# **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

**theSecurities Exchange Act of 1934**

 

## **For the quarterly period ended April 3, 2004**

** **

**or**

** **

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

**theSecurities Exchange Act of 1934**

** **

**Commission file number 0-4090**

** **

# **ANALYSTS INTERNATIONAL CORPORATION**

(Exact name of Registrant as specified in its charter)

 

| **Minnesota**                                            |   | **41-0905408**           |
|----------------------------------------------------------|--------|--------------------------|
| (State of Incorporation)                                 |   | (IRS Identification No.) |
|                                                     |   |                     |
| **3601 West 76th Street**                                |   |                     |
| **Minneapolis, MN**                                      |   | **55435**                |
| (Address of Principal Executive Office)                  |   | (Zip Code)               |
|                                                     |   |                     |
| Registrant’s telephone number, including area code: |   | **(952) 835-5900**       |

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months and (2) has been subject to such filing requirements for the past 90days.

 

Yes  ý  No  o

 

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes  ý  No  o

 

As of May 5, 2004,24,211,957 shares of the Registrant’s common stock were outstanding.

 

 

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ANALYSTSINTERNATIONAL CORPORATION

 

INDEX

 
| Part I.  FINANCIAL INFORMATION |                                                                                                              |
|-------------------------------------|-------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                              |   |
| Item 1.                             | Condensed Consolidated Balance  Sheets  April 3, 2004 (Unaudited) and January 3, 2004                             |   |
|                                |                                                                                                              |   |
|                                | Condensed  Consolidated Statements of Operations  Three months ended April 3, 2004 and March 29, 2003 (Unaudited) |   |
|                                |                                                                                                              |   |
|                                | Condensed  Consolidated Statements of Cash Flows  Three months ended April 3, 2004 and March 29, 2003 (Unaudited) |   |
|                                |                                                                                                              |   |
|                                | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                 |   |
|                                |                                                                                                              |   |
| Item 2.                             | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                       |   |
|                                |                                                                                                              |   |
| Item 3.                             | Quantitative and Qualitative Disclosures About  Market Risk                                                       |   |
|                                |                                                                                                              |   |
| Item 4.                             | Controls and Procedures                                                                                           |   |
|                                |                                                                                                              |   |
| Part II.                            | OTHER INFORMATION                                                                                                 |   |
|                                |                                                                                                              |   |
| Item 6.                             | Exhibits and Reports on Form 8-K                                                                                  |   |
|                                |                                                                                                              |
| Signatures                          |                                                                                                              |
|                                |                                                                                                              |
| Exhibit Index                       |                                                                                                              |
|                                     |                                                                                                                   |  |  |

 

2

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PARTI.  FINANCIAL INFORMATION

 

Item 1.

 

**AnalystsInternational Corporation**

**CondensedConsolidated Balance Sheets**

 
| **(In thousands)**                                         |   | **April 3,  2004** |    | **January 3,  2004** |   |
|------------------------------------------------------------|--------|--------------------|---------|----------------------|--------|
|                                                       |   | **(Unaudited)**    |    |                 |   |
|                                                       |   |               |    |                 |   |
| **ASSETS**                                                 |   |               |    |                 |   |
| Current assets:                                            |   |               |    |                 |   |
| Cash and cash equivalents                                  |   | $                  | 718     |                 | $      | 4,499 |   |
| Accounts receivable, less allowance for  doubtful accounts |   | 59,009             |    | 55,623               |   |
| Prepaid expenses and other current assets                  |   | 4,390              |    | 4,737                |   |
| Total current assets                                       |   | 64,117             |    | 64,859               |   |
|                                                       |   |               |    |                 |   |
| Property and equipment, net                                |   | 6,176              |    | 6,297                |   |
| Intangible assets other than goodwill, net                 |   | 11,056             |    | 11,249               |   |
| Goodwill                                                   |   | 16,460             |    | 16,460               |   |
| Other assets                                               |   | 3,068              |    | 3,030                |   |
|                                                       |   | $                  | 100,877 |                 | $      | 101,895 |   |
|                                                       |   |               |    |                 |   |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**             |   |               |    |                 |   |
|                                                       |   |               |    |                 |   |
| Current liabilities:                                       |   |               |    |                 |   |
| Accounts payable                                           |   | $                  | 15,672  |                 | $      | 15,825 |   |
| Salaries and vacations                                     |   | 6,641              |    | 7,774                |   |
| Deferred revenue                                           |   | 3,524              |    | 2,766                |   |
| Self-insured health care reserves and other  amounts       |   | 1,758              |    | 2,829                |   |
| Total current liabilities                                  |   | 27,595             |    | 29,194               |   |
|                                                       |   |               |    |                 |   |
| Non-current liabilities, primarily deferred  compensation  |   | 4,164              |    | 4,038                |   |
| Shareholders’ equity                                  |   | 69,118             |    | 68,663               |   |
|                                                       |   | $                  | 100,877 |                 | $      | 101,895 |   |

 

Note:  The balance sheet at January 3, 2004 hasbeen taken from the audited financial statements at that date, and condensed.

 

Seenotes to condensed consolidated financial statements.

 

3

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**AnalystsInternational Corporation**

**Condensed Consolidated Statements of Operations**

*(Unaudited)*

 
|                                                     |   | **Three  Months Ended** |   |
|----------------------------------------------------------|--------|-------------------------|--------|
| **(In thousands except per share  amounts)**             |   | **April 3,  2004**      |   | **March 29,  2003** |   |
|                                                     |   |                    |   |   |   |
| Professional services revenue:                           |   |                    |   |   |   |
| Provided directly                                        |   | $                       | 71,069 |   | $ | 69,635 |   |
| Provided through subsuppliers                            |   | 14,325                  |   | 16,406 |   |
| Total revenue                                            |   | 85,394                  |   | 86,041 |   |
|                                                     |   |                    |   |   |   |
| Expenses:                                                |   |                    |   |   |   |
| Salaries, contracted services and direct  charges        |   | 69,664                  |   | 70,656 |   |
| Selling, administrative and other operating  costs       |   | 15,081                  |   | 15,565 |   |
| Amortization of intangible assets                        |   | 193                     |   | 193 |   |
|                                                     |   |                    |   |   |   |
| Operating income (loss)                                  |   | 456                     |   | (373 | ) |
| Non-operating income                                     |   | 6                       |   | 8 |   |
| Interest expense                                         |   | (8                      | )      | (8 | ) |
|                                                     |   |                    |   |   |   |
| Income (loss) before income taxes                        |   | 454                     |   | (373 | ) |
| Income tax expense (benefit)                             |   | —                  |   | (57 | ) |
| Net income (loss)                                        |   | $                       | 454    |   | $ | (316 | ) |
|                                                     |   |                    |   |   |   |
| Per common share:                                        |   |                    |   |   |   |
| Basic income (loss)                                      |   | $                       | .02    |   | $ | (.01 | ) |
| Diluted income (loss)                                    |   | $                       | .02    |   | $ | (.01 | ) |
|                                                     |   |                    |   |   |   |
| Average common shares outstanding                        |   | 24,212                  |   | 24,199 |   |
| Average common and common equivalent shares  outstanding |   | 24,237                  |   | 24,199 |   |

 

Seenotes to condensed consolidated financial statements.

