****UNITED STATES****

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

**Washington, D.C. 20549**

 

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

 
| **x**                                                                                                                                                                         | ****Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934****  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                          |                                                                                                         |
| **For the  quarterly period ended October 3, 2009**                                                                                                                      |
|                                                                                                                                                                          |
| **or**                                                                                                                                                                        |
|                                                                                                                                                                          |                                                                                                         |   |
| **o**                                                                                                                                                                         | ****Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**** |
|                                                                                                                                                                          |                                                                                                         |
| **For the  transition period from                          to** |
|                                                                                                                                                                          |
| **Commission  File Number: 0-4090**                                                                                                                                           |

 

****ANALYSTS INTERNATIONAL CORPORATION****

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

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

 

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

 

As of November 9,2009, 24,925,076 shares of the registrant’s common stock were outstanding.

 

 

 

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****ANALYSTS INTERNATIONAL CORPORATION****

 

****INDEX****

 
| ******Part I.****** | ******FINANCIAL  INFORMATION.******                                                                                          | 3      |
|--------------------------|------------------------------------------------------------------------------------------------------------------------------|--------|
|                     |                                                                                                                         |   |
| Item 1.                  | Financial Statements (Unaudited)                                                                                             | 3      |
|                     |                                                                                                                         |   |
|                     | Consolidated Balance  Sheets as of October 3, 2009 and January 3, 2009                                             | 3      |
|                     |                                                                                                                         |   |
|                     | Consolidated  Statements of Operations for the Three and Nine Months Ended October 3,  2009 and September 27, 2008 | 4      |
|                     |                                                                                                                         |   |
|                     | Consolidated  Statements of Cash Flows for the Nine Months Ended October 3, 2009 and  September 27, 2008           | 5      |
|                     |                                                                                                                         |   |
|                     | Notes to Consolidated Financial Statements                                                                                   | 6      |
|                     |                                                                                                                         |   |
| Item 2.                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  | 13     |
|                     |                                                                                                                         |   |
| Item 3.                  | Quantitative  and Qualitative Disclosures About Market Risk                                                                  | 26     |
|                     |                                                                                                                         |   |
| Item 4T.                 | Controls and  Procedures                                                                                                     | 26     |
|                     |                                                                                                                         |   |
| **Part II.**        | **OTHER INFORMATION**                                                                                                        | 27     |
|                     |                                                                                                                         |   |
| Item 1.                  | Legal Proceedings                                                                                                            | 27     |
|                     |                                                                                                                         |   |
| Item 1A.                 | Risk Factors                                                                                                                 | 27     |
|                     |                                                                                                                         |   |
| Item 2.                  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                 | 28     |
|                     |                                                                                                                         |   |
| Item 3.                  | Defaults Upon  Senior Securities                                                                                             | 28     |
|                     |                                                                                                                         |   |
| Item 4.                  | Submission of  Matters to a Vote of Security Holders                                                                         | 28     |
|                     |                                                                                                                         |   |
| Item 5.                  | Other Information                                                                                                            | 28     |
|                     |                                                                                                                         |   |
| Item 6.                  | Exhibits                                                                                                                     | 28     |
|                     |                                                                                                                         |   |
| Signatures               |                                                                                                                         | 30     |
|                     |                                                                                                                         |   |
| Exhibit Index       |                                                                                                                         | 31     |

 

2

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

 

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

 

****AnalystsInternational Corporation****

****Consolidated Balance Sheets****

**(Unaudited)**

** **
| ** **                                                                                                                            | ** ** | **October  3,** | ** ** | **January 3,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|---------------------|------------|
| **(In thousands)**                                                                                                                    | ** ** | **2009**             | ** ** | **2009**            | ** ** |
|                                                                                                                                  |       |                 |       |                |       |
| **ASSETS**                                                                                                                            |       |                 |       |                |       |
|                                                                                                                                  |       |                 |       |                |       |
| Current assets:                                                                                                                       |       |                 |       |                |       |
| Cash and cash equivalents                                                                                                             |       | $                    | 7,261      |                | $          | 2,288 |   |
| Restricted cash                                                                                                                       |       | 396                  |       | —              |       |
| Accounts receivable, less allowance for doubtful  accounts of $1,025 and $1,092, respectively                                         |       | 25,462               |       | 40,814              |       |
| Prepaid expenses and other current assets                                                                                             |       | 734                  |       | 1,521               |       |
| Total current assets                                                                                                                  |       | 33,853               |       | 44,623              |       |
|                                                                                                                                  |       |                 |       |                |       |
| Property and equipment, net                                                                                                           |       | 1,972                |       | 3,081               |       |
| Intangible assets, net of accumulated amortization  of nil and $7,155, respectively                                                   |       | —               |       | 6,104               |       |
| Other assets                                                                                                                          |       | 583                  |       | 446                 |       |
| Total assets                                                                                                                          |       | $                    | 36,408     |                | $          | 54,254 |   |
|                                                                                                                                  |       |                 |       |                |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                        |       |                 |       |                |       |
|                                                                                                                                  |       |                 |       |                |       |
| Current liabilities:                                                                                                                  |       |                 |       |                |       |
| Accounts payable                                                                                                                      |       | $                    | 7,947      |                | $          | 15,581 |   |
| Line of credit                                                                                                                        |       | —               |       | —              |       |
| Salaries and benefits                                                                                                                 |       | 4,764                |       | 3,249               |       |
| Deferred revenue                                                                                                                      |       | 418                  |       | 1,473               |       |
| Deferred compensation                                                                                                                 |       | 347                  |       | 275                 |       |
| Restructuring accrual                                                                                                                 |       | 1,529                |       | 184                 |       |
| Other current liabilities                                                                                                             |       | 970                  |       | 1,025               |       |
| Total current liabilities                                                                                                             |       | 15,975               |       | 21,787              |       |
|                                                                                                                                  |       |                 |       |                |       |
| Non-current liabilities:                                                                                                              |       |                 |       |                |       |
| Deferred compensation                                                                                                                 |       | 1,105                |       | 1,391               |       |
| Restructuring accrual                                                                                                                 |       | 958                  |       | 65                  |       |
| Other long-term liabilities                                                                                                           |       | 424                  |       | 616                 |       |
| Total non-current liabilities                                                                                                         |       | 2,487                |       | 2,072               |       |
|                                                                                                                                  |       |                 |       |                |       |
| Shareholders’ equity:                                                                                                            |       |                 |       |                |       |
| Common stock, par value $.10 a share; authorized  120,000,000 shares; issued and outstanding 24,925,076 and 24,913,076,  respectively |       | 2,492                |       | 2,491               |       |
| Additional capital                                                                                                                    |       | 23,442               |       | 23,145              |       |
| Accumulated (deficit) earnings                                                                                                        |       | (7,988               | )          | 4,759               |       |
| Total shareholders’ equity                                                                                                       |       | 17,946               |       | 30,395              |       |
| Total liabilities and shareholders’ equity                                                                                       |       | $                    | 36,408     |                | $          | 54,254 |   |

 

See notes to consolidated financial statements.

 

3

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****AnalystsInternational Corporation****

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

****(Unaudited)****

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **October 3,**    | ** ** | **September 27,** | ** ** | **October 3,** | ** ** | **September 27,** | ** ** |
| **(In thousands except per share  amounts)**           | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                                               | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Professional  services provided directly               |       | $                      | 29,335     |                   | $          | 50,116 |   | $ | 105,211 |   | $ | 169,018 |   |
| Professional  services provided through subsuppliers   |       | 460                    |       | 2,891                  |       | 2,011 |   | 31,217 |   |
| Product  sales                                         |       | 1,106                  |       | 9,610                  |       | 9,339 |   | 27,175 |   |
| Total  revenue                                         |       | 30,901                 |       | 62,617                 |       | 116,561 |   | 227,410 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Expenses:                                              |       |                   |       |                   |       |   |   |   |   |
| Cost  of services provided directly                    |       | 23,595                 |       | 39,167                 |       | 83,704 |   | 133,275 |   |
| Cost  of services provided through subsuppliers        |       | 441                    |       | 2,796                  |       | 1,915 |   | 30,100 |   |
| Cost  of product sales                                 |       | 965                    |       | 8,899                  |       | 7,973 |   | 24,682 |   |
| Selling,  administrative and other operating costs     |       | 8,886                  |       | 11,780                 |       | 30,233 |   | 38,409 |   |
| Restructuring  costs and other severance related costs |       | 917                    |       | 291                    |       | 2,708 |   | 2,659 |   |
| Impairment  of intangible assets                       |       | —                 |       | —                 |       | 2,268 |   | — |   |
| Amortization  of intangible assets                     |       | 44                     |       | 235                    |       | 491 |   | 793 |   |
| Total  expenses                                        |       | 34,848                 |       | 63,168                 |       | 129,292 |   | 229,918 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Operating  loss                                        |       | (3,947                 | )          | (551                   | )          | (12,731 | ) | (2,508 | ) |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Non-operating  income                                  |       | 8                      |       | 27                     |       | 35 |   | 97 |   |
| Interest  expense                                      |       | (9                     | )          | (8                     | )          | (20 | ) | (143 | ) |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Loss  before income taxes                              |       | (3,948                 | )          | (532                   | )          | (12,716 | ) | (2,554 | ) |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Income  tax expense                                    |       | 13                     |       | 6                      |       | 31 |   | 15 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Net  loss                                              |       | $                      | (3,961     | )                      | $          | (538 | ) | $ | (12,747 | ) | $ | (2,569 | ) |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Per  common share (basic):                             |       |                   |       |                   |       |   |   |   |   |
| Net  loss                                              |       | $                      | (0.16      | )                      | $          | (0.02 | ) | $ | (0.51 | ) | $ | (0.10 | ) |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Per  common share (diluted):                           |       |                   |       |                   |       |   |   |   |   |
| Net  loss                                              |       | $                      | (0.16      | )                      | $          | (0.02 | ) | $ | (0.51 | ) | $ | (0.10 | ) |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Weighted-average  shares outstanding:                  |       |                   |       |                   |       |   |   |   |   |
| Basic                                                  |       | 24,925                 |       | 24,913                 |       | 24,925 |   | 24,913 |   |
| Diluted                                                |       | 24,925                 |       | 24,913                 |       | 24,925 |   | 24,913 |   |

 

See notes to consolidated financial statements.

