |                             |           |                                 |       |                             |           |                       |           |   |   |   |   |
| Expenses:                                                 |           |                             |           |                                 |       |                             |           |                       |           |   |   |   |   |
| Cost of services provided directly                        |           | 39,167                           |           | 62.5                                 |       | 47,936                           |           | 51.2                       |           | (8,769 | ) | (18.3 | ) |
| Cost of services provided through  subsuppliers           |           | 2,796                            |           | 4.5                                  |       | 13,181                           |           | 14.1                       |           | (10,385 | ) | (78.8 | ) |
| Cost of product sales                                     |           | 8,899                            |           | 14.2                                 |       | 18,289                           |           | 19.5                       |           | (9,390 | ) | (51.3 | ) |
| Selling, administrative and other operating  costs        |           | 11,780                           |           | 18.8                                 |       | 14,105                           |           | 15.1                       |           | (2,325 | ) | (16.5 | ) |
| Restructuring, severance, and other related  expenses     |           | 291                              |           | 0.5                                  |       | 337                              |           | 0.4                        |           | (46 | ) | (13.6 | ) |
| Amortization of intangible assets                         |           | 235                              |           | 0.4                                  |       | 266                              |           | 0.3                        |           | (31 | ) | (11.7 | ) |
| Total expenses                                            |           | 63,168                           |           | 100.9                                |       | 94,114                           |           | 100.6                      |           | (30,946 | ) | (32.9 | ) |
|                                                      |           |                             |           |                                 |       |                             |           |                       |           |   |   |   |   |
| Operating loss                                            |           | (551                             | )              | (0.9                                 | )          | (569                             | )              | (0.6                       | )              | (18 | ) | (3.2 | ) |
|                                                      |           |                             |           |                                 |       |                             |           |                       |           |   |   |   |   |
| Non-operating income                                      |           | 27                               |           | 0.0                                  |       | 227                              |           | 0.2                        |           | (200 | ) | (88.1 | ) |
| Interest expense                                          |           | (8                               | )              | 0.0                                  |       | (100                             | )              | (0.1                       | )              | (92 | ) | (92.0 | ) |
|                                                      |           |                             |           |                                 |       |                             |           |                       |           |   |   |   |   |
| Loss before income taxes                                  |           | (532                             | )              | (0.9                                 | )          | (442                             | )              | (0.5                       | )              | 90 |   | 20.4 |   |
|                                                      |           |                             |           |                                 |       |                             |           |                       |           |   |   |   |   |
| Income tax expense                                        |           | 6                                |           | 0.0                                  |       | 6                                |           | 0.0                        |           | 0 |   | 0.0 |   |
|                                                      |           |                             |           |                                 |       |                             |           |                       |           |   |   |   |   |
| Net loss                                                  |           | $                                | (538           | )                                    | (0.9       | )%                          | $              | (448                       | )              | (0.5 | )%  | $ | 90 |   | 20.1 | % |

 

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**RESULTS OF OPERATIONS, NINE-MONTH PERIODS ENDED SEPTEMBER 27, 2008 VS.SEPTEMBER 29, 2007**