 

4

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**AnalystsInternational Corporation**

**Condensed Consolidated Statements of Cash Flows**

*(Unaudited)*

* *
|                                                  |   | **Three  Months Ended** |   |
|-------------------------------------------------------|--------|-------------------------|--------|
| **(In thousands)**                                    |   | **April 3,  2004**      |   | **March 29,  2003** |   |
|                                                  |   |                    |   |   |   |
| Net cash (used in) provided by operating  activities  |   | $                       | (3,160 | ) | $ | 5,952 |   |
|                                                  |   |                    |   |   |   |
| Cash flows from investing activities:                 |   |                    |   |   |   |
| Property and equipment additions                      |   | (628                    | )      | (238 | ) |
| Proceeds from property and equipment sales            |   | 6                       |   | 13 |   |
| Net cash used in investing activities                 |   | (622                    | )      | (225 | ) |
|                                                  |   |                    |   |   |   |
| Cash flows from financing activities:                 |   |                    |   |   |   |
| Net change in working capital line of  credit         |   | —                  |   | (324 | ) |
| Proceeds from exercise of stock options               |   | 1                       |   | — |   |
| Net cash provided by (used in) financing  activities  |   | 1                       |   | (324 | ) |
|                                                  |   |                    |   |   |   |
| Net (decrease) increase in cash and cash  equivalents |   | (3,781                  | )      | 5,403 |   |
|                                                  |   |                    |   |   |   |
| Cash and cash equivalents at beginning of  period     |   | 4,499                   |   | 54 |   |
|                                                  |   |                    |   |   |   |
| Cash and cash equivalents at end of period            |   | $                       | 718    |   | $ | 5,457 |   |

 

Seenotes to condensed consolidated financial statements.

 

5

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**AnalystsInternational Corporation**

**Notes to Condensed Consolidated Financial Statements**

(Unaudited)

 

1.                                   Summary of Significant Accounting Policies

 

Condensed ConsolidatedFinancial Statements - The condensed consolidated balance sheet as of April 3,2004, the condensed consolidated statements of operations for the three-monthperiods ended April 3, 2004 and March 29, 2003, and the condensed consolidatedstatements of cash flows for the three-month periods ended April 3, 2004 andMarch 29, 2003 have been prepared by the Company, without audit.  In the opinion of management, alladjustments necessary to present fairly the financial position at April 3, 2004and the results of operations and the cash flows for the periods ended April 3,2004 and March 29, 2003 have been made.

 

The Company operates on afiscal year ending on the Saturday closest to December 31.  Accordingly, the Company’s fiscal quartersend on the Saturday closest to the end of the calendar quarter.

 

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted. The Company suggests reading these condensed consolidated financialstatements in conjunction with the financial statements and notes theretoincluded in the Company’s January 3, 2004 annual report to shareholders.

 

Comprehensive income (loss)for the three months ended April 3, 2004 and March 29, 2003 was equivalent toreported net income (loss).

 

Effective January 1, 2002,the Company fully adopted the provisions of Statement of Financial AccountingStandards (SFAS) No. 142, “Goodwill and Other Intangible Assets.”

 

SFAS 142 requires companiesto test purchased goodwill and certain indefinite-lived intangible assets forimpairment at least annually.  Asrequired by SFAS 142, the Company evaluated its intangible assets as of thefirst day of the fiscal year (January 4, 2004).  It has determined that the customer list has a determinable lifewhile the tradename does not.  TheCompany has ceased amortization of the tradename asset.

 

SFAS 142 prescribes atwo-phase process for impairment testing of goodwill.  The first phase screens for the existence of impairment, whilethe second phase (if necessary) measures the impairment.  To screen goodwill for impairment, we relyheavily on the discounted cash flow model to assess the value of the associatedreporting units.  The discounted cashflow valuation technique requires us to project operating results and therelated cash flows over a ten-year period. The Company completed its first phase impairment analysis for 2004during the first quarter and found no indication of impairment of its recordedgoodwill, although the valuation determined the fair value of theInfrastructure and Solutions reporting units to approximate their carryingvalue.

 

For the three months endedApril 3, 2004, no goodwill or other intangibles were acquired, impaired ordisposed.  Other intangibles consistedof the following:

 
|               |   | **April 3,  2004**          |   | **January 3,  2004**          |   |                         |
|--------------------|--------|-----------------------------|--------|-------------------------------|--------|------------------------------|
| **(In thousands)** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Other  Intangibles,  Net** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Other  Intangibles,  Net** |   |
|               |   |                        |   |                          |   |                         |   |   |   |   |   |   |   |
| Customer list      |   | $                           | 12,270 |                          | $      | (2,801                       | ) | $ | 9,469 |   | $ | 12,270 |   | $ | (2,608 | ) | $ | 9,662 |   |
| Tradename          |   | 1,720                       |   | (133                          | )      | 1,587                        |   | 1,720 |   | (133 | ) | 1,587 |   |
|               |   | $                           | 13,990 |                          | $      | (2,934                       | ) | $ | 11,056 |   | $ | 13,990 |   | $ | (2,741 | ) | $ | 11,249 |   |
|                    |        |                             |        |                               |        |                              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

6

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The customer list isscheduled to be fully amortized by 2015 with corresponding amortizationestimated to be approximately $800,000 per year.