 

4

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****AnalystsInternational Corporation****

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

****(Unaudited)****

 
| ** **                                          | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **October 3,**   | ** ** | **September 27,** | ** ** |
| **(In thousands)**                                  | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                                |       |                  |       |   |   |
| Cash flows from operating activities:               |       |                  |       |   |   |
| Net loss                                            |       | $                     | (12,747    | ) | $ | (2,569 | ) |
|                                                |       |                  |       |   |   |
| Adjustments to net loss:                            |       |                  |       |   |   |
| Depreciation                                        |       | 1,086                 |       | 1,183 |   |
| Amortization of intangible assets                   |       | 491                   |       | 793 |   |
| Impairment of intangible assets                     |       | 2,268                 |       | — |   |
| Gain on sale of assets                              |       | (399                  | )          | — |   |
| Stock based compensation                            |       | 298                   |       | 389 |   |
| Loss on asset disposal                              |       | 5                     |       | 43 |   |
|                                                |       |                  |       |   |   |
| Changes in:                                         |       |                  |       |   |   |
| Accounts receivable                                 |       | 15,933                |       | 15,132 |   |
| Accounts payable                                    |       | (7,158                | )          | (6,967 | ) |
| Salaries and benefits                               |       | 1,517                 |       | (3,291 | ) |
| Restructuring accrual                               |       | 2,238                 |       | (1,598 | ) |
| Deferred compensation                               |       | (214                  | )          | (1,443 | ) |
| Prepaid expenses and other assets                   |       | 404                   |       | 665 |   |
| Deferred revenue                                    |       | (381                  | )          | (987 | ) |
| Other accrued liabilities                           |       | (55                   | )          | (91 | ) |
| Net cash provided by operating activities           |       | 3,286                 |       | 1,259 |   |
|                                                |       |                  |       |   |   |
| Cash flows from investing activities:               |       |                  |       |   |   |
| Expended for property and equipment additions       |       | (1,082                | )          | (1,063 | ) |
| Proceeds from asset sales, net                      |       | 3,263                 |       | — |   |
| Change in restricted cash                           |       | (396                  | )          | — |   |
| Net cash provided by (used in) investing activities |       | 1,785                 |       | (1,063 | ) |
|                                                |       |                  |       |   |   |
| Cash flows from financing activities:               |       |                  |       |   |   |
| Net change in line of credit                        |       | —                |       | (121 | ) |
| Payment of capital lease obligation                 |       | (98                   | )          | (80 | ) |
| Net cash used in financing activities               |       | (98                   | )          | (201 | ) |
|                                                |       |                  |       |   |   |
| Net increase in cash and cash equivalents           |       | 4,973                 |       | (5 | ) |
|                                                |       |                  |       |   |   |
| Cash and cash equivalents at beginning of period    |       | 2,288                 |       | 91 |   |
|                                                |       |                  |       |   |   |
| Cash and cash equivalents at end of period          |       | $                     | 7,261      |   | $ | 86 |   |

 

See notes to consolidated financial statements.

 

5

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****AnalystsInternational Corporation****

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

**(Unaudited)**

 

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

 

AnalystsInternational Corporation (“AIC,” “Company,” “we,” “us” or “our”) is aninformation technology (“IT”) services company that is focused on providingconfigured solutions for its clients. AIC serves a broad portfolio of clientsthroughout the United States with technology staffing, collaboration solutions,infrastructure solutions, project and application solutions and managedservices offerings. We were incorporated under Minnesota law in 1966 and ourcorporate headquarters is located in Minneapolis, Minnesota. For a morecomplete description of our Company, please refer to our Annual Report on Form 10-Kfor the fiscal year ended January 3, 2009.

 

Weoperate on a fiscal year ending on the Saturday closest to December 31.Accordingly, fiscal 2009 will end on Saturday, January 2, 2010. The thirdquarter of fiscal 2009 ended on October 3, 2009 and the third quarter offiscal 2008 ended on September 27, 2008. Fiscal 2009 will include 52 weekswhile fiscal 2008 included 53 weeks.

 

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

 

*Basis ofConsolidation*

 

The accompanyingunaudited Consolidated Financial Statements of AIC have been prepared on theaccrual basis of accounting and in accordance with the requirements of theSecurities and Exchange Commission (“SEC”) for interim financial reporting. Aspermitted under these rules, certain footnotes and other financial informationthat are normally required by accounting principles generally accepted in theUnited States (“U.S. GAAP”) can be condensed or omitted. The ConsolidatedFinancial Statements included in this document reflect, in the opinion of ourmanagement, all adjustments (consisting of only normal recurring adjustments,except as noted elsewhere in the Notes to Consolidated Financial Statements)necessary for fair presentation of the results of operations for the interimperiods presented. The following notes should be read in conjunction with theaccounting policies and other disclosures in the Notes to the ConsolidatedFinancial Statements incorporated by reference in our Annual Report on Form 10-Kfor the fiscal year ended January 3, 2009. Revenues, expenses, cash flows,assets and liabilities can and do vary during the year. Therefore, interimresults are not necessarily indicative of the results to be expected for thefull fiscal year.

 

*Estimates*

 

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

 

*Reclassifications*

 

To maintain consistencyand comparability, we reclassified certain prior-year amounts previouslyreported in our Annual Report on Form 10-K for the fiscal year ended January 3,2009 to conform to the current-year presentation.  The reclassifications affect only thegrouping of line item balances within current liabilities and non-currentliabilities. The reclassifications were deemed immaterial to the financialstatements as they did not change the character of any liability and had noeffect on total current and non-current liabilities, net income or cash flows.

 

*AccountingPronouncements*

 

In April 2009, theFinancial Accounting Standards Board (“FASB”) issued Financial Staff Position (“FSP”)FAS 141(R)-1, *Accounting for Assets Acquired andLiabilities Assumed in a Business Combination That Arise from Contingencies*(codified in FASB ASC Topic 805,*Business Combinations*)which amends and clarifies FASB Statement No. 141(R), *BusinessCombinations*, on initial recognition and measurement, subsequentmeasurement and accounting, and disclosure of assets and liabilities arisingfrom contingencies in a business combination. FSP FAS 141R-1 is effective forbusiness combinations occurring in fiscal years beginning on or after December 15,2008. The impact on

 

6

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our consolidatedfinancial statements of adopting FSP FAS 141R-1 will depend on the nature,terms and size of business combinations completed after the effective date.

 

In April 2009, theFASB issued FSP FAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments* (both codified in FASB ASC Topic825, *Financial Instruments*) to require anentity to provide disclosures about the fair value of financial instruments ininterim financial information. FSP FAS 107-1 and APB 28-1 would apply to allfinancial instruments within the scope of FASB Statement No. 107, *Disclosures about Fair Value of Financial Instruments*, andwill require entities to disclose the method(s) and significantassumptions used to estimate the fair value of financial instruments, in bothinterim financial statements as well as annual financial statements. FSP FAS107-1 and APB 28-1 will be effective for interim and annual periods endingafter June 15, 2009, with early adoption permitted for periods endingafter March 15, 2009. The adoption of FSP FAS 107-1 and APB 28-1 did nothave a material impact on our financial statement disclosures.

 

In May 2009, theFASB issued FASB Statement No. 165, *SubsequentEvents*(codified in FASB ASC Topic 855, *SubsequentEvents*). FASB Statement No. 165 establishes general standardsfor accounting for and disclosure of events that occur after the balance sheetdate but before financial statements are available to be issued (“subsequentevents”). FASB Statement No. 165 sets forth the period after the balancesheet date during which management of a reporting entity should evaluate eventsor transactions that may occur for potential recognition in the financialstatements, identifies the circumstances under which an entity should recognizeevents or transactions occurring after the balance sheet date in its financialstatements and the disclosures that should be made about events or transactionsthat occur after the balance sheet date. FASB Statement No. 165 provideslargely the same guidance on subsequent events which previously existed only inauditing literature.  FASB Statement No. 165is effective for interim and annual periods ending after June 15, 2009.The adoption of FASB Statement No. 165 did not have a material impact onour financial statement disclosures.

 

In June 2009, theFASB issued FASB Statement No. 168, *TheFASB Accounting Standards Codification and Hierarchy of Generally AcceptedAccounting Principles, a replacement of FASB Statement No. 162 (*codifiedin FASB ASC Topic 105, *Generally AcceptedAccounting Principles*). FASB Statement No. 168 establishes theFASB Standards Accounting Codification (“Codification”) as the source ofauthoritative U.S. GAAP recognized by the FASB to be applied tonongovernmental entities and rules and interpretive releases of the SEC asauthoritative GAAP for SEC registrants. The Codification will supersede all theexisting non-SEC accounting and reporting standards upon its effective date andsubsequently, the FASB will not issue new standards in the form of Statements,FASB Staff Positions or Emerging Issues Task Force Abstracts. FASB Statement No. 168also replaces FASB Statement No. 162, *“TheHierarchy of Generally Accepted Accounting Principles”*given thatonce in effect, the Codification will carry the same level of authority. FASBStatement No. 168 will be effective for interim and annual periods endingafter September 15, 2009. The adoption of this FASB Statement No. 168did not have a material impact on our consolidated financial statementdisclosures.

 

****3.****  ****Fair Value Measurement****

 

Effective January 1,2008, we adopted FASB Statement No. 157, *Fair ValueMeasurements* (codified in FASB ASC Topic 820, *Fair ValueMeasurements and Disclosures*). The adoption of FASB Statement No. 157had no impact on our consolidated financial statements or the valuation methodsconsistently followed by the Company.

 

The fair value hierarchygives the highest priority to unadjusted quoted prices in active markets foridentical assets or liabilities (Level 1) and the lowest priority tounobservable inputs (Level 3). A financial instrument’s level within thehierarchy is based on the lowest level of any input that is significant to thefair value measurement. The levels of the fair value hierarchy are defined asfollows:

 

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

 

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

 

7

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

 

Short-termcash investments in money market accounts are considered to be cash equivalents.The estimated fair values for cash equivalents approximate their carryingvalues due to the short-term maturities of these instruments. Cash equivalentsare classified as Level 1 and are recorded in our cash and cash equivalentsline on our Consolidated Balance Sheets.

 

**4.****Saleof Assets**

 

*Saleof Value Added Reseller (“VAR”) assets*

 

On August 4, 2009,AIC entered into and closed on an asset sale agreement for the Company’s VARoperations. In consideration for the assets sold, which are primarily customercontracts, and the liabilities transferred, the Company received $3.0 millionin cash at closing and has the potential to receive up to an additional $0.75million in cash in August 2010 depending on the number of customercontract assignments received prior to December 31, 2009.

 

The carrying value of theassets sold and liabilities transferred on the closing date of the transactionare as follows:

 
| ** **                    | ** ** | **Balance as of**       | ** ** |
|-------------------------------|------------|-------------------------|------------|
| **(In thousands)**            | ** ** | **August 5, 2009** | ** ** |
| Assets:                       | ** ** | ** **              | ** ** |
| Inventory                     |       | $                       | 129        |   |
| Property and equipment, net   |       | 769                     |       |
| Intangible assets             |       | 3,345                   |       |
| Other assets                  |       | 4                       |       |
| Total assets sold             |       | $                       | 4,247      |   |
|                          |       |                    |       |
| Liabilities:                  |       |                    |       |
| Current liabilities           |       | $                       | 391        |   |
| Deferred revenue              |       | 784                     |       |
| Total liabilities transferred |       | $                       | 1,175      |   |

 

TheCompany recorded a gain on the sale of the net assets of $0.2 million which isincluded within Selling, Administrative and Other Operating Costs (“SG&A”)in the Consolidated Statement of Operations.

 

*Sale of Medical Concepts Staffing (“MCS”) assets*

 

OnSeptember 25, 2009, AIC entered into and closed on an asset sale agreementfor the Company’s nurse staffing operations. In consideration for the assetssold and the liabilities transferred, the Company received $0.5 million incash. The Company recorded a gain on the sale of the net assets ofapproximately $0.2 million which is included within SG&A in theConsolidated Statement of Operations.

 

**5.   Intangible Assets**

 

Inthe third quarter of fiscal 2009, we incurred amortization expense related tointangible assets of $44,000 and disposed of the remaining balance of ourcustomer lists. Our customer lists were sold as part of the VAR assets sale asdescribed in the *Sale of Assets* footnote in theNotes to Consolidated Financial Statements.

 

Forthe nine month period ended October 3, 2009, we incurred amortizationexpense of $0.5 million, recorded an impairment of our customer lists ofapproximately $2.3 million, as described below, and disposed of the remainingbalance of our customer lists of approximately $3.3 million.