 
| **** ****                                            | **** **** | ****Nine  Months Ended****  | ** **     | ****Nine  Months Ended****      | ** ** | ** **                   | ** **     | ** **                 | ** **     |
|-----------------------------------------------------------|----------------|----------------------------------|----------------|--------------------------------------|------------|------------------------------|----------------|----------------------------|----------------|
| ** **                                                | ** **     | **September 27, 2008** | ** **     | ****September 29, 2007**** | ** ** | **Increase (Decrease)** | ** **     |
| ****(Dollars in thousands)****                  | **** **** | ****Amount****                   | **** **** | ****% of  Revenue****           | ** ** | **Amount**                   | **** **** | ****% of  Revenue**** | **** **** | ****Amount**** | **** **** | ****%**** | **** **** |
| Revenue:                                                  |           |                             |           |                                 |       |                         |           |                       |           |   |   |   |   |
| Professional services provided directly                   |           | $                                | 169,018        |                                 | 74.3       | %                            | $              | 183,275                    |           | 67.4 | % | $ | (14,257 | ) | (7.8 | )% |
| Professional services provided  through subsuppliers |           | 31,217                           |           | 13.7                                 |       | 44,651                       |           | 16.4                       |           | (13,434 | ) | (30.1 | ) |
| Product sales                                             |           | 27,175                           |           | 12.0                                 |       | 43,975                       |           | 16.2                       |           | (16,800 | ) | (38.2 | ) |
| Total revenue                                             |           | 227,410                          |           | 100.0                                |       | 271,901                      |           | 100.0                      |           | (44,491 | ) | (16.4 | ) |
|                                                      |           |                             |           |                                 |       |                         |           |                       |           |   |   |   |   |
| Expenses:                                                 |           |                             |           |                                 |       |                         |           |                       |           |   |   |   |   |
| Cost of services provided directly                        |           | 133,275                          |           | 58.6                                 |       | 146,372                      |           | 53.8                       |           | (13,097 | ) | (8.9 | ) |
| Cost of services provided through subsuppliers            |           | 30,100                           |           | 13.2                                 |       | 42,881                       |           | 15.8                       |           | (12,781 | ) | (29.8 | ) |
| Cost of product sales                                     |           | 24,682                           |           | 10.9                                 |       | 39,784                       |           | 14.6                       |           | (15,102 | ) | (38.0 | ) |
| Selling, administrative and other operating  costs        |           | 38,409                           |           | 16.9                                 |       | 43,478                       |           | 16.0                       |           | (5,069 | ) | (11.7 | ) |
| Restructuring, severance, and other related  expenses     |           | 2,659                            |           | 1.2                                  |       | 1,759                        |           | 0.7                        |           | 900 |   | 51.2 |   |
| Amortization of intangible assets                         |           | 793                              |           | 0.3                                  |       | 799                          |           | 0.3                        |           | (6 | ) | (0.8 | ) |
| Total expenses                                            |           | 229,918                          |           | 101.1                                |       | 275,073                      |           | 101.2                      |           | (45,155 | ) | (16.4 | ) |
|                                                      |           |                             |           |                                 |       |                         |           |                       |           |   |   |   |   |
| Operating loss                                            |           | (2,508                           | )              | (1.1                                 | )          | (3,172                       | )              | (1.2                       | )              | (664 | ) | (20.9 | ) |
|                                                      |           |                             |           |                                 |       |                         |           |                       |           |   |   |   |   |
| Non-operating income                                      |           | 97                               |           | 0.0                                  |       | 251                          |           | 0.1                        |           | (154 | ) | (61.4 | ) |
| Interest expense                                          |           | (143                             | )              | 0.0                                  |       | (243                         | )              | (0.1                       | )              | (100 | ) | (41.2 | ) |
|                                                      |           |                             |           |                                 |       |                         |           |                       |           |   |   |   |   |
| Loss before income taxes                                  |           | (2,554                           | )              | (1.1                                 | )          | (3,164                       | )              | (1.2                       | )              | (610 | ) | (19.3 | ) |
|                                                      |           |                             |           |                                 |       |                         |           |                       |           |   |   |   |   |
| Income tax expense                                        |           | 15                               |           | 0.0                                  |       | 34                           |           | 0.0                        |           | (19 | ) | (55.9 | ) |
|                                                      |           |                             |           |                                 |       |                         |           |                       |           |   |   |   |   |
| Net loss                                                  |           | $                                | (2,569         | )                                    | (1.1       | )%                      | $              | (3,198                     | )              | (1.2 | )%  | $ | (629 | ) | (19.7 | )% |
|                                                      |           |                             |           |                                 |       |                         |           |                       |           |   |   |   |   |
| Personnel:                                                |           |                             |           |                                 |       |                         |           |                       |           |   |   |   |   |
| Management and Administrative                             |           | 274                              |           |                                 |       | 379                          |           |                       |           | (105 | ) | (27.7 | )% |
| Technical Consultants                                     |           | 1,472                            |           |                                 |       | 2,138                        |           |                       |           | (666 | ) | (31.2 | )% |

 

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**Revenue**

 