 

Effective December 29, 2002,the Company adopted the disclosure provisions of SFAS No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure”, which amends SFAS No.123, “Accounting for Stock-Based Compensation.”  We have continued to apply Accounting Principles Board (APB)Opinion No. 25 and related interpretations in accounting for our fourstock-based compensation plans.  SFAS148 provides alternative methods of transition for a voluntary change to thefair value based method of accounting for stock-based employeecompensation.  In addition, SFAS 148amends the disclosure requirements of SFAS 123 to require more prominent andmore frequent disclosures in financial statements of the effects of stock-basedcompensation.

 

Had compensation cost forour stock-based compensation plans been determined based on the fair value atthe grant dates as calculated in accordance with SFAS 148, our pro forma netincome (loss) and income (loss) per share for the three months ended April 3,2004 and March 29, 2003 would have been the amounts indicated below:

 

|                                   |   | **Three  Months Ended** |   |
|----------------------------------------|--------|-------------------------|--------|
|                                   |   | **April 3,  2004**      |   | **March 29,  2003** |   |
| Net income (loss) *(in thousands):*    |   |                    |   |   |   |
| As reported                            |   | $                       | 454    |   | $ | (316 | ) |
| Pro forma                              |   | 234                     |   | (570 | ) |
| Net income (loss) per share (basic):   |   |                    |   |   |   |
| As reported                            |   | $                       | .02    |   | $ | (.01 | ) |
| Pro forma                              |   | .01                     |   | (.02 | ) |
| Net income (loss) per share (diluted): |   |                    |   |   |   |
| As reported                            |   | $                       | .02    |   | $ | (.01 | ) |
| Pro forma                              |   | .01                     |   | (.02 | ) |

 

2.                                 Line of Credit

 

Effective April 11, 2002,the Company consummated an asset-based revolving credit facility with up to$55,000,000 of availability.  TheCompany reduced the level of availability to $45,000,000 following the sale ofits corporate headquarters building on May 15, 2002.  Borrowings under this credit agreement are secured by all of theCompany’s assets.  Under the revolvingcredit agreement, which matures on April 10, 2005, the Company must takeadvances or pay down the outstanding balance daily.  The Company can, however, choose to request fixed-term advancesof one, two, or three months for a portion of the outstanding balance on the lineof credit.  Daily advances on the lineof credit bear interest at the Wall Street Journal’s “Prime Rate” plus .75%(4.75% on April 3, 2004) while the fixed-term advances bear interest at theLIBOR rate plus 3.0%.  The creditagreement requires the payment of a commitment fee of .50% of the unusedportion of the line plus an annual administration fee of $50,000.  The agreement restricts, among other things,the payment of dividends, establishes limits on capital expenditures andrequires the Company to maintain a minimum accounts payable turnoverratio.  The Company believes it will beable to continue to meet these requirements for the foreseeable future and asof April 3, 2004 did not have any borrowings under this agreement.

 

7

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3.                                 Shareholders’ Equity

 

| **(In thousands)**                      |   | **Three  Months Ended  April 3, 2004** |   |
|-----------------------------------------|--------|----------------------------------------|--------|
|                                    |   |                                   |   |
| Balance at beginning of period          |   | $                                      | 68,663 |   |
|                                    |   |                                   |   |
| Proceeds upon exercise of stock options |   | 1                                      |   |
|                                    |   |                                   |   |
| Comprehensive income                    |   | 454                                    |   |
|                                    |   |                                   |   |
| Balance at end of period                |   | $                                      | 69,118 |   |

 

4.           Net Income Per Common Share

 

Basic anddiluted earnings (loss) per share (EPS) are presented in accordance with SFASNo. 128, “Earnings per Share.”  BasicEPS excludes dilution and is computed by dividing income available to commonstockholders by the weighted-average number of common shares outstanding forthe period.  The difference betweenweighted-average common shares and average common and common equivalent sharesused in computing diluted EPS is the result of outstanding stock options.  Options to purchase 2,133,000 and 2,031,000shares of common stock were outstanding at the end of the periods ended April3, 2004 and March 29, 2003, respectively. Options to purchase 1,552,000 at April 3, 2004 were consideredanti-dilutive and excluded from the computation of common equivalent sharesbecause the exercise price was greater than the average share price during theperiod.  All outstanding options wereconsidered anti-dilutive and excluded from the computation of common equivalentshares at March 29, 2003 because the Company reported a net loss. Thecomputation of earnings (loss) per share for the three months ended April 3,2004 and March 29, 2003 is as follows:

 
|                                                                        |   | **Three  Months Ended** |   |
|-----------------------------------------------------------------------------|--------|-------------------------|--------|
| **(In thousands, except per share amounts)**                                |   | **April 3,  2004**      |   | **March 29,  2003** |   |
|                                                                        |   |                    |   |   |   |
| Net income (loss)                                                           |   | $                       | 454    |   | $ | (316 | ) |
| Weighted-average  number of common shares outstanding                       |   | 24,212                  |   | 24,199 |   |
| Dilutive  effect of employee stock options                                  |   | 25                      |   | — |   |
| Weighted-average number of common and  common equivalent shares outstanding |   | 24,237                  |   | 24,199 |   |
|                                                                        |   |                    |   |   |   |
| Earnings (loss) per share:                                                  |   |                    |   |   |   |
| Basic                                                                       |   | $                       | .02    |   | $ | (.01 | ) |
| Diluted                                                                     |   | $                       | .02    |   | $ | (.01 | ) |

 

5.                                 Restructuring

 

In December 2000, theCompany recorded a restructuring charge of $7,000,000.  Of this charge, $2,600,000 related toworkforce reductions (primarily non-billable staff), and $4,400,000 related tolease termination and abandonment costs (net of sub-lease income), including anamount for assets to be disposed of in conjunction with this consolidation.  The restructuring accrual for workforcereductions was fully used prior to January 3, 2004.  A summary of activity with respect to the restructuring chargefor the three-month period ended April 3, 2004 is as follows:

 

| **(In thousands)**         |   | **Office  Closure/  Consolidation** |   |
|----------------------------|--------|-------------------------------------|--------|
|                       |   |                                |   |
| Balance at January 3, 2004 |   | $                                   | 611    |   |
|                       |   |                                |   |
| Cash expenditures          |   | 70                                  |   |
|                       |   |                                |   |
| Balance at April 3, 2004   |   | $                                   | 541    |   |

 

The remaining balance inthis accrual is to cover the ongoing lease payments for properties abandoned asa part of the restructuring.  The lastof these lease obligations is expected to terminate in September 2006.

 

8

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Item 2.