 

8

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Asof October 3, 2009, we had no intangible assets.

 
| ** **         | ** ** | **October 3, 2009** | ** ** | **January 3, 2009**      | ** ** |
|--------------------|------------|--------------------------|------------|-------------------------------|------------|
| **(In thousands)** | ** ** | **Carrying  Amount**     | ** ** | **Accumulated  Amortization** | ** ** | **Intangibles,  Net** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Intangibles,  Net** | ** ** |
|               | ** ** | ** **               | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer lists     |       | $                        | —     |                          | $          | — |   | $ | — |   | $ | 13,259 |   | $ | (7,155 | ) | $ | 6,104 |   |
|                    |            |                          |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the second quarterof fiscal 2009, we reviewed our customer lists in accordance with FASB Statement No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*(codified in FASB ASC Topic 360, *Property, Plant, and Equipment*), based on the expectationthat the business with which the customer lists are associated would be soldsignificantly before the end of their previously estimated useful life. Basedon this measurement, we recorded a $2.3 million impairment loss, which is theamount by which the carrying value of the customer lists exceeded the fairvalue. In determining fair value, we considered the expected consideration tobe received from the sale of assets as described in the *Sale ofAssets* footnote in the Notes to Consolidated Financial Statements.The impairment loss is included within Impairment of Intangible Assets in theConsolidated Statement of Operations.

 

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

 

On September 30, 2009, AIC entered into a revolving line of credit(the “Credit Facility”) with Wells Fargo Bank, National Association (“WellsFargo”) pursuant to which Wells Fargo will advance up to $15.0 million to AICfor working capital purposes and to facilitate the issuance of letters ofcredit.  The Credit Facility replaces the Company’s existing $15.0 millioncredit facility with General Electric Capital Corporation (“GE Capital”). The total amount available for borrowing under the Credit Facility willfluctuate based on the Company’s level of eligible accounts receivable.

 

The Credit Facility carries an interest rate equal to the three-monthLIBOR rate plus 3.5%.  The Credit Facility has a one-time origination feeof $150,000 and an unused line fee of 0.50% annually on the daily averageunused amount.  The maturity date of the Credit Facility is September 30,2012 and may be terminated or reduced by the Company on 90 days notice inexchange for a termination fee of 2% of the maximum line amount or reduction ofthe maximum line amount in the first year or 1% of such amounts in the secondyear (and no fee in the third year).  Borrowings under the Credit Facilityare secured by all of the Company’s assets.

 

The Credit Facility requires the Company to meet certain levels ofyear-to-date earnings/loss before taxes.  The Credit Facility limits theCompany’s annual capital expenditures to $2.0 million and requires the Companyto maintain an excess borrowing base of at least $5.0 million and containscustomary affirmative covenants, including covenants regarding annual,quarterly and projected financial reporting requirements, collateral andinsurance maintenance, and compliance with applicable laws and regulations.Further, the facility contains customary negative covenants limiting the abilityof the Company to grant liens, incur indebtedness, make investments, repurchaseCompany stock, create new subsidiaries, sell assets or engage in any change ofcontrol transaction without the consent of Wells Fargo.

 

Upon an event of default, Wells Fargo may terminate the facility ordeclare the entire amount outstanding under the facility to be immediately dueand payable and exercise other rights under the agreement.  The events of defaultunder the facility include, among other things, payment defaults, breaches ofcovenants, a change in control of the Company and bankruptcy events.

 

As of October 3,2009, we were in compliance with all the requirements and had no borrowingunder the Credit Facility. Total availability of the Credit Facility, whichfluctuates based on our level of eligible accounts receivable, was $9.4 millionas of October 3, 2009.

 

On September 30,upon consummating the Credit Facility with Wells Fargo, we extinguished ourasset-based revolving credit facility with GE Capital. Extinguishment expensesof $40,000, relating to the remaining deferred 

 

9

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financing costs andtransaction-related expenses were expensed in the third quarter of fiscal 2009and included within SG&A in the Consolidated Statements of Operations.

 

Inextinguishing our asset-based revolving credit facility, we were required tocash collateralize $0.4 million for a standby letter of credit issued by GECapital until terminated in accordance with the provisions of the asset-basedrevolving credit facility. The cash collateralization of $0.4 million isreported as Restricted Cash in our Consolidated Balance Sheets. The GE Capitalletter of credit has been terminated in accordance with the provisions of theasset-based revolving credit facility and we received our cashcollateralization during the fourth quarter of fiscal 2009.

 

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

 

Inthe third quarter of fiscal 2009, we recorded workforce reduction and officeclosure charges totaling $0.9 million. Of these charges, $0.8 million relatedto severance and severance-related charges and $0.1 million related to futurerent obligations (net of anticipated sub-lease income).

 

Forthe nine month period ended October 3, 2009, we recorded workforcereduction charges and office closure/consolidation charges totaling $2.7million. Of these charges, $0.9 million related to severance andseverance-related charges and $1.8 million related to future rent obligations.

 

Inthe third quarter of fiscal 2008, we recorded workforce reduction and officeclosure/consolidation charges totaling $0.3 million. Of these charges, $0.4million of expense related to severance and severance-related charges and anexpense reduction of $0.1 million related to adjustments and office closures.

 

Forthe nine months ended September 27, 2008, we recorded workforce reductionand office closure and consolidation charges totaling $2.7 million. Of thesecharges, $2.5 million related to severance and severance-related charges and$0.2 million related to future rent obligations (net of anticipated sub-leaseincome) for locations we closed or downsized prior to September 27, 2008.

 

A summary of the activityin the restructuring accrual for the nine months ended October 3, 2009 isas follows:

 
| ** **                         | ** ** | **Workforce** | ** ** | **Office Closure/** | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------|------------|---------------------|------------|------------|------------|
| **(In thousands)**                 | ** ** | **Reduction** | ** ** | **Consolidation**   | ** ** | **Total**  | ** ** |
| Balance as of January 3, 2009 |       | $             | 28         |                | $          | 221        |       | $ | 249 |   |
| Additional restructuring charges   |       | 922           |       | 1,786               |       | 2,708      |       |
| Cash expenditures                  |       | (145          | )          | (325                | )          | (470       | )          |
| Balance as of October 3, 2009 |       | $             | 805        |                | $          | 1,682      |       | $ | 2,487 |   |

 

**8.  Shareholders’ Equity**

 
| ** **                                 | ** ** | ** ** | ** ** | ** **     | ** ** | **Accumulated** | ** ** | **Total**              | ** ** |
|--------------------------------------------|------------|------------|------------|----------------|------------|-----------------|------------|------------------------|------------|
| ** **                                 | ** ** | **Common** | ** ** | **Additional** | ** ** | **Earnings**    | ** ** | **Shareholders’** | ** ** |
| **(In thousands)**                         | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)**   | ** ** | **Equity**             | ** ** |
|                                       |       |       |       |           |       |            |       |                   |       |
| Balances as of January 3, 2009        |       | $          | 2,491      |           | $          | 23,145          |       | $                      | 4,759      |   | $ | 30,395 |   |
| Common stock issued - 12,000 shares        |       | 1          |       | 4              |       | —          |       | 5                      |       |
| SFAS 123R share based compensation expense |       | —     |       | 293            |       | —          |       | 293                    |       |
| Net loss                                   |       | —     |       | —         |       | (12,747         | )          | (12,747                | )          |
| Balance as of October 3, 2009         |       | $          | 2,492      |           | $          | 23,442          |       | $                      | (7,988     | ) | $ | 17,946 |   |

 

10

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****9.**** ****Equity Compensation Plans****

 

Total equity-basedcompensation expense for the three and nine-month periods ended October 3,2009 was approximately $0.1 million and $0.3 million, respectively. Thisincludes compensation expense related to both stock options and stock awards.The tax benefit recorded for these same periods was approximately $6,000 and$28,000 respectively. The tax benefit is offset against our valuation allowancefor our deferred tax asset.

 

Total equity-basedcompensation expense for the three and nine-month periods ended September 27,2008, was approximately $0.1 million and $0.4 million, respectively. Thisincludes compensation expense related to both stock options and stock awards.The tax benefit recorded for these same periods was approximately $11,000 and$42,000 respectively. The tax benefit is offset against our valuation allowancefor our deferred tax asset.

 

No stock optionswere exercised during the three and nine-month periods ended October 3,2009, and September 27, 2008. As of October 3, 2009, there wasapproximately $0.4 million of unrecognized compensation expense related tounvested option awards that are expected to vest over a weighted-average periodof 1.4 years.

 

During the threeand nine-month periods ended October 3, 2009, and September 27, 2008,we granted equity compensation awards as follows:

 
|          |       |                    |       |                                          |       |                |       |                                             |       |       |       |                                             |       |       |       |                                             |       |   |   |   |   |
|---------------|------------|-------------------------|------------|-----------------------------------------------|------------|---------------------|------------|--------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|--------|--------|--------|--------|
| ** **    | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended**                        | ** ** |
| ** **    | ** ** | **October 3,**     | ** ** | **September 27,**                        | ** ** | **October 3,** | ** ** | **September 27,**                           | ** ** |
| ** **    | ** ** | **2009**                | ** ** | **2008**                                      | ** ** | **2009**            | ** ** | **2008**                                         | ** ** |
| ** **    | ** ** | **Grants**              | ** ** | **Weighted-  Average Grant  Date Fair Value** | ** ** | **Grants**          | ** ** | **Weighted-    Average  Grant Date  Fair Value** | ** ** | **Grants** | ** ** | **Weighted-    Average  Grant Date  Fair Value** | ** ** | **Grants** | ** ** | **Weighted-    Average  Grant Date  Fair Value** | ** ** |
|          | ** ** | ** **              | ** ** | ** **                                    | ** ** | ** **          | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** **                                       | ** ** |
| Stock Options |       | 590,000                 |       | $                                             | 0.43       |                | 250,000    |                                             | $          | 0.55       |       | 894,000                                          |       | $          | 0.39       |                                             | 1,313,000  |   | $      | 0.58   |   |
| Stock Awards  |       | —                  |       | $                                             | —     |                | —     |                                             | $          | —     |       | 12,000                                           |       | $          | 0.44       |                                             | 9,000      |   | $      | 1.38   |   |

 

On June 2,2009, the stockholders approved the Analysts International Corporation 2009Equity Incentive Plan (the “2009 Plan”) for employees, officers, directors andnon-employee consultants. Under the 2009 Plan, the Board of Directors (“Board”)or a committee appointed by the Board may award incentive stock options toemployees and may award nonqualified stock options, restricted stock and otherstock awards, restricted stock units, stock appreciation rights, performanceshare awards and other stock awards to directors and non-employee consultants.2,500,000 shares of the Company’s common stock are available for grants of awardsto participants directly or indirectly under the 2009 Plan. If any awardsgranted under the 2009 Plan expire or terminate prior to exercise or otherwiselapse, the shares subject to such portion of the award are available forsubsequent grants of awards.  The periodduring which an award may be exercised and whether the award will beexercisable immediately, in stages, or otherwise is set by the Board. Anincentive stock option may not be exercisable more than ten years from the dateof grant.