Revenue from services provided directly by our employees declinedduring the three- and nine-month periods ended September 27, 2008 by 16.4%and 7.8%, respectively, over the comparable period last year.  The decline in revenue was primarily due toour decision to discontinue our relationship with one of our large staffingaccounts and a reduction in the number of billable technical consultants whichwas partially offset by an increase in overall billing rates of 13.1% and 7.4%for the three- and nine-month periods ended September 27, 2008, comparedto the three- and nine month periods ended September 29, 2007,respectively.  Our subsupplier revenue,which is mainly pass-through revenue with associated fees, declined by 78.9%and 30.1%, respectively, over the comparable periods last year primarily due tothe sale of Symmetry early in the third quarter of 2008.  Product sales during the three- andnine-month periods ended September 27, 2008, declined by 51.7% and 38.2%,respectively, over the comparable periods last year due to an overall reductionin business volume.

 

**Cost of Services Provided Directly**

 

Cost of services provided directly represents our payroll and benefitcosts associated with our billable consultants. This category of expense as a percentage of direct services revenue was78.2% and 78.9%, respectively, for the three- and nine-month periods ended September 27,2008, compared to 80.0% and 79.9%, respectively, for the comparable periods ayear ago.  The decrease in the expense asa percentage of direct services revenue for the three- and nine-month periodsis a result of increasing the bill rates that we charge our customers in excessof the payroll and benefit rates we incur for our billable consultants.

 

**Cost of Services Provided Through Subsuppliers**

 

**Cost of services provided through subsuppliers represents our cost whenwe utilize third parties to fulfill our obligations to our large staffingclients.  This category of expense as apercentage of revenue for services provided through subsuppliers was 96.7% and96.4% for the three- and nine-month periods, respectively, ended September 27,2008, compared to 96.1% and 96.0% for the comparable periods a year ago.  The increase in the expense as a percentageof subsupplier revenue is a result of increased costs from our subsuppliers.**

 

**Cost of Product Sales**

 

Cost of product sales represents our cost when we resell hardware andsoftware products.  This category ofexpense, as a percentage of product sales, was 92.6% and 90.8% for the three-and nine-month periods, respectively, ended September 27, 2008, comparedto 91.9% and 90.5% for the three- and nine-month periods a year ago.  The increase in expense as a percentage ofrevenue is a result of the mix of product sales between the comparable periods.

 

**Selling, Administrative and Other Operating Costs**

 

Selling, administrative and other operating (SG&A) costs includemanagement and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs, and other administrativecosts.  This category of costs decreased$2.3 million and $5.1 million from the comparable three- and nine-monthperiods, respectively, in 2007 and represented 18.8% and 16.9% of total revenuefor the three- and nine-month periods, respectively, ended September 27,2008, compared to 15.1% and 16.0% for the comparable periods in 2007.  SG&A expenses decreased primarily due tothe reduction in expenses as a result of execution of the businesstransformation plan and a reduction of sales and recruiting expense due to thedecrease in business volume for the three- and nine-month periods ended September 27,2008, respectively, compared to the three- and nine-month periods ended September 29,2007.  The remainder of the decrease forthe nine months ended September 27, 2008, is due to the reduction inbusiness volume.

 

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*Restructuring, Severance, and Other Related Expense*

 

During the three- and nine-month periods ended September 27, 2008,we recorded restructuring, severance, and other related expenses totaling $0.3million and $2.7 million, respectively. The expenses recorded were a continuation of the restructuring commencedin December of 2007 as part of the implementation of our businesstransformation plan.

 

**Non-Operating Income**

 

Non-operating income decreased by $0.2 million and $0.2 million duringthe three- and nine-month periods, respectively, ended September 27, 2008,as compared to the comparable periods of 2007. The comparable three- and nine-month periods in 2007 included a $0.2million non-cash item resulting from the return of 124,654 shares of our commonstock from an escrow account following the departure of two of the principlesof a company we acquired in 2005.

 

**Interest Expense**

 

Interest expense decreased by $0.1 million and $0.1 million for thethree-and nine-month periods ended September 27, 2008, respectively, dueto a decrease in average borrowings to $0.6 million and $3.2 million during thethree- and nine-month periods ended September 27, 2008, respectively, from$4.9 million and $3.9 million during the three- and nine-month periods ended September 29,2007, respectively.  Additionally, areduction in the interest rates from 7.75% at the end of the third quarter 2007to 5.00% at the end of the third quarter 2008 reduced the amount of interestexpense.