 

**Management’sDiscussion and Analysis**

**ofFinancial Condition and Results of Operations**

Three Months Ended April 3,2004 and March 29, 2003

 

*ForwardLooking Statements*

 

The statements contained in“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” that are not historical fact, including without limitation,statements relating to the need of current and prospective clients for ourservices and our ability to retain and/or win that business, the effects ofcompetition and our ability to respond to competitive and market conditions,our success in retaining and placing qualified professional staff, our abilityto balance changes in billing and labor rates and to control otheremployee-related and operating costs (our ability to maintain gross marginlevels), our ability to comply with the terms of our credit agreement, ourability to meet our working capital requirements and our ability to achieve andmaintain profitability are forward looking statements made under the safeharbor provision of the Private Securities Litigation Reform Act.  Words such as “believes,” “intends,”“possible,” “expects,” “estimates,” “anticipates,” or “plans” and similarexpressions are intended to identify forward-looking statements.  Such statements are based on management’scurrent expectations as of the date of this document but involve risks,uncertainties and other factors which could cause actual results to differmaterially from those contemplated by such forward looking statements.  Investors are cautioned to consider theseforward looking statements in light of important factors including, but notlimited to, the risk factors discussed below, which may result in variationsfrom results contemplated by such forward looking statements.

 

The following discussion ofthe results of our operations and our financial condition should be read inconjunction with our consolidated financial statements and the related notes toconsolidated financial statements in this 10-Q, our other filings with theSecurities and Exchange Commission and our other investor communications.

 

Overview

 

Total revenue for the threemonths ended April 3, 2004 was $85.4 million, down from $86.0 million in thecomparable quarter a year ago.  Thedecline included a 2.1% increase in revenue from services we supply directly toclients and a 12.7% revenue decline from services we provide to our clientsthrough subsuppliers.  These changes inour revenue mix resulted in 83.2% of our revenues flowing from directlyprovided services compared to 80.9% in the comparable quarter a year ago.  This favorable increase in percentage ofdirect revenue allowed us to improve our gross margins from 17.9% in the firstquarter of 2003 to 18.4% in the first quarter of 2004 in spite of continuingpricing pressures from our clients.

 

Our net income for the threemonths ended April 3, 2004 was $454,000, compared with last year’s comparablequarter net loss of ($316,000).  On adiluted per share basis, the net income for the three months ended April 3,2004 was $.02 per share, compared with a loss of ($.01) per share last year.

 

During the first quarter wecontinued our focus on managing the key elements to our future success: (i)increasing the number of requirements our sales organization brings to theCompany from new and existing clients; (ii) increasing the number of qualifiedcandidates our recruiting organization submits against those requirements; andmost importantly, (iii) increasing the rate at which quality submittals turninto placements.

 

During the quarter, theproductivity of both our sales and recruiting staff remained strong.  During the first quarter of 2004, averageweekly requirements coming from new and existing clients increased 53.8% overthe quarter last year.  Additionally,during the same period average weekly candidate submittals against requirementsincreased 35.1%.  As a result of theimprovements in these key indicators, average weekly placements increased byseventeen over the same period one year ago, resulting in a net increase intechnical headcount of thirteen during the quarter compared to a net decreaseof sixty during the same period last year. This improvement is an indication of the recovery we are beginning tosee.

 

9

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As important as the abovekey elements are to growth of revenue, the bill rates we are able to charge toclients and the margins we are able to obtain on those bill rates are the keyindicators of our profitability. Although we continue to experience intense competition on average billrates, we did experience a slight increase in these rates during the firstquarter.  This increase, whileencouraging, was more than offset by increases in medical and other fringebenefit costs, resulting in a slight decrease in our overall gross margin.  As evidence of the continuing pressure onbill rates, one of our most significant clients has informed us they will bereducing the rates they pay their vendors by 5% over the next severalmonths.  This rate reduction, and otherrate competitive situations we are expecting to arise during the remainder of2004, will make further improvements in our average bill rates very difficultto achieve.  As a result, we areanticipating average bill rates to remain flat for the remainder of 2004.  To enhance the profitability in anenvironment of intense margin pressures, we are focused on three key objectives:i) developing the lowest-cost staffing delivery model in the industry andbecoming the service provider, and employer of choice to the IT consultingcommunity; ii) fully integrating offshore capabilities into each line ofbusiness; and iii) developing channel sales partners to drive new businessopportunities.

 

Critical AccountingEstimates

 

The discussion and analysisof our financial condition and results of operations are based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America.  The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamount of assets and liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities at the date of our financialstatements.  Actual results may differfrom these estimates under different assumptions or conditions.

 

*Estimatesof Future Operating Results*

 

The realization of certainassets recorded in our balance sheet is dependent upon our ability to return toprofitability.  In evaluating therecorded value of our intangible assets ($11.1 million), goodwill ($16.5million), and deferred tax assets ($2.6 million) for indication of impairment,we are required to make critical accounting estimates regarding the futureoperating results of the Company.  Theseestimates are based on management’s current expectations but involve risks, uncertaintiesand other factors that could cause actual results to differ materially fromthese estimates.

 

To evaluate our intangibleassets and goodwill for impairment, we rely heavily on the discounted cash flowmodel to assess the value of the associated reporting units.  The discounted cash flow valuation techniquerequires us to project operating results and the related cash flows over aten-year period.  These projectionsinvolve risks, uncertainties and other factors and are by their natureextremely subjective.  If actual resultswere substantially below projected results, an impairment of the recorded valueof our goodwill and intangible assets could result.

 

To assess the recorded valueof our deferred tax assets for possible impairment, we must predict thelikelihood of future taxable income generation.  Realization of the net deferred tax assets of $2.6 millionrequires the generation of at least $6.8 million of future taxable income.  If the Company does not generate sufficientfuture taxable income, an impairment of the recorded assets could result.

 

*Allowancefor Doubtful Accounts*

 

In each accounting period wedetermine an amount to be set aside to cover potentially uncollectibleaccounts.  We base our determination onan evaluation of accounts receivable for risk associated with a client’sability to make contractually required payments.  These determinations require considerable judgment in assessingthe ultimate potential for collection of these receivables and includereviewing the financial stability of the client, the clients’ willingness topay and current market conditions.  Ifour evaluation of a client’s ability to pay is incorrect, we may incur futurecharges.