 

**10.  Loss Per Share**

 

Basic and dilutedloss per share is presented in accordance with SFAS No. 128, *Earnings per Share*(codified in FASB ASC Topic 260,*Earnings Per Share*). Basic loss per share excludes dilution and is computed by dividing lossavailable to common stockholders by the weighted-average number of commonshares outstanding for the period. Options to purchase approximately 2,754,000 and 2,466,000 shares ofcommon stock were outstanding at October 3, 2009 and September 27,2008, respectively.  All options wereconsidered anti-dilutive and excluded from the computation of common equivalentshares at October 3, 2009 and September 27, 2008, because we reporteda net loss.  The computation of basic anddiluted loss per share for the three- and nine-months ended October 3,2009 and September 27, 2008, is as follows:

 

11

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| ** **                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                 | ** ** | **October 3,**    | ** ** | **September 27,** | ** ** | **October 3,** | ** ** | **September 27,** | ** ** |
| **(In thousands except per share  amounts)**                               | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                       |       |                   |       |                   |       |   |   |   |   |
| Net loss                                                                   |       | $                      | (3,961     | )                      | $          | (538 | ) | $ | (12,747 | ) | $ | (2,569 | ) |
| Weighted-average number of common shares  outstanding                      |       | 24,925                 |       | 24,913                 |       | 24,925 |   | 24,913 |   |
| Dilutive effect of equity compensation awards                              |       | —                 |       | —                 |       | — |   | — |   |
| Weighted-average number of common andcommon equivalent shares  outstanding |       | 24,925                 |       | 24,913                 |       | 24,925 |   | 24,913 |   |
|                                                                       |       |                   |       |                   |       |   |   |   |   |
| Net loss per share:                                                        |       |                   |       |                   |       |   |   |   |   |
| Basic                                                                      |       | $                      | (0.16      | )                      | $          | (0.02 | ) | $ | (0.51 | ) | $ | (0.10 | ) |
| Diluted                                                                    |       | $                      | (0.16      | )                      | $          | (0.02 | ) | $ | (0.51 | ) | $ | (0.10 | ) |

 

**11.  Subsequent Events**

 

For the quarter ended October 3,2009, AIC evaluated subsequent events through the date of filing this Form 10-Qwith the SEC on November 11, 2009 and determined there to be no materialsubsequent events. 

 

12

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

 

****Three and nine-month periods ended October 3,2009 and September 27, 2008****

 

***1.******    ******Company Overview***

 

Analysts InternationalCorporation (“AIC,” “Company,” “we,” “us” or “our”) is an informationtechnology (“IT”) services company that is focused on providing configuredsolutions for our clients. We serve a broad portfolio of clients throughout theUnited States with technology staffing, collaboration solutions, infrastructuresolutions, project and application solutions and managed services offerings. Wewere incorporated under Minnesota law in 1966 and our corporate headquarters islocated in Minneapolis, Minnesota. For a more complete description of our Company,please refer to our Annual Report on Form 10-K for the fiscal year ended January 3,2009.

 

***2.******    ******Consequences and Challenges of the EconomicEnvironment on Our Business and Our Strategic Plan***

 

The sharp contraction inthe U.S. economy that began in the second half of fiscal 2008 and continuestoday has had a significant and continuing impact on our business. The effectsof this economic deterioration have presented significantly greater challengesthan we previously anticipated, resulting in accelerating downward pressures onour revenues, margins, results of operations and cash flows. We expect thechallenges we are facing to continue throughout the remainder of fiscal 2009and into 2010.  We expect operatinglosses to continue throughout fiscal 2009 and that the total operating lossincurred for the fiscal year will be significant. We believe that we are makingprogress on executing our strategic plan that should help us to weather theeconomic downturn and emerge as a stronger, more institutionally maturebusiness that can serve as a platform for future growth.  However, the economic downturn has made itmore difficult to fulfill some of the stated objectives of our strategic plan,which difficulties we expect to continue. Further, if the economic downturnworsens or extends significantly into the future or we are unsuccessful inexecuting on our strategic plan, we would expect to incur additional lossesfrom operations and reductions in our cash flows and liquidity.

 

***3.******    ******Our Strategic Plan***

 

In January 2008, we announced a long-term strategic plan (the “Plan”)intended to restore AIC to profitability and increase shareholder value. ThePlan was built around four strategic goals:

 

1.Returning the Company to sustainedprofitability;

2.Focusing on business development andexpanding our service offerings in key metro markets;

3.Attracting and retaining top talent; and

4.Aligning with our technology partners.

 

Inour 2008 Annual Report, we communicated our annual objectives in support of ourbusiness strategy, placing the highest priority on protecting our businessthrough these economic challenges. Our objectives for fiscal 2009 and ourprogress towards these objectives are as follows:

 

·  **Manage Cash Flow and Maintain a Strong Balance Sheet**

 

Webelieve managing our cash flow activity and maintaining a strong balance sheetis necessary to mitigate the financial risks during the current economicrecession.

 

·      Duringthe first nine months of fiscal 2009, cash provided by operations and investingactivities was approximately $5.1 million. See “Liquidity and Capital Resources”in this Form 10-Q for further discussion regarding our changes in workingcapital.

·      On September 30, 2009,we consummated aCredit and Security Agreement with Wells Fargo Bank, National Association (“WellsFargo”) for an asset-based revolving line of credit (“Credit Facility”) whichprovides us with up to $15.0 million of credit which can be used for workingcapital purposes and to facilitate the issuance of letters of credit. The termof the Credit Facility is three years.

·      As of October 3, 2009, our cash balance,including restricted cash, was $7.7 million.

·      As of October 3, 2009, our current ratio hasimproved to 2.12.

·      As ofOctober 3, 2009, we had no borrowing outstanding under our CreditFacility.

 

13

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·  **Exit Non-Strategic or Non-Core Business**

 

Webelieve exiting additional lines of business that are non-strategic or non-coreto our future will allow us to focus on growing our business, provide the cashto fund our growth and aid in simplifying our business model.

 

·      On August 4, 2009, we sold our value-addedreseller (“VAR”) assets. The sale provided us with $3.0 million in cash at closing andmay provide up to an additional $0.75 million in contingent cash consideration.  In addition, we retained the working capitalrelated to the VAR business which is expected to provide additional net cash tous upon settlement of approximately $1.7 million.

·      On September 25, 2009,we sold the assets of our Medical Concepts Staffing (“MCS”) business. The saleprovided us with $0.5 million in cash at closing.

 

·  **Strengthen our IT Staffing Business**

 

Strengtheningour IT staffing business is essential to the financial stability of theCompany; however, we have experienced a further decline in the number ofconsultants and associated billable hours during fiscal 2009.

 

·      On May 5,2009, we appointed Eric Educate as Senior Vice President of Sales to enhanceour sales performance, provide sales leadership and strengthen our brand andour business.

·      On September 3,2009, we appointed James Anderson as Senior Vice President of Client ServicesOperations to oversee the operations of our practices, recruiting andtechnology partner programs and enhance our client delivery and improve ourclient relationships.

·      Newsystems and tools were implemented in the third quarter of fiscal 2009 andadditional systems and tools will be implemented in the fourth quarter offiscal 2009 to enhance our sales efforts and delivery processes.

 

·  **Expand our Public Sector Practice**

 

TheUnited States government has enacted substantial economic stimulus programs,including programs in practice areas where we provide services. We haveexperience in Justice & Public Safety engagements as well as existinggovernmental relationships, and are actively pursuing several opportunities inthe public sector.

 

·      Wecontinue to actively pursue numerous opportunities due to the impact of theeconomic stimulus packages.

·      Duringfiscal 2009, we entered into a Lawson Software Systems Integrator partnershipagreement.

 

·  **Improve Gross Margins**

 

Wecontinue to focus on improving our gross margins. The improvements achieved inour gross margin percentage have been attenuated, however, by the lower volumeof business.

 

·      Our gross margin increased to 19.1% in the thirdquarter of fiscal 2009 and 19.7% during the first nine months of fiscal 2009.Our gross margins for the third quarter and first nine months of fiscal 2008were 18.8% and 17.3%, respectively. The primary driver of the increase was theelimination or exit from low margin lines of business and customer relationships.

 

·  **Retain Clients and Develop Business**

 

Retaininggross margins from existing clients as well as attracting new clients anddeveloping business in key markets is vital to delivering long-term operatingprofits.

 

·      We haveincreased our sales team by twelve people during the third quarter of fiscal2009 and plan to continue to add sales headcount in the fourth quarter offiscal 2009 as well.

 

·  **Continue To Reduce Selling, Administrative and Other Operating Expenses(“SG&A”)**

 

Reducingour SG&A as a percentage of revenue through continued process improvements,cost reductions and controls and improved performance management will allow usto provide additional operating capital to support our business and fund futuregrowth.

 

·      Wereduced our SG&A expenses in the third quarter and first nine months offiscal 2009 by $2.9 million and $8.2 million when compared against the thirdquarter and first nine months of fiscal 2008, respectively; however, we expectthe rate and amount of future SG&A reductions to

 

14

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decline. As a percentage of revenue, our SG&Aexpense increased to 28.8% and 25.9% during the third quarter and first ninemonths of fiscal 2009 compared to 18.8% and 16.9% in the third quarter andfirst nine months of fiscal 2008, respectively, primarily due to asignificantly lower revenue base and investments made in sales and deliveryoperations.

·                  During the third quarter and first nine months of fiscal 2009, wereduced our SG&A staff by approximately 27% and 41%, respectively.

 

***4.******             ******Business Developments***

 

*Sale ofthe Company’s VAR assets*

 

In line with ourobjective of exiting non-strategic or non-core businesses, we entered into andclosed on an asset sale agreement on August 4, 2009 for the Company’s VARoperations.

 

In consideration for theassets sold, which were primarily customer contracts, and the liabilitiestransferred, we received $3.0 million in cash at closing and we have topotential to receive up to an additional $0.75 million in cash in August 2010depending on the number of customer contract assignments received prior to December 31,2009. We recorded a gain on the sale of the net assets of $0.2 million in thethird quarter of fiscal 2009.

 

We believe the sale ofthe VAR assets will significantly impact our future operations. For thepreceding 12 months before the sale date, the VAR operations generated revenuesof approximately $35.1 million and had an unfavorable contribution margin ofapproximately $0.8 million.

 

We believe the sale ofthe VAR assets will help us achieve several of the objectives in support of ourbusiness strategy as outlined above. Exiting the lower margin product reselleroperations, which is working capital intensive, should allow us to bettermanage our balance sheet and cash flows as well as improve our margins. Thecash provided by the sale allows us to further invest in our core businessofferings. In addition, the sale allowed us to further reduce our general andadministrative costs to align our back office operations with the remainingbusiness operations.  We also expectlower capital expenditures and related depreciation expense as a result of thesale of assets.

 

*CorporateRestructuring*

 

OnSeptember 1, 2009, we announced and implemented a plan to reduce ourgeneral and administrative staff by approximately 20% or over 30individuals.  The reduction plan carries out a realignment of ourworkforce and operations consistent with our strategic plans.

 

Morespecifically, the reduction in workforce results primarily from (a) ourdecision to shift more of our resources to making the strategic investmentsrequired to grow our business, including sales, recruiting and client services;(b) our sale, on August 4, 2009, of our VAR assets; and (c) ourongoing efforts to reduce SG&A expenses as a percentage of revenue. Werecorded restructuring charges in connection with the corporate staff reductionplan with respect to severance payments and benefits continuation of $0.8million in the third quarter of 2009, consistent with the guidance contained inSFAS No. 146 (codified in FASB ASC Topic 420, *Exit orDisposal Cost Obligations*). Such charges are anticipated to be paidby the end of fiscal 2010.  Substantially all of these charges will resultin cash expenditures.

 

*Sale ofthe Company’s MCS assets*

 

In addition, on September 25,2009, we entered into and closed on an asset sale agreement for our fullservice nurse staffing agency operations. In consideration for the assets soldand the liabilities transferred, we received $0.5 million in cash. We recordeda gain on the sale of the net assets of $0.2 million. For the preceding 12months before the sale date, MCS generated revenues of approximately $3.1million and had an unfavorable contribution margin of approximately $0.1million.

 

*Saleof the Company’s Managed Staffing Operations and Discontinuance of a LargeStaffing Account*

 

Early in the thirdquarter of fiscal 2008, we sold Symmetry Workforce Solutions (“Symmetry”), ourmanaged staffing operations, to COMSYS Information Technology Services, Inc.and discontinued our staffing relationship with

 

15

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one of our large staffingaccounts. Together, business through Symmetry and the large staffing accountrepresented approximately $15 million in quarterly revenue and$60 million in annualized revenue.