 

**Income Taxes**

 

During the three- and nine-month periods ended September 27, 2008,we recorded a charge for income taxes related to subsidiaries whereprofitability was achieved and state taxes were expected.  We recorded no additional income tax expenseor benefit because any tax expense or benefit which would otherwise have beenrecorded has been negated by adjusting the valuation allowance against ourdeferred tax asset.  If, however, wesuccessfully return to profitability to a point where future realization ofdeferred tax assets which are currently reserved, becomes “more likely than not,”we may be required to reverse the existing valuation allowance to realize thebenefit of these assets.

 

**Personnel**

 

Our technical consulting staff levels finished the quarter at 1,472, a31.2% reduction from the comparable quarter last year.  The decline in technical consulting stafflevels is due to a reduction of approximately 320 billable consultants as aresult of the transfer of our existing contract with one of our largeststaffing accounts to other suppliers and an overall decline in business volume.  The decline in management and administrativepersonnel is due to our focus on reducing the number of management andadministrative personnel that are necessary to support the business operations.  The reported technical consulting stafflevels exclude approximately 100 billable headcount in Medical ConceptsStaffing, our medical staffing business, due to the separate industry focus ofthat business.

 

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Liquidity and Capital Resources

 

The following table provides information relative to the liquidity ofour business.

 
| **** ****                           | **** **** | ****September 27,**** | **** **** | ****December 29,**** | **** **** | ****Increase****   | **** **** | ****Percentage  Increase**** | **** **** |
|------------------------------------------|----------------|----------------------------|----------------|---------------------------|----------------|--------------------|----------------|------------------------------|----------------|
| ****(Dollars in thousands)**** | **** **** | ****2008****               | **** **** | ****2007****              | **** **** | ****(Decrease)**** | **** **** | ****(Decrease)****           | **** **** |
|                                     |           |                       |           |                      |           |               |           |                         |           |
| Cash and cash equivalents                |           | $                          | 86             |                      | $              | 91                 |           | $                            | (5             | ) | (5.5 | )% |
| Accounts receivable                      |           | 51,110                     |           | 66,074                    |           | (14,964            | )              | (22.6                        | )              |
| Other current assets                     |           | 1,551                      |           | 2,101                     |           | (550               | )              | (26.2                        | )              |
| Total current assets                     |           | $                          | 52,747         |                      | $              | 68,266             |           | $                            | (15,519        | ) | (22.7 | )% |
|                                     |           |                       |           |                      |           |               |           |                         |           |
| Accounts payable                         |           | $                          | 20,667         |                      | $              | 27,780             |           | $                            | (7,113         | ) | (25.6 | )% |
| Salaries and vacations                   |           | 3,971                      |           | 6,885                     |           | (2,914             | )              | (42.3                        | )              |
| Line of credit                           |           | 1,466                      |           | 1,587                     |           | (121               | )              | (7.6                         | )              |
| Restructuring accrual current            |           | 369                        |           | 1,900                     |           | (1,531             | )              | (80.6                        | )              |
| Other current liabilities                |           | 2,769                      |           | 5,327                     |           | (2,558             | )              | (48.0                        | )              |
| Total current liabilities                |           | $                          | 29,242         |                      | $              | 43,479             |           | $                            | (14,237        | ) | (32.7 | )% |
|                                     |           |                       |           |                      |           |               |           |                         |           |
| Working capital                          |           | $                          | 23,505         |                      | $              | 24,787             |           | $                            | (1,282         | ) | (5.2 | )% |
| Current ratio                            |           | 1.80                       |           | 1.57                      |           | 0.23               |           | 14.6                         |           |
|                                     |           |                       |           |                      |           |               |           |                         |           |
| Total shareholders’ equity          |           | $                          | 37,855         |                      | $              | 40,035             |           | $                            | (2,180         | ) | (5.4 | )% |

 

**Cash Requirements**

 

During the three-and nine-month periods ended September 27, 2008,we made total payments of approximately $43.2 million and $140.9 million,respectively, to pay our employee’s wages, benefits and associated taxes and topurchase product from our vendors.  Wealso made payments during the three- and nine-month periods ended September 27,2008 of approximately $20.3 million and $78.7 million, respectively, to payvendors who provided billable technical resources to our clients throughus.  We made payments during the three-and nine-month periods ended September 27, 2008 of approximately $7.0million and $21.7 million, respectively, to fund other operating expenses suchas our employee expense reimbursement, office space rental and utilities.  We made payments of approximately $0.8million and $4.6 million to fund severance, restructuring, and other relatedcharges during the three- and nine-month periods ended September 27, 2008,respectively.