 

10

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*Accrual ofUnreported Medical Claims*

 

In each accounting period weestimate an amount to accrue for medical costs incurred but not yet reported(IBNR) under our self-funded employee medical insurance plans.  We base our determination on an evaluationof past rates of claim payouts and trends in the amount of payouts.  This determination requires significantjudgment and assumes past patterns are representative of future paymentpatterns and that we have identified any trends in our claim experience.  A significant shift in usage and paymentpatterns within our medical plans could necessitate significant adjustments tothese accruals in future accounting periods.

 

Critical Accounting Policies

 

Critical accounting policiesare defined as those that involve significant judgments and uncertainties oraffect significant line items within our financial statements and potentiallyresult in materially different outcomes under different assumptions andconditions.  Application of thesepolicies is particularly important to the portrayal of our financial conditionand results of operations.  We believethe accounting policies described below meet these characteristics.

 

*RevenueRecognition*

 

We recognize revenue for ourstaffing business and the majority of our business solutions and infrastructurebusiness as services are performed or products are delivered.  Certain of our outsourcing and help deskengagements provide for a specific level of service each month for which webill a standard monthly fee.  Revenuefor these engagements is recognized in monthly installments over the period ofthe contract.  In some such contracts weinvoice in advance for two or more months of service.  When we do this, the revenue is deferred and recognized over theterm of the invoicing agreement.

 

We generally do not enterinto fixed price engagements.  If weenter into such an engagement, revenue is recognized over the life of thecontract based on time and materials input to date and estimated time andmaterials to complete the project.  Thismethod of revenue recognition relies on accurate estimates of the cost, scopeand duration of the engagement.  If theCompany does not accurately estimate the resources required or the scope of thework to be performed, then future revenues may be negatively affected or losseson contracts may need to be recognized. All future anticipated losses are recognized in the period they areidentified.

 

In all of our services, riskassociated with client satisfaction exists. Although management feels these risks are adequately addressed by ouradherence to proven project management methodologies and other procedures, thepotential exists for future revenue charges relating to unresolved issues witha small number of clients.

 

*SubsupplierRevenue*

 

In certain clientsituations, where the nature of the engagement requires it, we utilize theservices of other companies in our industry. If these services are provided under an arrangement whereby we agree toretain only a fixed portion of the amount billed to the client to cover ourmanagement and administrative costs, we classify the amount billed to theclient as subsupplier revenue.  Theserevenues, however, are recorded on a gross versus net basis because we retaincredit risk and are the primary obligor to our client.  All revenue derived from services providedby our employees or other independent contractors who work directly for us arerecorded as direct revenue.

 

*Goodwilland Intangible Impairment*

 

We evaluate goodwill andother intangible assets on a periodic basis. This evaluation relies on assumptions regarding estimated future cashflows and other factors to determine the fair value of the respectiveassets.  If these estimates or relatedassumptions change, we may be required to recognize impairment charges.

 

11

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In June 2001, the FinancialAccounting Standards Board (FASB) issued SFAS No. 142, “Goodwill and OtherIntangible Assets.”  In accordance withthe provisions of SFAS 142, effective January 1, 2002 we ceased amortization ofcertain intangible assets including goodwill. Intangible assets with definite useful lives will continue to beamortized over their useful lives and reviewed for impairment in accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  The Company completed itsimpairment analysis for 2004 during the first quarter and found no indicationof impairment of its recorded goodwill although the valuation determined thefair value of the Infrastructure and Solutions reporting units to approximatetheir carrying value.  Additionalwrite-downs of intangible assets may be required if future valuations do notsupport current carrying value.

 

*DeferredTaxes*

 

We account for income taxesin accordance with SFAS No. 109, “Accounting for Income Taxes,” which requiresthat deferred tax assets and liabilities be recognized for the effect oftemporary differences between reported income and income considered taxable bythe taxing authorities.  SFAS 109 alsorequires the resulting deferred tax assets to be reduced by a valuation allowanceif some portion or all of the deferred tax assets are not expected to berealized.  Based upon prior taxableincome and estimates of future taxable income, we expect our deferred taxassets, net of the established valuation allowance, will be fully realized inthe future.  If actual future taxableincome is less than we anticipate from our estimates, we may be required torecord a valuation allowance against our deferred tax assets resulting inadditional income tax expense which will be recorded in our consolidatedstatement of operations.

 

*RestructuringCharge*

 

We recorded a restructuringcharge and reserves associated with restructuring plans approved by managementin December 2000.  The remaining reserveconsists of an estimate pertaining to real estate lease obligations.  Factors such as the Company’s ability toenter into subleases, the creditworthiness of sublessees, and the ability tonegotiate early termination agreements with lessors could materially affectthis real estate reserve.  While webelieve our current estimates regarding lease obligations are adequate, ourinability to sublet the remaining space or obtain payments from sublesseescould necessitate significant adjustments to these estimates in the future.

 

**RESULTS OFOPERATIONS, THREE-MONTH PERIODS ENDED APRIL 3, 2004 VS. MARCH 29, 2003**

 

The following tableillustrates the relationship between revenue and expense categories along witha count of employees and technical consultants for the three-month periodsended April 3, 2004 and March 29, 2003. The table provides guidance in our explanation of our operations andresults.