 

***5.******             *******Overviewof Results of Third Quarter Fiscal 2009 Operations****

 

Our revenuesdecreased $31.7 million, or 50.7%, in the third quarter of fiscal 2009 ascompared to the third quarter of fiscal 2008 primarily due to the negativeimpact the economic environment has had on the demand for our IT professionalservices (34.4%) and our planned exit from non-core and low-margin lines ofbusiness (16.3%).

 

Gross margins as apercentage of revenue increased due to the impact of implementing our strategyof exiting low margin lines of business and accounts and the reduction in lowermargin product sales.

 

SG&A expensesdeclined in the third quarter of fiscal 2009 due largely to the execution ofour Plan and the reduction in business volume. During the third quarter offiscal 2009, we recorded $0.9 million of restructuring charges comprised of severanceand severance related costs, future rent obligations (net of anticipatedsub-lease income).

 

We generated cashfrom operations of $0.2 million and cash from investing activities of $2.5million during the third quarter of fiscal 2009. As of October 3, 2009, wehad a cash and cash equivalents and restricted cash balance of$7.7 million and no borrowing under our Credit Facility.

 

16

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****RESULTS OFOPERATIONS, THREE MONTHS ENDED OCTOBER 3, 2009 VS. SEPTEMBER 27, 2008****

 

The following tableillustrates the relationship between revenue and expense categories along witha count of employees and consultants for the three months ended October 3,2009 and September 27, 2008.

 
| ** **                                             | ** ** | **Three Months Ended**   | ** ** | **Three Months Ended**      | ** ** | ** **              | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                                             | ** ** | ** **               | ** ** | **% of**                    | ** ** | ** **              | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                             | ** ** | **Amount**               | ** ** | **Revenue**                 | ** ** | **Amount**              | ** ** | **Revenue** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenue:                                               |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Professional services provided directly                |       | $                        | 29,335     |                        | 94.9       | %                       | $          | 50,116 |   | 80.0 | % | $ | (20,781 | ) | (41.5 | )% |
| Professional services provided through subsuppliers    |       | 460                      |       | 1.5                         |       | 2,891                   |       | 4.6 |   | (2,431 | ) | (84.1 | ) |
| Product sales                                          |       | 1,106                    |       | 3.6                         |       | 9,610                   |       | 15.4 |   | (8,504 | ) | (88.5 | ) |
| Total revenue                                          |       | 30,901                   |       | 100.0                       |       | 62,617                  |       | 100.0 |   | (31,716 | ) | (50.7 | ) |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Expenses:                                              |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Cost of services provided directly                     |       | 23,595                   |       | 76.4                        |       | 39,167                  |       | 62.5 |   | (15,572 | ) | (39.8 | ) |
| Cost of services provided through subsuppliers         |       | 441                      |       | 1.4                         |       | 2,796                   |       | 4.5 |   | (2,355 | ) | (84.2 | ) |
| Cost of product sales                                  |       | 965                      |       | 3.1                         |       | 8,899                   |       | 14.2 |   | (7,934 | ) | (89.2 | ) |
| Selling, administrative and other operating costs      |       | 8,886                    |       | 28.8                        |       | 11,780                  |       | 18.8 |   | (2,894 | ) | (24.6 | ) |
| Restructuring costs and other severance related  costs |       | 917                      |       | 3.0                         |       | 291                     |       | 0.5 |   | 626 |   | 215.1 |   |
| Amortization of intangible assets                      |       | 44                       |       | 0.1                         |       | 235                     |       | 0.4 |   | (191 | ) | (81.3 | ) |
| Total expenses                                         |       | 34,848                   |       | 112.8                       |       | 63,168                  |       | 100.9 |   | (28,320 | ) | (44.8 | ) |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Operating loss                                         |       | (3,947                   | )          | (12.8                       | )          | (551                    | )          | (0.9 | ) | 3,396 |   | 616.3 |   |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Non-operating income                                   |       | 8                        |       | 0.0                         |       | 27                      |       | 0.0 |   | (19 | ) | (70.4 | ) |
| Interest expense                                       |       | (9                       | )          | 0.0                         |       | (8                      | )          | 0.0 |   | 1 |   | 12.5 |   |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Loss before income taxes                               |       | (3,948                   | )          | (12.8                       | )          | (532                    | )          | (0.9 | ) | 3,416 |   | 642.1 |   |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Income tax expense                                     |       | 13                       |       | 0.0                         |       | 6                       |       | 0.0 |   | 7 |   | 116.7 |   |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Net loss                                               |       | $                        | (3,961     | )                           | (12.8      | )%                      | $          | (538 | ) | (0.9 | )% | $ | 3,423 |   | 636.2 | % |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Personnel:                                             |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Management and Administrative                          |       | 153                      |       |                        |       | 274                     |       |   |   | (121 | ) | (44.2 | )% |
| Consultants                                            |       | 877                      |       |                        |       | 1,472                   |       |   |   | (595 | ) | (40.4 | )% |

 

**Revenue**

 

Revenue from servicesprovided directly for the three months ended October 3, 2009 declined41.5% to $29.3 million from $50.1 million in the prior comparable period. Thedecline in revenue was primarily due to a reduction in the number of billablehours and consultants as a result of lower business volumes, the sale of ourVAR operations and a 3.0% decrease in overall billing rates as compared to theprior year period. Our subsupplier revenue for the three months ended October 3,2009, which is mainly pass-through revenue with associated fees, declined by84.1% from the prior year period primarily due to the sale of Symmetry early inthe third quarter of fiscal 2008. Product sales in the third quarter of fiscal 2009 declined by 88.5% fromthe prior year period primarily due to our sale of the VAR operations.

 

17

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**Cost of Services Provided Directly**

 

Cost of servicesprovided directly represents our payroll and benefit costs associated with ourbillable consultants. This category of expense as a percentage of directservices revenue increased to 80.4% in the third quarter of fiscal 2009compared to 78.2% in the prior comparable period due to increased benefit costsand the impact of bill rate reductions without offsetting cost reductions.

 

**Cost of Services Provided Through Subsuppliers**

 

**Cost of services provided through subsuppliersrepresents our cost when we utilize third parties to fulfill our obligations toour large staffing clients.  Thiscategory of expense as a percentage of revenue for services provided throughsubsuppliers was 95.9% for the third quarter of fiscal 2009 compared to 96.7%for the comparable period in fiscal 2008. The decrease in expense as apercentage of subsupplier revenue was primarily due to**exiting lower margin subsupplierbusiness.

 

**Cost of Product Sales**

 

Costof product sales represents our cost when we resell hardware and softwareproducts.  This category of expense, as apercentage of product sales, was 87.3% in the third quarter of fiscal 2009compared to 92.6% in the third quarter of fiscal 2008. The decrease in expenseas a percentage of revenue was primarily due to the mix of product salesbetween the comparable periods.

 

**Selling, Administrative and Other Operating Costs**

 

SG&Acosts include management and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs, and other administrativecosts.  This category of costs decreasedapproximately $3.0 million in the third quarter of fiscal 2009 from thecomparable period in 2008 and represented 28.8% of total revenue for the thirdquarter of fiscal 2009 compared to 18.8% for the third quarter in fiscal 2008.SG&A expenses decreased primarily due to the impact of personnel reductionsand implementation of non-personnel cost reductions and a reduction of salesand recruiting incentive compensation expense due to the decrease in businessvolume. As a percentage of revenue, SG&A costs increased due to asignificantly lower revenue base in the third quarter of fiscal 2009.

 

*Restructuring Costs and Other Severance RelatedCosts*

 

Inthe third quarter of fiscal 2009, we recorded workforce reduction and officeclosure charges totaling $0.9 million. Of these charges, $0.8 million relatedto severance and severance-related charges and $0.1 million related to futurerent obligations (net of anticipated sub-lease income).

 

Inthe third quarter of fiscal 2008, we recorded workforce reduction and officeclosure/consolidation charges totaling $0.3 million. Of these charges, $0.4million of expense related to severance and severance-related charges and anexpense reduction of $0.1 million related to adjustments and office closures.

 

*Amortizationof Intangible Assets*

 

Amortization ofintangible assets relates to our customer lists. This category of expensedecreased during the third quarter of fiscal 2009 compared to the third quarterof fiscal 2008 as a result of the impairment recorded in the second quarter offiscal 2009 and the sale of assets of the VAR business on August 4, 2009whereby we disposed of the remaining balance of our customer lists.

 

*Non-operatingIncome*

 

Non-operating incomedecreased slightly in the third quarter of fiscal 2009 compared to the thirdquarter of fiscal 2008 as a result of less interest income earned from our cashbalances due to lower interest rates and higher interest income related to acustomer equipment lease in the prior year.

 

18

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**Interest Expense**

 

We had noborrowings outstanding in the third quarter of fiscal 2009 compared to averageborrowing outstanding under our credit facility of approximately $0.6 millionfor the third quarter of fiscal 2008 at an average interest rate of 5.00%.

 

**Income Taxes**

 

For both thirdquarters of fiscal 2009 and fiscal 2008, we recorded a provision for incometaxes for amounts due for certain state income taxes and changes in ourreserves for tax obligations. We recorded no additional income tax benefit orexpense associated with our net operating losses because any tax benefit orexpense that would otherwise have been recorded has been negated by adjustingthe valuation allowance against our deferred tax asset.  If, however, we successfully return toprofitability to a point where future realization of deferred tax assets, whichare currently reserved, becomes “more likely than not,” we may be required toreverse the existing valuation allowance to realize the benefit of theseassets.

 

**Personnel**

 

Our consultingstaff levels finished the third quarter of fiscal 2009 at 877, a 40.4% declineagainst the comparable prior period. The decline in consulting staff levels wasdue to the sale of assets of our VAR operations during the third quarter offiscal 2009 and an overall decline in business volume. The decline inmanagement and administrative personnel was due to our focus on reducing thenumber of management and administrative personnel that are necessary to supportthe business operations. The reported consulting staff levels exclude MedicalConcepts Staffing, our medical staffing business, due to the separate industryfocus of that business.

 

**CertainInformation Concerning Off-Balance Sheet Arrangements**

 

For the threemonths ended October 3, 2009, we did not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities that would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. We are, therefore, notexposed to any financing, liquidity, market or credit risk that could arise ifwe had engaged in these relationships.