 

The cash to fund these payments comes almost exclusively from ourcollection of amounts due to us for services rendered to our clients ($70.2million and $241.4 million in the three- and nine-month periods ended September 27,2008, respectively).  During the thirdquarter, we also increased our line of credit balance by $0.1 million.  Generally, payments made to fund theday-to-day operation of our business are due and payable regardless of the rateof cash collections from our clients. While we do not anticipate such an occurrence, a significant decline inthe rate of collections from our clients, or an inability to timely invoice andtherefore collect from our clients, could rapidly increase our need to borrowcash in order to fund the operations of our business.

 

**Sources and Uses of Cash and Our Credit Facility**

 

Cash and cash equivalents at September 27, 2008 remained stablefrom December 29, 2007. Our primary need for working capital is to supportaccounts receivable resulting from our business and to fund the lag timebetween payroll disbursement and receipt of fees billed to clients.  Historically, we have been able to supportinternal growth in our business with internally generated funds and use of ourcredit facility.

 

Our asset-based revolving credit agreement provides us with up to $45.0million of availability.  At September 27,2008, our borrowing availability under this credit facility, which fluctuatesbased on our level of eligible accounts

 

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receivable, was $21.3 million. Borrowings under the credit agreement are secured by all of ourassets.  This line of credit is availableto us to fund working capital needs and other investments such as acquisitionsas these needs arise.  We believe we willbe able to continue to meet the requirements of this agreement for the foreseeablefuture.

 

The revolving credit agreement requires us to take advances or pay downthe outstanding balance on the line of credit daily.  However, we can request fixed-term advancesof one, two, or three months for a portion of the outstanding balance on theline of credit.  Effective August 5,2004, we amended our credit agreement and modified certain terms of theagreement.  The amendment reduced theannual commitment fee to .25% of the unused portion of the line, reduced theannual administration fee to $25,000, and reduced the interest rates on dailyadvances to the Wall Street Journal’s “Prime Rate”, or 5.00% as of September 27,2008, and fixed-term advances to the applicable LIBOR rate plus 2.0%.  The agreement continues, among other things,to prohibit the payment of dividends and to restrict capital expenditures.  Effective January 20, 2006, we againamended the credit agreement extending the expiration date from October 31,2006 to January 20, 2010.  Theamendment eliminated certain reserves in calculating the amount we can borrowunder the facility and changed the definition of eligible accounts receivablein calculating our borrowing capacity. The effect of the modifications was to increase the borrowing capacityunder the line by $4.0 to $5.0 million.

 

During the three- and nine-month periods ended September 27, 2008,we made capital expenditures totaling $0.2 million and $1.1 million,respectively, compared to $0.3 million and $1.0 million in the comparableperiods ended September 29, 2007.

 

Working capital was $23.5 million at September 27, 2008, down $1.3million from December 29, 2007.  Theratio of current assets to current liabilities increased by 14.6% at September 27,2008, compared to December 29, 2007.

 

We believe our working capital will be sufficient for the foreseeableneeds of our business.  Significant rapidgrowth in our business, a major acquisition, a significant lengthening ofpayment terms with major clients, or significant costs associated withnon-operating activities could create a need for additional working capital.  An inability to obtain additional workingcapital, should it be required, could have a material adverse effect on ourbusiness.  We expect to be able to complywith the requirements of our credit agreement; however, failure to do so couldaffect our ability to obtain necessary working capital and could have amaterial adverse effect on our business.