 
|                                               |   | **Three  Months Ended  April 3, 2004** |   | **Three  Months Ended  March 29, 2003** |   | **Increase  (Decrease)** |   |
|----------------------------------------------------|--------|----------------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|
| **(dollars in thousands)**                         |   | **Amount**                             |   | **% of  Revenue**                       |   | **Amount**               |   | **% of  Revenue** |   | **Amount** |   | **%  Inc (Dec)** |   | **As % of  Revenue** |   |
| Professional services revenue:                     |   |                                   |   |                                    |   |                     |   |   |   |   |   |   |   |   |   |
| Provided directly                                  |   | $                                      | 71,069 |                                    | 83.2   | %                        | $      | 69,635 |   | 80.9 | % | $ | 1,434 |   | 2.1 | % | 2.3 | % |
| Provided through subsuppliers                      |   | 14,325                                 |   | 16.8                                    |   | 16,406                   |   | 19.1 |   | (2,081 | ) | (12.7 | ) | (2.3 | ) |
| Total revenue                                      |   | 85,394                                 |   | 100.0                                   |   | 86,041                   |   | 100.0 |   | (647 | ) | (.8 | ) | .0 |   |
| Salaries, contracted services and direct  charges  |   | 69,664                                 |   | 81.6                                    |   | 70,656                   |   | 82.1 |   | (992 | ) | (1.4 | ) | (.5 | ) |
| Selling, administrative and other operating  costs |   | 15,081                                 |   | 17.7                                    |   | 15,565                   |   | 18.1 |   | (484 | ) | (3.1 | ) | (.4 | ) |
| Amortization of intangible assets                  |   | 193                                    |   | .2                                      |   | 193                      |   | .2 |   | — |   | .0 |   | .0 |   |
| Non-operating income                               |   | (6                                     | )      | (.0                                     | )      | (8                       | )      | (.0 | ) | 2 |   | (25.0 | ) | .0 |   |
| Interest expense                                   |   | 8                                      |   | .0                                      |   | 8                        |   | .0 |   | — |   | .0 |   | .0 |   |
| Income (loss) before income taxes                  |   | 454                                    |   | .5                                      |   | (373                     | )      | (.4 | ) | 827 |   | 221.7 |   | .9 |   |
| Income tax expense (benefit)                       |   | —                                 |   | .0                                      |   | (57                      | )      | (.0 | ) | 57 |   | 100.0 |   | .0 |   |
| Net income (loss)                                  |   | $                                      | 454    |                                    | .5     | %                        | $      | (316 | ) | (.4 | )% | $ | 770 |   | 243.7 | % | .9 | % |
|                                               |   |                                   |   |                                    |   |                     |   |   |   |   |   |   |   |   |   |
| Personnel:                                         |   |                                   |   |                                    |   |                     |   |   |   |   |   |   |   |   |   |
| Management and administrative                      |   | 415                                    |   |                                    |   | 440                      |   |   |   | (25 | ) | (5.7 | )% |   |   |
| Technical consultants                              |   | 2,590                                  |   |                                    |   | 2,550                    |   |   |   | 40 |   | 1.6 | % |   |   |

 

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*Revenue*

 

Services provided directlyfor the three-month period ended April 3, 2004 resulted in a 2.1% increase indirect revenue over the comparable quarter a year ago.  We derived a substantially greaterpercentage of our total revenue from direct billings during the period in 2004as compared to the same period last year. This increase in the percentage of direct revenue was due to thedecrease in revenue from certain Managed Services clients, most of which hadbeen provided through subsuppliers, and an increase of $1.4 million in revenueprovided directly.  The decrease insubsupplier revenue from these Managed Services clients was partially offset bya significant increase in subsupplier revenue with another existingclient.  Our subsupplier revenue ismainly pass-through revenue with associated fees providing minimal profit.

 

The increase in directrevenue resulted primarily from the increase in the number of consultants wehad billable during these periods, which appears to be reflective of a modestrecovery in the Information Technology (IT) market sector.  Our technical consultant staff has increasedby 40 consultants from March 29, 2003. The increase in technical consultants over the comparable period a yearago was offset by continued pricing pressures from our clients.  Although our hourly rates increased slightlyduring the period ending April 3, 2004, these pressures have resulted in a 4%reduction in average bill rates within our staffing business as compared tolast year.  As demand for the servicesour industry provides has declined, many clients have taken the opportunity todemand pricing concessions, and we have had to concede lower prices to retainour relationships with these clients.

 

*Salaries,Contracted Services and Direct Charges*

 

Salaries, contractedservices and direct charges primarily represent our payroll and benefit costsassociated with billable consultants. Comparing the 2004 period to the 2003 period, these expenses decreasedslightly as a percentage of revenue.  Wehave been successful at managing our direct labor rates downward in response todecreasing bill rates.  We have beenable to do this by passing billing rate decreases through to our consultants inthe form of labor rate decreases where possible and increasing productivitylevels of our billable technical staff. The shifting of our revenue mix to include more direct revenue, withbetter margins, and less low margin subsupplier revenue also played a role indecreasing this category of expense as a percentage of revenue.  Excluding the revenue and cost associatedwith subsupplier activity, this category of expense as a percentage of revenueremained at 78.7% in the three months ended April 3, 2004 as compared to thesame period a year ago.  Although wecontinuously attempt to control the factors which affect this category ofexpense, there can be no assurance we will be able to maintain or improve thislevel.

 

*Selling,Administrative and Other Operating Costs*

 

Selling, administrative andother operating (SG&A) costs include management and administrativesalaries, commissions paid to sales representatives and recruiters, locationcosts, and other administrative costs. This category of costs represented 17.7% of total revenue for thethree-month period ended April 3, 2004, down from 18.1% for the three-monthperiod in 2003.  We have managed thesecosts downward primarily by reducing discretionary spending for non-billabletravel, imposing wage controls on administrative and management personnel,eliminating office space where possible, and by reducing the number ofnon-technical personnel we employ.  Weare committed to continuing to manage this category of expense to the rightlevel for our company; however, there can be no assurance this category of costwill not increase as a percentage of income if our revenue continues todecline.

 

*Non-OperatingIncome*

 

Non-operating income,consisting primarily of interest income, declined during the three months endedApril 3, 2004 compared to the same quarter a year ago due to a decrease ininvested cash balances.

 

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*InterestExpense*

 

Interest expense during thethree-month period ended April 3, 2004 was the same as the comparable periodlast year.  Debt levels declined to zeroduring the three months ended March 29, 2003 and they have remained at or nearzero since that time.

 

*Income Taxes*

 

We recorded no income taxesduring the three months ended April 3, 2004. Income tax expense which would have been recorded was negated by areversal of previously established reserves against deferred tax assets.  As we continue to generate profit, weanticipate reversing portions of these reserves to negate any tax expense inwhich may otherwise have been recorded.

 

*Personnel*

 

The increase in technicalconsultants is an indication of what appears to be the beginning of a modestrecovery in the IT market sector. Administrative and management personnel decreased as a result of ourcontinuing efforts to contain our operating costs.