 

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****RESULTS OFOPERATIONS, NINE MONTHS ENDED OCTOBER 3, 2009 VS. SEPTEMBER 27, 2008****

 

The following tableillustrates the relationship between revenue and expense categories along witha count of employees and consultants for the nine months ended October 3,2009 and September 27, 2008.

 
| ** **                                             | ** ** | **Nine Months Ended**    | ** ** | **Nine Months Ended**       | ** ** | ** **              | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** | **Increase (Decrease)** | ** ** |
| **(Dollars in thousands)**                             | ** ** | **Amount**               | ** ** | **% of  Revenue**           | ** ** | **Amount**              | ** ** | **% of  Revenue** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenue:                                               | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Professional services provided directly                |       | $                        | 105,211    |                        | 90.3       | %                       | $          | 169,018 |   | 74.3 | % | $ | (63,807 | ) | (37.8 | )% |
| Professional services provided through subsuppliers    |       | 2,011                    |       | 1.7                         |       | 31,217                  |       | 13.7 |   | (29,206 | ) | (93.6 | ) |
| Product sales                                          |       | 9,339                    |       | 8.0                         |       | 27,175                  |       | 12.0 |   | (17,836 | ) | (65.6 | ) |
| Total revenue                                          |       | 116,561                  |       | 100.0                       |       | 227,410                 |       | 100.0 |   | (110,849 | ) | (48.7 | ) |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Expenses:                                              |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Cost of services provided directly                     |       | 83,704                   |       | 71.8                        |       | 133,275                 |       | 58.6 |   | (49,571 | ) | (37.2 | ) |
| Cost of services provided through subsuppliers         |       | 1,915                    |       | 1.6                         |       | 30,100                  |       | 13.2 |   | (28,185 | ) | (93.6 | ) |
| Cost of product sales                                  |       | 7,973                    |       | 6.8                         |       | 24,682                  |       | 10.9 |   | (16,709 | ) | (67.7 | ) |
| Selling, administrative and other operating costs      |       | 30,233                   |       | 25.9                        |       | 38,409                  |       | 16.9 |   | (8,176 | ) | (21.3 | ) |
| Restructuring costs and other severance related  costs |       | 2,708                    |       | 2.3                         |       | 2,659                   |       | 1.2 |   | 49 |   | 1.8 |   |
| Impairment of intangible assets                        |       | 2,268                    |       | 1.9                         |       | —                  |       | — |   | 2,268 |   | 100.0 |   |
| Amortization of intangible assets                      |       | 491                      |       | 0.4                         |       | 793                     |       | 0.3 |   | (302 | ) | (38.1 | ) |
| Total expenses                                         |       | 129,292                  |       | 110.9                       |       | 229,918                 |       | 101.1 |   | (100,626 | ) | (43.8 | ) |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Operating loss                                         |       | (12,731                  | )          | (10.9                       | )          | (2,508                  | )          | (1.1 | ) | 10,223 |   | 407.6 |   |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Non-operating income                                   |       | 35                       |       | —                      |       | 97                      |       | — |   | (62 | ) | (63.9 | ) |
| Interest expense                                       |       | (20                      | )          | —                      |       | (143                    | )          | — |   | (123 | ) | (86.0 | ) |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Loss before income taxes                               |       | (12,716                  | )          | (10.9                       | )          | (2,554                  | )          | (1.1 | ) | 10,162 |   | 397.9 |   |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Income tax expense                                     |       | 31                       |       | —                      |       | 15                      |       | — |   | 16 |   | 106.7 |   |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Net loss                                               |       | $                        | (12,747    | )                           | (10.9      | )%                      | $          | (2,569 | ) | (1.1 | )% | $ | 10,178 |   | 396.2 | % |
|                                                   |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Personnel:                                             |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Management and Administrative                          |       | 153                      |       |                        |       | 274                     |       |   |   | (121 | ) | (44.2 | )% |
| Consultants                                            |       | 877                      |       |                        |       | 1,472                   |       |   |   | (595 | ) | (40.4 | )% |

 

**Revenue**

 

Total revenue fromservices provided directly declined 37.8% to $105.2 million for the nine monthsended October 3, 2009 from $169.0 million for the nine months ended September 27,2008.  The decline in revenue wasprimarily due to a reduction in the number of billable hours and consultants asa result of lower business volumes, our decision to discontinue ourrelationship with one of our large staffing accounts and the sale of the assetsof the VAR operations on August 4, 2009, partially offset by an 4.9%increase in overall billing rates over the prior year period. Our subsupplierrevenue, which is mainly pass-through revenue with associated fees, declined by93.6% in 2009 compared to 2008 due to the sale of Symmetry early in the thirdquarter of fiscal 2008. Product sales declined 65.6 % to $9.3 million for thenine months ended October 3, 2009 from $27.2 million for the nine monthsended October 3, 2008 due to an overall reduction in business volume andthe sale of our VAR operations.

 

20

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**Cost of Services Provided Directly**

 

Cost of servicesprovided directly represents our payroll and benefit costs associated with ourbillable consultants. This category of expense as a percentage of directservices revenue increased slightly to 79.6% for the nine months ended October 3,2009 from 78.9% for the nine months ended September 27, 2008 due toincreased benefit costs and the impact of bill rate reductions withoutoffsetting cost reductions.

 

**Cost of Services Provided Through Subsuppliers**

 

**Cost of services provided through subsuppliersrepresents our cost when we utilize third parties to fulfill our obligations toour large staffing clients.  Thiscategory of expense as a percentage of revenue for services provided throughsubsuppliers was 95.2% for the nine months ended October 3, 2009 comparedto 96.4% for the nine months ended September 27, 2008. The decrease inexpense as a percentage of subsupplier revenue was primarily due to**exiting lower margin subsupplier businessduring fiscal 2009.

 

**Cost of Product Sales**

 

Costof product sales represents our cost when we resell hardware and softwareproducts.  This category of expense, as apercentage of product sales, was 85.4% for the nine months ended October 3,2009 compared to 90.8% for the nine months ended September 27, 2008. Thedecrease in expense as a percentage of revenue was primarily due to the mix ofproduct sales between the comparable periods.

 

**Selling, Administrative and Other Operating Costs**

 

SG&Acosts include management and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs, and other administrative costs.  Thiscategory of costs decreased 21.3% from $38.4 million for the nine months ended September 27,2008 to $30.2 million for the nine months ended October 3, 2009. Theseamounts represented 16.9% and 25.9% of total revenue for 2008 and 2009,respectively. SG&A expenses decreased primarily due to the impact ofpersonnel reductions and implementation of non-personnel cost reductions and areduction of sales and recruiting incentive compensation expense due to thedecrease in business volume. As a percentage of revenue, SG&A costsincreased due to a significantly lower revenue base for the nine months ended October 3,2009.

 

*Restructuring Costs and Other Severance RelatedCosts*

 

Forthe nine month period ended October 3, 2009, we recorded workforce reductioncharges and office closure/consolidation charges totaling $2.7 million. Ofthese charges, $0.9 million related to severance and severance-related chargesand $1.8 million related to future rent obligations (net of anticipatedsub-lease income).

 

Forthe nine months ended September 27, 2008, we recorded workforce reductionand office closure and consolidation charges totaling $2.7 million. Of thesecharges, $2.5 million related to severance and severance-related charges and$0.2 million related to future rent obligations (net of anticipated sub-leaseincome).

* *

*Impairmentof Intangible Assets*

 

During the nine monthsended October 3, 2009, we reviewed our customer lists in accordance with FASB SFAS 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*(codifiedin FASB ASC Topic 360, *Property, Plant, andEquipment*)*,* based on theexpectation that the business with which the customer lists are associatedwould be sold significantly before the end of their previously estimated usefullife. Based on this measurement, we recorded a $2.3 million impairment loss,which is the amount by which the carrying value of the customer lists exceededthe fair value. In determining fair value, we considered the expectedconsideration to be received from the sale of the VAR assets.

 

*Amortizationof Intangible Assets*

 

Amortization ofintangible assets primarily relates to our customer lists. This category ofexpense decreased during fiscal 2009 compared to fiscal 2008 due to theSequoiaNet.com trade name and a certain customer list becoming fully amortizedduring fiscal 2008, the impairment of intangible assets recorded in the secondquarter of fiscal 2009 and

 

21

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the sale of theassets of the VAR operations on August 4, 2009 whereby we disposed of theremaining balance of our customer lists.

 

*Non-operatingIncome*

 

Non-operatingincome decreased slightly for the nine months ended October 3, 2009compared to the nine months ended September 27, 2009 as a result of lessinterest income earned from our cash balances due to lower interest rates andhigher interest income earned related to a customer equipment lease in theprior year.

 

**Interest Expense**

 

Interest expensedecreased to $20,000 for the nine months ended October 3, 2009 from$143,000 for the nine months ended September 27, 2008 primarily due to adecrease in the average borrowing base from $3.2 million for 2008 to $18,000for 2009. A reduction in interest rates from 5.00% at the end of the thirdquarter of fiscal 2008 to 3.78% at the end of the third quarter of fiscal 2009also contributed to the decrease in interest expense.

 

**Income Taxes**

 

For the nine months endedOctober 3, 2009 and September 27, 2008, we recorded a provision forincome taxes for amounts due for certain state income taxes and changes in ourreserves for tax obligations. We recorded no additional income tax expense orbenefit 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, we successfully return toprofitability to a point where future realization of deferred tax assets, whichare currently reserved, becomes “more likely than not,” we may be required toreverse the existing valuation allowance to realize the benefit of theseassets.

 

**Personnel**

 

Our consultingstaff levels finished the third quarter of fiscal 2009 at 877, a 40.4% declineagainst the comparable prior period. The decline in consulting staff levels wasdue to the sale of our VAR business during the third quarter of fiscal 2009 andan overall decline in business volume. The decline in management andadministrative personnel was due to our focus on reducing the number ofmanagement and administrative personnel that are necessary to support thebusiness operations. The reported consulting staff levels exclude MedicalConcepts Staffing, our medical staffing business, due to the separate industryfocus of that business.

 

**CertainInformation Concerning Off-Balance Sheet Arrangements**

 

For the ninemonths ended October 3, 2009, we did not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities that would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. We are, therefore, notexposed to any financing, liquidity, market or credit risk that could arise ifwe had engaged in these relationships.

 

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**Liquidityand Capital Resources**

 

Thefollowing table provides information relative to the liquidity of our business.

 
| ** **                      | ** ** | ** **          | ** ** | ** **          | ** ** | ** **     | ** ** | **Percentage** | ** ** |
|---------------------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|----------------|------------|
| ** **                      | ** ** | **October 3,** | ** ** | **January 3,** | ** ** | **Increase**   | ** ** | **Increase**   | ** ** |
| **(In thousands)**              | ** ** | **2009**            | ** ** | **2009**            | ** ** | **(Decrease)** | ** ** | **(Decrease)** | ** ** |
|                            |       |                |       |                |       |           |       |           |       |
| Cash and cash equivalents       |       | $                   | 7,261      |                | $          | 2,288          |       | $              | 4,973      |   | 217.4 | % |
| Restricted cash                 |       | 396                 |       | —              |       | 396            |       | 100            | %          |
| Accounts receivable             |       | 25,462              |       | 40,814              |       | (15,352        | )          | (37.6          | )          |
| Other current assets            |       | 734                 |       | 1,521               |       | (787           | )          | (51.7          | )          |
| Total current assets            |       | $                   | 33,853     |                | $          | 44,623         |       | $              | (10,770    | ) | (24.1 | )% |
|                            |       |                |       |                |       |           |       |           |       |
| Accounts payable                |       | $                   | 7,947      |                | $          | 15,581         |       | $              | (7,634     | ) | (49.0 | )% |
| Line of credit                  |       | —              |       | —              |       | —         |       | —         |       |
| Salaries and benefits           |       | 4,764               |       | 3,249               |       | 1,515          |       | 46.6           |       |
| Deferred revenue                |       | 418                 |       | 1,473               |       | (1,055         | )          | (71.6          | )          |
| Deferred compensation           |       | 347                 |       | 275                 |       | 72             |       | 26.2           |       |
| Restructuring accrual           |       | 1,529               |       | 184                 |       | 1,345          |       | 731.0          |       |
| Other current liabilities       |       | 970                 |       | 1,025               |       | (55            | )          | (5.4           | )          |
| Total current liabilities       |       | $                   | 15,975     |                | $          | 21,787         |       | $              | (5,812     | ) | (26.7 | )% |
|                            |       |                |       |                |       |           |       |           |       |
| Working capital                 |       | $                   | 17,878     |                | $          | 22,836         |       | $              | (4,958     | ) | (21.7 | )% |
| Current ratio                   |       | 2.12                |       | 2.05                |       | 0.07           |       | 3.4            | %          |
|                            |       |                |       |                |       |           |       |           |       |
| Total shareholders’ equity |       | $                   | 17,946     |                | $          | 30,395         |       | $              | (12,449    | ) | (41.0 | )% |

 

**Change in Working Capital**

 

Workingcapital was $17.9 million at October 3, 2009, down $5.0 million from January 3,2009. The ratio of current assets to current liabilities increased to 2.12 at October 3,2009 compared to 2.05 at January 3, 2009.