 

Commitments and Contingencies

 

We have entered into arrangements that represent certain commitmentsand have arrangements with certain contingencies.  We lease office facilities undernon-cancelable operating leases, are engaged in license agreements with futurecommitments, and have deferred compensation that is payable to participants inaccordance with the terms of our Restated Special Executive RetirementPlan.  Our line of credit, with anoutstanding balance of $1.5 million at September 27, 2008, expires on January 20,2010.  Our line of credit balance istreated as a current liability on our balance sheet as our agreement requiresus to take advances or pay down the outstanding balance daily.

 

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We will incur interest expense on all amounts outstanding on our lineof credit at a variable interest rate. We will incur interest expense on certain portions of our deferredcompensation obligation.  Minimum futureobligations on operating leases, license agreements, deferred compensation andthe line of credit outstanding at September 27, 2008, are as follows:

 
| ****(Dollars in thousands)**** | **** **** | ****1 Year**** | **** **** | ****2-3 Years**** | **** **** | ****4-5 Years**** | **** **** | ****Over 5  Years**** | **** **** | ****Total**** | **** **** |
|------------------------------------------|----------------|---------------------|----------------|------------------------|----------------|------------------------|----------------|----------------------------|----------------|---------------|----------------|
|                                     |           |                |           |                   |           |                   |           |                       |           |          |           |
| Line of credit                           |           | $                   | 1,466          |                   | $              | —                 |           | $                          | —         |          | $              | — |   | $ | 1,466 |   |
|                                     |           |                |           |                   |           |                   |           |                       |           |          |           |
| Operating leases                         |           | 3,462               |           | 6,502                  |           | 3,584                  |           | 737                        |           | 14,285        |           |
|                                     |           |                |           |                   |           |                   |           |                       |           |          |           |
| Maintenance agreements                   |           | 267                 |           | 400                    |           | —                 |           | —                     |           | 667           |           |
|                                     |           |                |           |                   |           |                   |           |                       |           |          |           |
| Capital lease obligations                |           | 192                 |           | 288                    |           | —                 |           | —                     |           | 480           |           |
|                                     |           |                |           |                   |           |                   |           |                       |           |          |           |
| Deferred compensation                    |           | 438                 |           | 281                    |           | 130                    |           | 522                        |           | 1,371         |           |
|                                     |           |                |           |                   |           |                   |           |                       |           |          |           |
| Total                                    |           | $                   | 5,825          |                   | $              | 7,471                  |           | $                          | 3,714          |          | $              | 1,259 |   | $ | 18,269 |   |

 

New Accounting Pronouncements and Standards

 

In September 2006, the FASB issued SFAS No. 157, **Fair ValueMeasurements.**  Thisstatement establishes a consistent framework for measuring fair value andexpands disclosures on fair value measurements. The provisions of SFAS No. 157became effective for us beginning December 30, 2007.  The adoption of SFAS No. 157 did nothave a material effect on our consolidated results of operations and financialcondition.

 

In February 2007, the FASB issued SFAS No. 159, *Fair Value Option for Financial Assets and Financial Liabilities*.  This Statement permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The provisions of SFAS No. 159 becameeffective for us beginning December 30, 2007.  We have assessed the provisions of thestatement and elected not to apply fair value accounting to our eligiblefinancial instruments.  As a result,adoption of this statement had no impact on our consolidated results ofoperations and financial condition.

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), *Business Combinations* (SFAS No. 141R),which replaced FASB Statement No. 141. SFAS 141R establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, any non-controlling interest in the acquireeand the goodwill acquired.  The Statementalso establishes disclosure requirements, which will enable users to evaluatethe nature and financial effects of the business combination.  SFAS No. 141R applies prospectively tobusiness combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008, and interim periods within those fiscal years.  We will apply the provisions of SFAS 141R toany applicable business combinations after the effective date.

 

Critical Accounting Policies

 

In our 2007 Annual Report on Form 10-K, we identified criticalaccounting policies which effect our more significant estimates and assumptionsused in preparing our consolidated financial statements.  We have not changed those policies previouslydisclosed in our Annual Report.