 

Liquidity and CapitalResources

 

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

 
| **(dollars in thousands)**      |   | **April 3,  2004** |   | **January 3,  2004** |   | **Increase  (Decrease)** |   | **Percentage  Increase  (Decrease)** |   |
|---------------------------------|--------|--------------------|--------|----------------------|--------|--------------------------|--------|--------------------------------------|--------|
|                            |   |               |   |                 |   |                     |   |                                 |   |
| Cash and Cash Equivalents       |   | $                  | 718    |                 | $      | 4,499                    |   | $                                    | (3,781 | ) | (84.0 | )% |
| Accounts Receivable             |   | 59,009             |   | 55,623               |   | 3,386                    |   | 6.1                                  |   |
| Other Current Assets            |   | 4,390              |   | 4,737                |   | (347                     | )      | (7.3                                 | )      |
| Total Current Assets            |   | $                  | 64,117 |                 | $      | 64,859                   |   | $                                    | (742   | ) | (1.1 | ) |
|                            |   |               |   |                 |   |                     |   |                                 |   |
| Accounts Payable                |   | $                  | 15,672 |                 | $      | 15,825                   |   | $                                    | (153   | ) | (1.0 | ) |
| Salaries and Vacations          |   | 6,641              |   | 7,774                |   | (1,133                   | )      | (14.6                                | )      |
| Other Current Liabilities       |   | 5,282              |   | 5,595                |   | (313                     | )      | (5.6                                 | )      |
| Total Current Liabilities       |   | $                  | 27,595 |                 | $      | 29,194                   |   | $                                    | (1,599 | ) | (5.5 | ) |
|                            |   |               |   |                 |   |                     |   |                                 |   |
| Working Capital                 |   | $                  | 36,522 |                 | $      | 35,665                   |   | $                                    | 857    |   | 2.4 |   |
| Current Ratio                   |   | 2.32               |   | 2.22                 |   | .10                      |   | 4.5                                  |   |
|                            |   |               |   |                 |   |                     |   |                                 |   |
| Total Shareholders’ Equity |   | $                  | 69,118 |                 | $      | 68,663                   |   | $                                    | 455    |   | 0.7 | % |

 

*CashRequirements*

 

The day-to-day operation ofour business requires a significant amount of cash to flow through ourCompany.  During the three months endedApril 3, 2004, we made total payments of approximately $61.3 million to pay ouremployee’s wages, benefits, and associated taxes.  We also made payments of approximately $14.2 million to payvendors who provided billable technical resources to our clients through us.  Finally, we made payments of approximately$10.3 million to fund general operating expenses such as employee expensereimbursement, office space rental and utilities.

 

The cash to fund thesesignificant payments comes almost exclusively from our collection of amountsdue us for services rendered to our clients (approximately $82.0 million in thethree months ended April 3, 2004). Generally, payments made to fund the day-to-day operation of ourbusiness are due and payable regardless of the rate of cash collections fromour clients.  While we do not anticipatesuch an occurrence, a significant decline in rate of

 

14

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collections from ourclients, or an inability of the Company to timely invoice and therefore collectfrom our clients, could rapidly increase our need to borrow to fund theoperations of our business.

 

*Sourcesand Uses of Cash/Credit Facility*

 

Cash and cash equivalents atApril 3, 2004 decreased from January 3, 2004. As our revenue and consequently our receivable balance have grown duringthat time, our cash reserves have been utilized to fund that growth.  Our primary need for working capital is tosupport accounts receivable resulting from our business and to fund the timelag between payroll disbursement and receipt of fees billed to clients.  Historically, we have been able to supportinternal growth in our business with internally generated funds.  If our revenue and payroll continue to grow,we would expect our need to borrow to increase.

 

Working capital at April 3,2004 was up slightly from January 3, 2004. During the first quarter of 2004, we have been able to keep our line ofcredit at or near zero and maintain our average cash and cash equivalentsposition in the $3.0 million range.  Theratio of current assets to current liabilities increased at April 3, 2004,compared to January 3, 2004.

 

Our asset-based revolvingcredit agreement, consummated in April 2002, provides us with up to $45.0million of availability.  We have beensuccessful at maintaining the balance on this line of credit at or near zerothroughout the quarter ended April 3, 2004. At April 3, 2004 our borrowing capability, a calculation based on oureligible level of accounts receivable, was at $30.9 million under our creditfacility.  The level of availability hasincreased from the previous quarter as our receivable collateral base hasincreased.  Borrowings under the creditagreement are secured by all of our assets.

 

The revolving creditagreement requires us to take advances or pay down the outstanding balance onthe line of credit daily.  However, wecan request fixed-term advances of one, two, or three months for a portion ofthe outstanding balance on the line of credit. The daily advances on the line of credit bear interest at the WallStreet Journal’s “Prime Rate” plus .75%, or 4.75% currently, while thefixed-term advances bear interest at the LIBOR rate plus 3.0%.  The credit agreement requires the payment ofa commitment fee of .50% of the unused portion of the line plus an annualadministration fee of $50,000.  Theagreement restricts, among other things, the payment of dividends, establisheslimits on capital expenditures and requires us to maintain a minimum accountspayable turnover ratio.  We believe wewill be able to continue to meet the requirements of the agreement.  The credit agreement matures on April 10,2005.

 

During the three-monthperiod ended April 3, 2004, we made capital expenditures totaling $628,000compared to $238,000 in the three-month period ended March 29, 2003.  We funded these capital expenditures withinternally generated funds.  We continueto tightly control capital expenditures to preserve working capital.

 

Commitments andContingencies

 

The Company leases officefacilities under non-cancelable operating leases.  Deferred compensation is payable to participants in accordancewith the terms of individual contracts. Minimum future obligations on operating leases and deferred compensationat April 3, 2004, are as follows (in thousands):

 

|                  |   | **1 Year** |   | **2-3 Years** |   | **4-5 Years** |   | **Over 5  Years** |   | **Total** |   |
|-----------------------|--------|------------|--------|---------------|--------|---------------|--------|-------------------|--------|-----------|--------|
|                  |   |       |   |          |   |          |   |              |   |      |   |
| Operating Leases      |   | $          | 5,859  |          | $      | 10,614        |   | $                 | 3,507  |      | $      | — |   | $ | 19,980 |   |
|                  |   |       |   |          |   |          |   |              |   |      |   |   |   |   |   |   |
| Deferred Compensation |   | 306        |   | 389           |   | 502           |   | 2,727             |   | 3,924     |   |
|                  |   |       |   |          |   |          |   |              |   |      |   |
| Total                 |   | $          | 6,165  |          | $      | 11,003        |   | $                 | 4,009  |      | $      | 2,727 |   | $ | 23,904 |   |
|                       |        |            |        |               |        |               |        |                   |        |           |        |  |  |  |  |  |  |

 

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Market Conditions, BusinessOutlook and Risks to Our Business

 

Several market conditionsare affecting our industry.  Intenseprice competition in the area of technical staff augmentation has createdpressure on billable hourly rates, and clients have been requestingincreasingly lower cost models for staff augmentation services.  As a result, we have encountered lowerbilling rates for quite some time.  Lowcost offerings for staff augmentation services through e-procurement systems,extremely competitive bidding processes, the granting of various types ofdiscounts and the use of offshore resources will continue, thus makingimprovement in our average billing rates very difficult.  Our ability to respond to customer requestsfor lower pricing or to provide other low cost solutions in this area of ourbusiness will have a direct effect on our performance.  Management expects competitive conditions inthe area of technical staff augmentation to continue for the foreseeable future,although it expects that demand for these services will increase as theeconomic recovery continues.