 

Ourtotal current assets decreased approximately $10.8 million at October 3,2009 compared to the beginning of the year as a result of lower accountsreceivable offset slightly by an increase in our cash and cash equivalents. Theprimary reason for the 37.6% decrease in our accounts receivable from thebeginning of the year is the 45.6% decline in revenues from the fourth quarterof fiscal 2008 to the third quarter of fiscal 2009 and the impact of the VARand MCS asset sales.

 

Ourtotal current liabilities decreased approximately $5.8 million at October 3,2009 compared to the beginning of the year primarily due to fewer productpurchases and less business volume.

 

We believeour working capital and availability under our Credit Facility, as describedbelow, will be sufficient to support the cash flow needs of our business infiscal 2009 and 2010. Continuing operating losses, a significant increase inbad debt experience, a significant lengthening of payment terms, or significantcosts associated with restructuring activities could create a need foradditional working capital. An inability to obtain additional working capital,should it be required, could have a material adverse effect on our business. Weexpect to be able to comply with the requirements of our new credit agreement;however, failure to do so could affect our ability to obtain necessary workingcapital and could have a material adverse effect on our business.

 

*Sources and Uses of Cash/Credit Facility*

 

Cashand cash equivalents increased by $5.4 million from January 3, 2009to October 3, 2009. Our primary need for working capital is to supportaccounts receivable and to fund the time lag between payroll and vendordisbursements and receipt of fees billed to clients. Historically, we have beenable to support internal growth in our business with internally generated fundsand the use of our Credit Facility.

 

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On September 30, 2009, AIC entered into a revolving line of credit(the “Credit Facility”) with Wells Fargo Bank, National Association (“WellsFargo”) pursuant to which Wells Fargo will advance up to $15.0 million to AICfor working capital purposes and to facilitate the issuance of letters ofcredit.  The Credit Facility replaces the Company’s existing $15.0 millioncredit facility with General Electric Capital Corporation (“GE Capital”). The total amount available for borrowing under the Credit Facility willfluctuate based on the Company’s level of eligible accounts receivable.

 

The Credit Facility carries an interest rate equal to the three-monthLIBOR rate plus 3.5%.  The Credit Facility has a one-time origination feeof $150,000 and an unused line fee of 0.50% annually on the daily averageunused amount.  The maturity date of the Credit Facility is September 30,2012 and may be terminated or reduced by the Company on 90 days notice inexchange for a termination fee of 2% of the maximum line amount or reduction ofthe maximum line amount in the first year or 1% of such amounts in the secondyear (and no fee in the third year).  Borrowings under the Credit Facilityare secured by all of the Company’s assets.

 

The Credit Facility requires the Company to meet certain levels ofyear-to-date earnings/loss before taxes.  The Credit Facility limits theCompany’s annual capital expenditures to $2.0 million and requires theCompany to maintain an excess borrowing base of at least $5.0 million andcontains customary affirmative covenants, including covenants regarding annual,quarterly and projected financial reporting requirements, collateral andinsurance maintenance, and compliance with applicable laws and regulations.Further, the facility contains customary negative covenants limiting theability of the Company to grant liens, incur indebtedness, make investments,repurchase Company stock, create new subsidiaries, sell assets or engage in anychange of control transaction without the consent of Wells Fargo.

 

Upon an event of default, Wells Fargo may terminate the facility ordeclare the entire amount outstanding under the facility to be immediately dueand payable and exercise other rights under the agreement.  The events ofdefault under the facility include, among other things, payment defaults,breaches of covenants, a change in control of the Company and bankruptcyevents.

 

As of October 3,2009, we were in compliance with all the requirements and had no borrowingunder the Credit Facility. Total availability of the Credit Facility, whichfluctuates based on our level of eligible accounts receivable, was $9.4 millionas of October 3, 2009.

 

On September 30,upon consummating the Credit Facility with Wells Fargo, we extinguished ourasset-based revolving credit facility with GE Capital. Extinguishment expensesof $40,000, relating to the remaining deferred financing costs andtransaction-related expenses were expensed in the third quarter of fiscal 2009and are included within SG&A in the Consolidated Statements of Operations.

 

Inextinguishing our asset-based revolving credit facility, we were required tocash collateralize $0.4 million for a standby letter of credit issued by GECapital until terminated in accordance with the provisions of the asset-basedrevolving credit facility. The cash collateralization of $0.4 million isreported as Restricted Cash in our Consolidated Balance Sheets. The GE Capitalletter of credit has been terminated in accordance with the provisions of theasset-based revolving credit facility and we received our cashcollateralization during the fourth quarter of fiscal 2009.

 

On August 4, 2009,we entered into and closed on an asset sale agreement for our VARoperations.  In consideration for theassets sold, which were primarily customer contracts, and the liabilitiestransferred, we received $3.0 million in cash at closing and have the potentialto receive up to an additional $0.75 million in cash in August 2010depending on the number of customer contract assignments received prior to December 31,2009.

 

On September 25,2009, we entered into and closed on an asset sale agreement for our fullservice nurse staffing agency operations. In consideration for the assets soldand the liabilities transferred, we received $0.5 million in cash.

 

We madecapital expenditures of $0.3 million and $1.1 million during the third quarterand first nine months of fiscal 2009, respectively.

 

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**NewAccounting Pronouncements**

 

In April 2009, theFinancial Accounting Standards Board (“FASB”) issued Financial Staff Position (“FSP”)FAS 141(R)-1, *Accounting for Assets Acquired andLiabilities Assumed in a Business Combination That Arise from Contingencies*(codified in FASB ASC Topic 805,*Business Combinations*)which amends and clarifies FASB Statement No. 141(R), *BusinessCombinations*, on initial recognition and measurement, subsequentmeasurement and accounting, and disclosure of assets and liabilities arisingfrom contingencies in a business combination. FSP FAS 141R-1 is effective forbusiness combinations occurring in fiscal years beginning on or after December 15,2008. The impact on our consolidated financial statements of adopting FSPFAS 141R-1 will depend on the nature, terms and size of business combinationscompleted after the effective date.

 

In April 2009, theFASB issued FSP FAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments* (both codified in FASB ASC Topic825, *Financial Instruments*) to require anentity to provide disclosures about the fair value of financial instruments ininterim financial information. FSP FAS 107-1 and APB 28-1 would apply to allfinancial instruments within the scope of FASB Statement No. 107, *Disclosures about Fair Value of Financial Instruments*, andwill require entities to disclose the method(s) and significantassumptions used to estimate the fair value of financial instruments, in bothinterim financial statements as well as annual financial statements. FSP FAS107-1 and APB 28-1 will be effective for interim and annual periods endingafter June 15, 2009, with early adoption permitted for periods endingafter March 15, 2009. The adoption of FSP FAS 107-1 and APB 28-1 did nothave a material impact on our financial statement disclosures.

 

In May 2009, theFASB issued FASB Statement No. 165, *SubsequentEvents*(codified in FASB ASC Topic 855, *SubsequentEvents*). FASB Statement No. 165 establishes general standardsfor accounting for and disclosure of events that occur after the balance sheetdate but before financial statements are available to be issued (“subsequentevents”). FASB Statement No. 165 sets forth the period after the balancesheet date during which management of a reporting entity should evaluate eventsor transactions that may occur for potential recognition in the financialstatements, identifies the circumstances under which an entity should recognizeevents or transactions occurring after the balance sheet date in its financialstatements and the disclosures that should be made about events or transactionsthat occur after the balance sheet date. FASB Statement No. 165 provideslargely the same guidance on subsequent events which previously existed only inauditing literature.  FASB Statement No. 165is effective for interim and annual periods ending after June 15, 2009.The adoption of FASB Statement No. 165 did not have a material impact onour financial statement disclosures.

 

In June 2009, theFASB issued FASB Statement No. 168, *TheFASB Accounting Standards Codification and Hierarchy of Generally AcceptedAccounting Principles, a replacement of FASB Statement No. 162 (*codifiedin FASB ASC Topic 105, *Generally AcceptedAccounting Principles*). FASB Statement No. 168 establishes theFASB Standards Accounting Codification (“Codification”) as the source ofauthoritative U.S. GAAP recognized by the FASB to be applied tonongovernmental entities and rules and interpretive releases of the SEC asauthoritative GAAP for SEC registrants. The Codification will supersede all theexisting non-SEC accounting and reporting standards upon its effective date andsubsequently, the FASB will not issue new standards in the form of Statements,FASB Staff Positions or Emerging Issues Task Force Abstracts. FASB Statement No. 168also replaces FASB Statement No. 162, *“TheHierarchy of Generally Accepted Accounting Principles”*given thatonce in effect, the Codification will carry the same level of authority. FASBStatement No. 168 will be effective for interim and annual periods endingafter September 15, 2009. The adoption of this FASB Statement No. 168did not have a material impact on our consolidated financial statementdisclosures.

 

**Forward-LookingStatements**

 

ThisForm 10-Q contains forward-looking statements (within the meaning of thePrivate Securities Litigation Reform Act of 1995) about: (i) ourexpectations and beliefs with respect to the recession, the volatility of thecapital markets, the tightening of lending standards in the credit markets, andthe general downturn in the global economy, as well as our assumptions withrespect to the impact these economic conditions will have on our business,including an expectation of a reduction in business volume and continuedoperating losses through fiscal 2009, (ii) our Plan and the objectives ofthe Plan, including certain expense reduction initiatives, additions to salesheadcount and the planned expansion into new geographic markets, (iii) theplanned expansion of our public sector practice, (iv) our beliefs andexpectations with respect to the impact of the VAR and MCS business sales, (v) ourexpectations with respect to growing our business, reducing expenses andachieving profitability, (vi) our beliefs regarding the adequacy of our

 

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working capitaland our ability to meet the requirements of our new credit facility, and (vii) ourexpectations with respect to our financial results and operating performance.You can identify these statements by the use of words such as “anticipate,” “estimate,”“expect,” “project,” “intend,” “plan,” “believe,” “will,” and other words andterms of similar meaning or import in connection with any discussion of futureoperating or financial performance. Among the factors that could cause actualresults to differ materially are: (i) our inability, in whole or in part,to implement or execute the Plan, (ii) our inability to successfullyrecruit and hire qualified technical and sales personnel, (iii) ourinability to successfully compete on a national basis with other companies inour industry by responding to our customers’ varied staffing needs, (iv) ourinability to maintain key client relationships, (v) incorrect assumptionsby management with respect to the impact of the VAR and MCS business sales, (vi) ourinability to reduce operating costs, (vii) our inability to comply withthe covenants in our new credit facilities, (viii) a prolonged or worseneddownturn in the national or global economy, and (ix) our inability toeffectively manage accounts receivable, as well as other economic, business,competitive and/or regulatory factors affecting our business generally,including those set forth in our most recent Annual Report on Form 10-Kand our Current Reports on Form 8-K. All forward-looking statementsincluded in this Form 10-Q are based on information available to us as ofthe date hereof. We undertake no obligation (and expressly disclaim any suchobligation) to update forward-looking statements made in this Form 10-Q toreflect events or circumstances after the date of this Form 10-Q or toupdate reasons why actual results would differ from those anticipated in anysuch forward-looking statements, other than as required by law.

 

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

 

Notapplicable.

 

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

 

(a)       Evaluation of Disclosure Controls andProcedures

 

Asof the end of the period covered by this report, we conducted an evaluationunder the supervision and with the participation of our management, includingthe President and Chief Executive Officer, Elmer N. Baldwin, and ChiefFinancial Officer and Treasurer, Randy W. Strobel, regarding the effectivenessof the design and operation of our disclosure controls and procedures pursuantto Rules 13a-15(e) of the Securities Exchange Act of 1934 (the “ExchangeAct”). Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures areeffective to ensure that information that is required to be disclosed by us inreports that are filed under the Exchange Act is recorded, processed,summarized and reported within the time period specified in the rules ofthe Securities Exchange Commission.