 

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**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report on Form 10-Q contains forward-lookingstatements within the meaning of Section 27A  ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, including statements regardingour expectations, beliefs, intentions or strategies regarding the future.Forward-looking  statements include, but are not limited to,statements relating to management’s beliefs with respect to our ability to  successfullyimplement our business transformation plan, restore the Company toprofitability and increase  shareholder value; our efforts to reducecosts; our focus on marketing our services and delivering on the needs and  expectationsof our clients; the rate of cash collections from our clients; our workingcapital needs; and our ability to comply with the covenants andrequirements of our credit agreement. Any statement that is not based solelyupon  historical facts, including strategies for the future and the outcomeof events that have not yet occurred, is considered a  forward-lookingstatement.

 

All forward-looking statements in this document are based oninformation available to us as of the date  hereof,and we assume no obligation to update any such forward-looking statements,other than as required by law. It is important to note that ouractual results could differ materially from those in such forward-lookingstatements. The  forward-looking statements we make in thisQuarterly Report are subject to certain risks and uncertainties that could  causefuture results to differ materially from our recent results or those projectedin the forward-looking statements, including those detailed in theCompany’s Annual Report on Form 10-K for the year ended December 29,2007, filed  with the Securities and Exchange Commission.

 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk.**

 

Not applicable.

 

****Item 4. Controls andProcedures.****

 

(a)        Evaluation of DisclosureControls and Procedures

 

As of the end of the period covered by this report, we conducted anevaluation under the supervision and with the participation of our management,including the President and Chief Executive Officer, Elmer N. Baldwin, 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 InternalControls

 

There were no changes in our internal control over financial reportingthat occurred during the period covered by this report that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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| ****PART II. OTHER INFORMATION**** |
|-----------------------------------------|
| **** ****                          | **** **** | **** **** |
| ****Item  1.****                        | **** **** | ****Legal Proceedings**** |
|                                    |   |   |
|                                    |   | There  are no pending legal proceedings to which we are a party or to which any of  our property is subject, other than routine litigation incidental to the business. |
|                                    |   |   |
| **Item  1.A.**                          | ** ** | **Risk Factors.** |
|                                    |   |   |
|                                    |   | Not  applicable. |
|                                    |   |   |
| ****Item  2.****                        | **** **** | ****Unregistered Sales of Equity Securities and Use of Proceeds.**** |
|                                    |   |   |
|                                    |   | None. |
|                                    |   |   |
| ****Item  3.****                        | **** **** | ****Defaults Upon Senior Securities.**** |
|                                    |   |   |
|                                    |   | None. |
|                                    |   |   |
| ****Item  4.****                        | **** **** | ****Submission of Matters to a Vote of Security Holders.**** |
|                                    |   |   |
|                                    |   | None. |
|                                    |   |   |
| **Item  5.**                            | ** ** | **Other Information.** |
|                                    |   |   |
|                                    |   | None. |
|                                    |   |   |
| **Item  6.**                            | ** ** | **Exhibits.** |
|                                    |   |   |
| (a)                                     | Exhibits—See  Exhibit Index on page following signatures. |
|                                         |  |  |  |

 

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****SIGNATURES****

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, there unto duly authorized.

 

 
|                          | ANALYSTS INTERNATIONAL CORPORATION |
|-------------------------------|------------------------------------|
|                          |                               |   |
|                          |                               |   |
| Date:  November 10, 2008 | By:                                | /s/  Elmer N. Baldwin |
|                          |                               | Elmer  N. Baldwin |
|                          |                               | Chief  Executive Officer |
|                          |                               | (Principal  Executive Officer) |
|                          |                               |   |
|                          |                               |   |
| Date:  November 10, 2008 | By:                                | /s/  Randy W. Strobel |
|                          |                               | Randy  W. Strobel |
|                          |                               | Chief  Financial Officer |
|                          |                               | (Principal  Financial and Accounting Officer) |

 