 

Management continues toconcentrate on staff augmentation in Fortune 500 and small and medium-sizedbusinesses, business solutions for small and medium-sized businesses, andbusiness opportunities with its technology and product partners.  In addition, we are developing a low-coststaffing model, expanding our offshore service capabilities and developingrelationships with sales channel partners with which we will share salesleads.  While we believe these areas ofour business present opportunities to grow our business, growth in these areaswill depend on improvement in the economy and spending in the overall ITservices market, our ability to compete with other vendors and our success inobtaining new clients.

 

Staff augmentation continuesto represent more than half of total revenues (revenue from services provideddirectly to client (direct revenue) plus revenue from services provided to ourclients by subsuppliers (subsupplier revenue)) and over half of our directrevenue.  While we saw a slight increasein demand for our services during the first quarter of 2004, there can be noassurance as to when, or if, we will begin to see significant increases inrevenue.  Our ability to respond to theconditions outlined above will bear directly on our performance.

 

Our ability to quicklyidentify, attract and retain qualified technical personnel, especially whenrecovery begins, will affect our results of operations and ability to grow inthe future.  Competition for qualifiedpersonnel is intense.  If we are unableto hire the talent required by our client in a timely, cost-effective manner,it will affect our ability to grow our business.  In addition to our ability to control labor costs, our ability tocontrol employee benefit costs and other employee-related costs will affect ourfuture performance.  In an effort tocontain our benefits costs, we implemented substantial changes to our benefitsplans in fiscal year 2003 and have implemented additional changes in 2004.  While we believe the changes we implementedwill be effective, the effectiveness of these changes may vary due to factorswe cannot control such as rising medical costs, the amount of medical servicesused by our employees and similar factors.

 

Controlling operating costswhile attempting not to impact our ability to respond to our clients also is afactor in our future success.  We havestreamlined our operations by consolidating offices, reducing administrativeand management personnel and continuing to review our company structure formore efficient methods of operating our business and delivering ourservices.  We may not be able tocontinue to reduce costs without affecting our ability to deliver service toour clients and therefore may choose to forego particular cost reductions if webelieve it would be prudent to do so for the future business of the Company.

 

Terms and conditionsstandard to computer consulting services contracts also present a risk to ourbusiness.  In general, our clients cancancel or reduce their contracts on short notice.  Loss of a significant client relationship or a significant portionthereof, a significant number of relationships or a major contract could have amaterial adverse effect on our business.

 

We believe our workingcapital will be sufficient for the foreseeable needs of our business.  Significant rapid growth in our business ora significant stretching of payment terms with major clients, could create aneed for additional working capital.  Aninability to obtain additional working capital, should it be required, couldhave a material adverse effect on our business.  We expect to be able to comply with the requirements of ourcredit agreement; however, failure to do so could have a material adverseeffect on our business.

 

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Item 3.

 

**Quantitativeand Qualitative Disclosures About Market Risk**

 

We are exposed to certainmarket risks on our line of credit agreement because of the variable interestrate charged.  Market risk is thepotential loss arising from the adverse changes in market rates and prices,such as interest rates.  Market risk isestimated as the potential increase in fair value resulting from a hypotheticalone percent increase in interest rates which assuming an average outstandingdebt balance of $5.0 million would result in an annual interest expenseincrease of approximately $50,000.

 

Item 4.

 

**Controlsand Procedures**

 

(a)                                   Evaluation of Disclosure Controls andProcedures

 

As of the end of the periodcovered by this report, the Company conducted an evaluation under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer, Michael J. LaVelle, and Interim ChiefFinancial Officer, David J. Steichen, regarding the effectiveness of the designand operation of the Company’s disclosure controls and procedures pursuant toRules 13a-15(b) of the Securities Exchange Act of 1934 (the “ExchangeAct”).  Based upon that evaluation, theChief Executive Officer and Interim Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective to ensure thatinformation that is required to be disclosed by the Company in reports that itfiles under the Exchange Act is recorded, processed, summarized and reportedwithin the time period specified in the rules of the Securities ExchangeCommission.

 

(b)                                  Changes in Internal Controls

 

There were no changes in theCompany’s internal control over financial reporting that occurred during theperiod covered by this report that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

PARTII.  OTHER INFORMATION

 

Item 6.

 

**Exhibits and Reports on Form 8-K**

 
| (a)    |   | Exhibits                                                                                                                                                                                                              |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                  |
|   |   | 31.1                                                                                                                                                                                                                  | Certification of CEO  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   | 31.2                                                                                                                                                                                                                  | Certification of Interim  CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   | 32                                                                                                                                                                                                                    | Certification of CEO and  Interim CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  section 906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                                                                  |
| (b)    |   | Reports on Form 8-K                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                  |
|   |   | A.  Form 8-K  filed February 26, 2004 providing information pursuant to Item 12,  “Disclosure of Results of Operations and Financial Condition,” for the  quarter and year ended January 3, 2004. |

 

17

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SIGNATURES

 

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

 
|               | ANALYSTS INTERNATIONAL  CORPORATION |   |
|--------------------|-------------------------------------|--------|
|               | (Registrant)                        |
|               |                                |
| Date: May 12, 2004 |                                | By:    |   | /s/ David J. Steichen |   |
|               |                                |   | David J. Steichen |
|               |                                |   | Interim Chief Financial  Officer |
|               |                                |   | (Chief Accounting Officer) |
|                    |                                     |        |  |  |  |  |

 

18

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**ANALYSTS INTERNATIONAL CORPORATION**

**EXHIBITINDEX**

**FORM 10-Q**

**QUARTER ENDED APRIL 3, 2004**

 
| **Exhibit  No.** |   | **Description**                                                                                                                                  |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                             |
| 31.1             |   | Certification of CEO Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                 |
|             |   |                                                                                                                                             |
| 31.2             |   | Certification of Interim  CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         |
|             |   |                                                                                                                                             |
| 32               |   | Certification of CEO and  Interim 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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