 

(b)       Changes in Internal Controls

 

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

 

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****PART II. OTHER INFORMATION****

 

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

 

Thereare no pending legal proceedings to which we are a party or to which any of ourproperty is subject, other than routine litigation incidental to the business.

 

**Item 1A.         RiskFactors.**

 

***If we are unable to satisfy the Nasdaq Global Market’s continuedlisting requirements, including a minimum price per share of $1.00, our commonstock may be delisted, which would likely impair the liquidity and the value ofour common stock.***

 

OnSeptember 15, 2009, we received a letter from the Nasdaq ListingQualification department indicating that, for the last 30 consecutive businessdays, the bid price of our common stock has closed below the minimum $1.00 pershare requirement for continued inclusion on the Nasdaq Global Market underMarketplace Rule 5450(a)(1) (the “Bid Price Rule”). In accordancewith the Bid Price Rule, we have 180 calendar days, or until March 15,2010, to regain compliance. At this time, this notification has no effect onthe listing of our common stock.

 

Toregain compliance, the closing bid price of our common stock must meet orexceed $1.00 per share for a period of 10 consecutive business days. In theevent the Company does not regain compliance with the Bid Price Rule by March 15,2010, Nasdaq will determine whether we meet all other listing criteria for theNasdaq Global Market. If we meet all other initial listing criteria, with theexception of the bid price requirement, we will be afforded an additional 180calendar day grace period. If we are not eligible for an additional graceperiod, Nasdaq will provide us with written notification that our securitiesare subject to delisting. At that time, we may appeal Nasdaq’s delistingdetermination to a Nasdaq Listings Qualifications Panel pursuant toapplicable Nasdaq rules.

 

Alternatively,we might be permitted under Nasdaq rules to transfer the listing of ourcommon stock to the Nasdaq Capital Market if our common stock satisfies allcriteria, other than compliance with the minimum bid price requirement, forinitial inclusion on such market. In the event of such a transfer, the NasdaqMarketplace Rules provide that we would be afforded an additional 180calendar days to comply with the minimum bid price requirement while listed on theNasdaq Capital Market.

 

If our common stock is delisted from the NasdaqGlobal Market and the Nasdaq Capital Market, trading in our common stock wouldlikely be conducted on the OTC Bulletin Board, a regulated quotation service.If our common stock is delisted from Nasdaq, the liquidity of our common stockmay be reduced, not only in terms of the number of shares that can be boughtand sold at a given price, but also through delays in the timing oftransactions and reduction in security analysts’ and the media’s coverage ofus. This may result in lower prices for our common stock than might otherwisebe obtained and could also result in a larger spread between the bid and askedprices for our common stock. Delisting could also result in a loss of confidenceby our suppliers, customers and employees.

 

***We may be unsuccessful in executing the Plan and restoring the companyto profitability and increasing shareholder value.***

 

We announced a long-term strategic plan (the “Plan”)in January 2008 to restore profitability and increase shareholder value.The Plan requires us to achieve several objectives such as:

 

·                  increasing revenue, improvingmargins and adding sales personnel in higher-margin service areas;

 

·                  expanding our value-addedservices in key metro markets;

 

·                  strengthening relationshipswith technology partners;

 

·                  reducing corporate expensesthrough consolidation of back-office and other corporate overhead functions;

 

·                  exiting non-strategic,non-core lines of business;

 

·                  investing in our IT systems inorder to simplify, streamline and automate our business process;

 

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·                  attracting and retaining toptalent;

 

·                  managing our cash flow andmaintaining a strong balance sheet;

 

·                  delivering operating profits;

 

·                  continue to improve our grossmargins; and

 

·                  building our public sectorpractice.

 

We have been unsuccessful in achieving our goal of increasing revenueover the first nine months of fiscal 2009. The improvements achieved in ourgross margins have been attenuated by the lower volumes of business. Inaddition, we believe our ability to provide higher margin services will belimited as long as our clients continue to be impacted by the economicdownturn. Finally, we may be unsuccessful in our ability to expand into keymetro markets and strengthen relationships with technology partners. If we areunable to increase our revenues or achieve one or more of the other objectiveslisted above, we may fail to restore profitability and increase shareholder value.

 

Ourbusiness continues to be subject to material risks. See Item 1A. *Risk Factors* in our Annual Report on Form 10-K for thefiscal year ended January 3, 2009 for a listing of additional riskfactors.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

****Item 6.            Exhibits****

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                           |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                      |
| ^2.1                 |       | Asset Purchase  Agreement, dated August 4, 2009, by and between Netarx LLC and Analysts  International Corporation (with Ex. K, Form of Promissory Note)  (Exhibit 2.1 to Current Report on Form 8-K, filed August 5,  2009, Commission File No. 0-4090, incorporated by reference).        |
| ^ 3.1                |       | Articles of  Incorporation, as amended (Exhibit 3-a to Annual Report on  Form 10-K for fiscal year 1988, Commission File No. 0-4090,  incorporated by reference).                                                                                                                                          |
| ^ 3.2           |       | Restated Bylaws  (Exhibit 3-b to Annual Report on Form 10-K for fiscal year 2000,  Commission File No. 0-4090, incorporated by reference).                                                                                                                                                                 |
| ^ 3.3                |       | Amendment to Articles  of Incorporation to increase authorized shares to 40 million (Exhibit A  to Definitive Proxy Statement dated September 5, 1996, Commission File  No. 0-4090, incorporated by reference).                                                                                            |
| ^ 3.4                |       | Amendment to Articles  of Incorporation to increase authorized shares to 60 million  (Exhibit 3-d to Annual Report on Form 10-K for fiscal year 1998,  Commission File No. 0-4090, incorporated by reference).                                                                                             |
| ^ 3.5                |       | Amendment to Articles  of Incorporation to increase authorized shares to 120 million (Exhibit A  to Definitive Proxy Statement dated September 8, 1998, Commission File  No. 0-4090, incorporated by reference).                                                                                           |
| ^ 4.1                |       | Amended and Restated  Rights Agreement dated as of February 27, 2008 between the Company and  Wells Fargo Bank N.A and Form of Right Certificate  (Exhibit 4.1 to the Registrant’s Form 8-A12B dated  February 27, 2008, Commission File No. 0-4090, incorporated by  reference). |

 

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| +4.2   |   | Specimen Common Stock  Certificate.                                                                                                                                                                                                                                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ^10.1  |   | Consent and Twelfth  Amendment to Credit Agreement, dated August 4, 2009 (Exhibit 10.1  to Current Report on Form 8-K, filed August 5, 2009, Commission  File No. 0-4090, incorporated by reference).                                                                                                |
| ^*10.2 |   | Credit and Security  Agreement with Wells Fargo Bank, National Association acting through its  Wells Fargo Business Credit operating division, dated September 30, 2009  (Exhibit 10.1 to Current Report on Form 8-K, filed August 5,  2009, Commission File No. 0-4090, incorporated by reference). |
| + 31.1 |   | Certification of CEO  Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                                                         |
| + 31.2 |   | Certification of CFO  Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                                                         |
| ++ 32  |   | Certification of CEO  and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                            |

 

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| ^  |   | Denotes an exhibit  previously filed with the Securities and Exchange Commission and incorporated  herein by reference.                                                                           |
|----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| +  |   | Filed herewith.                                                                                                                                                                                   |
| ++ |   | Furnished herewith.                                                                                                                                                                               |
| *  |   | Certain  portions of this exhibit have been omitted pursuant to a request for  confidential treatment. The entire exhibit has been separately filed with the  Securities and Exchange Commission. |

 

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****SIGNATURES****

 

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

 

 
|                          | ANALYSTS  INTERNATIONAL CORPORATION |
|-------------------------------|-------------------------------------|
|                          | (Registrant)                        |
|                          |                                |   |
|                          |                                |   |
| Date: November 11,  2009 | By:                                 | /s/ Elmer N. Baldwin |
|                          |                                | Elmer N. Baldwin |
|                          |                                | President and Chief  Executive Officer |
|                          |                                | (Principal Executive  Officer) |
|                          |                                |   |
|                          |                                |   |
| Date: November 11,  2009 | By:                                 | /s/ Randy W. Strobel |
|                          |                                | Randy W. Strobel |
|                          |                                | Chief Financial Officer |
|                          |                                | (Principal Financial  and Accounting Officer) |

 

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****EXHIBIT INDEX****

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                           |
| ^2.1                 |       | Asset Purchase  Agreement, dated August 4, 2009, by and between Netarx LLC and Analysts  International Corporation with Ex. K, Form of Promissory Note  (Exhibit 2.1 to Current Report on Form 8-K, filed August 5,  2009, Commission File No. 0-4090, incorporated by reference).               |
| ^ 3.1                |       | Articles of  Incorporation, as amended (Exhibit 3-a to Annual Report on  Form 10-K for fiscal year 1988, Commission File No. 0-4090,  incorporated by reference).                                                                                                                                               |
| ^ 3.2           |       | Restated Bylaws  (Exhibit 3-b to Annual Report on Form 10-K for fiscal year 2000,  Commission File No. 0-4090, incorporated by reference).                                                                                                                                                                      |
| ^ 3.3                |       | Amendment to Articles  of Incorporation to increase authorized shares to 40 million (Exhibit A  to Definitive Proxy Statement dated September 5, 1996, Commission File  No. 0-4090, incorporated by reference).                                                                                                 |
| ^ 3.4                |       | Amendment to Articles  of Incorporation to increase authorized shares to 60 million  (Exhibit 3-d to Annual Report on Form 10-K for fiscal year 1998,  Commission File No. 0-4090, incorporated by reference).                                                                                                  |
| ^ 3.5                |       | Amendment to Articles  of Incorporation to increase authorized shares to 120 million (Exhibit A  to Definitive Proxy Statement dated September 8, 1998, Commission File  No. 0-4090, incorporated by reference).                                                                                                |
| ^ 4.1                |       | Amended and Restated  Rights Agreement dated as of February 27, 2008 between the Company and  Wells Fargo Bank N.A. and Form of Right Certificate  (Exhibit 4.1 to the Registrant’s Form 8-A12B dated  February 27, 2008, Commission File No. 0-4090, incorporated by  reference).     |
| + 4.2                |       | Specimen Common Stock  Certificate.                                                                                                                                                                                                                                                                                            |
| ^10.1                |       | Consent and Twelfth  Amendment to Credit Agreement, dated August 4, 2009 (Exhibit 10.1  to Current Report on Form 8-K, filed August 5, 2009, Commission  File No. 0-4090, incorporated by reference).                                                                                                 |
| *10.2                |       | Credit and Security  Agreement with Wells Fargo Bank, National Association acting through its  Wells Fargo Business Credit operating division, dated September 30, 2009  (Exhibit 10.1 to Current Report on Form 8-K, filed October 5,  2009, Commission File No. 0-4090, incorporated by reference). |
| + 31.1               |       | Certification of CEO  Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                                                          |
| + 31.2               |       | Certification of CFO  Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                                                          |
| ++ 32                |       | Certification of CEO  and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                             |

 

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| ^  |   | Denotes an exhibit  previously filed with the Securities and Exchange Commission and incorporated  herein by reference.                                                                          |
|----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| +  |   | Filed herewith.                                                                                                                                                                                  |
| ++ |   | Furnished herewith.                                                                                                                                                                              |
| *  |   | Certain  portions of this exhibit have been omitted pursuant to a request for  confidential treatment the entire exhibit has been separately filed with the  Securities and Exchange Commission. |

 

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