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EXHIBIT INDEX

ANALYSTS INTERNATIONAL CORPORATION

FORM 10-Q

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                       |
|-------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ^  Exhibit 10.1    |       | Employment  Agreement between the Company and Michael W. Souders, fully executed on  June 27, 2008, effective July 1, 2008—incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed  July 3, 2008.                                                            |
| ^  Exhibit 10.2    |       | Change  in Control Agreement between the Company and Michael W. Souders, fully  executed on June 27, 2008, effective July 1, 2008—incorporated by  reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K, filed July 3, 2008.                                                     |
| ^  Exhibit 10.3    |       | Analysts  International Corporation Annual Management Incentive Plan (AMIP) between the  Company and Michael W. Souders, fully executed on June 27,  2008—incorporated by reference to Exhibit 10.3 to the Company’s Current  Report on Form 8-K, filed July 3, 2008.                                   |
| ^  Exhibit 10.4    |       | Incentive  Stock Option Agreement (Analysts International Corp. 2004 Equity Incentive  Plan) between the Company and Michael W. Souders, fully executed on  June 27, 2008—incorporated by reference to Exhibit 10.4 to the  Company’s Current Report on Form 8-K, filed July 3, 2008.                   |
| ^  Exhibit 10.5    |       | Incentive  Stock Option Agreement (Analysts International Corp. 1999 Plan) between the  Company and Michael W. Souders, fully executed on June 27,  2008—incorporated by reference to Exhibit 10.5 to the Company’s Current  Report on Form 8-K, filed July 3, 2008.                                    |
| ^  Exhibit 10.6    |       | Employee  Agreement between the Company and Brittany McKinney, fully executed on  June 27, 2008, effective June 23, 2008—incorporated by reference to  Exhibit 10.6 to Current Report on Form 8-K, filed July 3,  2008.                                                                                 |
| ^  Exhibit 10.7    |       | Amendment  No. 2 to Analysts International Corporation’s Restated Special Executive  Compensation Plan—incorporated by reference to Exhibit 10.7 to the Company’s  Current Report on Form 8-K, filed July 3, 2008.                                                                                 |
| ^  Exhibit 10.8    |       | Exhibit A  to Amendment No. 2 to Analysts International Corporation’s Restated  Special Executive Compensation Plan—incorporated by reference to  Exhibit 10.8 to the Company’s Current Report on Form 8-K, filed  July 3, 2008.                                                              |
| ^  Exhibit 10.9    |       | Employment  Agreement between the Company and Randy W. Strobel, fully executed on  August 8, 2008, effective August 25, 2008—incorporated by reference  to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed  August 12, 2008.                                                       |
| ^  Exhibit 10.10   |       | Change  in Control Agreement between the Company and Randy W. Strobel, fully executed  on August 8, 2008, effective August 25, 2008—incorporated by  reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K,  filed August 12, 2008.                                                |
| ^  Exhibit 10.11   |       | Analysts  International Corporation Annual Management Incentive Plan (AMIP) between the  Company and Randy W. Strobel, fully executed on August 8, 2008,  effective August 25, 2008—incorporated by reference to Exhibit 10.3  to the Company’s Current Report on Form 8-K, filed August 12, 2008. |
| ^  Exhibit 10.12   |       | Amended  and Restated Employment Agreement between the Company and Elmer Baldwin,  fully executed on August 19, 2008, effective November 1,  2007—incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, filed August 22, 2008.                                   |
| ^  Exhibit 10.13   |       | Change  in Control Agreement between the Company and Elmer Baldwin, fully executed on  August 19, 2008, effective November 1, 2007—incorporated by  reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K, filed August 22, 2008.                                                 |
| ^  Exhibit 10.14   |       | Amended  and Restated Employment Agreement between the Company and Robert E. Woods,  fully executed on August 19, 2008, effective January 1, 2008—incorporated  by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K, filed August 22, 2008.                                  |
| ^  Exhibit 10.15   |       | Change  in Control Agreement between the Company and Robert E. Woods, fully executed  on August 19, 2008, effective January 1, 2008—incorporated by  reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K, filed August 22, 2008.                                                |
| +  Exhibit 31.1    |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley  Act of 2002.                                                                                                                                                                                                                            |
| +  Exhibit 31.2    |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley  Act of 2002.                                                                                                                                                                                                                            |

 

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| ++  Exhibit 32.1 |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
|-----------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ++  Exhibit 32.2 |   | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |

 

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| ^  |   | Denotes  an exhibit previously filed with the Securities and Exchange Commission and  incorporated herein by reference. |
|----|--------|-------------------------------------------------------------------------------------------------------------------------|
| +  |   | Filed  herewith.                                                                                                        |
| ++ |   | Furnished  herewith.                                                                                                    |

 

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